Costing Systems

EMBA 5403Fall 2010

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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 Overhead-Variable

Actual Applied Standard

Manufacturing Overhead-Fixed

Actual Applied Standard Applied

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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 CostingAbsorption costing allocates

variable and fixedoverhead costs to products.

Finished GoodsInventoryValuation

Cost of GoodsSold

Cost of Goods Manufactured

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Product Costing Proceduresin Organizations

ProcessCosting

Job-orderCosting

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• Law firms

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Product Costing Proceduresin Organizations

ProcessCosting

Job-orderCosting

Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

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Job-Order Costing

Traced directly to each job

Traced directly

to each job

TheTheJobJobTheTheJobJob

Direct labor

Direct labor

Direct materials

Direct materials

Manufacturingoverhead (MOVH)

Applied (added) to

eachjob using a

predeterminedrate

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Job-Order Costing

Part of the job cost

MaterialsRequisition and

Time tickets

Direct materials

and labor

Indirect materials and labor

Manufacturing Overhead Control Account

Raw materials could be used as direct or indirect

product cost.

An employee’stime may be eitherdirect or indirect.

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Job-Order Costing

wages

Job-Order Cost

Sheets

Material usage

OtherActual OHCharges

IndirectMaterials

IndirectLabor

AppliedOverhead

Manufacturing Overhead Control Account

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Job-Order Cost Sheet

XYZ Job-Order Cost Sheet

Job Number A - 143 Date Initiated 17 September 2008Date Completed

Department A4 Units Completed 2Item Steel water tank

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountMR 1041 TL 1200 20 8 TL 160 8 TL 6 TL 48

Cost Summary Units ShippedDirect Materials TL 1200 Date Number BalanceDirect Labor TL 160Manufacturing Overhead TL 48Total Cost 1408Unit Cost 704 11/17/08 1 1

17-Nov-08

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Job-Order System Cost Flows

Direct Labor

Mfg. Overhead

Salaries and Wages Payable

Work-in-Process(Job Cost Sheet)

Direct

Materials

OverheadApplied to

Work inProcess

IndirectLabor

Direct Labor

Overhead Applied

IndirectLabor

Indirect Materials

Actual Applied If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

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Job-Order System Cost Flows

Cost ofGoodsMfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoodsMfd.

Cost of Goods Sold

Cost ofGoodsSold

Work-in-Process(Job Cost Sheet)

Direct

MaterialsDirect Labor

Overhead Applied

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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 overhead

Underabsorbed overhead

Overabsorbed overhead

Underabsorbed overhead

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Over- and Underabsorbed Overhead

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = TL 6.00 per DLH × 100,000 DLH = TL 600,000

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = TL 6.00 per DLH × 100,000 DLH = TL 600,000

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 ofTL 6.00 per direct labor hour, how much overhead

was applied to XYZ’s jobs during the year?

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Accounting for Over- andUnderabsorbed Overhead

Three basic approaches Prorate among work-in-process,

finished goods, and cost of goods sold.

Adjust cost of goods sold. Recalculate the application rate and

apply to all the jobs during the period.

Three basic approaches Prorate among work-in-process,

finished goods, and cost of goods sold.

Adjust cost of goods sold. Recalculate the application rate and

apply to all the jobs during the period.

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Accounting for Over- andUnderabsorbed Overhead

Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation

UNDERABSORBED INCREASE INCREASECost of Goods Sold Work-in-Process

(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERABSORBED DECREASE DECREASECost of Goods Sold Work-in-Process

(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

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Allocation Base

Products

Application Rate

If overhead costs are

accumulated in a single cost

pool and allocated using

a single allocation base.

If overhead costs are

accumulated in a single cost

pool and allocated using

a single allocation base.

Single Overhead Cost Pool

Single Overhead Cost Pool

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Many companies use Activity Based Costing where multiple cost pools and a different allocation base for each cost pool.

Many companies use Activity Based Costing where multiple cost pools and a different allocation base for each cost pool.

Products

Application Rate A

Overhead Cost Pool

A

Overhead Cost Pool

A

Overhead Cost Pool

B

Overhead Cost Pool

B

Overhead Cost Pool

C

Overhead Cost Pool

C

Application Rate B

Application Rate C

Multiple Allocation Bases

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Improves planning and control. Activity Based Costing (ABC) is one

method of using multiple allocation bases.

ABC and Multiple Allocation Bases

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Multistage Allocation Processes

Overhead Cost Pool 1Overhead

Cost Pool 1Overhead

Cost Pool 2Overhead

Cost Pool 2Overhead

Cost Pool 3Overhead

Cost Pool 3Overhead

Cost Pool 4Overhead

Cost Pool 4

Separate Application Rates

Department ADepartment A Department CDepartment CDepartment BDepartment B

Products

Dept. Application Rates

Dept. Application Rates

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Process Costing

Identical units of product are producedin a continuous flow through a series of manufacturing steps or processes.

Costs are assigned to completed units transferred out of the process and to

incomplete units remaining in the process.

Identical units of product are producedin a continuous flow through a series of manufacturing steps or processes.

Costs are assigned to completed units transferred out of the process and to

incomplete units remaining in the process.

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Costs are accumulated for a period of period of timetime for products in work-in-process

inventory.

Equivalent unitsEquivalent units is a concept expressing these partially completed

products as a smaller number of fully completed products.

Costs are accumulated for a period of period of timetime for products in work-in-process

inventory.

Equivalent unitsEquivalent units is a concept expressing these partially completed

products as a smaller number of fully completed products.

Process Costing

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Two one-half completed products are equivalent to one completed product.

Two one-half completed products are equivalent to one completed product.

+ =

So, 8,000 units 70 percent completeare equivalent to 5,600 complete units.

So, 8,000 units 70 percent completeare equivalent to 5,600 complete units.

Equivalent Units

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For the current period, Ames started 15,000 units and completed 10,000 units, leaving

5,000 units in process 30 percent complete. How many equivalent units of production did

Ames have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

For the current period, Ames started 15,000 units and completed 10,000 units, leaving

5,000 units in process 30 percent complete. How many equivalent units of production did

Ames have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units Question

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For the current period, Ames started 15,000 units and completed 10,000 units, leaving

5,000 units in process 30 percent complete. How many equivalent units of production did

Ames have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

For the current period, Ames started 15,000 units and completed 10,000 units, leaving

5,000 units in process 30 percent complete. How many equivalent units of production did

Ames have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

10,000 units + (5,000 units × .30) = 11,500 equivalent units

Equivalent Units Question

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Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period

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Now assume that Ames incurred $27,600 in production costs for the 11,500 equivalent units. What was Ames’ average cost per

equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Now assume that Ames incurred $27,600 in production costs for the 11,500 equivalent units. What was Ames’ average cost per

equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units Question

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Now assume that Ames incurred $27,600 in production costs for the 11,500 equivalent units. What was Ames’ average cost per

equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Now assume that Ames incurred $27,600 in production costs for the 11,500 equivalent units. What was Ames’ average cost per

equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Equivalent Units Question

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What portion of the $27,600 in production costs was assigned to work-in-process

inventory and what amount was assigned to completed units for the period?

a. $0 and $27,600

b. $7,600 and $20,000

c. $3,600 and $24,000

d. $12,000 and $15,600

What portion of the $27,600 in production costs was assigned to work-in-process

inventory and what amount was assigned to completed units for the period?

a. $0 and $27,600

b. $7,600 and $20,000

c. $3,600 and $24,000

d. $12,000 and $15,600

Equivalent Units Question

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What portion of the $27,600 in production costs was assigned to work-in-process

inventory and what amount was assigned to completed units for the period?

a. $0 and $27,600

b. $7,600 and $20,000

c. $3,600 and $24,000

d. $12,000 and $15,600

What portion of the $27,600 in production costs was assigned to work-in-process

inventory and what amount was assigned to completed units for the period?

a. $0 and $27,600

b. $7,600 and $20,000

c. $3,600 and $24,000

d. $12,000 and $15,600

Work-in-process:1,500 equivalent units @ $2.40 = $3,600

Completed units: 10,000 equivalent units @ $2.40 = $24,000

Equivalent Units Question

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Equivalent Units

When there are partially completed units in beginning inventory, work efforts

during the period can be categorized as follows:

Work to complete beginning work-in-process Work on units started and completed during

the period Work on units in ending work-in-process

When there are partially completed units in beginning inventory, work efforts

during the period can be categorized as follows:

Work to complete beginning work-in-process Work on units started and completed during

the period Work on units in ending work-in-process

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Equivalent Units - ExampleACE 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-processon June 30. They were 40% complete. How many total equivalent units

did ACE produce during June?

Continue

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Equivalent Units - Example

Since 30% of the work was done on these units in May, the remaining 70% of

the work is done in June.

Since 30% of the work was done on these units in May, the remaining 70% of

the work is done in June.

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Equivalent Units - Example

Since 1,200 units were started during June, and 300 ofthose units are still in work-in-process on June 30,900 units were started and completed during June.

Since 1,200 units were started during June, and 300 ofthose units are still in work-in-process on June 30,900 units were started and completed during June.

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Equivalent Units - Example

40% of the work was done on these units in June.40% of the work was done on these units in June.