st chap006
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Fundamentals of Productand Service Costing
Chapter 6
Copyright © 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e". McGraw-Hill#Irwin
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Reasons to Calculate Product
or Service Costs
• For decision making
• For deciding what to sell
• For setting prices
• For knowing the cost of goods sold
• For knowing the cost of inventory
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Cost Allocation and Product Costing
L.O. 2 Explain how cost allocation is usedin a cost management system.
Basic Cost Flow iagram
irectmaterials
irectlabor
!anufacturingoverhead
"lpha Beta
Costpools
Costobjects
Costallocation
rule
#ndirect
$allocated
by direct labor cost%irect
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Basic Cost Flow Model
L.O. 3 Explain how a basic product costing system works.
• &ow costs and units move through inventories'
• This is true for the following accounts' ( )aw !aterials $)!% ( *ork+in+rocess $*#% ( Finished -oods $F-%
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Costing with No or!"in"Process
#nventories
• Bater aint begins production on "pril /.
• #t starts and completes production of /00,000gallons of paint in "pril and has no ending
work+in+process inventory.
!aterials 1 200,000
3abor /00,000!anufacturing overhead 400,000
Total 1/,000,000
Cost of resources used in "pril'
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Costing with or!"in"Process
#nventories
Beginning inventory +0+6tarted in !ay //0,000
Total //0,0007nding *# $408 complete% 90,000Transferred out :0,000
roduction for Bater aint for !ay follows $gallons%'
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Costing with or!"in"Process
#nventories
FG
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Costing with or!"in"Process
#nventories
• &ow do we cost Bater;s 90,000 gallons of paint thatare only half finished5
• 90,000 gallons half finished is e<uivalent to /0,000gallons finished.
• :0,000 gallons transferred out plus /0,000 e<uivalent gallonsof finished paint e<uals /00,000 e<uivalent gallons of paint.
-allons of paint transferred out :0,0007<uivalent gallons of finished paint /0,000Total e<uivalent gallons of paint /00,000
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Costing with or!"in"Process
#nventories
irect material = irect labor = >verhead$1::0,000%
Finished goodsinventory1?:/,000
*ork+in+processinventory1::,000
7<uivalent gallons:0,000gallons$:08%
/0,000gallons$/08%
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Predetermined $verhead Rates
L.O. 4 Understand how overhead cost is allocated to products.
• #ndirect costs are allocated using a predetermined
overhead rate $>&)%.• >&) is the cost per unit of the allocation base used
to charge overhead to products.
>&) @ 1 A Base
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Multiple Allocation Bases
and %wo"Stage Systems
L.O. 5 Explain the operation of a two-stage allocation
system for product costing.
• *e can use two or more allocation bases to allocatemanufacturing overhead to products.
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Multiple Allocation Bases
and %wo"Stage Systems
!anufacturing overhead
!achine+relatedcosts irect labor+relatedcosts
C+9s C+90s
Costpool
Costobjects
Costallocation
rules
#ndirect costs #ndirect costs
$allocated in proportion
to machine hours%
$allocated in proportion
to direct labor costs%
6econdstage
First stage
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Multiple Allocation Bases
and %wo"Stage Systems
Costpool
Cost allocationrule
#ntermediatecost pools
>verhead1/?0,000
3abor+related1/0?,000
!achine+related19,000
irect labor costs
!achinehours
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Product Costing Systems
L.O. 6 Describe the three basic types of product costing
systems: job order process and operations.
• ob costing'
( "n accounting system that traces costs to individual unitsor to specific jobs, contracts, or batches of goods.$custom homes, movies, services%
• rocess costing' ( "n accounting system used when identical units are
produced through a series of uniform production steps.$cornflakes, facial tissues, paint%
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&nd of Chapter 6
Copyright © 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e". McGraw-Hill#Irwin
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