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Costing Systems

Costing Systems. EMBA 5403 Fall 2010. Available costing systems. Absorption costing Actual Costing Normal Costing Standard Costing Variable costing Actual Costing Normal Costing Standard Costing. Costing systems. Variance.

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Costing Systems

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  1. Costing Systems EMBA 5403 Fall 2010

  2. Available costing systems • Absorption costing • Actual Costing • Normal Costing • Standard Costing • Variable costing • Actual Costing • Normal Costing • Standard Costing Mugan

  3. Costing systems Mugan

  4. Variance • Differences between the costs according to the costing system used and actual amounts • Actual amounts are reflected in the financial statements Mugan

  5. Absorption Costing Absorption costing allocates variable and fixedoverhead costs to products. Cost of Goods Manufactured Cost of GoodsSold Finished Goods InventoryValuation Mugan

  6. ProcessCosting Job-orderCosting • Distinct jobs or batches of units. • Costs accumulated separately by job. • Typical job order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals • Law firms Product Costing Proceduresin Organizations Mugan

  7. ProcessCosting Job-orderCosting Product Costing Proceduresin Organizations • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill Mugan

  8. Manufacturingoverhead (MOVH) Applied (added) to eachjob using apredeterminedrate Direct materials Traced directly to each job The Job Traced directly to each job Direct labor Job-Order Costing Mugan

  9. Raw materials could be used as direct or indirect product cost. An employee’stime may be eitherdirect or indirect. Job-Order Costing Direct materials and labor Part of the job cost MaterialsRequisition and Time tickets Manufacturing Overhead Control Account Indirect materials and labor Mugan

  10. Job-Order Costing IndirectLabor wages OtherActual OHCharges Manufacturing Overhead Control Account Job-Order Cost Sheets AppliedOverhead Material usage IndirectMaterials Mugan

  11. Job-Order Cost Sheet Mugan

  12. Job-Order System Cost Flows Work-in-Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor • Overhead Applied Mfg. Overhead Actual Applied If actual and applied manufacturing overheadare not equal, a year-end adjustment is required. • Indirect Materials • OverheadApplied to Work inProcess • IndirectLabor Mugan

  13. Job-Order System Cost Flows Work-in-Process(Job Cost Sheet) Finished Goods • Direct Materials • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labor • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold Mugan

  14. Allocation Process Define the cost objects. Accumulate indirect costs in cost pools. Choose an allocation base. Estimate an application rate. Allocate indirect costs based on use of the allocation base Mugan

  15. Over- and Underabsorbed Overhead Overabsorbed overhead Underabsorbed overhead Mugan

  16. Over- and Underabsorbed Overhead XYZ’sactual overhead for the year was TL650,000 and a total of 100,000 direct labor hours were worked. Using XYZ’s predetermined overhead rate ofTL 6.00 per direct labor hour, how much overhead was appliedto XYZ’s jobs during the year? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = TL 6.00 per DLH × 100,000 DLH = TL 600,000 Mugan

  17. Accounting for Over- andUnderabsorbed Overhead Three basic approaches • Prorate among work-in-process, finished goods, and cost of goods sold. • Adjust cost of goods sold. • Recalculate the application rate and apply to all the jobs during the period. Mugan

  18. Accounting for Over- andUnderabsorbed Overhead Mugan

  19. Allocation Base If overhead costs are accumulated in a single cost pool and allocated using a single allocation base. Single Overhead Cost Pool Application Rate Products Mugan

  20. Multiple Allocation Bases Many companies use Activity Based Costing where multiple cost pools and a different allocation base for each cost pool. Overhead Cost Pool B Overhead Cost Pool A Overhead Cost Pool C Application Rate A Application Rate B Application Rate C Products Mugan

  21. ABC and Multiple Allocation Bases • Improves planning and control. • Activity Based Costing (ABC) is one method of using multiple allocation bases. Mugan

  22. Multistage Allocation Processes Overhead Cost Pool 1 Overhead Cost Pool 2 Overhead Cost Pool 3 Overhead Cost Pool 4 Separate Application Rates Department A Department B Department C Dept. Application Rates Dept. Application Rates Products Mugan

  23. Process Costing Identical units of product are producedin a continuous flow through a series of manufacturing steps orprocesses. Costs are assigned to completed units transferred out of the process and to incomplete units remaining in the process. Mugan

  24. Process Costing Costs are accumulated for a period of timefor products in work-in-process inventory. Equivalent unitsis a concept expressing these partially completed products as a smaller number of fully completed products. Mugan

  25. + = Equivalent Units Two one-half completed products are equivalent to one completed product. So, 8,000 units 70 percent completeare equivalent to 5,600 complete units. Mugan

  26. Equivalent Units Question For the current period, Ames 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 Ames have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Mugan

  27. Equivalent Units Question For the current period, Ames 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 Ames have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units Mugan

  28. Calculating and Using Equivalent Units of Production To calculate the cost perequivalent unit for the period: Cost perequivalent unit Costs for the periodEquivalent units for the period = Mugan

  29. Equivalent Units Question Now assume that Ames incurred $27,600 in production costs for the 11,500 equivalent units. What was Ames’ average cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 Mugan

  30. Equivalent Units Question Now assume that Ames incurred $27,600 in production costs for the 11,500 equivalent units. What was Ames’ average cost per equivalent 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 Mugan

  31. Equivalent Units Question What portion of the $27,600 in production costs was assigned to work-in-process inventory and what amount was assigned to completed units for the period? a. $0 and $27,600 b. $7,600 and $20,000 c. $3,600 and $24,000 d. $12,000 and $15,600 Mugan

  32. Equivalent Units Question Work-in-process: 1,500 equivalent units @ $2.40 = $3,600 Completed units: 10,000 equivalent units @ $2.40 = $24,000 What portion of the $27,600 in production costs was assigned to work-in-process inventory and what amount was assigned to completed units for the period? a. $0 and $27,600 b. $7,600 and $20,000 c. $3,600 and $24,000 d. $12,000 and $15,600 Mugan

  33. Equivalent Units When there are partially completed units in beginning inventory, work efforts during the period can be categorized as follows: • Work to complete beginning work-in-process • Work on units started and completed during the period • Work on units in ending work-in-process Mugan

  34. Equivalent Units - Example ACE started June with 250 partially completedunits in work-in-process (30% complete). During June, ACE completed the units in work-in-process and started an additional 1,200 units. There were 300 units in ending work-in-processon June 30. They were 40% complete. How many total equivalent unitsdid ACE produce during June? Continue Mugan

  35. Equivalent Units - Example Since 30% of the work was done on these units in May, the remaining 70% of the work is done in June. Mugan

  36. Equivalent Units - Example Since 1,200 units were started during June, and 300 ofthose units are still in work-in-process on June 30,900 units were started and completed during June. Mugan

  37. Equivalent Units - Example 40% of the work was done on these units in June. Mugan

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