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Accounting Systems For Measuring Costs

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Basic Cost Accounting Procedures The McGraw-Hill Companies, Inc., 2002. McGraw-Hill/Irwin ... Basic Cost Accounting Procedures. Process. Costing. Job Order. Costing ... – PowerPoint PPT presentation

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Title: Accounting Systems For Measuring Costs


1
Chapter 17
Accounting Systems For Measuring Costs
2
Cost Accounting Systems
Determining unit manufacturing costs.
Planning and control functions.
Cost accounting systems provide information
supporting decisions making the business
successful.
Assessing the efficiency and effectiveness of
operations.
Providing products or services to customers.
3
Cost Accounting Systems
Evaluate and reward employee performance.
Disclose inventories and cost of goods sold.
Cost accounting systems are the procedures and
techniques used by management.
Manage activities that consume resources.
Track resources consumed by products and services.
4
Basic Cost Accounting Procedures
Process Costing
Job Order Costing
5
Basic Cost Accounting Procedures
Process Costing
Job Order Costing
6
Basic Cost Accounting Procedures
Process Costing
Job Order Costing
7
Basic Cost Accounting Procedures
Process Costing
Job Order Costing
8
Job Order Costing
Manufacturing overhead (OH) Applied to each job
using a predetermined rate (POHR)
Direct materials
Traced directly to each job
THE JOB
Traced directly to each job
Direct labor
9
Job Order Costing
  • The primary document for tracking the costs
    associated with a given job is the job cost sheet.

10
The Job Cost Sheet
11
The Job Cost Sheet
12
The Job Cost Sheet
13
The Job Cost Sheet
14
Job Order Costing Document Flow Summary
Lets summarize the document flow we have been
discussing in a job order costing system.
15
Job Order Costing Document Flow Summary
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.
Materials Ledger Cards
Materials Ledger Cards
Materials Ledger Cards
Materials Requisition
Indirect materials
16
Job Order Costing Document Flow Summary
Direct Labor
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
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Indirect Labor
17
Job Order Costing Document Flow Summary
Indirect Labor
Employee Time Ticket
Overhead Applied with POHR
Other Actual OH Charges
Manufacturing Overhead Account
Job Cost Sheets
Materials Requisition
Indirect Material
18
Flow of Costs in Job Costing
Flow of Costs in Job Costing
Lets examine the cost flows in a job order
costing system. We will use T-accounts and start
with materials.
19
Flow of Costs in Job Costing
Work in Process (Job Cost Sheet)
Materials Inventory
  • Direct Material
  • Direct Material
  • Material
  • Purchases
  • Indirect Material

Mfg. Overhead
  • Indirect Material

20
Flow of Costs in Job Costing
Next lets add labor costs and applied
manufacturing overhead to the job order cost
flows. Are you with me?
21
Flow of Costs in Job Costing
Work in Process (Job Cost Sheet)
Labor
  • Direct Labor
  • Direct Material
  • Direct Labor
  • Indirect Labor
  • Overhead Applied

Mfg. Overhead
  • Indirect Material
  • Overhead Applied to Work in Process
  • Indirect Labor

22
Closing Under- or Overapplied Manufacturing
Overhead
23
Flow of Costs in Job Costing
Now lets complete the goods and sell them.
Still with me?
24
Flow of Costs in Job Costing
Work in Process (Job Cost Sheet)
Finished Goods
  • Direct Material
  • Cost of Goods Mfd.
  • Cost of Goods Mfd.
  • Cost of Goods Sold
  • Direct Labor
  • Overhead Applied

Cost of Goods Sold
  • Cost of Goods Sold

25
Process Costing
  • 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.

26
Comparing Job and Process Costing
  • 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

27
Job and Process Costing
The Work in Process account consists of
individual jobs in job costing.
Direct Materials
Finished Goods
Direct Labor
Jobs
Factory Overhead
Cost per unit for each job
28
Job and Process Costing
The Work in Process account consists of specific
processes in process costing.
Direct Materials
Finished Goods
Direct Labor
Processes
Factory Overhead
Cost per unit processed
29
Job and Process Costing Similarities
30
Work in Process Accounts The Key to Process
Costing
Direct
Materials
Work in Process Assembly
Indirect
Work in Process Packaging
Finished Goods
Factory Overhead
Applied Overhead
Indirect
Delivered to Customers
Direct
Labor
31
Computing Unit Cost
  • 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.
32
Computing Unit Cost
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.
If partially complete units remain in process,
we must use equivalent units as the divisor to
obtain unit costs.
33
Computing and Using Equivalent Units of Production
  • 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.
1
34
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
35
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
10,000 units (5,000 units .30) 11,500
equivalent units
36
Cost Per Equivalent Unit
37
Question
Now assume that PencilCo incurred 27,600 in
production costs. What was PencilCos cost per
unit for the period? a. 1.84 b. 2.40 c. 2.76
d. 2.90
38
Question
Now assume that PencilCo incurred 27,600 in
production costs. What was PencilCos 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
39
Equivalent Units
40 of Material
Equivalent units may be different for material
and labor and overhead at different stages of a
process.
Stage 1
25 of Labor and Overhead
At completion of Stage 1 of the process,
material is 40 complete, but labor and overhead
are only 25 complete.
40
Equivalent Units
60 of Material
40 of Material


100
Stage 2
Stage 1
25 of Labor and Overhead
25 of Labor and Overhead


50
41
Equivalent Units
60 of Material
40 of Material
Stage 3
Stage 2
Stage 1
50 of Labor and Overhead
25 of Labor and Overhead
25 of Labor and Overhead
The process is now complete.
42
Process Costing and Equivalent Units
Owl Inc uses FIFO process costing in its
Fabrication Department where a product called
Strata is made.
43
Process Costing and Equivalent Units
44
Process Costing and Equivalent Units
Material is added at the beginning of the process
so it is always 100 complete.
45
Process Costing and Equivalent Units
Overhead is applied on the basis of labor, so
both are at the same percentage of completion.
46
Physical Flow of Units
47
Computing Equivalent Units of Production
48
Computing Equivalent Units of Production
Since materials are added at the beginning of the
process, no additional materials are necessary to
complete the beginning inventory.
49
Computing Equivalent Units of Production
100,000 units completed and transferred.

100,000
50
Computing Equivalent Units of Production
51
Computing Equivalent Units of Production
Since labor and overhead were 40 percent complete
in the beginning inventory, 60 percent of the
work must be completed in April.
52
Computing Equivalent Units of Production

100,000 Transferred
53
Computing Equivalent Units of Production
54
Process Costing and Equivalent Units
55
Cost per Equivalent Unit
56
Cost Reconciliation
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.
57
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58
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59
0.12 0.48 0.50 1.10
60
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61
Activity-Based Costing (ABC)
62
Activity-Based Costing (ABC)
  • 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.

I agree!
63
Activity-Based Costing (ABC)
Activity-Based Costing
Departmental Overhead Rates
Level of Complexity
Plantwide Overhead Rate
Overhead Allocation
64
Activity-Based Costing (ABC)
In the ABC method, we recognize that many
activities within a department drive overhead
costs.
65
Activity-Based Costing (ABC)
  • Identify activities and assign indirect costs to
    those activities.
  • Central idea . . .
  • Products require activities.
  • Activities consume resources.

66
The Benefits of ABC
  • 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.

67
Identifying Cost Drivers
  • 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.

68
Activity-Based Costing Procedures
  • 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

69
Activity-Based Costing
Lets look at an example comparing traditional
costing with ABC. We will start with traditional
costing.
70
Traditional Costing vs. ABC Example
  • 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.
71
Traditional Costing
72
Traditional Costing
ABC will have different overhead per unit.
73
Activity-Based Costing
  • 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.

74
Activity-Based Costing
400 deluxe 800 regular 1,200 total
75
Activity-Based Costing
76
Activity-Based Costing
77
Activity-Based Costing
Lets complete the table.
78
Activity-Based Costing
79
Activity-Based Costing
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.
80
Activity-Based Costing
81
Activity-Based Costing
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.
82
Costs and Cost Drivers in Activity-Based Costing
83
End of Chapter 17
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