1. Fundamentals of Product and Service Costing Cost Accounting-II Dr. Salah Hammad Lecture 1 6 - 1

2. Cost System Keys to a good cost system: Oriented to the needs of the decision makers Designed so that benefits exceed costs 6 - 2

3. Cost Management Systems The objective of the cost management system is to provide information about costs relevant for decision making. The cost system accumulates and reports costs about processes, products, and services. 6 - 3

4. Reasons to Calculate Product or Service Costs For decision making For deciding what to sell For setting prices For knowing the cost of goods sold For knowing the cost of inventory 6 - 4

5. Cost Allocation and Product Costing Basic Cost Flow Diagram Direct materials Direct labor Manufacturing overhead AlphaBeta Cost pools Cost objects Cost allocation rule Indirect (allocated by direct labor cost) Direct 6 - 5

6. Fundamental Themes Underlying the Design of Cost Systems Cost systems should have a decision focus. Different cost information is used for different purposes. Cost information for managerial purposes must meet the cost-benefit test. 6 - 6

7. Basic Cost Flow Model How costs and units move through inventories: Beginning balance Transfers in Transfers out Ending balance +–= BBTITOEB+–= This is true for the following accounts: – Raw Materials (RM) – Work-in-Process (WIP) – Finished Goods (FG) 6 - 7

8. Costing with No Work-in-Process Inventories Baxter Paint begins production on April 1. It starts and completes production of 100,000 gallons of paint in April and has no ending work-in-process inventory. Materials$ 400,000 Labor 100,000 Manufacturing overhead 500,000 Total$1,000,000 Cost of resources used in April: 6 - 8

9. Costing with No Work-in-Process Inventories BBTITOEB+–= 0 100,000 gallons 100,000 gallons 0+–= FG 6 - 9

10. Costing with No Work-in-Process Inventories What are the costs at the end of the period? $1,000,000 was added to work-in-process and then transferred out to finished goods. Since Baxter produced 100,000 gallons of paint, then the cost per gallon of paint is $10. 6 - 10

11. Costing with Work-in-Process Inventories Beginning inventory-0- Started in May110,000 Total110,000 Ending WIP (50% complete) 20,000 Transferred out 90,000 Production for Baxter Paint for May follows (gallons): 6 - 11

12. Costing with Work-in-Process Inventories BBTITOEB+–= 0 110,000 gallons 90,000 gallons 20,000 gallons (50% complete) +–= FG 6 - 12

13. Costing with Work-in-Process Inventories How do we cost Baxter’s 20,000 gallons of paint that are only half finished? 20,000 gallons half finished is equivalent to 10,000 gallons finished. 90,000 gallons transferred out plus 10,000 equivalent gallons of finished paint equals 100,000 equivalent gallons of paint. Gallons of paint transferred out 90,000 Equivalent gallons of finished paint 10,000 Total equivalent gallons of paint100,000 6 - 13

14. Costing with Work-in-Process Inventories Materials$390,000 Labor 100,000 Manufacturing overhead 500,000 Total$990,000 Costs incurred in May: $990,000/100,000 gallons = $9.90 per gallon 90,000 gallons × $9.90/gallon = $891,000 6 - 14

15. Costing with Work-in-Process Inventories Direct material + Direct labor + Overhead ($990,000) Finished goods inventory $891,000 Work-in-process inventory $99,000 Equivalent gallons 90,000 gallons (90%) 10,000 gallons (10%) 6 - 15