© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Accounting Systems For
Measuring Costs
Chapter
17
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Planning and
control
functions.
Providing
products or
services to...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Disclose
inventories
and cost of
goods sold.
Track resources
cons...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Process
Costing
Job Order
Costing
 Used for production of large,...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
 Typical job order cost
applications:
 Special-order printing
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
 Used for production of small,
identical, low-cost items.
 Mass...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Typical process cost applications:
 Petrochemical refinery
 Pai...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
THE JOB
Direct
materials
Direct
labor
Traced directlyto each job
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The primary
document for
tracking the costs
associated with a
giv...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The Job Cost SheetThe Job Cost Sheet
RoseCo Job Cost Sheet
Job Nu...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The Job Cost SheetThe Job Cost Sheet
RoseCo Job Cost Sheet
Job Nu...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The Job Cost SheetThe Job Cost Sheet
RoseCo Job Cost Sheet
Job Nu...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The Job Cost SheetThe Job Cost Sheet
RoseCo Job Cost Sheet
Job Nu...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s summarize
the document
flow we have
been discussing
in a jo...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Materials
Ledger CardsMaterials
Ledger CardsMaterials
Ledger Card...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Employee time
tickets indicate
the cost of direct
labor
to charge...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Employee
Time Ticket
Materials
Requisition
Other
Actual OH
Charge...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s examine the
cost flows in a
job order costing
system. We wi...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
•Material
Purchases
•Direct
Material
•Direct
Material
Mfg. Overhe...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Next let’s add
labor costs and
applied
manufacturing
overhead to ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
•Direct
Labor
Mfg. Overhead
Work in Process
(Job Cost Sheet)
•Ind...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
If Manufacturing Effect of Closing to
Overhead is . . . Cost of G...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Now let’s
complete the
goods and sell
them. Still with
me?
Flow o...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
•Cost of
Goods
Mfd.
Finished Goods
•Cost of
Goods
Sold
•Cost of
G...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
 Used for production of small,
identical, low-cost items.
 Mass...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Job Costing
 Custom orders
 Heterogeneous products
 Low produc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Direct
Materials
Finished
Goods
Cost per
unit for
each job
Direct...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Direct
Materials
Finished
Goods
Direct
Labor
Factory
Overhead
Pro...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Same objective: to determine
the cost of products
Same inventory ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Work in
Process
Assembly
Labor
Materials
IndirectIndirect
Finishe...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Costs are accumulated for a period of
time by process or departme...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Unit cost is computed by dividing the
accumulated costs by the nu...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Equivalent units is a concept expressing a
number of partially co...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
QuestionQuestion
For the current period, PencilCo started
15,000 ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
For the current period, PencilCo started
15,000 units and complet...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Cost per
equivalent
unit
=
Product costs for the period
Equivalen...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Now assume that PencilCo incurred
$27,600 in production costs. Wh...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Now assume that PencilCo incurred
$27,600 in production costs. Wh...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Equivalent units may be
different for material and labor
and over...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Stage 2
25% of
Labor and
Overhead
60% of
Material
Stage 1
40% of
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Stage 3
50% of
Labor and
Overhead
The process is now complete.The...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Owl Inc uses FIFO
process costing
in its Fabrication
Department w...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Process Costing and
Equivalent Units
Process Costing and
Equivale...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Owl Inc Fabrication Department Data For April 2002
Beginning Inve...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Owl Inc Fabrication Department Data For April 2002
Beginning Inve...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
April Fabrication Department Physical Flow
Units to account for:
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department
Direct Material Equivalent Units of Produc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department
Direct Material Equivalent Units of Produc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department
Direct Material Equivalent Units of Produc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department Direct Labor and Factory
Overhead Equivale...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department Direct Labor and Factory
Overhead Equivale...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department Direct Labor and Factory
Overhead Equivale...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Summary of Fabrication Department
Equivalent Units of Production ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department
April Work in Process Costs
Beginning work...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department
Cost Per Equivalent Unit - April 2002
Dire...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
We will account for all costs incurred
by assigning unit costs to...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department Work in Process
Cost Summary for April 200...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department Work in Process
Cost Summary for April 200...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department Work in Process
Cost Summary for April 200...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Fabrication Department Work in Process
Cost Summary for April 200...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
A
B C
A
CB
Activity-Based Costing (ABC)Activity-Based Costing (AB...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
One of the most
difficult tasks in
computing accurate
unit costs ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Level of Com
plexity
Overhead Allocation
Plantwide
Overhead
Rate
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
In the ABC method,
we recognize that many
activities within a
dep...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Identify activities and assign indirect costs to
those activities...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
More detailed measures of costs.
Better understanding of activi...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Most cost drivers are related to either volume
or complexity of p...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Overhead Actual
Rate Activity
×
Rate =
Estimated overhead costs i...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s look at an
example comparing
traditional costing
with ABC.
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Pear Company manufactures a product in regular and
deluxe models....
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Direct
Labor Hours
Deluxe Model 5,000 units @ 1.6 hours 8,000
Reg...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Deluxe Regular
Model Model
Direct Material 150$ 112$
Direct Labor...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Pear Company plans to adopt activity-based
costing. Using the fol...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Overhead Units
Activity Cost Cost for of
Center Driver Activity A...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Overhead Units
Activity Cost Cost for of
Center Driver Activity A...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Deluxe Model Regular Model
Actual Cost Actual Cost
Units of Alloc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Deluxe Model Regular Model
Actual Cost Actual Cost
Units of Alloc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Deluxe Model Regular Model
Actual Cost Actual Cost
Units of Alloc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Deluxe Model Regular Model
Actual Cost Actual Cost
Units of Alloc...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Overhead Costs Assigned to Products:
Deluxe Model $720,000 ÷ 5,00...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
This result is not uncommon when activity-based
costing is used. ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Cost Cost Driver
Materials purchasing Number of purchase orders
M...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
End of Chapter 17End of Chapter 17
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    1. 1. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Accounting Systems For Measuring Costs Chapter 17
    2. 2. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Planning and control functions. Providing products or services to customers. Assessing the efficiency and effectiveness of operations. Determining unit manufacturing costs. Cost accounting systems provide information supporting decisions making the business successful. Cost Accounting SystemsCost Accounting Systems
    3. 3. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Disclose inventories and cost of goods sold. Track resources consumed by products and services. Manage activities that consume resources. Evaluate and reward employee performance. Cost accounting systems are the procedures and techniques used by management. Cost Accounting SystemsCost Accounting Systems
    4. 4. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Process Costing Job Order Costing  Used for production of large, unique, high-cost items.  Built to order rather than mass produced.  Many costs can be directly traced to each job. Basic Cost Accounting ProceduresBasic Cost Accounting Procedures
    5. 5. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin  Typical job order cost applications:  Special-order printing  Building construction  Also used in service industry  Hospitals  Law firms Basic Cost Accounting ProceduresBasic Cost Accounting Procedures Process Costing Job Order Costing
    6. 6. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product. Basic Cost Accounting ProceduresBasic Cost Accounting Procedures Process Costing Job Order Costing
    7. 7. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill Basic Cost Accounting ProceduresBasic Cost Accounting Procedures Process Costing Job Order Costing
    8. 8. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin THE JOB Direct materials Direct labor Traced directlyto each job Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate (POHR) Job Order CostingJob Order Costing
    9. 9. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate Job Order CostingJob Order Costing
    10. 10. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The Job Cost SheetThe Job Cost Sheet RoseCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-X9 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units Shipped Direct Materials Date Number Balance Direct Labor Manufacturing Overhead Total Cost Unit Cost
    11. 11. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The Job Cost SheetThe Job Cost Sheet RoseCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-X9 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 116$ Cost Summary Units Shipped Direct Materials 116$ Date Number Balance Direct Labor Manufacturing Overhead Total Cost Unit Cost
    12. 12. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The Job Cost SheetThe Job Cost Sheet RoseCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-X9 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 116$ 36 8 88$ Cost Summary Units Shipped Direct Materials 116$ Date Number Balance Direct Labor 88$ Manufacturing Overhead Total Cost Unit Cost Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
    13. 13. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin The Job Cost SheetThe Job Cost Sheet RoseCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-X9 Date Completed 3-5-X9 Department B3 Units Completed 2 Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 116$ 36 8 88$ 8 4$ 32$ Cost Summary Units Shipped Direct Materials 116$ Date Number Balance Direct Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$ Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on direct labor hours (DLH).
    14. 14. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Let’s summarize the document flow we have been discussing in a job order costing system. Job Order Costing Document Flow Summary Job Order Costing Document Flow Summary
    15. 15. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Materials Ledger CardsMaterials Ledger CardsMaterials Ledger CardsMaterials Requisition Direct materials The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Indirect materials Job Cost Sheets Job Cost Sheets Job Cost Sheets Job Cost Sheets Manufacturing Overhead Account Job Order Costing Document Flow Summary Job Order Costing Document Flow Summary
    16. 16. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Job Cost Sheets Job Cost Sheets Direct Labor Indirect Labor Employee Time TicketEmployee Time TicketEmployee Time TicketEmployee Time Ticket Job Order Costing Document Flow Summary Job Order Costing Document Flow Summary
    17. 17. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Employee Time Ticket Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Overhead Applied with POHR Manufacturing Overhead Account Job Cost Sheets Job Order Costing Document Flow Summary Job Order Costing Document Flow Summary
    18. 18. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Let’s examine the cost flows in a job order costing system. We will use T-accounts and start with materials. Flow of Costs in Job CostingFlow of Costs in Job Costing Flow of Costs in Job CostingFlow of Costs in Job Costing
    19. 19. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin •Material Purchases •Direct Material •Direct Material Mfg. Overhead •Indirect Material Work in Process (Job Cost Sheet) •Indirect Material Materials Inventory Flow of Costs in Job CostingFlow of Costs in Job Costing
    20. 20. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Next let’s add labor costs and applied manufacturing overhead to the job order cost flows. Are you with me? Flow of Costs in Job CostingFlow of Costs in Job Costing
    21. 21. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin •Direct Labor Mfg. Overhead Work in Process (Job Cost Sheet) •Indirect Material •Direct Material •Overhead Applied to Work in Process •Indirect Labor •Direct Labor •Overhead Applied •Indirect Labor the difference is closed to cost of goods sold. When Actual Applied factory factory overhead overhead =/ Labor Flow of Costs in Job CostingFlow of Costs in Job Costing
    22. 22. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin If Manufacturing Effect of Closing to Overhead is . . . Cost of Goods Sold UNDERAPPLIED INCREASE (Applied OH is less Cost of Goods Sold than actual OH) OVERAPPLIED DECREASE (Applied OH is greater Cost of Goods Sold than actual OH) Closing Under- or Overapplied Manufacturing Overhead Closing Under- or Overapplied Manufacturing Overhead
    23. 23. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Now let’s complete the goods and sell them. Still with me? Flow of Costs in Job CostingFlow of Costs in Job Costing
    24. 24. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin •Cost of Goods Mfd. Finished Goods •Cost of Goods Sold •Cost of Goods Mfd. Cost of Goods Sold •Cost of Goods Sold Work in Process (Job Cost Sheet) •Direct Material •Direct Labor •Overhead Applied Flow of Costs in Job CostingFlow of Costs in Job Costing
    25. 25. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product.  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product. Process CostingProcess Costing
    26. 26. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Job Costing  Custom orders  Heterogeneous products  Low production volume  High product flexibility  Low to medium standardization Process Costing  Repetitive production  Homogeneous products  High production volume  Low product flexibility  High standardization Comparing Job and Process CostingComparing Job and Process Costing
    27. 27. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Direct Materials Finished Goods Cost per unit for each job Direct Labor Factory Overhead Jobs The Work in Process account consists of individual jobs in job costing. Job and Process CostingJob and Process Costing
    28. 28. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Direct Materials Finished Goods Direct Labor Factory Overhead Processes The Work in Process account consists of specific processes in process costing. Cost per unit processed Job and Process CostingJob and Process Costing
    29. 29. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Same objective: to determine the cost of products Same inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method: predetermined rate times actual activity Job and Process Costing Similarities Job and Process Costing Similarities
    30. 30. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Work in Process Assembly Labor Materials IndirectIndirect Finished Goods Factory Overhead Direct Direct Delivered to Customers Applied Overhead Work in Process Packaging Work in Process Accounts — The Key to Process Costing Work in Process Accounts — The Key to Process Costing
    31. 31. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Costs are accumulated for a period of time by process or department. Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. Computing Unit CostComputing Unit Cost
    32. 32. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. If partially complete units remain in process, we must use equivalent units as the divisor to obtain unit costs. If partially complete units remain in process, we must use equivalent units as the divisor to obtain unit costs. Computing Unit CostComputing Unit Cost Costs are accumulated for a period of time by process or department. Costs are accumulated for a period of time by process or department.
    33. 33. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Two one-half full pitchers are equivalent to one full pitcher. + = Computing and Using Equivalent Units of Production Computing and Using Equivalent Units of Production 1
    34. 34. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin QuestionQuestion For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000
    35. 35. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units QuestionQuestion
    36. 36. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Cost per equivalent unit = Product costs for the period Equivalent units for the period Cost Per Equivalent UnitCost Per Equivalent Unit
    37. 37. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 QuestionQuestion
    38. 38. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per 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 QuestionQuestion
    39. 39. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Equivalent units may be different for material and labor and overhead at different stages of a process. Equivalent units may be different for material and labor and overhead at different stages of a process. At completion of Stage 1 of the process, material is 40% complete, but labor and overhead are only 25% complete. At completion of Stage 1 of the process, material is 40% complete, but labor and overhead are only 25% complete. Stage 1 40% of Material 25% of Labor and Overhead Equivalent UnitsEquivalent Units
    40. 40. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead + + = = 100% 50% Equivalent UnitsEquivalent Units
    41. 41. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Stage 3 50% of Labor and Overhead The process is now complete.The process is now complete. Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead Equivalent UnitsEquivalent Units
    42. 42. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Owl Inc uses FIFO process costing in its Fabrication Department where a product called Strata is made. Process Costing and Equivalent Units Process Costing and Equivalent Units
    43. 43. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Process Costing and Equivalent Units Process Costing and Equivalent Units Owl Inc Fabrication Department Data For April 2002 Beginning Inventory: Units of product 30,000 Percentage of completion - direct material 100% Percentage of completion - direct labor 40% Percentage of completion - overhead 40% Units started in April 90,000 Units transferred from grinding to mixing 100,000 Ending Inventory: Units of product 20,000 Percentage of completion - direct material 100% Percentage of completion - direct labor 25% Percentage of completion - overhead 25%
    44. 44. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Owl Inc Fabrication Department Data For April 2002 Beginning Inventory: Units of product 30,000 Percentage of completion - direct material 100% Percentage of completion - direct labor 40% Percentage of completion - overhead 40% Units started in April 90,000 Units transferred from grinding to mixing 100,000 Ending Inventory: Units of product 20,000 Percentage of completion - direct material 100% Percentage of completion - direct labor 25% Percentage of completion - overhead 25% Material is added at the beginning of the process so it is always 100% complete. Process Costing and Equivalent Units Process Costing and Equivalent Units
    45. 45. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Owl Inc Fabrication Department Data For April 2002 Beginning Inventory: Units of product 30,000 Percentage of completion - direct material 100% Percentage of completion - direct labor 40% Percentage of completion - overhead 40% Units started in April 90,000 Units transferred from grinding to mixing 100,000 Ending Inventory: Units of product 20,000 Percentage of completion - direct material 100% Percentage of completion - direct labor 25% Percentage of completion - overhead 25% Overhead is applied on the basis of labor, so both are at the same percentage of completion. Process Costing and Equivalent Units Process Costing and Equivalent Units
    46. 46. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin April Fabrication Department Physical Flow Units to account for: Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000 Units accounted for as: Units transferred from Fabrication to Mixing 100,000 Ending inventory 20,000 Total number of units 120,000 Physical Flow of UnitsPhysical Flow of Units
    47. 47. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Direct Material Equivalent Units of Production - April 2002 Units of Percent Added Equivalent Product This Period Units Beginning goods in process 30,000 0% 0 Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 100% 20,000 Total units 120,000 90,000 Computing Equivalent Units of Production Computing Equivalent Units of Production
    48. 48. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Direct Material Equivalent Units of Production - April 2002 Units of Percent Added Equivalent Product This Period Units Beginning goods in process 30,000 0% 0 Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 100% 20,000 Total units 120,000 90,000 Since materials are added at the beginning of the process, no additional materials are necessary to complete the beginning inventory. Computing Equivalent Units of Production Computing Equivalent Units of Production
    49. 49. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Direct Material Equivalent Units of Production - April 2002 Units of Percent Added Equivalent Product This Period Units Beginning goods in process 30,000 0% 0 Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 100% 20,000 Total units 120,000 90,000 } 100,000 100,000 units completed and transferred. Computing Equivalent Units of Production Computing Equivalent Units of Production
    50. 50. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Direct Labor and Factory Overhead Equivalent Units of Production - April 2002 Units of Percent Added Equivalent Product This Period Units Beginning goods in process 30,000 60% 18,000 Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 25% 5,000 Total units 120,000 93,000 Computing Equivalent Units of Production Computing Equivalent Units of Production
    51. 51. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Direct Labor and Factory Overhead Equivalent Units of Production - April 2002 Units of Percent Added Equivalent Product This Period Units Beginning goods in process 30,000 60% 18,000 Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 25% 5,000 Total units 120,000 93,000 Since labor and overhead were 40 percent complete in the beginning inventory, 60 percent of the work must be completed in April. Computing Equivalent Units of Production Computing Equivalent Units of Production
    52. 52. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Direct Labor and Factory Overhead Equivalent Units of Production - April 2002 Units of Percent Added Equivalent Product This Period Units Beginning goods in process 30,000 60% 18,000 Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 25% 5,000 Total units 120,000 93,000 } 100,000 Transferred Computing Equivalent Units of Production Computing Equivalent Units of Production
    53. 53. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Summary of Fabrication Department Equivalent Units of Production - April 2002 Direct Direct Factory Activities during April 2002 Material Labor Overhead Units from beginning inventory processed in current period 0 18,000 18,000 Units started and completed in current period 70,000 70,000 70,000 Units in ending inventory at end of current period 20,000 5,000 5,000 Equivalent units of production for period 90,000 93,000 93,000 Computing Equivalent Units of Production Computing Equivalent Units of Production
    54. 54. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department April Work in Process Costs Beginning work in process 22,380$ Costs added in April: Direct material 45,000 Direct labor 11,160 Overhead 44,640 Total costs to account for 123,180$ Process Costing and Equivalent Units Process Costing and Equivalent Units
    55. 55. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Cost Per Equivalent Unit - April 2002 Direct Direct Factory Materials Labor Overhead Total cost of resource for April 45,000$ 11,160$ 44,640$ Equivalent units of production in April ÷ 90,000 ÷ 93,000 ÷ 93,000 Cost per equivalent unit for April = 0.50$ = 0.12$ = 0.48$ Cost per Equivalent UnitCost per Equivalent Unit
    56. 56. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. Cost ReconciliationCost Reconciliation
    57. 57. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Work in Process Cost Summary for April 2002 Cost of completed units From beginning work in process April 1 balance 22,380$ Costs to complete April 1 inventory Direct material Direct labor Overhead Started and completed Total completed and transferred Cost of ending work in process Direct material Direct labor Overhead Total cost accounted for
    58. 58. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Work in Process Cost Summary for April 2002 Cost of completed units From beginning work in process April 1 balance 22,380$ Costs to complete April 1 inventory Direct material 0$ Direct labor (18,000 × $0.12) 2,160 Overhead (18,000 × $0.48) 8,640 10,800 Started and completed Total completed and transferred Cost of ending work in process Direct material Direct labor Overhead Total cost accounted for
    59. 59. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Work in Process Cost Summary for April 2002 Cost of completed units From beginning work in process April 1 balance 22,380$ Costs to complete April 1 inventory Direct material 0$ Direct labor (18,000 × $0.12) 2,160 Overhead (18,000 × $0.48) 8,640 10,800 Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$ Cost of ending work in process Direct material Direct labor Overhead Total cost accounted for $0.12 + $0.48 + $0.50 = $1.10
    60. 60. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Fabrication Department Work in Process Cost Summary for April 2002 Cost of completed units From beginning work in process April 1 balance 22,380$ Costs to complete April 1 inventory Direct material 0$ Direct labor (18,000 × $0.12) 2,160 Overhead (18,000 × $0.48) 8,640 10,800 Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$ Cost of ending work in process Direct material (20,000 × $0.50) 10,000$ Direct labor (5,000 × $0.12) 600 Overhead (5,000 × $0.48) 2,400 13,000 Total cost accounted for 123,180$
    61. 61. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin A B C A CB Activity-Based Costing (ABC)Activity-Based Costing (ABC)
    62. 62. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job. Assigning overhead is difficult. I agree! Activity-Based Costing (ABC)Activity-Based Costing (ABC)
    63. 63. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Level of Com plexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing Activity-Based Costing (ABC)Activity-Based Costing (ABC)
    64. 64. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin In the ABC method, we recognize that many activities within a department drive overhead costs. In the ABC method, we recognize that many activities within a department drive overhead costs. A B C A CB Activity-Based Costing (ABC)Activity-Based Costing (ABC)
    65. 65. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Identify activities and assign indirect costs to those activities. Central idea . . .  Products require activities.  Activities consume resources. A B C A CB Activity-Based Costing (ABC)Activity-Based Costing (ABC)
    66. 66. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin More detailed measures of costs. Better understanding of activities. More accurate product costs for . . .  Pricing decisions.  Product elimination decisions.  Managing activities that cause costs. Benefits should always be compared to costs of implementation. The Benefits of ABCThe Benefits of ABC
    67. 67. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Most cost drivers are related to either volume or complexity of production.  Examples: machine time, machine setups, purchase orders, production orders. Three factors are considered in choosing a cost driver:  Causal relationship.  Benefits received.  Reasonableness. Identifying Cost DriversIdentifying Cost Drivers
    68. 68. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Overhead Actual Rate Activity × Rate = Estimated overhead costs in activity cost pool Estimated number of activity units  Identify activities that consume resources.  Assign costs to a cost pool for each activity.  Identify cost drivers associated with each activity.  Compute overhead rate for each cost pool:  Assign costs to products: Activity-Based Costing Procedures Activity-Based Costing Procedures
    69. 69. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Let’s look at an example comparing traditional costing with ABC. We will start with traditional costing. Activity-Based CostingActivity-Based Costing
    70. 70. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Pear Company manufactures a product in regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Budgeted overhead for the current year is $2,000,000. Other information: Deluxe Regular Model Model Direct Material 150$ 112$ Direct Labor Cost 16 8 Direct Labor Time 1.6 hours 0.8 hours Expected Volume (units) 5,000 40,000 First, determine the unit cost of each model using traditional costing methods. Traditional Costing vs. ABC Example Traditional Costing vs. ABC Example
    71. 71. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Direct Labor Hours Deluxe Model 5,000 units @ 1.6 hours 8,000 Regular Model 40,000 units @ 0.8 hours 32,000 Total Direct Labor Hours (DLH) 40,000 Overhead Estimated overhead costs Rate Estimated activity = Overhead $2,000,000 Rate 40,000 DLH = = $50 per DLH Traditional CostingTraditional Costing
    72. 72. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Deluxe Regular Model Model Direct Material 150$ 112$ Direct Labor 16 8 Manufacturing Overhead $50 per hour × 1.6 hours 80 $50 per hour × 0.8 hours 40 Total Unit Cost 246$ 160$ ABC will have different overhead per unit. Traditional CostingTraditional Costing
    73. 73. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Pear Company plans to adopt activity-based costing. Using the following activity center data, determine the unit cost of the two products using activity-based costing. Overhead Activity Cost Cost for Units of Activity Center Driver Activity Deluxe Regular Purchasing Orders 84,000$ 400 800 Scrap Rework Orders 216,000 300 600 Testing Tests 450,000 4,000 11,000 Machine Related Hours 1,250,000 20,000 30,000 Total Overhead 2,000,000$ Activity-Based CostingActivity-Based Costing
    74. 74. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Overhead Units Activity Cost Cost for of Center Driver Activity Activity Rate Purchasing Orders 84,000$ 1,200 Scrap Rework Orders 216,000 900 Testing Tests 450,000 15,000 Machine Related Hours 1,250,000 50,000 Total Overhead 2,000,000$ 400 deluxe + 800 regular = 1,200 total Activity-Based CostingActivity-Based Costing
    75. 75. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Overhead Units Activity Cost Cost for of Center Driver Activity Activity Rate Purchasing Orders 84,000$ 1,200 $ 70 per order Scrap Rework Orders 216,000 900 $240 per order Testing Tests 450,000 15,000 $ 30 per test Machine Related Hours 1,250,000 50,000 $ 25 per hour Total Overhead 2,000,000$ Rate = Overhead Cost for Activity ÷ Units of Activity Activity-Based CostingActivity-Based Costing
    76. 76. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Deluxe Model Regular Model Actual Cost Actual Cost Units of Allocated Units of Allocated Activity Rate Activity to Product Activity to Product Purchasing $ 70/order 400 ? 800 ? Scrap Rework $240/order 300 ? 600 ? Testing $ 30/test 4,000 ? 11,000 ? Machine Related $ 25/hour 20,000 ? 30,000 ? Total Overhead ? ? Activity-Based CostingActivity-Based Costing
    77. 77. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Deluxe Model Regular Model Actual Cost Actual Cost Units of Allocated Units of Allocated Activity Rate Activity to Product Activity to Product Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 ? 600 ? Testing $ 30/test 4,000 ? 11,000 ? Machine Related $ 25/hour 20,000 ? 30,000 ? Total Overhead ? ? Cost Allocated to Product = Actual Units of Activity × Rate Let’s complete the table. Activity-Based CostingActivity-Based Costing
    78. 78. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Deluxe Model Regular Model Actual Cost Actual Cost Units of Allocated Units of Allocated Activity Rate Activity to Product Activity to Product Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$ Cost Allocated to Product = Actual Units of Activity × Rate Activity-Based CostingActivity-Based Costing
    79. 79. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Deluxe Model Regular Model Actual Cost Actual Cost Units of Allocated Units of Allocated Activity Rate Activity to Product Activity to Product Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$ Cost Allocated to Product = Actual Units of Activity × Rate Total overhead = $720,000 + $1,280,000 = $2,000,000 Recall that $2,000,000 was the original amount of overhead assigned to the products using traditional overhead costing. Activity-Based CostingActivity-Based Costing
    80. 80. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Overhead Costs Assigned to Products: Deluxe Model $720,000 ÷ 5,000 units = $144 per unit Regular Model $1,280,000 ÷ 40,000 units = $32 per unit Deluxe Regular Model Model Direct Materials 150$ 112$ Direct Labor 16 8 Manufacturing Overhead 144 32 Total Unit Cost 310$ 152$ Activity-Based CostingActivity-Based Costing
    81. 81. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin This result is not uncommon when activity-based costing is used. Many companies have found that low- volume, specialized products have greater overhead costs than previously realized. Traditional Costing ABC Deluxe Regular Deluxe Regular Model Model Model Model Direct materials 150$ 112$ 150$ 112$ Direct labor 16 8 16 8 Overhead 80 40 144 32 Total cost 246$ 160$ 310$ 152$ Activity-Based CostingActivity-Based Costing
    82. 82. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Cost Cost Driver Materials purchasing Number of purchase orders Materials handling Number of materials requisitions Personnel processing Number of employees hired or laid off Equipment depreciation Number of products produced or hours of use Quality inspection Number of units inspected Indirect labor for Number of setups required equipment setups Engineering costs for Number of modifications product modifications Costs and Cost Drivers in Activity-Based Costing Costs and Cost Drivers in Activity-Based Costing
    83. 83. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin End of Chapter 17End of Chapter 17
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