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Costing Systems EMBA 5403 Fall 2010. Mugan2/37 Available costing systems  Absorption costing Actual Costing Normal Costing Standard Costing  Variable.

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Presentation on theme: "Costing Systems EMBA 5403 Fall 2010. Mugan2/37 Available costing systems  Absorption costing Actual Costing Normal Costing Standard Costing  Variable."— Presentation transcript:

1 Costing Systems EMBA 5403 Fall 2010

2 Mugan2/37 Available costing systems  Absorption costing Actual Costing Normal Costing Standard Costing  Variable costing Actual Costing Normal Costing Standard Costing

3 Fall 2010Mugan3/37 Costing systems Cost component ActualNormalStandard materialActual Standard labor costActual Standard Manufacturing Overhead- Variable ActualAppliedStandard Manufacturing Overhead-Fixed ActualAppliedStandard Applied

4 Fall 2010Mugan4/37 Variance  Differences between the costs according to the costing system used and actual amounts  Actual amounts are reflected in the financial statements

5 Fall 2010Mugan5/37 Absorption Costing Absorption costing allocates variable and fixed overhead costs to products. Finished Goods Inventory Valuation Cost of Goods Sold Cost of Goods Manufactured

6 Fall 2010Mugan6/37 Product Costing Procedures in Organizations Process Costing Job-order Costing 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

7 Fall 2010Mugan7/37 Product Costing Procedures in Organizations Process Costing Job-order Costing Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

8 Fall 2010Mugan8/37 Job-Order Costing Traced directly to each job TheJobTheJob Direct labor Direct materials Manufacturing overhead (MOVH) Applied (added) to each job using a predetermined rate

9 Fall 2010Mugan9/37 Job-Order Costing Part of the job cost Materials Requisition and Time tickets Direct material s and labor Indirect materials and labor Manufacturing Overhead Control Account Raw materials could be used as direct or indirect product cost. An employee’s time may be either direct or indirect.

10 Fall 2010Mugan10/37 Job-Order Costing wages Job-Order Cost Sheets Material usage Other Actual OH Charges Indirect Materials Indirect Labor Applied Overhead Manufacturing Overhead Control Account

11 Fall 2010Mugan11/37 Job-Order Cost Sheet

12 Fall 2010Mugan12/37 Job-Order System Cost Flows Direct Labor Mfg. Overhead Salaries and Wages Payable Work-in-Process (Job Cost Sheet) Direct Materials Overhead Applied to Work in Process Indirect Labor Direct Labor Overhead Applied Indirect Labor Indirect Materials ActualApplied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

13 Fall 2010Mugan13/37 Job-Order System Cost Flows Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Work-in-Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied

14 Fall 2010Mugan14/37 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

15 Fall 2010Mugan15/37 Over- and Underabsorbed Overhead Overabsorbed overhead Underabsorbed overhead Overabsorbed overhead Underabsorbed overhead

16 Fall 2010Mugan16/37 Over- and Underabsorbed Overhead SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = TL 6.00 per DLH × 100,000 DLH = TL 600,000 SOLUTION Applied 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 of TL 6.00 per direct labor hour, how much overhead was applied to XYZ’s jobs during the year?

17 Fall 2010Mugan17/37 Accounting for Over- and Underabsorbed 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.

18 Fall 2010Mugan18/37 Accounting for Over- and Underabsorbed Overhead

19 Fall 2010Mugan19/37 Allocation Base Products Application Rate If overhead costs are accumulated in a single cost pool and allocated using a single allocation base. Single Overhead Cost Pool

20 Fall 2010Mugan20/37 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 B Overhead Cost Pool C Application Rate B Application Rate C Multiple Allocation Bases

21 Fall 2010Mugan21/37  Improves planning and control.  Activity Based Costing (ABC) is one method of using multiple allocation bases. ABC and Multiple Allocation Bases

22 Fall 2010Mugan22/37 Multistage Allocation Processes Overhead Cost Pool 1 Overhead Cost Pool 2 Overhead Cost Pool 3 Overhead Cost Pool 4 Separate Application Rates Department A Department C Department B Products Dept. Application Rates

23 Fall 2010Mugan23/37 Process Costing Identical units of product are produced in 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 produced in 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.

24 Fall 2010Mugan24/37 period of time Costs are accumulated for a period of time for products in work-in-process inventory. Equivalent units Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. period of time Costs are accumulated for a period of time for products in work-in-process inventory. Equivalent units Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. Process Costing

25 Fall 2010Mugan25/37 Two one-half completed products are equivalent to one completed product. + = So, 8,000 units 70 percent complete are equivalent to 5,600 complete units. Equivalent Units

26 Fall 2010Mugan26/37 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

27 Fall 2010Mugan27/37 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

28 Fall 2010Mugan28/37 Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit = Costs for the period Equivalent units for the period

29 Fall 2010Mugan29/37 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

30 Fall 2010Mugan30/37 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

31 Fall 2010Mugan31/37 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

32 Fall 2010Mugan32/37 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

33 Fall 2010Mugan33/37 Equivalent Units When there are partially completed units in beginning inventory, work efforts during the period can be categorized as follows: Ê Work to complete beginning work-in-process Ë Work on units started and completed during the period Ì 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: Ê Work to complete beginning work-in-process Ë Work on units started and completed during the period Ì Work on units in ending work-in-process

34 Fall 2010Mugan34/37 Equivalent Units - Example ACE 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-process on June 30. They were 40% complete. How many total equivalent units did ACE produce during June? Continue

35 Fall 2010Mugan35/37 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.

36 Fall 2010Mugan36/37 Equivalent Units - Example Since 1,200 units were started during June, and 300 of those units are still in work-in-process on June 30, 900 units were started and completed during June.

37 Fall 2010Mugan37/37 Equivalent Units - Example 40% of the work was done on these units in June.

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