Transcript Management Accounting: Information That Creates Value

Product Costing
Job Order
Process Costing
Allocates costs to products
that are readily identifiable
Average costs over large number of
nearly identical units
Common in construction,
print shops, unique goods
Common in chemical, textiles,
lumber, glass, food processing
Accumulate costs for
specific jobs
Accumulate costs
by departments
Produce for sale
Produce for inventory
Job-Order versus Process Costing
Job-Order Costing
Direct materials
Direct labour
Factory overhead
Process Costing
Job 100
Job 101
Finished
Goods
Inventory
Cost of
Goods
Sold
Finished
Goods
Inventory
Cost of
Goods
Sold
Job 102
Process A
Direct materials
Direct labour
Process B
Factory overhead
Process C
Similarities Between Job-Order and Process
Costing
•
Both systems assign material, labour and overhead costs
to products and they provide a mechanism for
computing unit product cost.
•
Both systems use the same manufacturing accounts,
including Manufacturing Overhead, Raw Materials,
Work in Process, and Finished Goods.
•
The flow of costs through the manufacturing accounts
is basically the same in both systems.
Differences Between Job-Order and Process
Costing
•
•
•
•
Process costing is used when a single product is produced
on a continuing basis or for a long period of time. Job-order
costing is used when many different jobs are worked on
each period.
Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by individual
jobs.
Process costing systems use department production reports
to accumulate costs. Job-order costing systems use job
cost sheets to accumulate costs.
Process costing systems compute unit costs by department.
Job-order costing systems compute unit costs by job on the
job cost sheet.
Process Costing


Process costing is used when all products are
identical such as soda drinks and breakfast cereal
Process costing systems use two different cost
terms:
– Direct material
– Conversion costs—all manufacturing costs that are
not direct material costs
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Equivalent Units of Production
Equivalent units are the product of the number of partially
completed units and the percentage completion of those
units.
We need to calculate equivalent units because a
department usually has some partially completed units
in its beginning and ending inventory.
Equivalent Units – The Basic
Idea
Two half completed products are equivalent to one
completed product.
+
=
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
1
Compute and Apply Costs
The formula for computing the cost per
equivalent unit is :
Cost per
equivalent =
unit
Cost of beginning
work in process + Cost added during
inventory
the period
Equivalent units of production
Compute and Apply Costs
Beginning work in process:
Materials: 55% complete
Conversion: 30% complete
200 units
$
9,600
5,575
Production started during May 5,000 units
Production completed during May
4,800 units
Costs added to production in May
Materials cost
Conversion cost
Ending work in process
Materials:
40% complete
Conversion: 25% complete
$ 368,600
350,900
400 units
Weighted-Average Example
Double Diamond Skis reported the following activity in
Shaping and Milling Department for the month of May:
Percent Completed
Shaping and Milling Department
Beginning work in process
Units
200
Materials Conversion
55%
30%
Units started into production in May
5,000
Units completed during May and
transferred to the next department
4,800
100%
100%
400
40%
25%
Ending work in process
Weighted-Average Example
Materials
Units completed and transferred
to the next department
4,800
Conversion
4,800
Work in process, June 30:
400 units × 40%
160
400 units × 25%
Equivalent units of Production in
during the month of May
100
4,960
4,900
Compute and Apply Costs
Here is a schedule with the cost and equivalent unit
information.
Total
Cost
Cost to be accounted for:
Work in process, May 1
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
$
15,175
Materials
Conversion
$
$
9,600
5,575
719,500
368,600
350,900
$ 734,675
$ 378,200
$ 356,475
4,960
4,900
Cost per equivalent unit
$ 76.25
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
$
72.75
$356,475
÷ 4,900
unitsunits
= $72.75
$378,200
÷ 4,960
= $76.25
Computing the Cost of Units Transferred
Out
Shaping and Milling Department
Cost of Ending Work in Process Inventory and the Units Transferred Out
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production
160
100
Cost per equivalent unit
$
76.25
$
72.75
Cost of ending work in process inventory
$
12,200
$
7,275
$
19,475
Units completed and transferred out:
Units transferred to the next department
Cost per equivalent unit
Cost of units transferred out
$
$
4,800
76.25
366,000
$
$
4,800
72.75
349,200
$
715,200
Activity-Based Cost
Systems
Chapter 5
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Traditional Costing



Also called cost smoothing or peanut butter
costing
Spread the costs of conversion uniformly among
products and services
Appropriate if:
– Indirect costs are a small proportion of total costs
– Activities are consumed uniformly in the
production process

Inappropriate otherwise: leads to overcosting and
undercosting of products and services
Copyright  2010
Pearson Education
Canada
Traditional Manufacturing
Costing Systems

Typical volume-based cost drivers include:
– Direct labor hours
– Machine hours
– Direct labor dollars

Adequate for companies with high-volume
products with similar production volumes and
batch sizes

Can lead to product cost distortion in an
environment of high product variety
© 2012 Pearson Prentice Hall. All rights reserved.
Traditional Cost System
Direct
Material
Costs
Direct
Labour
Costs
Overhead
Costs
Direct
Trace
Direct
Trace
DLH
Allocation
Products
ABC Cost System
Overhead Costs
Direct
Material
Costs
Direct
Labour
Costs
Direct
Trace
Direct
Trace
Machining
activity
costs
Assembly
activity
costs
Inspection
activity
costs
Processing
Hours
# of parts
# of
inspections
Products
Activity-Based Cost Systems

Activity-based cost systems have been developed
to eliminate distortion

Time-driven activity-based costing systems
(TDABC or Time-Driven ABC) estimate two
parameters and then assign indirect costs similar
to the way direct costs are assigned
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TDABC – First Parameter

Cost rate for each type of indirect resource
– Identify all costs incurred to supply the resource
– Identify the practical capacity supplied by the
resource
– Determine the capacity cost rate of the resource by
dividing its cost by the practical capacity
Capacity
Cost of capacity supplied
=
cost rate
Practical capacity of resources supplied
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Capacity Cost Rate Example


Assume that indirect labor employees supply 2,500 hours
of labor in total each quarter at a cost of $84,000
The practical capacity (at 80% of theoretical) is about
2,000 hours per quarter, leading to a unit cost (per hour) of
supplying indirect labor capacity of:
Indirect labor cost per hour =
$84,000
2,000 hours
= $42 per hour
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TDABC – Second Parameter

Estimation of how much of each resource’s
capacity is used by the activities performed to
produce the products and services
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Time-Driven ABC

Use parameter estimates to assign indirect costs:
Cost of using resource i by product j =
Capacity cost rate of resource i
x Quantity of capacity of resource i used
by product j
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TDABC Profitability Report


Managers may use insights from TDABC cost
analysis to improve operations
Possible actions include:
– Reduce setup times
– Reduce time required for purchasing
– Reduce time required for scheduling production
orders
– Increase prices on unprofitable products
– Impose minimum customer order sizes
– Make decisions on desired product mix
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Measuring the Cost of
Unused Resource Capacity

Activity cost driver rates are frequently but
incorrectly calculated based on capacity actually
used; this leads to:
– rates that are too high
– the cost of unused capacity being applied to
products actually produced
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Cost of Unused Capacity




The cost of unused capacity should not be
assigned to products produced or customers served
during a period
The cost of unused capacity remains someone’s,
or some department’s, responsibility
Usually you can assign the cost of unused capacity
after analyzing the decision that authorized the
level of capacity supplied
Such an assignment is done on a lump-sum basis;
it will not be assigned to individual units of
products
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Activity-Based Costing
Systems
Three things to consider to improve an existing costing system:
1.
Direct-cost tracing
–
2.
Indirect-cost pools
–
3.
Reduce indirect costs by classifying more costs as direct
Expand the number of indirect-cost pools until the costs in each pool
are homogeneous – the amount varies directly as activity varies
Activity-cost drivers
–
–
A measure of the activity performed for each cost driver
The denominator that is divided into the indirect cost pool to
calculate the activity cost rate
Copyright  2010
Pearson Education
Canada
Define Activities, Activity Cost Pools,
and Activity Measures
At Classic Brass, the ABC team, selected the following
activity cost pools and activity measures:
Define Activities, Activity Cost Pools,
and Activity Measures





Customer Orders - assigned all costs of resources that are
consumed by taking and processing customer orders.
Product Designs - assigned all costs of resources consumed
by designing products.
Order Size - assigned all costs of resources consumed as a
consequence of the number of units produced.
Customer Relations – assigned all costs associated with
maintaining relations with customers.
Other – assigned all overhead costs that are not associated
with the other cost pools.
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labour
Shipping
Costs
Traced
Traced
Traced
Overhead Costs
Cost Objects:
Products, Customer Orders, Customers
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labour
Shipping
Costs
Overhead Costs
First-Parameter Allocation
Order
Size
Customer
Orders
Product
Design
Customer
Relations
Cost Objects:
Products, Customer Orders, Customers
Other
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labour
Shipping
Costs
Overhead Costs
First-Parameter Allocation
Customer
Orders
Order
Size
Product
Design
Customer
Relations
Other
Second-Parameter Allocations
$/Order
$/Design
$/MH
$/Customer
Cost Objects:
Products, Customer Orders, Customers
Unallocated
Calculate Activity Rates
Assigning Overhead to
Customers
ABC at Service Companies

Although ABC had its origins in manufacturing
companies, many service organizations today are
obtaining great benefits from this approach
– In practice, the actual construction of an ABC
model is nearly identical for both types of
companies
– This should not be surprising since, in
manufacturing companies, the ABC system focuses
on the “service” component of the company
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ABC at Service Companies

Service companies in general are ideal candidates
for activity-based costing
– Virtually all costs are indirect and appear to be
fixed
– They often do not have direct, traceable costs to
serve as convenient allocation bases
– They must supply virtually all their resources in
advance to provide the capacity to perform work
for customers during each period
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