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CHAPTER 13. Cost Accounting and Reporting Systems. Financial Accounting. Managerial Accounting. Focus on External Reporting. Focus on Internal Reporting. Cost Accounting. Focus on Cost Accumulation & Assignment. Cost Accounting. Revisit plans. Implement plans.

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chapter 13

CHAPTER 13

Cost Accounting and Reporting Systems

cost accounting

FinancialAccounting

ManagerialAccounting

Focus onExternalReporting

Focus onInternalReporting

CostAccounting

Focus onCost Accumulation& Assignment

Cost Accounting
decision making

Revisit plans

Implement plans

Data collection andperformance feedback

Decision Making

Strategic, Operational,and Financial Planning

Planning and control cycle

Performance analysis: Plans vs. actual results (Controlling)

Executing operational activities (Managing)

value chain functions

DesiredROI

Design

Customer

Service

Production

Marketing

Distribution

Value Chain Functions

Research

and

Development

The sequence offunctions and activitiesthat, over the lifeof the product orservice, adds valuefor the customer.

cost accumulation and assignment

CostObject

Cost Assignment

Cost

Object

Cost Assignment

Cost Assignment

Cost

Object

Cost Accumulation and Assignment

Cost

Pool

Cost objects are products, jobs, and services.

direct costs and indirect costs
Direct costs

Can be easily and conveniently traced to a unit of product or other cost objective.

Would not be incurred if the product or activity were discontinued.

Indirect costs

Cannot be easily and conveniently traced to a unit of product or other cost object.

Would be incurred even if the product or activity were discontinued.

Direct Costs and Indirect Costs
costs for cost accounting purposes
Costs for Cost Accounting Purposes

Financial Accounting

Cost is a measure of resources used or given up to achieve a stated purpose.

Managerial Accounting

Costs are assigned to products and become expenses when products are sold.

costs for cost accounting purposes8
Manufacturers . . .

Buy raw materials.

Produce and sell finished goods.

Merchandisers . . .

Buy finished goods.

Sell finished goods.

Costs for Cost Accounting Purposes

MegaLoMart

costs for cost accounting purposes9
Costs for Cost Accounting Purposes

Merchandiser

Current Assets

  • Cash
  • Receivables
  • Prepaid Expenses
  • Merchandise Inventory
  • Manufacturer
  • Current Assets
    • Cash
    • Receivables
    • Prepaid Expenses
    • Inventories
      • Raw Materials
      • Work in Process
      • Finished Goods
costs for cost accounting purposes10

Sold to

Customers

Sold to

Customers

=

Manufacturedproduct

Purchasedproduct

Costs for Cost Accounting Purposes

Income Statement

Cost of Goods Sold

Balance Sheet

Inventory

Manufacturer

Ingredients

+

Human effort

+

Machine support

Merchandiser

costs for cost accounting purposes11

RawMaterials

DirectLabor

ManufacturingOverhead

Costs for Cost Accounting Purposes

The Product

costs for cost accounting purposes12
Costs for Cost Accounting Purposes

Raw materials are theingredients of the product.

Example:A radio installed in an automobile

costs for cost accounting purposes13
Costs for Cost Accounting Purposes

Direct labor is the effort provided by workers who are directly involved withthe manufacture of the product.

Example:Wages paid to automobile assembly workers

costs for cost accounting purposes14
Costs for Cost Accounting Purposes

Manufacturing overhead includes all manufacturing costs except raw materialand direct labor.

  • Examples
  • Wages of maintenance workers, janitors,security guards.
  • Factory utilities, property taxes, and insurance.
  • Depreciation for factory buildings and equipment.
  • Production supervision salaries.
slide15

Cost Accounting Systems

Determining unitmanufacturingcosts.

Planning andcontrolfunctions.

Cost accounting systems provide information supporting decisions making the business successful.

Assessing theefficiency andeffectivenessof operations.

Providingproducts or services tocustomers.

slide16

Cost Accounting Systems

Evaluate andrewardemployeeperformance.

Discloseinventoriesand cost ofgoods sold.

Cost accounting systems are the proceduresand techniques used by management.

Manage activitiesthat consumeresources.

Track resourcesconsumed byproducts andservices.

cost accounting systems

Raw Materials

Work in Process

Cost of GoodsSold

FinishedGoods

Period Costs

Selling andAdministrative

Cost Accounting Systems

Income StatementExpenses

Balance Sheet Costs Inventories

Material Purchases

Direct Labor

ManufacturingOverhead

Selling andAdministrative

cost accounting systems18
Cost Accounting Systems

Manufacturingoverhead (OH)

Applied to eachjob using apredeterminedrate

Rawmaterial

Traced directly to each job

THE JOB

Traced directly to each job

Direct labor

cost accounting systems19

Estimated total manufacturingoverhead cost for the coming period

POHR =

Estimated total units in theallocation base for the coming period

Cost Accounting Systems

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

Ideally, the allocation base is a cost driver that causes overhead.

cost accounting systems20
Cost Accounting Systems

Based onestimates, and determined before the period begins.

Overhead applied = POHR × Actual activity

Actualamount of thecost driversuch as units produced, direct labor hours, or machine hours. Incurred during the period.

cost accounting systems21
Cost Accounting Systems

Cruisers, Inc., applies overhead based on direct labor hours. Total estimatedoverhead for the year is $4,200,000. Totalestimatedlabor hours are 300,000.What is Cruisers’ predeterminedoverhead rate?

cost accounting systems22

Estimated total manufacturingoverhead cost for the coming period

POHR =

Estimated total units in theallocation base for the coming period

$4,200,000

POHR =

300,000 direct labor hours (DLH)

Cost Accounting Systems

POHR = $14.00 per DLH

For each direct labor hour worked on a job, $14.00 of factory overhead will be applied to the job.

cost accounting systems23
Cost Accounting Systems

Cruisers, Inc., produced 86 SeaCruiser sailboats during the month working a total of 20,640 labor hours and incurring these costs: raw materials $368,510; and direct labor $330,240.What is the cost per SeaCruiser sailboat?

cost accounting systems26
Cost Accounting Systems

Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours.

How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined overhead rate of $14.00 per direct labor hour.

cost accounting systems27
Cost Accounting Systems

Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours.

How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined overhead rate of $14.00 per direct labor hour.

SOLUTION

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $14.00 per DLH × 310,000 DLH =$4,340,000

cost accounting systems28
Cost Accounting Systems

Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours.

How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined overhead rate of $14.00 per direct labor hour.

Overhead isoverapplied for the year by$90,000. What willCruisers do?

SOLUTION

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $14.00 per DLH × 310,000 DLH =$4,340,000

cost accounting systems29
Cost Accounting Systems

Smaller amounts

$90,000may be allocatedto these accounts.

$90,000 may beclosed directly to cost of goods sold.

OR

Work inProcess

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

slide31

Let’s examine the cost flows in a product costing system. We will use T-accounts and start withmaterials.

Cost Accounting Systems

slide32

Cost Accounting Systems

Work in Process

Raw Materials

  • Direct Materials
  • Direct Materials
  • Material

Purchases

  • Indirect Materials

Mfg. Overhead

Actual

Applied

  • Indirect Materials
slide33

Next let’s addlabor costs andapplied manufacturing overhead to the cost flows. Are you with me?

Cost Accounting Systems

slide34

Cost Accounting Systems

Salaries and Wages Payable

Work in Process

  • 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
slide36

Cost Accounting Systems

Finished Goods

Work in Process

  • Direct Materials
  • Cost ofGoodsMfd.
  • Cost ofGoodsMfd.
  • Cost ofGoodsSold
  • Direct Labor
  • Overhead Applied

Cost of Goods Sold

  • Cost ofGoodsSold
slide37

Cost Accounting Systems

A schedule of cost of goods manufacturedis prepared to assist managers in understanding and evaluating the overall cost of manufacturing products.

slide38

Cost Accounting Systems

Use the following informationto prepare a statement of costof goods manufactured for Cruisers, Inc. for April:

Raw materials inventory:

March 31 $126,900

April 30 $106,250

Raw materials purchases:

April $347,860

slide40

Finished goodsinventory numbersare assumed amounts.

The cost of goods manufactured during the period is used to compute cost of goods sold for the period.

slide41

The income statement is prepared using established financial accounting procedures.

Sales andexpense numbersare assumed amounts.

slide42

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.

Cost Accounting Systems

ProcessCosting

Job OrderCosting

slide43

Typical job order cost applications:

    • Special-order printing
    • Building construction
  • Also used in service industry
    • Hospitals
    • Law firms

Cost Accounting Systems

ProcessCosting

Job OrderCosting

slide44

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.

Cost Accounting Systems

ProcessCosting

Job OrderCosting

slide45

Typical process cost applications:

    • Petrochemical refinery
    • Paint manufacturer
    • Paper mill

Cost Accounting Systems

ProcessCosting

Job OrderCosting

absorption and variable costing

ProductCosts

Raw Materials

ProductCosts

Direct Labor

Variable Manufacturing Overhead

Fixed Manufacturing Overhead

PeriodCosts

PeriodCosts

Variable Selling and Administrative Expenses

Fixed Selling and Administrative Expenses

Absorption and Variable Costing

AbsorptionCosting

VariableCosting

absorption and variable costing47

Raw Materials

Work in Process

Absorption costing

Cost of GoodsSold

FinishedGoods

Variable costing

Selling andAdministrative

Absorption and Variable Costing

Balance SheetCosts Inventories

Income StatementExpenses

Material Purchases

Direct Labor

VariableManufacturing Overhead

FixedManufacturing Overhead

Selling andAdministrative

Period Costs

absorption and variable costing48

All manufacturingcosts must be assignedto products to properlymatch revenues andcosts.

Fixed costs arenot really the costsof any particularproduct.

VariableCosting

AbsorptionCosting

Absorption and Variable Costing
absorption and variable costing49

These are capacitycosts and will beincurred even if nothingis produced.

Depreciation,taxes, insurance andsalaries are just asessential to productsas variable costs.

VariableCosting

AbsorptionCosting

Absorption and Variable Costing
absorption and variable costing50

They are the numbers that appear on our external reports.

VariableCosting

AbsorptionCosting

Absorption and Variable Costing

Absorption

costing product costs

are misleading for

decision making.

activity based costing abc52
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.

Activity-Based Costing (ABC)

I agree!

activity based costing abc53
Activity-Based Costing (ABC)

Activity-Based

Costing

TraditionalPlantwide

Overhead

Rate

Level of Complexity

Overhead Allocation

activity based costing abc54

A

A

C

B

B

C

Activity-Based Costing (ABC)

In the ABC method,

we recognize that many

activities within a

department drive

overhead costs.

activity based costing abc55
Identify activities and assign indirect costs to those activities.

Central idea . . .

Products require activities.

Activities consume resources.

A

A

C

B

B

C

Activity-Based Costing (ABC)
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 tocosts of implementation.

The Benefits of ABC
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.

Identifying Cost Drivers
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:

Estimated overhead costs in activity cost pool

Estimated number of activity units

Rate =

Overhead Actual Rate Activity

×

Activity-Based Costing Procedures
activity based costing
Activity-Based Costing

Let’s look at anexample comparingtraditional costingwith ABC. We will start withtraditional costing.

traditional costing vs abc
Cruisers, Inc. manufactures sailboats and canoes. Overhead is applied at the rate of $14 per direct labor hour. Production for May was 100 sailboats requiring 24,000 hours, and 1,000 canoes requiring 13,000 hours.

Overhead applied using traditional costing is:

Traditional Costing vs. ABC
activity based costing61
Activity-Based Costing

Cruisers plans to adopt activity-based costing and identifies these activities and costs for computing overhead rates.

Same amount of annual total overhead used earlier in the chapter.

activity based costing62
Using the following activity center data, determine the amount of overhead applied to the two products using activity-based costing.Activity-Based Costing
activity based costing63
Activity-Based Costing

Let’s complete the table.

activity based costing65
Activity-Based Costing

This result is not uncommon when activity-based costing is used. Many companies have found that lower volume, more complex products have greater overhead costs than previously realized.