Lecture2
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• Summary of last weeks lecture • Job order costing (Chapter 3) P r o g r a m
• Process costing (Chapter 4)
C o s t
• • • •
direct – indirect (assignment) fixed – variable (behavior) manufacturing – marketing (function) total – unit (level of aggregation)
Different costing (systems) for different purposes
C o s t a s s I g n m e n t a n d b e h a v I o r
Direct cost Variable cost Fixed cost
• cost of materials; • packaging • depreciation mach. X; • wages sales repr. prod. Y
Indirect cost • company public relations; • transport; • phone (partly) • wages staff employees; • insurance; • taxes
C o s t f u n c t I o n
Product cost: labor (direct) materials (direct) production overhead (indirect, assigned) manufacturing cost direct marketing cost indirect marketing cost (assigned) Product cost
J o b C o s t i n g
•
& P r o c e s s C o s t i n g
•
Production:
(individual) Job
(mass) Process
Costing systems
Cost calculation for each Job
Cost calculation for each Process
Different Costing Systems for different Production Systems
J o b C o s t i n g & P r o c e s s C o s t i n g
Job-costing systems Distinct, identifiable unit of a product or service.
Hybrid-costing systems
Process-costing systems Masses of similar product units or service units.
•
that is being performed once?
J o b C o s t i n g
What are the costs of an assignment/product/service/job
•
Once: how reliable is the outcome of the calculation of the budgeted cost?
•
Are decisions made by managers based on the results of calculations or are the decisions based on gut-feeling (marketing/strategic arguments)?
Cost assignment: J o b C o s t i n g
•
direct cost: •
•
cost tracing
indirect cost: •
cost allocation
Indirect Cost Pools J o b C o s t i n g
Indirect Cost Allocation Base
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Marketing Overhead
Machine hours
Machine hours
Dir. Mkting labour
Cost Object
Fixed Marketing Overhead
Units Sold
Indirect Cost Direct Cost
Direct Cost Direct Materials
Direct Manufacturing Labour
Direct Marketing Labour
Calculation and allocation of fixed cost: F i x e d
€
C o s t
Fixed cost Average FC 1
volume
Determine fixed cost per unit of performance:
F I x e d
•
tariff is based on budgeted level of activities
•
user is charged based on actual usage €
C o s t
Allocated FC FC Av.FC
Tariff: FC/N N
volume
A l l o c a t i o n (u n d e r
Difference between Actual cost and Allocated Cost Reasons: •
cost level is in/decreased in the recent period; •
a n d o v e r)
Numerator reason:
Denominator reason: budgeted level is not the same as the Cost sales Allocation Department actual level.
Consequence: •
Over or under allocation
A l l o c a t i o n
Cost
Department
Budgeted cost € 12.000
Budgeted allocation € 12.000
o f
Work in process
t h e r e s u l t s
Allocation
Department Actual cost € 10.000
Finished Goods Cost of Goods Sold Actual allocation € 12.000
€ 2.000
What to do with the (in this case) positive result ?
A l l o c a t i o n o f t h e r e s u l t s
Work in process
Department Actual cost € 10.000
Finished Goods Cost of Goods Sold Actual allocation € 12.000 € 10.000
€ 2.000
What to do with the (in this case) positive result ? Adjusted Allocation Rate approach: Calculate the cost of each job on the basis of actual cost. Question: Does it matter what the cause of the result was?
A l l o c a t i o n o f t h e r e s u l t s
Actual cost € 10.000
Actual allocation € 12.000 € 2.000
What to do with the (in this case) positive result ? Proration approach: Assign the result to WiP, FG and CoGs on a basis of •usage of indirect cost •ending balance of WiP, FG and CoGs Another method: just bring it under period costs
P r o c e s s C o s t i n g
Process •
repeating
•
extends to more then one period
•
products in different stages in the process
Conversion cost added evenly during process
P r o c e s s C o s t i n g
Conversion cost added evenly during process
Assembly
Testing
Finished Goods
Direct materials Direct materials added at added at the end beginning What to do, at the end of the period, with the determination of the value of •
goods still in the process;
•
goods in Finished Goods inventory;
•
goods that are already sold?
P r o c e s s C o s t i n g
Establish the value of products on a basis of •
Weighted Average
•
First In First Out (FIFO)
Is there a lot of difference?
Process Costing Hilton example (1)
Unit flow during period
Percentage of completion Direct materials
Conversion
Units in Work in process beginning of period
20,000
Units started during the period
30,000
Total units to account for
50,000
Units completed during the period Units in Work in process end of period
40,000
100%
100%
10,000
100%
50%
Total units accounted for
50,000
Process Costing example (2)
Equivalent units Direct materials Units completed during the period Units in Work in process end of period
Conversion
40,000
40,000
10,000
5,000
50,000
45,000
10.000 units @ 50%
Process Costing example (3)
Direct materials
Conversion
Total
Costs in Work in process beginning of period
€
50,000 €
7,200 €
57,200
Costs incurred during period
€
90,000 €
193,500 €
283,500
Total cost to account for
€ 140,000 €
200,700 €
340,700
Cost per equivalent unit
€ 2.80
Cost of Goods completed Cost of Work in process end of period
€ 112,000 €
Total cost to account for
€ 140.000 / 50.000 e.u.
Weighted average
€ 4.46
€ 7.26
178,400 €
290,400
28,000 €
22,300 €
50,300
€ 140,000 €
200,700 €
340,700
€
40.000 e.u. completed during period @ € 2,80
Process Costing example (4) Percentage of completion beginning inventory is relevant Percentage of completion Unit flow during period Units in Work in process beginning of period
20,000
Units started during the period
30,000
Total units to account for
50,000
Units completed from beginning WIP
20,000
Units completed during the period Units in Work in process end of period Total units accounted for
50,000
Direct materials
Conversion
100%
10%
20,000
100%
100%
10,000
100%
50%
Same example but now: First In First Out method
Process Costing example (5)
20.000 units beginning inventory @ (1-10%)
Equivalent units Direct materials Units completed from beginning WIP Units completed during the period Units in Work in process end of period
Conversion 0
18000
20,000
20,000
10,000
5,000
30,000
43,000
10.000 units in ending inventory @ 50% Same example but now: First In First Out method
Process Costing example (6)
Direct materials
Conversion
Total
Costs in Work in process beginning of period
€
50,000 €
Costs incurred during period
€
90,000 € 193,500 € 283,500
Total cost to account for
€ 140,000 € 200,700 € 340,700
Cost per equivalent unit
€ 3.00
7,200 €
€ 4.50
Costs incurred during period (€193.500) / total e.u.(43.000)
Same example but now: First In First Out method
57,200
€ 7.50
Process Costing example (7)
Costs are given WIP beginning
€
50,000 €
Cost to complete WIP beginning
€
Cost of goods completed from beginning WIP
€
50,000 €
88,200 € 138,200
Started and completed this period Cost of Work in process end of period
€
60,000 €
90,000 € 150,000
€
30,000 €
22,500 €
Total cost to account for
€ 140,000 € 200,700 € 340,700
-
€
7,200 €
57,200
81,000 €
81,000
52,500
Units completed from beginning inventory (18.000) @ € 4,50 Units started and completed during period @ € 4,50
Same example but now: First In First Out method
J o b C o s t i n g & P r o c e s s C o s t i n g
Conclusion Difference between two systems: in practice often a mixture. Cost tracing essential to stay alive in a competitive environment. Cost allocation for assigning indirect cost to costobjects. Job-costing Hybrid-costing Process-costing systems systems systems Distinct, identifiable unit of a product or service.
Masses of similar product units or service units.
• Process costing (Chapter 4)
C o s t
• • • •
direct – indirect (assignment) fixed – variable (behavior) manufacturing – marketing (function) total – unit (level of aggregation)
Different costing (systems) for different purposes
C o s t a s s I g n m e n t a n d b e h a v I o r
Direct cost Variable cost Fixed cost
• cost of materials; • packaging • depreciation mach. X; • wages sales repr. prod. Y
Indirect cost • company public relations; • transport; • phone (partly) • wages staff employees; • insurance; • taxes
C o s t f u n c t I o n
Product cost: labor (direct) materials (direct) production overhead (indirect, assigned) manufacturing cost direct marketing cost indirect marketing cost (assigned) Product cost
J o b C o s t i n g
•
& P r o c e s s C o s t i n g
•
Production:
(individual) Job
(mass) Process
Costing systems
Cost calculation for each Job
Cost calculation for each Process
Different Costing Systems for different Production Systems
J o b C o s t i n g & P r o c e s s C o s t i n g
Job-costing systems Distinct, identifiable unit of a product or service.
Hybrid-costing systems
Process-costing systems Masses of similar product units or service units.
•
that is being performed once?
J o b C o s t i n g
What are the costs of an assignment/product/service/job
•
Once: how reliable is the outcome of the calculation of the budgeted cost?
•
Are decisions made by managers based on the results of calculations or are the decisions based on gut-feeling (marketing/strategic arguments)?
Cost assignment: J o b C o s t i n g
•
direct cost: •
•
cost tracing
indirect cost: •
cost allocation
Indirect Cost Pools J o b C o s t i n g
Indirect Cost Allocation Base
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Marketing Overhead
Machine hours
Machine hours
Dir. Mkting labour
Cost Object
Fixed Marketing Overhead
Units Sold
Indirect Cost Direct Cost
Direct Cost Direct Materials
Direct Manufacturing Labour
Direct Marketing Labour
Calculation and allocation of fixed cost: F i x e d
€
C o s t
Fixed cost Average FC 1
volume
Determine fixed cost per unit of performance:
F I x e d
•
tariff is based on budgeted level of activities
•
user is charged based on actual usage €
C o s t
Allocated FC FC Av.FC
Tariff: FC/N N
volume
A l l o c a t i o n (u n d e r
Difference between Actual cost and Allocated Cost Reasons: •
cost level is in/decreased in the recent period; •
a n d o v e r)
Numerator reason:
Denominator reason: budgeted level is not the same as the Cost sales Allocation Department actual level.
Consequence: •
Over or under allocation
A l l o c a t i o n
Cost
Department
Budgeted cost € 12.000
Budgeted allocation € 12.000
o f
Work in process
t h e r e s u l t s
Allocation
Department Actual cost € 10.000
Finished Goods Cost of Goods Sold Actual allocation € 12.000
€ 2.000
What to do with the (in this case) positive result ?
A l l o c a t i o n o f t h e r e s u l t s
Work in process
Department Actual cost € 10.000
Finished Goods Cost of Goods Sold Actual allocation € 12.000 € 10.000
€ 2.000
What to do with the (in this case) positive result ? Adjusted Allocation Rate approach: Calculate the cost of each job on the basis of actual cost. Question: Does it matter what the cause of the result was?
A l l o c a t i o n o f t h e r e s u l t s
Actual cost € 10.000
Actual allocation € 12.000 € 2.000
What to do with the (in this case) positive result ? Proration approach: Assign the result to WiP, FG and CoGs on a basis of •usage of indirect cost •ending balance of WiP, FG and CoGs Another method: just bring it under period costs
P r o c e s s C o s t i n g
Process •
repeating
•
extends to more then one period
•
products in different stages in the process
Conversion cost added evenly during process
P r o c e s s C o s t i n g
Conversion cost added evenly during process
Assembly
Testing
Finished Goods
Direct materials Direct materials added at added at the end beginning What to do, at the end of the period, with the determination of the value of •
goods still in the process;
•
goods in Finished Goods inventory;
•
goods that are already sold?
P r o c e s s C o s t i n g
Establish the value of products on a basis of •
Weighted Average
•
First In First Out (FIFO)
Is there a lot of difference?
Process Costing Hilton example (1)
Unit flow during period
Percentage of completion Direct materials
Conversion
Units in Work in process beginning of period
20,000
Units started during the period
30,000
Total units to account for
50,000
Units completed during the period Units in Work in process end of period
40,000
100%
100%
10,000
100%
50%
Total units accounted for
50,000
Process Costing example (2)
Equivalent units Direct materials Units completed during the period Units in Work in process end of period
Conversion
40,000
40,000
10,000
5,000
50,000
45,000
10.000 units @ 50%
Process Costing example (3)
Direct materials
Conversion
Total
Costs in Work in process beginning of period
€
50,000 €
7,200 €
57,200
Costs incurred during period
€
90,000 €
193,500 €
283,500
Total cost to account for
€ 140,000 €
200,700 €
340,700
Cost per equivalent unit
€ 2.80
Cost of Goods completed Cost of Work in process end of period
€ 112,000 €
Total cost to account for
€ 140.000 / 50.000 e.u.
Weighted average
€ 4.46
€ 7.26
178,400 €
290,400
28,000 €
22,300 €
50,300
€ 140,000 €
200,700 €
340,700
€
40.000 e.u. completed during period @ € 2,80
Process Costing example (4) Percentage of completion beginning inventory is relevant Percentage of completion Unit flow during period Units in Work in process beginning of period
20,000
Units started during the period
30,000
Total units to account for
50,000
Units completed from beginning WIP
20,000
Units completed during the period Units in Work in process end of period Total units accounted for
50,000
Direct materials
Conversion
100%
10%
20,000
100%
100%
10,000
100%
50%
Same example but now: First In First Out method
Process Costing example (5)
20.000 units beginning inventory @ (1-10%)
Equivalent units Direct materials Units completed from beginning WIP Units completed during the period Units in Work in process end of period
Conversion 0
18000
20,000
20,000
10,000
5,000
30,000
43,000
10.000 units in ending inventory @ 50% Same example but now: First In First Out method
Process Costing example (6)
Direct materials
Conversion
Total
Costs in Work in process beginning of period
€
50,000 €
Costs incurred during period
€
90,000 € 193,500 € 283,500
Total cost to account for
€ 140,000 € 200,700 € 340,700
Cost per equivalent unit
€ 3.00
7,200 €
€ 4.50
Costs incurred during period (€193.500) / total e.u.(43.000)
Same example but now: First In First Out method
57,200
€ 7.50
Process Costing example (7)
Costs are given WIP beginning
€
50,000 €
Cost to complete WIP beginning
€
Cost of goods completed from beginning WIP
€
50,000 €
88,200 € 138,200
Started and completed this period Cost of Work in process end of period
€
60,000 €
90,000 € 150,000
€
30,000 €
22,500 €
Total cost to account for
€ 140,000 € 200,700 € 340,700
-
€
7,200 €
57,200
81,000 €
81,000
52,500
Units completed from beginning inventory (18.000) @ € 4,50 Units started and completed during period @ € 4,50
Same example but now: First In First Out method
J o b C o s t i n g & P r o c e s s C o s t i n g
Conclusion Difference between two systems: in practice often a mixture. Cost tracing essential to stay alive in a competitive environment. Cost allocation for assigning indirect cost to costobjects. Job-costing Hybrid-costing Process-costing systems systems systems Distinct, identifiable unit of a product or service.
Masses of similar product units or service units.
