© 2012 Pearson Prentice Hall. All rights reserved. Accumulating and Assigning Costs to Products Chapter 4

© 2012 Pearson Prentice Hall. All rights reserved. Cost Flows in Organizations In order to compute product costs, management accounting systems should reflect the actual cost flows in an organization Manufacturing, retail, and service organizations have different patterns of cost flows resulting in different management accounting priorities

Cost Flows in a Manufacturing Organization 3

Cost Flows in a Retail Organization 4

Cost Flows in a Service Organization 5

© 2012 Pearson Prentice Hall. All rights reserved. Cost Terms Cost Object—is anything for which a cost is computed – Examples of cost objects are: activities, products, product lines, departments, or even entire organizations

Resource Costs Consumable Resource Consumed or used up by the production process Cost of depends on how much of the resource is used Examples – Wood in furniture making – Engines in auto making – Processors in laptop making Capacity-Related Resource Supports the production process Cost depends on how much of the resource is acquired Examples – Supervisory labour – Warehouse space – Admin Employees 7

© 2012 Pearson Prentice Hall. All rights reserved. Cost Terms Direct Cost—a cost that is uniquely and unequivocally attributable to a single cost object – Almost all variable costs are direct costs Indirect Cost—a cost that fails the test of being direct is classified as indirect – Most capacity-related costs are indirect

Which costs are direct/indirect of you going to WLU? Direct vs. Indirect Tuition Joining a sorority Buying a laptop Additional fees on Laurier bill (excl tuition) Books

Costing System Architecture 10

Applied and Incurred Indirect Costs 11

How are Indirect Costs Applied? 12

The Best Arguments for Using Practical Capacity Provides a solid basis to compute long run cost Isolates the cost of idle capacity which is charged to the income statement instead of being included in inventory valuations 13

Product Costing Job Order Allocates costs to products that are readily identifiable Common in construction, print shops, unique goods Accumulate costs for specific jobs Produce for sale Process Costing Average costs over large number of nearly identical units Common in chemical, textiles, lumber, glass, food processing Accumulate costs by departments Produce for inventory

Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labour costs to each job as work is performed. Job-Order Costing – An Overview Direct Materials Direct Labour

Manufacturing Overhead, including indirect materials and indirect labour, are allocated to all jobs rather than directly traced to each job. Direct Manufacturing Costs Direct Materials Direct Labour Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead