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Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 2 Measuring Product Costs Maher, Stickney and Weil.

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Presentation on theme: "Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 2 Measuring Product Costs Maher, Stickney and Weil."— Presentation transcript:

1 Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 2 Measuring Product Costs Maher, 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 (Appendix 2.1).

5 What are the three manufacturing costs?

6 Relation Between Departmental Costing & Product Costing (Slide 1 of 3)  Manufacturing costs are first assigned to departments or responsibility centers  A responsibility center is any organizational unit with its own manager  e.g., divisions, territories, plants  Aids in planning and performance evaluation

7 Relation Between Departmental Costing & Product Costing (Slide 2 of 3) Direct Materials Direct Labor Manufacturing Overhead Product A Product B Assembly Dept. Finishing Dept. Record Costs for Performance Evaluation Assign Costs To Products

8 Relation Between Departmental Costing & Product Costing (Slide 3 of 3)  Actual manufacturing costs recorded in departments can be compared to standard or budgeted amounts  Differences, called variances, can be investigated further  Costs are then assigned to products  Useful in managerial decision-making such as evaluating product profitability

9 Finished Goods Inventory Draw the Flow of Costs through T-Accounts WIP-Dept.1 WIP-Dept.2 Cost of Goods Sold Balance Sheet AccountsIncome Statement Accounts Mktg. & Admin.

10 What is the basic cost flow equation?

11 Cost Measures (Slide 1 of 2) Define Normal Costing  Normal Costing--commonly used to assign costs to products  Assigns actual direct materials and direct labor plus “normal” manufacturing overhead  Overhead is applied to units produced using an application rate estimated before the accounting period begins

12 Cost Measures (Slide 2 of 2) Define Actual Costing

13 Applying Overhead Costs  Normal costing works as follows: 1. Select a cost driver 2.Estimate overhead and the level of activity for the accounting period 3.Compute the predetermined manufacturing overhead rate 4.Apply overhead to production by multiplying the predetermined overhead rate times the actual activity

14 Overhead Rate Computation  Predetermined manufacturing overhead rate is calculated as follows: What is the equation?

15 Example-Overhead Rate Computation  Pizza Shack estimates that next year variable overhead will be $108,000 and direct labor will be 12,000 hours  The predetermined overhead rate for next year will be:

16 Discuss Cost Systems

17 Production Methods and Accounting Systems Type ProductionAccounting SystemType Product JobJob Costing Customized (e.g., Custom Homes) OperationsOperation Costing Mostly Standardized (e.g., Cars) Continuous Flow Process Costing Standardized Processing (e.g., Oil Refinery)

18 Comment on Job Costing

19 Comment on Process Costing

20 Comment on Operation Costing

21 Service Organizations  Flow of costs is similar to that of a manufacturing company  Providing a service requires labor, overhead, & sometimes materials (called supplies)  Costs are collected by the job or client  Provides info for cost control, performance evaluation, and future pricing decisions

22 Review Ethical Issues in Job Costing

23 Just-In-Time (JIT) Methods  Attempt to obtain materials or provide finished goods just in time  Reduces or eliminates inventories and related carrying costs  May 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 & Quality of Production  Normal waste is typically included in the cost of work performed  If 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 normal  Prevents these costs from being buried in production costs

25 Computing Costs of Equivalent Production What are the Five steps required to compute costs of products, ending inventory, and finished goods?

26 If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact: Dr. Michael Blue, CFE, CPA, CMA blue@bloomu.edu Bloomsburg University of Pennsylvania


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