Presentation on theme: "Managerial Accounting: An Introduction To Concepts, Methods, And Uses"— Presentation transcript:
1 Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 2Measuring Product CostsMaher, Stickney and Weil
2 Learning Objectives (Slide 1 of 3) Understand the nature of manufacturing costs.Explain the need for recording costs by department and assigning costs to products.Understand how the Work-in-Process account both describes the transformation of inputs into outputs in a company and accounts for the costs incurred in the process.
3 Learning Objectives (Slide 2 of 3) Compare and contrast normal costing and actual costing.Know various production methods and the different accounting systems each requires.Compare and contrast job costing and process costing systems.Compare and contrast product costing in service organizations to that in manufacturing companies.
4 Learning Objectives (Slide 3 of 3) Understand the concepts of customer costing and profitability analysis.Identify ethical issues in job costing.Recognize components of just-in-time (JIT) production methods and understand how accountants adapt costing systems to them.Know how to compute end-of-period inventory book value using equivalent units of production.
5 Manufacturing Costs Include three major categories: Direct materials Easily traced to a productDirect laborLabor of workers who transform materials into a finished productManufacturing OverheadAll other costs of transforming materials into a finished product
6 Relation Between Departmental Costing and Product Costing(Slide 1 of 3) Manufacturing costs are first assigned to departments or responsibility centersA responsibility center is any organizational unit with its own managere.g., divisions, territories, plantsAids in planning and performance evaluation
7 Relation Between Departmental Costing and Product Costing(Slide 2 of 3) Record Costsfor PerformanceEvaluationAssign CostsTo ProductsProduct AAssemblyDept.Direct MaterialsDirect LaborManufacturing OverheadProduct BFinishingDept.
8 Relation Between Departmental Costing and Product Costing(Slide 3 of 3) Actual manufacturing costs recorded in departments can be compared to standard or budgeted amountsDifferences, called variances, can be investigated furtherCosts are then assigned to productsUseful in managerial decision making such as evaluating product profitability
9 Model of Cost Flows Finished Goods Inventory Cost of Goods Sold WIP-Dept.1WIP-Dept.2Transfer toDept.2Beg. Inv.Beg.Inv.Direct Mat.Direct LaborOverheadEnd.Inv.CostsAllocatedto UnitsFinishedThis PeriodCostsof UnitsSold ThisPeriodAdded MLOin Dept. 2End. Inv.Balance Sheet AccountsIncome StatementAccountsMktg. &Admin.
10 Basis Cost Flow Equation Beginning Balance + Transfers In= Transfers Out + Ending BalanceTransfer In to Work-In-Process include:MaterialsLaborOverheadEquation is useful in determining reasonableness of inventories
11 Cost Measures (Slide 1 of 2) Normal Costing--commonly used to assign costs to productsAssigns actual direct materials and direct labor plus “normal” manufacturing overheadOverhead is applied to units produced using an application rate estimated before the accounting period begins
12 Cost Measures (Slide 2 of 2) Actual Costing--assigns actual overhead to productsActual overhead may vary for reasons unrelated to production activity resulting in product cost fluctuations unrelated to production activityNormal costing tends to smooth out these fluctuations
13 Applying Overhead Costs Normal costing works as follows:1. Select a cost driver2. Estimate overhead and the level of activity for the accounting period3. Compute the predetermined manufacturing overhead rate4. Apply overhead to production by multiplying the predetermined overhead rate times the actual activity
15 Example-Overhead Rate Computation Plantimum Builders estimates that next year variable overhead will be $100,000 and direct labor will be 50,000 hoursThe predetermined overhead rate for next year will be:$100, = $2.00 Per Direct Labor Hour50,000 DLHs
16 Cost SystemsEffective cost systems must have the following characteristics:Decision focusProvide different cost information for different purposesPass the cost-benefit test
17 Production Methods and Accounting Systems Type Production Accounting System Type ProductJob Job Costing Customized(e.g., Custom Homes)Operations Operation Costing Mostly(e.g., Cars) StandardizedContinuous Flow Process Costing StandardizedProcessing(e.g., Oil Refinery)
18 Job Costing Collect costs for each “unit” produced Typically used by companies producing customized products or “jobs”Examples: print shops, customized construction companies, defense contractors
19 Process CostingCompany accumulates costs in a department or production processThose costs are spread evenly over units producedEssentially, computes an average cost per unitExamples: manufacture of soft drinks, paint, chemicals
20 Operation Costing A hybrid of job and process costing Typically used when production involves a standardized method of making a product that is performed repeatedlyProducts may share common production methods but differ in detailsExamples: Clothing, computers, furniture
21 Service Organizations Flow of costs is similar to that of a manufacturing companyProviding a service requires labor, overhead, and sometimes materials (called supplies)Costs are collected by the job or clientProvides info for cost control, performance evaluation, and future pricing decisions
22 Ethical Issues in Job Costing Improprieties in job costing generally arise from:Misstating stage of completionCharging costs to the wrong jobMay be an attempt to avoid the appearance of cost overrunsMisrepresenting the costs of jobsCauses problems when job is billed on a cost-plus-fee basis
23 Just-In-Time (JIT) Methods Attempt to obtain materials or provide finished goods just in timeReduces or eliminates inventories and related carrying costsMay allow production costs to be recorded directly to Cost of Goods Sold (COGS)May involve use of “Backflush Costing”Used to transfer costs back to inventories when production costs are initially recorded as COGS
24 Spoilage and Quality of Production Normal waste is typically included in the cost of work performedIf waste is not “normal” it may be included in an expense account called “Abnormal Spoilage”Companies concerned about quality production may not treat any waste or spoilage as normalPrevents these costs from being buried in production costs
25 Computing Costs of Equivalent Production Five steps required to compute costs of products, ending inventory, and finished goods1. Summarize flow of physical units2. Compute equivalent units3. Summarize costs to be accounted for4. Compute unit costs5. Compute cost of goods completed and transferred out and cost of ending inventory of WIP
26 Dr. Donald R. Trippeer, CPA Colorado State University-Pueblo If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:Dr. Donald R. Trippeer, CPAColorado State University-Pueblo