Absorption Cost Systems I

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Absorption Cost Systems I
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• Accountancy 503
• Prof. Clifton Brown
• Fall 2006

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Product costing objectives
The general objective of product costing is to
associate production costs with
Organizational units engaged in production,
Productive activities,
Products/services.
for purposes of decision making and control of
such phenomena.
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Product costing processes
Accountants attach costs to products through two
basic processes

• Direct association of specific costs
• Allocation of accumulated indirect cost pools

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Product cost accumulation
Kankakee Tool Co. organizes its materials
handling activities as a cost center within the
factory.
What are some costs Kankakee might accumulate
within this cost center where the objectives are
evaluation of the effectiveness and efficiency of
materials handling activities?
?
Movement of ? Raw materials to the
production centers, ? Partially completed
products from center to center, ? Final
product to finished goods inventory/shipping.
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Product cost allocation
Cost allocation generally occurs in two stages
Stage 1 from initial accounts and organization
units to production cost centers.
Stage 2 from production cost centers to other
cost objects within those centers.
?
Ultimately to products flowing through the
production cost centers.
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Product costing systems
Generic types of product costing systems
Job-order costing systems
Hybrid costing systems
?
Process costing systems
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Kankakee Tool
Product costing within Kankakees environment is
a job-order system.
Direct materials (mostly steel bar) traced
directly to each job
Direct labor (machine operators) traced directly
to each job
Manufacturing overheads, accumulated within
pro-duction centers, allocated to jobs flowing
through a production center.
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Budgeted allocation rates
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MX-49 job order
Total stages 1 2
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MX-49 machine time variances
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Over (under) applied overhead
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Turn-in a case write-up
The following individuals should e-mail a
write-up of the Kankakee case to the instructor
no later than 24-hours from now
Abumansour, Mohmed Ayimadu, Daniel Chen,
Yan-Lung Earl, Arthur Hardwidge, Mark Huang,
Hao-Chieh
Kaskyrbekova, Aigerim Kusaka, Hiroyuki Michaels,
Jonathan Pali, Gulali Tangka-Aree, Siri Yang,
Wen-Wen