PPT 4 -1 Don R. Hansen Maryanne M. Mowen COST MANAGEMENT.

PPT 4 -1

Don R. Hansen

Maryanne M. Mowen

COST MANAGEMENT

PPT 4 -2

Chapter Four

Product and Service Costing: Overhead Application and Job-Order System

PPT 4 -3

Learning Objectives

Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products.

Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment.

Compute a predetermined overhead rate, and use the rate to assign overhead to production.

PPT 4 -4

Learning Objectives (continued)

Explain the difference between job-order and process costing, and identify the source documents used in job-order costing.

Describe the cost flows associated with job-order costing, and prepare the journal entries.

Explain why multiple overhead rates may be preferred to a single, plantwide rate.

PPT 4 -5

Manufacturing Firms VersusService Firms

Manufacturing involves putting together materials, labor, and overhead to produce a new product. The good produced is tangible and can be inventoried and transported from the plant to the customer.

A service is characterized by its intangible nature. It is not separable from the customer and cannot be inventoried.

PPT 4 -6

Interface of Services with theCost Management System

1. Intangibility

2. Perishability

3. Inseparability

4. Heterogeneity

PPT 4 -7

Relationship to BusinessImpact on

Cost Management System

*Many of these effects are also true of tangible products.

Services cannot be stored.

Services cannot be protected through patents.

Services cannot readily be displayed or communicated.

Prices are difficult to set.

There are no inventory accounts.

There is a strong ethical code.*

Costs must be related to entire organization.*

Intangibility

PPT 4 -8




Consumer is involved in production.

Other consumers are involved in production

Centralized mass production of services is difficult.

Costs often accounted for by customer type.*

System must be generated to encourage consistent quality.*

Inseparability

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Standardization and quality control are difficult.

A strong systems approach is needed.

Productivity measurement is ongoing.*

Total quality management is critical.*

Heterogeneity

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Service benefits expire quickly.

Service may be repeated often for one customer.

There are no inventories.

There needs to be a standardized system to handle repeat customers.*

Perishability

PPT 4 -11

Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment

CostAccumulation

Record Costs:

CostMeasurement

Classify Costs:

CostAssignment

Assign to Cost Objects:

Purchase materialsAssemblers’ payrollFinishers’ payrollSupervisors’ payrollDepreciationUtilitiesProperty taxesLandscaping

Direct Materials

Direct Labor

Overhead

Product 1

Product 2

PPT 4 -12

Cost Accumulation

Cost accumulation refers to the recognition and recording of costs.

The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a transaction. Data from these source documents can then be recorded in a data-base. Well-designed source documents can supply information in a flexible way.

PPT 4 -13

Cost Measurement

There are two commonly used ways to measure the costs associated with production: actual costing and normal costing.

An actual cost system uses actual costs for direct materials, direct labor, and overhead to determine unit cost.

Normal costing systems measure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor.

PPT 4 -14

Johnson Leathergoods - Example

Suppose that Stan Johnson forms a new company, Johnson Leathergoods, which specializes in the production of custom leather products. Stan believes that there is a market for one-of-a-kind leather purses, briefcases, and backpacks. In its first month of operations, he obtains two orders: the first is for 20 leather backpacks for a local sporting goods store; the second is for 10 distinctively tooled briefcases for the coaches of a local college. Stan agrees to provide these orders at a price of cost plus 50 percent.

PPT 4 -15

Johnson Leathergoods - Unit Cost

Direct materials $1,000

Direct labor 1,080

Overhead 240

Total $2,320

number of units 20

Unit cost $ 116======

PPT 4 -16

Overhead Application a NormalCosting View

A predetermined overhead rate is calculated using the following formula:

Overhead rate = Budgeted annual overhead/Budgeted annual activity level

PPT 4 -17

Choosing the Activity Base

1. Units produced

2. Direct labor hours

3. Direct labor dollars

4. Machine hours

5. Direct materials

PPT 4 -18

Choosing the Activity Level

Expected activity level is simply the production level the firm expects to attain for the coming year.

Normal activity level is the average activity usage that a firm experiences in the long term (normal volume is computed over more than one year).

Theoretical activity level is the absolute maximum production activity of a manufacturing firm.

Practical activity level is the maximum output that can be realized if everything operates efficiently.

PPT 4 -19

Basic Concept of Overhead Application

In attempting to understand the concept of applied overhead, there are two points that should be emphasized.

1. Applied overhead is the basis for computing per-unit overhead cost.

2. Applied overhead is rarely equal to a period’s actual overhead.

PPT 4 -20

Overhead Application Example

Suncalc, Inc., produces two unique, solar-powered products: a pocket calculator and a currency translator used to convert foreign currency exchange rates into dollars and vice versa. The company has the following estimated and actual data for 2001:

Budgeted overhead $360,000

Normal activity (in direct labor hours) 120,000

Actual activity (in direct labor hours) 100,000

Actual overhead $320,000

PPT 4 -21

Overhead Application Example (continued)

Now assume that the firm bases its predetermined overhead rate on normal activity measured in direct labor hours (DLH). Thus, for 2001:Predetermined overhead rate = Budgeted overhead/Normal activity

= $360,000/120,000 direct labor hours

= $3 per DLH

Using the overhead rate, applied overhead for 2001 is:

Applied overhead = Overhead rate x Actual activity usage

= $3 per DLH x 100,000 DLH

= $300,000

PPT 4 -22

Overhead Application Example (continued)

Pocket CurrencyCalculator Translator

Units produced 80,000 90,000

Direct labor hours 40,000 60,000

Overhead applied to production ($3 x DLH) $120,000 $180,000

Overhead per unit $1.50 $2.00

PPT 4 -23

Overhead Variance

The difference between actual overhead and applied overhead an overhead variance. If actual overhead is greater than applied overhead, then the variance is called underapplied overhead. If applied overhead is greater than actual overhead, the the variance is called overapplied overhead.

The firm has underapplied overhead by ($320,000 - $300,000) or $20,000

PPT 4 -24

Disposition of Overhead Variance

The overhead variance is disposed of in one of two ways.

1. All overhead variance is allocated to cost of goods sold.

2. The overhead variance is allocated among work in process, finished goods, and cost of goods sold.

PPT 4 -25

Comparison of Job-order andProcess Costing

Job-Order Costing Process Costing

1. Wide variety of distinct 1. Homogeneous productsproducts

2. Cost accumulated by job 2. Costs accumulated byprocess or department

3. Unit cost computed by 3. Unit cost computed bydividing total job costs dividing process costs ofby units produced on that the period by the unitsjob produced in the period

PPT 4 -26

A Job-Order Cost Sheet

Item Description: _________ Job Order Number: _______Quantity Completed: ______ Date Started: _____________ Date Completed:_________

Direct Materials Direct Labor Overhead

Req. No. Amount Ticket # Hours Rate Amt. Hours Rate Amt. 24-A $500 49 40 $10 $400 40 $1.60 $6446-B 650 71 30 8 240 30 3.00 90

Cost Summary Direct Materials_______ Total Cost_________ Direct Labor _______ Unit Cost _________ Overhead _______

$1,150$640$154

$1,944$19.44

Drill Bits100

16-C1/25/2000

1/31/2001

PPT 4 -27

A Material Requisition Form

Requisition No._______Date:______ Department_________ Job No._____

Description Quantity Cost/unit Total Cost

Delivered By___________ Received by______________

24-A1/25/01 Fabrication 16-C

Steel Stock 100 $5.00 $500

J. Jones D. Reller

PPT 4 -28

A Job Time Ticket

Employee No.______ Name____________ Date_________

Start Time Stop Time Total Time Rate Amt. Job No.

10:00 a.m. 4:00 p.m. 6.0 hours $10 $60 16-C

Ticket No._________49

101 F. Flintstone 1/24/2001

Approved by

PPT 4 -29

Job-Order Costing – Material Purchases

A. Raw materials account is debited for the cost of materials purchased

Raw Materials Work in Process

(A)

PPT 4 -30

Exercise 4-9

Materials were purchased on account for $23,175.

Raw Materials 23,175

Accounts Payable 23,175

PPT 4 -31

Job-Order Costing – Material Requisitions

B. Raw Materials is credited for the cost of materials issued to jobs.

Work in Process is debited for the cost of materials issued to jobs.

Raw Materials Work in Process

(A) (B) (B)

PPT 4 -32

Exercise 4-9 (continued)

Materials totaling $19,000 were requisitioned for use in production.

Work in Process 19,000

Raw Materials 19,000

PPT 4 -33

Job-Order Costing – Direct Labor Incurred

C. Wages Payable is credited for direct labor.

Work in Process is debited for the cost of direct labor.

Wages Payable Work in Process

(C) (C)

PPT 4 -34


Direct labor payroll for the month was $17,850 with an average wage of $8.50 per hour.


Wages Payable 17,850

PPT 4 -35

Job-Order Costing – Actual Overhead

D. Overhead Control is debited for actual overhead.

Overhead Control Work in Process

(D)

PPT 4 -36


Actual overhead of $15,500 was incurred and paid.

Overhead Control 15,500

Cash 15,500

PPT 4 -37

Job-Order Costing – Applied Overhead

E. Overhead Control is credited for applied overhead.

Work in Process is debited for applied overhead.

Overhead Control Work in Process

(D) (E) (E)

PPT 4 -38


Factory overhead is charged to production at the rate of $7.00 per direct labor hour.


Overhead Control 14,700

PPT 4 -39

Job-Order Costing – Transfer of Completed Goods

F. Credit Work in Process for the COGM.

Debit Finished Goods for the COGM.

Work in Process Finished Goods

(B)(C)(E)

(F) (F)

PPT 4 -40


Completed units costing $36,085 were transferred to finished goods.

Finished Goods 36,085


PPT 4 -41

Job-Order Costing – Recognition of Expense

G. Credit Finished Goods for value of units sold.

Debit Cost of Goods Sold for value of units sold.

Finished Goods Cost of Goods Sold

(G) (G)

PPT 4 -42


Bags costing $30,000 were sold on account for $36,000.

Cost of Goods Sold 30,000

Finished Goods 30,000

Accounts Receivable 36,000

Sales Revenue 36,000

PPT 4 -43

General Contractor Example

Direct Materials House #1 $ 90,000

House #2 100,000

House #3 30,000

Direct Labor House #1 $ 65,000

House #2 70,000

House #3 15,000

Overhead is applied at 50 percent of DLC.

Houses #1 and #2 are completed during the period

House #1 is sold for $200,000 cash.

PPT 4 -44

General Contractor Example – Solution

Work in Process Finished Goods

(1) 220,000 (4) 187,500(2) 150,000 (4) 187,500 (5) 205,000 (6) 187,500(3) 75,000 (5) 205,000

52,500 205,000

Cost of Goods Sold

(6) 187,500

187,500

PPT 4 -45

Job Cost Sheets for Example

(1) 90,000 (2) 65,000 (3) 32,500 (1) 110,000 (2) 70,000 (3) 35,000

187,500 205,000

House #1 House #2

House #3

(1) 30,000 (2) 15,000 (3) 7,500

52,500

PPT 4 -46

Accounting for Spoilage

If the defective work was a consequence of the demanding nature of this particular job, then rework (spoilage) is assigned to the job.

On the other hand, if the defective work was a consequence of assigning new, untrained labor to the job, then the rework (spoilage) is assigned to overhead control.

PPT 4 -47

End of Chapter 4

PPT 4 -48

Don R. Hansen

Maryanne M. Mowen

COST MANAGEMENT

PPT 4 -49

Product and Service Costing: A

Process Systems Approach

Chapter Five

PPT 4 -50

Learning Objectives

Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report.

Describe process costing for settings without work in process inventories.

Define equivalent units, and explain their role in process costing.

PPT 4 -51

Learning Objectives (continued)

Prepare a departmental production report using the FIFO method.

Prepare a departmental production report using the weighted average method.

Prepare a departmental production report with transferred-in goods and changes in output measures.

Describe the basic features of operation costing.

PPT 4 -52

Job-Order Costing Process Costing

1. Wide variety of distinct 1. Homogeneous productsproducts

2. Cost accumulated by job 2. Costs accumulated by process or department

3. Unit cost computed by 3. Unit cost computed bydividing total job costs dividing process costs ofby units produced on that the period by the unitsjob produced in the period

Comparison of Job-Order andProcess Costing

PPT 4 -53

Characteristics of Process Costing

Homogeneous units pass through a series of similar processes.

Each unit in each process receives a similar dose of manufacturing costs.

Manufacturing costs are accumulated for a process for a given period of time.

PPT 4 -54

Characteristics of Process Costing (continued)

There is a work in process account for each process. Manufacturing cost flows and the associated journal

entries are generally similar to job-order costing. The departmental production report is the key

document for tracking manufacturing activity and costs.

Unit costs are computed by dividing the departmental costs of the period by the output for the period.

PPT 4 -55

Process Costing Cost Flow

Direct MaterialsDirect Labor

Applied Overhead

Picking Encapsulating Bottling

Finished Goods

PPT 4 -56

Service Organization Without Work in Process Inventories

To illustrate how services without work in process inventories are costed using a process approach, consider the teeth cleaning process offered by most dentists.

The production costs and the number of cleanings (patients served) for the month of March are given below:

Direct materials $ 200

Hygienist salary 2,500

Overhead 1,800

Total production cost $4,500=====

Number of cleanings 300

Unit cost = $4,500/300 = $15 per cleaning

PPT 4 -57

Steps for Costing Out Productionin Process Costing

1. Analysis of the flow of physical units

2. Calculation of equivalent units

3. Computation of unit cost

4. Valuation of inventories (goods transferred out and ending work in process)

5. Cost reconciliation

PPT 4 -58

A Cost Analysis

Cost ofUnits Started

Work inProcess

Costs addedto EWIP

Cost of Units Completed

Cost addedto BWIP

1,000 units - $5,000 materials added;$10,000 conversion costs added

10,000 units; $23,000 mat’l added; $120,175 conversion cost added

1,500 units - $8,000 materials added;$13,000 conversion costs added

9,500 units

Input Costs = Output Costs $158,175 = $158,175

PPT 4 -59

UnitsStarted

Work inProcess

Units inEWIP

Units Completed

Units inBWIP

1,000 units - 20% materials added;60% conversion costs added

10,000 units;

1,500 units - 1/3 materials added;50% conversion costs added

9,500 units

Units of Input = Units of OutputUnits in BWIP + Units Started = Units in EWIP + Units Completed 1,000 + 10,000 = 1,500 + 9,500

The Concept of Equivalent Units

PPT 4 -60

Equivalent Units Calculation: Materials Conversion Costs

Units Completed 9,500 9,500 Ending WIP 500 750 Total Units Processed *10,000 *10,250 Beg. WIP Inventory (200) (600)Units Processed

This Period **9,800 **9,650==== ====

*Equivalent units for weighted average (total units worked on)

** Equivalent units for FIFO (units worked on this period)

The Concept of Equivalent Units (continued)

PPT 4 -61

Materials are added at the beginning of the process.

Units started 24,000

Units completed and transferred out 20,000

Units in process, May 31, 25% complete 4,000

Costs:

Cost Added

Materials $126,000

Conversion Costs 42,000

ExampleNo Beginning Inventory

PPT 4 -62

Step 1 - Physical Flow:

Units to account for:

Units, BWIP 0

Units started 24,000

Total 24,000=====

Units accounted for:

Units completed 20,000

Units, EWIP 4,000

Total 24,000

====

ExampleNo Beginning Inventory (continued)

PPT 4 -63


Step 2 - Equivalent units:

Materials Conversion

Units completed 20,000 20,000

EWIP 4,000 1,000

Total Equivalent Units 24,000 21,000

========

PPT 4 -64


Step 3 - Unit Cost:

Unit Cost = $126,000/24,000 + $42,000/21,000

= $5.25 + $2.00

= $7.25

PPT 4 -65


Step 4 - Valuation of Inventories:

Goods Transferred Out:

$7.25 x 20,000 = $145,000

Ending Work in Process:

($5.25 x 4,000) + ($2.00 x 1,000 = $23,000

PPT 4 -66


Step 5 - Cost Reconciliation:

Cost Assigned:

Goods transferred $145,000

EWIP 23,000

$168,000=======

Cost to Account For:

BWIP $126,000

Cost added 42,000$168,000=======

PPT 4 -67

FIFO Costing ExampleProduction:

Units in process, October 1, 70% complete 10,000

Units completed and transferred out 60,000

Units in process, October 31, 40% complete 20,000

Costs:

Work in process, October 1:

Materials $ 1,000

Conversion costs 350

Total work in process $ 1,350======

Current costs;

Materials $12,600

Conversion costs 3,050

Total current costs $15,650======

PPT 4 -68

FIFO Costing Method

Under the FIFO costing method the equivalent units and manufacturing costs in beginning work in process are excluded from the current-period unit cost calculation. Thus, FIFO recognizes that the work and costs carried over from the prior period legitimately belong to that period.

PPT 4 -69

FIFO Costing (continued)

Step 1- Physical Flow Analysis

Inputs: Outputs:BWIP 10,000 EWIP 20,000Started 70,000 Completed 60,000

Total 80,000 Total 80,000===== =====

*Step one is the same for weighted average and FIFO

PPT 4 -70

Step 2 - Calculation of Equivalent Units


EWIP 20,000 8,000

Completed 60,000 60,000

Units Worked On in Total 80,000 68,000

BWIP 10,000 7,000

Units Worked On this Period 70,000 61,000===== =====


PPT 4 -71


Step 3 - Computation of Unit Cost Calculation

Materials ConversionTotal

Beginning WIP $ 1,000 $ 350$ 1,350

Added this period 12,600 3,050 15,650

Total $ 13,600 $ 3,400$17,000

Added this period $ 12,600 $ 3,050 $15,650

Equivalent units 70,000 61,000

Unit cost $ 0.18 $ 0.05$ 0.23

======= =============

PPT 4 -72


Step 4 - Value of Goods Completed and EWIP (Short-cut method)

Total Input Costs $17,000

Less: EWIP

Materials (20,000 x $0.18) $3,600

Conversion Cost (8,000 x $0.05) 400 4,000

Cost of Goods Completed $13,000======

PPT 4 -73


Manufacturing costs are reconciled as follows:

Costs to account for: Beginning work in process

$ 1,350 Incurred during the period:

Materials $12,600 Conversion costs 3,050

15,650 Total costs to account for

$17,000

======Costs accounted for:

Goods transferred out: Units, beginning work in process

$ 1,500 Units started and completed

11,500Goods in ending work in process

4,000Total costs accounted for

$17,000

======

Step 5 - Cost Reconciliation

PPT 4 -74

Journal Entries

Work in Process--Mixing 12,600Materials 12,600To record requisitions of materials for October.

Work in Process--Mixing 3,050Conversion Cost Control 3,050To record the application of overhead and incurrence of direct labor.

Work in Process--Tableting 13,000Work in Process--Mixing 13,000To record the transfer of cost of goods completed from Mixing toTableting.

PPT 4 -75

Step 1- Physical Flow Analysis

Inputs: Outputs:BWIP 10,000 EWIP 20,000Started 70,000 Completed 60,000

Total 80,000 Total 80,000===== =====

*Step one is the same for weighted average and FIFO

Weighted Average Costing

PPT 4 -76

Weighted Average Costing (continued)

Step 2 - Calculation of Equivalent Units


EWIP 20,000 8,000

Completed 60,000 60,000

Equivalent units 80,000 68,000===== =====

PPT 4 -77


Step 3 - Computation of Unit Cost Calculation

Materials CCTotal

Beginning WIP $ 1,000 $ 350$ 1,350

Added this period 12,600 3,050 15,650

Total $ 13,600 $ 3,400$17,000

Equivalent units 80,000 68,000

Unit cost $ 0.17 $ 0.05$ 0.22

======= =============

PPT 4 -78


Step 4 - Valuation of Inventories

Cost of Goods Transferred Out (0.22 x 60,000 ) = $13,200

Ending Work in Process:

Materials: ( $0.17 x 20,000) $3,400

Conversion: ($0.05 x 8,000) 400 3,800

Total $17,000======

PPT 4 -79

Basics of Operation Costing

Operation costing is a blend of job and process costing procedures applied to batches of homogeneous products. This costing system uses job-order procedures to assign materials costs to batches and process procedures to assign conversion costs.

Work orders are used to collect production costs for each batch.

PPT 4 -80

End of Chapter 5

PPT 4 -1 Don R. Hansen Maryanne M. Mowen COST MANAGEMENT.

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