Costing Systems: Emba 5403 Fall 2008

Costing Systems EMBA 5403 Fall 2008

Available costing systems 

Absorption costing   



Actual Costing Normal Costing Standard Costing

Variable costing   

Actual Costing Normal Costing Standard Costing

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Costing systems Cost component

Actual

Normal

Standard

material

Actual

Actual

Standard

labor cost

Actual

Actual

Standard

Manufacturing Actual Overhead-Variable

Applied

Standard

Manufacturing Overhead-Fixed

Applied

Standard Applied

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Actual

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Variance 



Differences between the costs according to the costing system used and actual amounts Actual amounts are reflected in the financial statements

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Absorption Costing Cost of Goods Manufactured

Absorption costing allocates variable and fixed overhead costs to products. Cost of Goods Sold

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Finished Goods Inventory Valuation 5/37

Product Costing Procedures in Organizations

Process Costing

Job-order Costing

 Distinct jobs or batches of units.

• Costs accumulated separately by job. •Typical job order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals Fall 2008-2009 Mugan • Law firms

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Product Costing Procedures in Organizations

Process Costing

Job-order Costing

Typical process cost applications: 

Petrochemical refinery



Paint manufacturer



Paper mill

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Job-Order Costing

Manufacturing overhead (MOVH) Applied (added) to

Direct Direct Tra ced materials d ir e materials to e ctly ach jo b

Direct Direct labor labor Fall 2008-2009

y l t c ir e d ed c ob a j Tr h c a e to Mugan

each job using a predetermined rate

The The Job Job 8/37

Job-Order Costing Direct materials and labor

Raw materials could be used as direct or indirect product cost.

Part of the job cost

Materials Requisition and Time tickets

An employee’s time may be either direct or indirect. Fall 2008-2009

Indirect materials and labor Mugan

Manufacturing Overhead Control Account 9/37

Job-Order Costing wages

Other Actual OH Charges

Material usage Fall 2008-2009

Indirect Labor

Manufacturing Applied Overhead Overhead Control Account

Job-Order Cost Sheets

Indirect Materials Mugan

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Job-Order Cost Sheet XYZ Job-Order Cost Sheet Job Number A - 143 Department A4 Item Steel water tank

Date Initiated 17 September 2008 Date Completed 17-Nov-08 Units Completed 2

Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount MR 1041 TL 1200 20 8 TL 160 8 TL 6 TL 48

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Cost

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Units Shipped Date Number Balance

TL 1200 TL 160 TL 48 1408 704 11/17/08

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1

1

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Job-Order System Cost Flows Salaries and Wages Payable Direct Labor Indirect Labor 

Mfg. Overhead Actual Applied  Indirect Overhead Materials Applied to  Indirect Work in Mugan Fall 2008-2009 Labor Process

Work-in-Process (Job Cost Sheet) Direct



Direct Materials Labor Overhead Applied

IfIfactual actualand andapplied applied manufacturing manufacturingoverhead overhead are arenot notequal, equal,aayear-end year-end adjustment adjustmentis isrequired. required. 12/37

Job-Order System Cost Flows Work-in-Process (Job Cost Sheet) Direct



Direct Materials Labor Overhead Applied

Cost of Goods Mfd.



Finished Goods Cost of Goods Mfd.



Cost of Goods Sold



Cost of Goods Sold Cost of Goods Sold Mugan



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Allocation Process Define the cost objects. Accumulate indirect costs in cost pools. Choose an allocation base. Estimate an application rate. Allocate indirect costs based on use of the allocation base

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Over- and Underabsorbed Overhead Overabsorbed Overabsorbed overhead overhead

Underabsorbed Underabsorbed overhead overhead

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Over- and Underabsorbed Overhead XYZ’s actual overhead for the year was TL650,000 and a total of 100,000 direct labor hours were worked. Using XYZ’s predetermined overhead rate of TL 6.00 per direct labor hour, how much overhead was applied to XYZ’s jobs during the year?

SOLUTION SOLUTION Applied AppliedOverhead Overhead == POHR POHR××Actual ActualDirect DirectLabor LaborHours Hours Applied AppliedOverhead Overhead == TL TL6.00 6.00per perDLH DLH××100,000 100,000DLH DLH==TL TL600,000 600,000 Fall 2008-2009

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Accounting for Over- and Underabsorbed Overhead Three Three basic basic approaches approaches   Prorate Prorate among among work-in-process, work-in-process,

finished finished goods, goods, and and cost cost of of goods goods sold. sold.   Adjust Adjust cost cost of of goods goods sold. sold.   Recalculate Recalculate the the application application rate rate and and apply apply to to all all the the jobs jobs during during the the period. period.

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Accounting for Over- and Underabsorbed Overhead If Manufacturing Overhead is . . . UNDERABSORBED

Alternative 1 Close to Cost of Goods Sold

Alternative 2

INCREASE Cost of Goods Sold

INCREASE Work-in-Process Finished Goods Cost of Goods Sold

DECREASE Cost of Goods Sold

DECREASE Work-in-Process Finished Goods Cost of Goods Sold

(Applied OH is less than actual OH) OVERABSORBED (Applied OH is greater than actual OH)

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Allocation

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Allocation Base IfIf overhead overhead costs costs are are accumulated accumulated in in aa single single cost cost pool pool and and allocated allocated using using aa single single allocation allocation base. base.

Single Single Overhead Overhead Cost Cost Pool Pool Application Rate

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Multiple Allocation Bases Many Manycompanies companiesuse useActivity ActivityBased BasedCosting Costingwhere wheremultiple multiplecost cost pools poolsand andaadifferent differentallocation allocationbase basefor foreach eachcost costpool. pool.

Overhead Overhead Cost CostPool Pool AA Application Rate A

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Overhead Overhead Cost Cost Pool Pool BB

Overhead Overhead Cost CostPool Pool CC

Application Rate B

Products Mugan

Application Rate C

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ABC and Multiple Allocation Bases  

Improves planning and control. Activity Based Costing (ABC) is one method of using multiple allocation bases.

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Multistage Allocation Processes Overhead Overhead Cost CostPool Pool11

Overhead Overhead Cost CostPool Pool22

Overhead Overhead Cost CostPool Pool33

Overhead Overhead Cost CostPool Pool44

Separate Application Rates

Department DepartmentAA

Department DepartmentBB

Dept. Application Rates

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Department DepartmentCC

Dept. Application Rates

Products Mugan

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Process Costing Identical Identical units units of of product product are are produced produced in in aa continuous continuous flow flow through through aa series series of of manufacturing manufacturing steps steps or or processes. processes. Costs Costs are are assigned assigned to to completed completed units units transferred transferred out out of of the the process process and and to to incomplete incomplete units units remaining remaining in in the the process. process. Fall 2008-2009

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Process Costing Costs Costs are are accumulated accumulated for for aa period period of of time time for for products products in in work-in-process work-in-process inventory. inventory. Equivalent Equivalent units units is is aa concept concept expressing expressing these these partially partially completed completed products products as as aa smaller smaller number number of of fully fully completed completed products. products.

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Equivalent Units Two Twoone-half one-half completed completedproducts productsare are equivalent equivalent to toone onecompleted completedproduct. product.

+

=

So, So, 8,000 8,000units units 70 70percent percent complete complete are areequivalent equivalentto to5,600 5,600complete completeunits. units. Fall 2008-2009

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Equivalent Units Question For For the the current current period, period, Ames Ames started started 15,000 15,000 units units and and completed completed 10,000 10,000 units, units, leaving leaving 5,000 5,000 units units in in process process 30 30 percent percent complete. complete. How How many many equivalent equivalent units units of of production production did did Ames Ames have have for for the the period? period? a. a. 10,000 10,000 b. b. 11,500 11,500 c. c. 13,500 13,500 d. d. 15,000 15,000

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Equivalent Units Question For For the the current current period, period, Ames Ames started started 15,000 15,000 units units and and completed completed 10,000 10,000 units, units, leaving leaving 5,000 5,000 units units in in process process 30 30 percent percent complete. complete. How How many many equivalent equivalent units units of of production production did did Ames Ames have have for for the the period? period? a. a. 10,000 10,000 10,000 units + (5,000 units × .30) b. b. 11,500 11,500 = 11,500 equivalent units c. c. 13,500 13,500 d. d. 15,000 15,000

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Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period:

Cost per equivalent

=

Costs for the period Equivalent units for the period

unit

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Equivalent Units Question Now Now assume assume that that Ames Ames incurred incurred $27,600 $27,600 in in production production costs costs for for the the 11,500 11,500 equivalent equivalent units. units. What What was was Ames’ Ames’ average average cost cost per per equivalent equivalent unit unit for for the the period? period? a. a. $1.84 $1.84 b. b. $2.40 $2.40 c. c. $2.76 $2.76 d. d. $2.90 $2.90 Fall 2008-2009

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Equivalent Units Question Now Now assume assume that that Ames Ames incurred incurred $27,600 $27,600 in in production production costs costs for for the the 11,500 11,500 equivalent equivalent units. units. What What was was Ames’ Ames’ average average cost cost per per equivalent equivalent unit unit for for the the period? period? a. a. $1.84 $1.84 $27,600 ÷ 11,500 equivalent units b. b. $2.40 $2.40 = $2.40 per equivalent unit c. c. $2.76 $2.76 d. d. $2.90 $2.90 Fall 2008-2009

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Equivalent Units Question What What portion portion of of the the $27,600 $27,600 in in production production costs costs was was assigned assigned to to work-in-process work-in-process inventory inventory and and what what amount amount was was assigned assigned to to completed completed units units for for the the period? period? a. a. $0 $0 and and $27,600 $27,600 b. b. $7,600 $7,600 and and $20,000 $20,000 c. c. $3,600 $3,600 and and $24,000 $24,000 d. d. $12,000 $12,000 and and $15,600 $15,600 Fall 2008-2009

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Equivalent Units Question Work-in-process: What portion of the $27,600 in production What portion of the $27,600 in production 1,500 equivalent units @ $2.40 = $3,600 costs costs was was assigned assigned to to work-in-process work-in-process inventory what Completed units: inventory and and what amount amount was was assigned assigned 10,000 equivalent $2.40 = $24,000 to units the period? to completed completed units for forunits the @ period? a. a. $0 $0 and and $27,600 $27,600 b. b. $7,600 $7,600 and and $20,000 $20,000 c. c. $3,600 $3,600 and and $24,000 $24,000 d. d. $12,000 $12,000 and and $15,600 $15,600 Fall 2008-2009

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Equivalent Units When When there there are are partially partially completed completed units units in in beginning beginning inventory, inventory, work work efforts efforts during during the the period period can can be be categorized categorized as as follows: follows:

Work Work to to complete complete beginning beginning work-in-process work-in-process Work Work on on units units started started and and completed completed during during the the period period ➌ ➌ Work Work on on units units in in ending ending work-in-process work-in-process ➊ ➊ ➋ ➋

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Equivalent Units - Example ACE started June with 250 partially completed units in work-in-process (30% complete). During June, ACE completed the units in work-in-process and started an additional 1,200 units. There were 300 units in ending work-in-process on June 30. They were 40% complete. How many total equivalent units did ACE produce during June?

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Equivalent Units - Example

Since Since30% 30% of ofthe thework workwas was done doneon on these these units unitsin inMay, May, the the remaining remaining70% 70%of of the the work workis is done done in inJune. June. Fall 2008-2009

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Equivalent Units - Example

Since Since1,200 1,200units unitswere were started startedduring duringJune, June, and and 300 300 of of those thoseunits unitsare arestill still in inwork-in-process work-in-processon onJune June30, 30, 900 900 units unitswere werestarted startedand andcompleted completedduring duringJune. June. Fall 2008-2009

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Equivalent Units - Example

40% on these units in June. 40% of ofthe thework workwas was done done Mugan on these units in June. 37/37

Fall 2008-2009