1. Copyright © by Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson - - - - - - - - - - - Multimedia Slides by: Harry Hooper Santa Fe Community College

2. Chapter 16 Cost Concepts and Cost Allocation

3. Copyright © by Houghton Mifflin Company. All rights reserved.3 1.State how managers use information about costs in the management cycle. 2.Identify various approaches managers use to classify costs. 3.Define and give examples of the three elements of product cost and compute a product unit cost for a manufacturing organization. LEARNING OBJECTIVES

4. Copyright © by Houghton Mifflin Company. All rights reserved.4 5.Describe the flow of product-related activities, documents, and costs through the Materials Inventory, Work in Process Inventory, and Finished Goods Inventory accounts. 6.Prepare a statement of cost of goods manufactured and an income statement for a manufacturing organization. 7.Define cost allocation and explain how cost objects, cost pools, and cost drivers are used to apply manufacturing overhead. LEARNING OBJECTIVES

5. Copyright © by Houghton Mifflin Company. All rights reserved.5 7. Calculate product unit cost using the traditional allocation of manufacturing overhead costs. 8.Calculate product unit cost using activity-based costing to allocate manufacturing overhead costs. 9.Apply costing concepts to a service organization. LEARNING OBJECTIVES

6. Costs Information and the Management Cycle OBJECTIVE 1 State how managers use information about costs in the management cycle.

7. Copyright © by Houghton Mifflin Company. All rights reserved.7 Operating Costs and the Management Cycle

8. Copyright © by Houghton Mifflin Company. All rights reserved.8 Planning Stage u Uses of operating cost information and product costs in the planning stage. Develop budgets. Determine selling prices or fees for services and products. Plan human resource needs.

9. Copyright © by Houghton Mifflin Company. All rights reserved.9 Executing Stage.  Uses of operating cost information and product costs in the executing stage. 4Make decisions about dropping a service line, product line, or segment. 4Evaluate outsourcing opportunities. 4Estimate margins and income. 4Bid on special orders. 4Negotiate a selling price or fee.

10. Copyright © by Houghton Mifflin Company. All rights reserved.10 Reviewing Stage  Uses of operating cost information and product costs in the reviewing stage. Calculate variances between estimated and actual costs. Help managers determine the causes of cost overruns and enable them to adjust future actions to reduce potential problems.

11. Copyright © by Houghton Mifflin Company. All rights reserved.11 Reporting Stage u Uses of operating cost information and product costs in the reporting stage. Report actual results of operating activities on the income statement. Report the value of inventory on the balance sheet. Report performance related to products or services.

12. Copyright © by Houghton Mifflin Company. All rights reserved.12 Examples of Types and Uses of Operating Cost Information Type of Organization ManufacturingRetailService Cost informationCost to needed by managementmanufacturepurchaseprovide the product the service Uses of cost information: To measure historical or future profitsYes To decide the selling price for regular or special sales or services providedYes To value finished goods or merchandise inventoriesYes N/A

13. Copyright © by Houghton Mifflin Company. All rights reserved.13 Q. Q.What are three uses of operating cost information and product costs in the planning stage? A. A.1. Develop budgets. 2. Determine selling prices or fees. 3. Plan human resource needs.Discussion

14. Copyright © by Houghton Mifflin Company. All rights reserved.14 Classifying Costs OBJECTIVE 2 Identify various approaches managers use to classify costs.

15. Copyright © by Houghton Mifflin Company. All rights reserved.15 Cost Classifications and Their Uses Common Cost Classifications: Classification BreakdownPurpose TraceabilityDirectControl costs by tracing Indirectcosts to a cost object BehaviorVariableCalculate number of units that must be sold to obtain a certain profit. Fixed Activity BasedValue adding Identify the costs that add value to the consumer. Non-value adding Financial ReportingProduct Classify costs for the preparation of financial statements. Period

16. Copyright © by Houghton Mifflin Company. All rights reserved.16 Overview of Cost Classification

17. Copyright © by Houghton Mifflin Company. All rights reserved.17 Cost Traceability Direct Cost Direct Cost – conveniently traced to a cost object. Indirect Cost Indirect Cost – cannot be conveniently traced to a cost object. [Cost Object: individual product, service, department, sales territory, etc.] Cost Behavior Variable Cost Variable Cost – changes in direct proportion to a change in volume. Fixed Cost Fixed Cost – remains constant within a range of activity or for a defined time period.

18. Copyright © by Houghton Mifflin Company. All rights reserved.18 Value-Adding Versus Non-Value Adding Costs Value Adding Cost Value Adding Cost – increases the market value of a product or service. Non-Value Adding Cost Non-Value Adding Cost – adds cost to a product or service but does not increase its market value. Costs for Financial Reporting Product (Inventoriable) Costs Product (Inventoriable) Costs – costs such as direct materials, direct labor, and manufacturing overhead, that are assigned to inventory as an asset, until sold. [Product Costs may be Prime Costs (Direct Materials and Direct Labor) or Conversion Costs (Direct Labor and Manufacturing Overhead)]. Period (Non-inventoriable) Costs Period (Non-inventoriable) Costs – costs of resources consumed, expensed as incurred, during the accounting period and not assigned to products.

19. The Management Cycle OBJECTIVE 3 Define and give examples of the three elements of product cost and compute a product unit cost for a manufacturing organization.

20. Copyright © by Houghton Mifflin Company. All rights reserved.20 Elements of Product Costs 1.Direct materials can be conveniently and economically traced to specific units of product. 2.Direct labor can be conveniently and economically traced to specific units of product. 3.Manufacturing overhead includes all manufacturing costs that are not direct materials or direct labor costs. Also called factory overhead or indirect manufacturing costs.

21. Copyright © by Houghton Mifflin Company. All rights reserved.21 Manufacturing Overhead u The following are examples of manufacturing overhead: 4 Indirect materials. 4 Indirect labor. 4 Depreciation associated with manufacturing operations. 4 Machinery and tool maintenance, taxes, insurance, rent, and utilities relating to manufacturing.

22. Copyright © by Houghton Mifflin Company. All rights reserved.22 Product Unit Cost u The manufacturing cost of a single unit of product. = Direct Material + Direct Labor + Mfg. Overhead Number of Units Produced Or =Sum of Costs per Unit for each Element

23. Copyright © by Houghton Mifflin Company. All rights reserved.23 Actual Costing Method u The actual costing method uses the actual cost information from the job to calculate the unit cost of a product. 4 At the end of an accounting period, or 4 At the end of a job.

24. Copyright © by Houghton Mifflin Company. All rights reserved.24 Normal Costing Method u The normal costing method combines the actual direct materials and direct labor costs with the estimated manufacturing overhead costs to determine product costs. u Used when total actual overhead costs are not known until the end of the year.

25. Copyright © by Houghton Mifflin Company. All rights reserved.25 Standard Costing Method u The standard costing method uses estimated product cost information that is used: 4 As a benchmark or target for evaluating subsequent performance. 4 For budgeting purposes. 4 For bidding on a future job. 4 For controlling product costs.

26. Copyright © by Houghton Mifflin Company. All rights reserved.26 Summary of the Use of Actual or Estimated Costs in Three Cost-Measurement Methods Product Cost Elements Actual Costing Normal Costing Standard Costing Direct materials Actual costs Actual costs Estimated costs Direct laborActual costs Actual costs Manufacturing overhead Actual costs Estimated costs Estimated costs Estimated costs

27. Copyright © by Houghton Mifflin Company. All rights reserved.27 Relationships Among Product Costs

28. Copyright © by Houghton Mifflin Company. All rights reserved.28 Q. Q.What are the three elements of product cost?Discussion A. A.1. Direct materials costs. 2. Direct labor costs. 3. Manufacturing overhead costs.

29. Manufacturing Inventory Accounts OBJECTIVE 4 Describe the flow of product-related activities, documents, and costs through the Materials Inventory, Work in Process Inventory, and Finished Goods Inventory accounts.

30. Copyright © by Houghton Mifflin Company. All rights reserved.30 Document Flows Activity Documents Purchasing MaterialsPurchase Request Purchase Order Receiving Report Vendor’s Invoice Materials Requisition and ConversionMaterials Request Time Card Job Order Cost Card Vendors’ Invoices for Overhead Product Completion and Sale Job Order Cost Card Sales Invoice Shipping Document

31. Copyright © by Houghton Mifflin Company. All rights reserved.31 Cost Flows u Direct materials, labor, and overhead are accumulated in the Work in Process Inventory account. u When goods are completed the costs are transferred to Finished Goods Inventory. u When the goods are sold, the costs are transferred to Cost of Goods Sold.

32. Copyright © by Houghton Mifflin Company. All rights reserved.32 Manufacturing Cost Flow Direct Materials Inventory Account Balance 12/31/x3:Used during $10,00020x4: Total direct $25,000 materials purchased during 20x4: 20,000 Balance 12/31/x4: $5,000 Work in Process Inventory Account Balance 12/31/x3:Completed $ 2,000during 20x4: $30,000 Direct materials used during 20x4: 25,000 Direct labor 20x4: 12,000 Manufacturing overhead 20x4: 6,000 Balance 12/31/x4 $15,000

33. Copyright © by Houghton Mifflin Company. All rights reserved.33 Manufacturing Cost Flow Factory Payroll Account Direct labor20x4: earned during$12,000 20x4: $12,000 Balance 12/31/x4: $ 0 Work in Process Inventory Account Balance 12/31x3:Completed $ 2,000during 20x4: $30,000 Direct materials used during 20x4: 25,000 Direct labor 20x4: 12,000 Manufacturing overhead 20x4: 6,000 Balance 12/31/x4 $15,000

34. Copyright © by Houghton Mifflin Company. All rights reserved.34 Manufacturing Cost Flow Manufacturing Overhead Control Account Total20x4: manufacturing$ 6,000 overhead incurred during 20x4: $ 6,000 Balance 12/31/03: $ 0 Work in Process Inventory Account Balance 12/31/x3:Completed $2,000during 20x4: $30,000 Direct materials used during 20x4: 25,000 Direct labor 20x4: 12,000 Manufacturing overhead 20x4: 6,000 Balance 12/31/x4 $15,000

35. Copyright © by Houghton Mifflin Company. All rights reserved.35 Manufacturing Cost Flow Work in Process Inventory Account Balance 212/31/x3:Completed $2,000during 20x4: $30,000 Direct materials used during 20x4: 25,000 Direct labor 20x4: 12,000 Manufacturing overhead 20x4: 6,000 Balance 12/31/x4 $15,000 Finished Goods Inventory Account Balance 12/31/x3:Sold during 20x4: $6,000$24,000 Completed during 20x4: 30,000 Balance 12/31/x4: $12,000

36. Copyright © by Houghton Mifflin Company. All rights reserved.36 Manufacturing Cost Flow Finished Goods Inventory Account Balance 12/31x3:Sold during 20x4: $6,000$24,000 Completed during 20x4: 30,000 Balance 12/31/x4: $12,000 Cost of Goods Sold Account Sold during 20x4: $24,000

37. Copyright © by Houghton Mifflin Company. All rights reserved.37 Q. Q. What are the three manufacturing inventory accounts?Discussion A. A. 1. Materials Inventory. 2. Work in Process Inventory. 3. Finished Goods Inventory.

38. Manufacturing and Financial Reporting OBJECTIVE 5 Prepare a statement of cost of goods manufactured and an income statement for a manufacturing organization.

39. Copyright © by Houghton Mifflin Company. All rights reserved.39 Cost of Goods Manufactured u Cost of goods manufactured is a key component of the income statement for a manufacturing company. u Costs of Goods Manufactured Account (for a manufacturing co.) replaces Purchases Account (for a merchandising co.) u Finished Goods Inventory replaces Merchandise Inventory.

40. Copyright © by Houghton Mifflin Company. All rights reserved.40 Cost of Goods Manufactured u Determining the cost of goods manufactured involves three steps. 1.Computing the cost of materials used. 2.Computing direct labor and manufacturing overhead. 3.Computing cost of goods manufactured, adjusting for beginning and ending work in process.

41. Copyright © by Houghton Mifflin Company. All rights reserved.41 Cost of Goods Manufactured u The cost of goods manufactured is used on the income statement to compute the cost of goods sold.

42. Copyright © by Houghton Mifflin Company. All rights reserved.42 Statement of Cost of Goods Manufactured: Step 1 Angelo’s Rolling Suitcases, Inc. Statement of Cost of Goods Manufactured For the Year Ended December 31, 20x4 Direct Materials Used: Direct Materials Inventory, 12/31/x3$10,000 Direct Materials Purchased 20,000 Cost of Direct Materials Available for Use$30,000 Less Direct Materials Inventory, 12/31/x4 5,000 Cost of Direct Materials Used $25,000

43. Copyright © by Houghton Mifflin Company. All rights reserved.43 Statement of Cost of Goods Manufactured: Step 2 Angelo’s Rolling Suitcases, Inc. Statement of Cost of Goods Manufactured For the Year Ended December 31, 20xx Cost of Direct Materials Used$25,000 Direct Labor 12,000 Manufacturing Overhead 6,000 Total Manufacturing Costs$43,000 Note: Total Manufacturing Costs  Cost of Goods Manufactured = Product Costs added during the manufacturing period.

44. Copyright © by Houghton Mifflin Company. All rights reserved.44 Statement of Cost of Goods Manufactured: Step 3 Angelo’s Rolling Suitcases, Inc. Statement of Cost of Goods Manufactured For the Year Ended December 31, 20x4 Total Manufacturing Costs$43,000 Add Work in Process Inventory, 12/31/x3 2,000 Total Cost of Work in Process During the Year$45,000 Less Work in Process Inventory, 12/31/x4 15,000 Cost of Goods Manufactured$30,000

45. Copyright © by Houghton Mifflin Company. All rights reserved.45 Income Statement Angelo’s Rolling Suitcases, Inc. Income Statement For the Year Ended December 31, 20x4 Sales$50,000 Cost of Goods Sold: Finished Goods Inventory, 12/31/x3$ 6,000 Cost of Goods Manufactured 30,000 Total Cost of Finished Goods Available for Sale$36,000 Less Finished Goods Inventory, 12/31/x4 12,000 Cost of Goods Sold 24,000 Gross Margin$26,000 Selling & Administrative Expenses 16,000 Net Income$10,000

46. Copyright © by Houghton Mifflin Company. All rights reserved.46 Q. Q. What are the three steps needed to determine the cost of goods? Discussion A. A. 1.Compute the cost of materials used. 2.Compute total manufacturing costs for the period. 3.Compute cost of goods manufactured, adjusting for beginning and ending work in process.

47. Cost Allocation OBJECTIVE 6 Define cost allocation and explain the process of manufacturing overhead allocation using cost objects, cost pools, and cost drivers.

48. Copyright © by Houghton Mifflin Company. All rights reserved.48 Cost Allocation u Cost allocation is the process of assigning collected indirect costs to specific cost objects using an allocation base that represents a major function of the business.

49. Copyright © by Houghton Mifflin Company. All rights reserved.49 Cost Allocation u A cost object is a: 4 product 4 process 4 department 4 activity that the organization wishes to cost.

50. Copyright © by Houghton Mifflin Company. All rights reserved.50 Cost Allocation u A cost pool is a pool of overhead costs related to a cost object. u A cost driver is an activity that causes the cost pool to increase in amount as the cost driver increases.

51. Copyright © by Houghton Mifflin Company. All rights reserved.51 Allocation of Manufacturing Overhead  The allocation of manufacturing overhead requires the following: 4 The pooling of manufacturing overhead costs that are affected by a common activity. 4 The selection of a cost driver whose activity level causes a change in the cost pool.

52. Copyright © by Houghton Mifflin Company. All rights reserved.52 Manufacturing Overhead Allocation u The process of manufacturing overhead allocation includes four steps: 1.Planning. 2.Application. 3.Recording actual costs. 4.Reconciliation.

53. Copyright © by Houghton Mifflin Company. All rights reserved.53 The Manufacturing Overhead Allocation Process Description:Calculate a predetermined manufacturing overhead rate. When:Before accounting period. Procedure:Divide the cost pool of total estimated overhead costs by the total estimated cost driver level. Journal entry?No Step 1: Planning

54. Copyright © by Houghton Mifflin Company. All rights reserved.54 The Manufacturing Overhead Allocation Process Description:Apply manufacturing overhead costs to production. When:During accounting period as units are produced. Procedure:Multiply the predetermined overhead rate for each cost pool by the actual cost driver level. Journal entry?Yes Increase Work in Process Inventory account Decrease Manufacturing Overhead Control account Step 2: Application

55. Copyright © by Houghton Mifflin Company. All rights reserved.55 The Manufacturing Overhead Allocation Process Description:Record actual manufacturing overhead costs. When:During accounting period as costs are incurred. Procedure:Record actual manufacturing overhead costs when incurred. Journal entry?Yes Increase Manufacturing Overhead Control account Decrease asset accounts Increase contra-assets or liability accounts Step 3: Recording Actual Costs

56. Copyright © by Houghton Mifflin Company. All rights reserved.56 The Manufacturing Overhead Allocation Process Description:Calculate the difference between applied and actual manufacturing overhead costs. When:At the end of the accounting period. Procedure:Calculate and record the difference between the actual and applied manufacturing overhead costs. Journal entry?Yes Step 4: Reconciliation

57. Copyright © by Houghton Mifflin Company. All rights reserved.57 The Manufacturing Overhead Allocation Process Journal entry?Yes If applied > actual, then increase Manufacturing Overhead Control account Decrease Cost of Goods Sold Account If applied < actual, then increase Cost of Goods Sold account Decrease Manufacturing Overhead Control account Note: If difference is material, allocate to Cost of Goods Sold, Finished Goods and Work-in-Process. Step 4: Reconciliation

58. Copyright © by Houghton Mifflin Company. All rights reserved.58 The Manufacturing Overhead Allocation Process Year 2000 Year 2002 Year 2001 January 1December 31 Step 1: Planning Step 4: Reconciliation Step 2: Application Step 3: Recording Actual Costs

59. Copyright © by Houghton Mifflin Company. All rights reserved.59 Allocation of Manufacturing Overhead u The successful allocation of manufacturing overhead costs depends on two factors : 4 A careful estimate of total manufacturing overhead costs. 4 A good forecast of the activity level used as the cost driver. u Errors in either estimate can cause product unit costs to be over or under estimated, resulting in bad pricing decisions.

60. Copyright © by Houghton Mifflin Company. All rights reserved.60 A. A. 1. Planning. 2. Application. 3. Recording actual costs. 4. Reconciliation. Discussion Q. Q. What are the four steps in the manufacturing overhead allocation process?

61. Manufacturing Overhead Allocation Using the Traditional Approach OBJECTIVE 7 Calculate product unit cost using the traditional allocation of manufacturing overhead costs.

62. Copyright © by Houghton Mifflin Company. All rights reserved.62 Predetermined Overhead Rate u The use of one predetermined overhead rate to apply manufacturing overhead to a product is appropriate if organizations: 1. Manufacture only one product, or 2. Manufacture a few very similar products that require the same production processes and production-related activities.

63. Copyright © by Houghton Mifflin Company. All rights reserved.63 Normal Costing Method u The normal costing method applies manufacturing overhead costs to a product’s cost by: 4 Estimating a predetermined manufacturing overhead rate, and 4 Multiplying that rate by the actual level of the cost driver consumed by that product.

64. Copyright © by Houghton Mifflin Company. All rights reserved.64 Traditional Activity Bases u Traditional activity bases are volume- related bases such as: 4 Direct labor hours. 4 Direct labor costs. 4 Machine hours. 4 Units of production.

65. Copyright © by Houghton Mifflin Company. All rights reserved.65 Product Unit Cost u The total manufacturing overhead cost is added to the actual costs of direct materials and direct labor in order to determine the total product cost. u The product unit cost is calculated by dividing total product cost by total units produced.

66. Copyright © by Houghton Mifflin Company. All rights reserved.66 Using the Traditional Approach to Assign Manufacturing Overhead Costs to Production

67. Copyright © by Houghton Mifflin Company. All rights reserved.67 Assignment of Manufacturing Overhead Costs: Traditional Approach = $5 per Direct Labor Hour Predetermined Overhead Rate = $200,000 40,000 Direct Labor Hours Step 1: Calculate the predetermined overhead rate.

68. Copyright © by Houghton Mifflin Company. All rights reserved.68 Assignment of Manufacturing Overhead Costs: Traditional Approach Step 2: Apply manufacturing overhead costs to production. Regular Cost Driver LevelCost Applied Overhead costs applied: Manufacturing overhead: $5 per DLHX 25,000 DLH$125,000  10,000Number of units $ 12.50Manufacturing overhead cost per unit

69. Copyright © by Houghton Mifflin Company. All rights reserved.69 Assignment of Manufacturing Overhead Costs: Traditional Approach Step 2: Apply manufacturing overhead costs to production. Deluxe Cost Driver LevelCost Applied Overhead costs applied: Manufacturing overhead: $5 per DLH X 15,000 DLH$ 75,000  5,000Number of units $ 15.00Manufacturing overhead cost per unit

70. Copyright © by Houghton Mifflin Company. All rights reserved.70 Product Unit Cost: Traditional Approach Step 3: Product Unit Cost Regular Rolling Suitcase Deluxe Rolling Suitcase Product costs per unit: Direct materials$40.00$42.00 Direct labor 37.50 45.00 Manufacturing overhead 12.50 15.00 Product unit cost$90.00$102.00

71. Copyright © by Houghton Mifflin Company. All rights reserved.71 Q. Q. What are some traditional activity bases?Discussion A. A. 1. Direct labor cost. 2. Direct labor hours. 3. Machine hours. 4. Units of production.

72. Manufacturing Overhead Allocation Using ABC OBJECTIVE 8 Calculate product unit cost using activity-based costing to assign manufacturing overhead costs.

73. Copyright © by Houghton Mifflin Company. All rights reserved.73 ABC Approach u When ABC is used, manufacturing costs are grouped into smaller activity cost pools. u Because more cost pools are used, each with their own cost driver for allocation to products, a more accurate product cost is obtained.

74. Copyright © by Houghton Mifflin Company. All rights reserved.74 ABC Approach u Costs from activity cost pools are assigned to cost objects using cost drivers. 4 Cost drivers are identified and cost driver levels are estimated for each cost pool. 4 Each cost pool rate is calculated by dividing the estimated cost amount by the cost driver level. 4 Manufacturing overhead is applied to the product’s cost by multiplying the cost pool rate by the actual cost driver amount.

75. Copyright © by Houghton Mifflin Company. All rights reserved.75 ABC Systems u ABC systems assign costs to cost objects based on each cost object’s relative use of overhead resources. u The total applied manufacturing overhead cost is added to the cost of direct materials and direct labor to determine the total product cost. u The product unit cost is the total product cost divided by the total units produced.

76. Copyright © by Houghton Mifflin Company. All rights reserved.76 Using ABC to Allocate Manufacturing Overhead Cost to Production

77. Copyright © by Houghton Mifflin Company. All rights reserved.77 ABC Costing Systems u Problems with product costs produced by traditional volume-based costing systems include: 4 Traditional volume based system, low volume products are under-costed and high volume products are over-costed. 4 Organizations face greater risk of making poor decisions when significant product cost distortions exist.

78. Copyright © by Houghton Mifflin Company. All rights reserved.78 Q. Q. What are two problems with traditional volume-based costing systems?DiscussionA. 1.Low-volume products are undercosted and high-volume products are overcosted. 2.Greater risk of making poor decisions.

79. Copyright © by Houghton Mifflin Company. All rights reserved.79 Step 1: Cost Driver Level Estimated Cost Driver Level Cost DriverRegularDeluxeTotal Number of setups300400700 Number of inspections150350500 Packaging hours6001,4002,000 Machine hours4,0006,00010,000

80. Copyright © by Houghton Mifflin Company. All rights reserved.80 Step 1: (cont’d) Setup $70,000  700 setups =$100 per setup Inspection $60,000  500 inspections =$120 per inspection Packaging $50,000  2,000 packaging hours =$25 per packaging hour Building $20,000  10,000 machine hours =$2 per machine hour Activity Pool Cost Driver Level Activity Cost Rate

81. Copyright © by Houghton Mifflin Company. All rights reserved.81 Step 2: Apply Overhead Costs to Production $ 100 per setup X300 setups =$30,000 $ 120 per inspection X150 inspections =$18,000 $ 25 per packaging hr X600 packaging hours =$15,000 $2 per machine hr X4000 machine hours =$8,000 Total $71,000  10,000 units = $7.10 Regular Suitcase Activity Cost Rate Cost Driver Level Cost Applied

82. Copyright © by Houghton Mifflin Company. All rights reserved.82 $100 per setup X400 setups =$40,000 $120 per inspection X350 inspections =$42,000 $25 per packaging hr X1,400 packaging hrs =$35,000 $2 per machine hr X6,000 machine hrs =$12,000 Total $129,000  5,000 units = $25.80 Deluxe Suitcase Activity Cost Rate Cost Driver Level Cost Applied Step 2: Apply Overhead Costs to Production (cont’d…)

83. Copyright © by Houghton Mifflin Company. All rights reserved.83 Step 3: Calculate Product Unit Cost Product Costs per Unit Regular Suitcase Deluxe Suitcase Direct Materials $40.00 $42.00 Direct Labor 37.50 45.00 Manufacturing Overhead 7.10 25.80 Product Unit Cost $84.60$112.80

84. Cost Allocation in Service Organizations OBJECTIVE 9 Apply costing concepts to a service organization.

85. Copyright © by Houghton Mifflin Company. All rights reserved.85 Service Organizations u A service organization does not have a physical product that can be: 4 Assembled. 4 Stored. 4 Valued.

86. Copyright © by Houghton Mifflin Company. All rights reserved.86 Service Organizations u The most important cost in a service organization is the professional labor cost (like product cost in manufacturing.) u Service related overhead is the other principal component of the cost of services rendered (like manufacturing overhead.)

87. Copyright © by Houghton Mifflin Company. All rights reserved.87 Q. Q.What is the most important cost in a service organization?Discussion A. A.Professional labor cost.

88. Copyright © by Houghton Mifflin Company. All rights reserved.88 OK, LET’S REVIEW... 1.State how managers use information about costs in the management cycle. 2.Identify various approaches managers use to classify costs. 3.Define and give examples of the three elements of product cost and compute a product’s unit cost for a manufacturing organization.

89. Copyright © by Houghton Mifflin Company. All rights reserved.89 WE ALSO COVERED... 4.Describe the flow of product-related activities, documents, and costs through the Materials Inventory, Work in Process Inventory, and Finished Goods Inventory accounts. 5.Prepare a statement of cost of goods manufactured and an income statement for a manufacturing organization. 6.Define cost allocation and explain the process of manufacturing overhead allocation using cost objects, cost pools, and cost drivers.

90. Copyright © by Houghton Mifflin Company. All rights reserved.90 AND FINALLY... 7.Calculate product unit cost using the traditional allocation of manufacturing overhead costs. 8.Calculate product unit cost using activity-based costing to assign manufacturing overhead costs. 9.Apply costing concepts to a service organization.