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Chapter 2 Cost Concepts and Cost Allocation

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					Chapter 16 Cost Concepts and Cost Allocation

Learning Objectives:
Cost

Classifications Product Costs Manufacturing Inventory Accounts and Cost Flows How much does it cost? Types of Businesses Financial Reporting of Costs Overhead Cost Allocation: Traditional and ABC Approaches

Types of Businesses
Figure 6
Service
Merchandising

or

Retail Manufacturing

Cost Classifications:

 Cost

traceability: direct and indirect  Cost behavior: fixed or variable  Marketing value: value or nonvalue adding  Financial reporting: product or period

Cost Classifications
Costs

Cost Traceability

Costs Behavior

Value-Adding Attributes

Financial Reporting

Direct

Indirect

Fixed

Variable

ValueAdding

NonvalueAdding

Product

Period

Cost Classifications:
Marketing Value Value Adding Non-Value Adding Financial Reporting Cost Behavior Variable Fixed

Period Costs Expenses SAG Noninventoriable

Product Costs Inventoriable

Direct Materials

Direct Labor

Overhead Indirect Costs Conversion Costs

Prime Costs

Conversion Costs Prime Costs

In-Class Exercise SE1

Product Costs and Inventory Accounts
Figure 5


Materials Inventory




Materials Purchased Materials Used in Production Current Manufacturing Costs: DM, DL, OH used Cost of Goods Manufactured Cost of Goods Manufactured/Completed Cost of Goods Available for Sale Cost of Goods Sold



Work in Process Inventory






Finished Goods Inventory





Exercise is E5.

Financial Statement and the Reporting of Costs
 



Service Organizations Do not have inventory accounts Retail or Merchandise Organizations Only on inventory account Use of Cost of Good Sold Cost of Good Sold = Beg. Inv. + Purchases - End. Inventory Manufacturing Organizations Keeps three inventory accounts
1. 2. 3.

Material Inventory Work In Process Inventory Finished Goods Inventory

Inventory Accounts in Manufacturing Organizations


Materials  The purchasing department is responsible for purchasing direct and indirect materials need. When the materials arrived, direct materials cost is moved to Work in Process Inventory.  Work in Process  Cost of direct materials, direct labor, and manufacturing overhead are accumulated in this account.  Finished Good Inventory  As the product is completed its cost moves from the work in process inventory to the Finished Good Inventory. When the product is sold, its cost will move to Cost of Good Sold.

Manufacturing Cost Flow
Direct Materials Inventory Account
Balance 12/31/x3: Used during $10,000 20x4: 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 $ 2,000 during 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

Manufacturing Cost Flow
Factory Payroll Account
Direct labor 20x4: earned during 20x4: $12,000
$12,000

Work in Process Inventory Account
Balance 12/31x3: Completed $ 2,000 during 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

Balance 12/31/x4: $0

Manufacturing Cost Flow
Manufacturing Overhead Control Account
Total manufacturing overhead incurred during 20x4: $ 6,000 20x4:
$ 6,000

Work in Process Inventory Account
Balance 12/31/x3: Completed $2,000 during 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

Balance 12/31/03: $0

Manufacturing Cost Flow
Work in Process Inventory Account

Finished Goods
Inventory Account

Balance 212/31/x3: Completed $2,000 during 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

Balance 12/31/x3: Sold during 20x4: $6,000 $24,000 Completed during 20x4: 30,000

Balance 12/31/x4: $12,000

Manufacturing Cost Flow
Finished Goods Inventory Account
Balance 12/31x3: Sold during 20x4: $6,000 $24,000 Completed during 20x4: 30,000

Cost of Goods Sold Account
Sold during 20x4: $24,000

Balance 12/31/x4: $12,000

Group Exercise
The balance in the Work in Process Inventory account on April 1 was $31,600, and the balance on April 30 was $22,600. Costs incurred during the month were as follows: Direct materials Direct Labor Manufacturing Overhead 41,250 17,300 32,600

What was the amount transfer to Finished Goods Inventory account during April?

Solution:
WIP Beginning Inventory $31,600

Less Ending Inventory
Completed Add:

22,600
9,000

Direct Materials
Direct Labor Manufacturing OH To Finished Goods Inventory

41,250
17,300 32,600 $101,150

Team Work
 Solve

SE3

Financial Reporting, Income Statement
 No

matter the type of organization the income statement is report as: Sales Less Cost of Good Sold = Gross Margin Less Expenses = Operating Income
In-Class Exercise SE2

Statement of Goods Manufactured


Step 1: Compute the cost of direct materials used during the accounting period.
Beginning Balance + DM purchase - Ending DM Balance

EI: Direct Materials Used:
Materials Inventory, Dec.31, 2005 Direct Materials Purchase Cost of Direct Materials available for use Less materials inventory, Dec. 31, 2006 Cost of direct materials used $100,000 200,000 300,000 50,000 $250,000

Calculating Unit CostManufacturing
The cost per unit of a product is found by adding all its cost and dividing it by the number of units produced. In manufacturing, for example, it will include: Materials $1,000 Labor $2,000 Overhead $5,000 Total Cost $8,000
# of Units Produced 10,000

Unit Cost (10,000/ $8,000) $1.2
In-Class Exercise SE8

Statement of Goods Manufactured


Step 2: Calculate total manufacturing cot for the period: Direct Materials Used + Direct Labor +Manufacturing
overhead

EI: Manufacturing Cost:
Direct Materials Used (from step 1) Direct Labor Manufacturing Overhead Total manufacturing cost $250,000 120,000 60,000 $430,000

Statement of Goods Manufactured


Step 3: Determine total cost of goods manufactured for the period. Total Manufacturing Cost + Beginning WIP - Ending WIP

EI: Cost of Goods Manufactured:
Total manufacturing cost (from step 2) Add WIP Dec. 31, 2005 Total cost of work in process during the year Less WIP Dec. 31, 2006 Cost of Goods Manufacturing $430,000 20,000 450,000 150,000 $300,000

Team Work
 Solve

E4

Ron Company Statement of Cost of Goods Manufactured For the Month of August

Direct materials used Materials Inventory, beginning $48,600

Direct Materials purchased
Cost of direct materials available for use Less materials inventory, ending Cost of direct materials used Direct labor costs (3,400 hours x $8.75) Overhead Utilities Supervision Indirect materials Depreciation Insurance Miscellaneous Total manufacturing overhead costs Total manufacturing costs Add work in process inventory, beginning Total cost of work in process during the year Less work in process inventory, ending Cost of goods manufactured

139,000
$187,600 50,100 $137,500 29,750

$67,000.00 41,000.00 54,000.00 5,000.00 3,000.00 66,000.00 38,350 $205,600 54,250 $259,850 48,400 $211,450

Elements of Cost


The three elements of product cost are:
1.

2.
3.

Direct Materials (Materials directly related to the product) Direct Labor (Employees who worked in manufacturing the
product)

Manufacturing Overhead (All other cost including:
materials, Indirect Labor, and other supplies)

Indirect



Prime Cost


Primary cost of a product, Direct Materials and Direct Labor



Conversion cost


The cost of converting a unit of production into a finished good, Direct materials and Manufacture Overhead. In-Class Exercise SE5

Costing Methods Actual Costing Method
 Uses

the know cost of materials, labor, and overhead.
Direct Materials $540 / 3,000 = .18 each bar Direct Labor $420 / 3,000 = .14 Overhead $421 / 3,000 = .08 Total Production Cost per bar = $.40

EI: Manufacturing 3,000 candy bars costing the following:

Costing Methods Normal Costing Method
 Uses

the know cost of materials, labor, and estimates overhead cost using a rate.

EI: Overhead rate is based on 60% of direct labor. Manufacturing 3,000 candy bars costing the following: Direct Materials $540 / 3,000 = .18 each bar Direct Labor $420 / 3,000 = .14 Overhead $420 x 60% = 252 / 3,000 = .08 (rounded) Total Production Cost per bar = $.40

Costing Methods Standard Costing Method
 Uses

predetermined rates for materials, labor, and overhead.

Manufacturing 3,000 candy bars costing the following: Direct Materials = .18 each bar Direct Labor = .14 Overhead = .09 Total Production Cost per bar = $.44

In-class Exercise SE6

Cost Allocation
A

cost object is a:

 product
 process  department  activity

that the organization wishes to cost.

Cost Allocation
A

cost pool is the collection of indirect cost assigned to a cost object. EI: Machine hours, Units produced, etc. cost driver is an activity that causes the cost pool to increase in amount as the cost driver increases.

A

Allocation of Manufacturing Overhead
The allocation of manufacturing overhead requires the following:


The pooling of manufacturing overhead costs that are affected by a common activity.



The selection of a cost driver whose activity level causes a change in the cost pool.

In-Class SE7

Key Question: How much does it cost?
 What

should be included?  Unit cost of a product or service:
Total costs Units produced

Overhead Cost Allocation:
Traditional and ABC Approaches to Applying Overhead


 

Traditional
One overhead account One plant wide rate All Budgeted Overhead divided by Estimated Cost Driver i.e. DL$,DLH

 ABC

 

Overhead divided into Activities Many activity rates Budgeted Activity Cost Pool divided by Estimated Cost Driver

Predetermined Rate:

Estimated Overhead Estimated Cost Driver

Predetermined Rate:

Estimated Cost Pool Estimated Cost Driver

Team Work


Exercise SE 8



Exercise SE 9

Computations:


SE 8



SE9
$4 $1,200 $4,800

Predetermine OH Rate = Total Estimated Overhead Cost Total Estimated Service Request

Overhead Cost Applies =
per direct labor hour

x Service request

=

$18,290 3,100 service request

= $5.90 per service request

Homework
E14, P1 and P3


				
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