1. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Accounting Systems For Measuring Costs Chapter 17

2. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Planning and control functions. Providing products or services to customers. Assessing the efficiency and effectiveness of operations. Determining unit manufacturing costs. Cost accounting systems provide information supporting decisions making the business successful. Cost Accounting Systems

3. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Disclose inventories and cost of goods sold. Track resources consumed by products and services. Manage activities that consume resources. Evaluate and reward employee performance. Cost accounting systems are the procedures and techniques used by management. Cost Accounting Systems

4. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Process Costing Job Order Costing  Used for production of large, unique, high-cost items.  Built to order rather than mass produced.  Many costs can be directly traced to each job. Basic Cost Accounting Procedures

5. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms Basic Cost Accounting Procedures Process Costing Job Order Costing

6. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product. Basic Cost Accounting Procedures Process Costing Job Order Costing

7. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill Basic Cost Accounting Procedures Process Costing Job Order Costing

8. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin THE JOB Direct materials Direct labor Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate (POHR) Job Order Costing

9. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate Job Order Costing

10. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Job Cost Sheet

11. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Job Cost Sheet

12. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Job Cost Sheet Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.

13. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Job Cost Sheet Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on direct labor hours (DLH).

14. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Let’s summarize the document flow we have been discussing in a job order costing system. Job Order Costing Document Flow Summary

15. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Materials Ledger Cards Materials Requisition Direct materials The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Indirect materials Job Cost Sheets Manufacturing Overhead Account Job Order Costing Document Flow Summary

16. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Direct Labor Indirect Labor Employee Time Ticket Job Order Costing Document Flow Summary

17. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Employee Time Ticket Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Overhead Applied with POHR Manufacturing Overhead Account Job Cost Sheets Job Order Costing Document Flow Summary

18. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Let’s examine the cost flows in a job order costing system. We will use T-accounts and start with materials. Flow of Costs in Job Costing

19. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Material Purchases Direct Material Mfg. Overhead Indirect Material Work in Process (Job Cost Sheet) Indirect Material Materials Inventory Flow of Costs in Job Costing

20. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Next let’s add labor costs and applied manufacturing overhead to the job order cost flows. Are you with me? Flow of Costs in Job Costing

21. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Direct Labor Mfg. Overhead Work in Process (Job Cost Sheet) Indirect Material Direct Material Overhead Applied to Work in Process Indirect Labor Direct Labor Overhead Applied Indirect Labor the difference is closed to cost of goods sold. When Actual Applied factory factory overhead overhead = / Labor Flow of Costs in Job Costing

22. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Closing Under- or Overapplied Manufacturing Overhead

23. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Now let’s complete the goods and sell them. Still with me? Flow of Costs in Job Costing

24. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 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 Material Direct Labor Overhead Applied Flow of Costs in Job Costing

25. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product.  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product. Process Costing

26. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Job Costing Custom orders Heterogeneous products Low production volume High product flexibility Low to medium standardization Process Costing Repetitive production Homogeneous products High production volume Low product flexibility High standardization Comparing Job and Process Costing

27. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Direct Materials Finished Goods Cost per unit for each job Direct Labor Factory Overhead Jobs The Work in Process account consists of individual jobs in job costing. Job and Process Costing

28. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Direct Materials Finished Goods Direct Labor Factory Overhead Processes The Work in Process account consists of specific processes in process costing. Cost per unit processed Job and Process Costing

29. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Same objective: to determine the cost of products Same inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method: predetermined rate times actual activity Job and Process Costing Similarities

30. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Work in Process Assembly Labor Materials Indirect Finished Goods Factory Overhead Direct Delivered to Customers Applied Overhead Work in Process Packaging Work in Process Accounts — The Key to Process Costing

31. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. Computing Unit Cost

32. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. If partially complete units remain in process, we must use equivalent units as the divisor to obtain unit costs. Computing Unit Cost Costs are accumulated for a period of time by process or department.

33. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Two one-half full pitchers are equivalent to one full pitcher. + = Computing and Using Equivalent Units of Production 1

34. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Question For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000

35. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Question

36. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cost per equivalent unit = Product costs for the period Equivalent units for the period Cost Per Equivalent Unit

37. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Question

38. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per 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 Question

39. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Equivalent units may be different for material and labor and overhead at different stages of a process. At completion of Stage 1 of the process, material is 40% complete, but labor and overhead are only 25% complete. Stage 1 40% of Material 25% of Labor and Overhead Equivalent Units

40. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead + + = = 100% 50% Equivalent Units

41. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Stage 3 50% of Labor and Overhead The process is now complete. Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead Equivalent Units

42. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Owl Inc uses FIFO process costing in its Fabrication Department where a product called Strata is made. Process Costing and Equivalent Units

43. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Process Costing and Equivalent Units

44. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Material is added at the beginning of the process so it is always 100% complete. Process Costing and Equivalent Units

45. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Overhead is applied on the basis of labor, so both are at the same percentage of completion. Process Costing and Equivalent Units

46. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Physical Flow of Units

47. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Computing Equivalent Units of Production

48. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Since materials are added at the beginning of the process, no additional materials are necessary to complete the beginning inventory. Computing Equivalent Units of Production

49. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin } 100,000 100,000 units completed and transferred. Computing Equivalent Units of Production

50. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Computing Equivalent Units of Production

51. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Since labor and overhead were 40 percent complete in the beginning inventory, 60 percent of the work must be completed in April. Computing Equivalent Units of Production

52. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin } 100,000 Transferred Computing Equivalent Units of Production

53. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Computing Equivalent Units of Production

54. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Process Costing and Equivalent Units

55. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cost per Equivalent Unit

56. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. Cost Reconciliation

57. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

58. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

59. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin $0.12 + $0.48 + $0.50 = $1.10

60. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

61. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin A BC A C B Activity-Based Costing (ABC)

62. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job. Assigning overhead is difficult. I agree! Activity-Based Costing (ABC)

63. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Level of Complexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing Activity-Based Costing (ABC)

64. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin In the ABC method, we recognize that many activities within a department drive overhead costs. In the ABC method, we recognize that many activities within a department drive overhead costs. A BC A C B Activity-Based Costing (ABC)

65. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Identify activities and assign indirect costs to those activities. Central idea... Products require activities. Activities consume resources. A BC A C B Activity-Based Costing (ABC)

66. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin More detailed measures of costs. Better understanding of activities. More accurate product costs for...  Pricing decisions.  Product elimination decisions.  Managing activities that cause costs. Benefits should always be compared to costs of implementation. The Benefits of ABC

67. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Most cost drivers are related to either volume or complexity of production.  Examples: machine time, machine setups, purchase orders, production orders. Three factors are considered in choosing a cost driver:  Causal relationship.  Benefits received.  Reasonableness. Identifying Cost Drivers

68. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Overhead Actual Rate Activity × Rate = Estimated overhead costs in activity cost pool Estimated number of activity units Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each activity. Compute overhead rate for each cost pool: Assign costs to products: Activity-Based Costing Procedures

69. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Let’s look at an example comparing traditional costing with ABC. We will start with traditional costing. Activity-Based Costing

70. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Pear Company manufactures a product in regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Budgeted overhead for the current year is $2,000,000. Other information: First, determine the unit cost of each model using traditional costing methods. Traditional Costing vs. ABC Example

71. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Overhead Estimated overhead costs Rate Estimated activity = Overhead $2,000,000 Rate 40,000 DLH == $50 per DLH Traditional Costing

72. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin ABC will have different overhead per unit. Traditional Costing

73. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Pear Company plans to adopt activity-based costing. Using the following activity center data, determine the unit cost of the two products using activity-based costing. Activity-Based Costing

74. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 400 deluxe + 800 regular = 1,200 total Activity-Based Costing

75. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Activity-Based Costing

76. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Activity-Based Costing

77. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Let’s complete the table. Activity-Based Costing

78. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Activity-Based Costing

79. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Total overhead = $720,000 + $1,280,000 = $2,000,000 Recall that $2,000,000 was the original amount of overhead assigned to the products using traditional overhead costing. Activity-Based Costing

80. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Activity-Based Costing

81. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin This result is not uncommon when activity-based costing is used. Many companies have found that low- volume, specialized products have greater overhead costs than previously realized. Activity-Based Costing

82. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Costs and Cost Drivers in Activity-Based Costing

83. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin End of Chapter 17