Cost Accounting and Reporting Systems CHAPTER 13 Cost Accounting and Reporting Systems

Managerial Accounting Cost Accounting Financial Accounting Focus on External Reporting Managerial Accounting Focus on Internal Reporting Cost Accounting Focus on Cost Accumulation & Assignment

Decision Making Planning and control cycle Revisit plans Strategic, Operational, and Financial Planning Implement plans Planning and control cycle Performance analysis: Plans vs. actual results (Controlling) Data collection and performance feedback Executing operational activities (Managing)

Value Chain Functions Desired ROI Research and Development The sequence of functions and activities that, over the life of the product or service, adds value for the customer. Design Customer Service Production Marketing Distribution

Cost Accumulation and Assignment Cost Object Cost Assignment Cost Pool Cost Object Cost Assignment Cost Object Cost Assignment Cost objects are products, jobs, and services.

Direct Costs and Indirect 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.

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 Purposes Merchandisers . . . Buy finished goods. Sell finished goods. Manufacturers . . . Buy raw materials. Produce and sell finished goods. MegaLoMart

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 Purposes Balance Sheet Inventory Income Statement Cost of Goods Sold Manufacturer Ingredients = Manufactured product + Sold to Customers Human effort + Machine support Purchased product Sold to Customers Merchandiser

Costs for Cost Accounting Purposes Raw Materials Direct Labor Manufacturing Overhead The Product

Costs for Cost Accounting Purposes Raw materials are the ingredients of the product. Example: A radio installed in an automobile

Costs for Cost Accounting Purposes Direct labor is the effort provided by workers who are directly involved with the manufacture of the product. Example: Wages paid to automobile assembly workers

Costs for Cost Accounting Purposes Manufacturing overhead includes all manufacturing costs except raw material and 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.

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.

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.

Cost Accounting Systems Income Statement Expenses Balance Sheet Costs Inventories Material Purchases Work in Process Raw Materials Direct Labor Finished Goods Manufacturing Overhead Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative

Cost Accounting Systems Manufacturing overhead (OH) Applied to each job using a predetermined rate Raw material Traced directly to each job THE JOB Traced directly to each job Direct labor

Cost Accounting Systems The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Ideally, the allocation base is a cost driver that causes overhead.

Cost Accounting Systems Based on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actual amount of the cost driver such as units produced, direct labor hours, or machine hours. Incurred during the period.

Cost Accounting Systems Cruisers, Inc., applies overhead based on direct labor hours. Total estimated overhead for the year is $4,200,000. Total estimated labor hours are 300,000. What is Cruisers’ predetermined overhead rate?

Cost Accounting Systems Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = $4,200,000 300,000 direct labor hours (DLH) POHR = 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 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 Systems

What will Cruisers do if actual and applied overhead are not equal? Cost Accounting Systems What will Cruisers do if actual and applied overhead are not equal?

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 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 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 is overapplied for the year by $90,000. What will Cruisers do? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $14.00 per DLH × 310,000 DLH = $4,340,000

Cost Accounting Systems Smaller amounts $90,000 may be allocated to these accounts. $90,000 may be closed directly to cost of goods sold. OR Work in Process Finished Goods Cost of Goods Sold Cost of Goods Sold

Cost Accounting Systems Smaller amounts

Cost Accounting Systems Let’s examine the cost flows in a product costing system. We will use T-accounts and start with materials.

Cost Accounting Systems Work in Process Raw Materials Direct Materials Direct Materials Material Purchases Indirect Materials Mfg. Overhead Actual Applied Indirect Materials

Cost Accounting Systems Next let’s add labor costs and applied manufacturing overhead to the cost flows. Are you with me?

Salaries and Wages Payable Overhead Applied to Work in Process Cost Accounting Systems Salaries and Wages Payable Work in Process Direct Labor Direct Materials Indirect Labor Direct Labor Overhead Applied Mfg. Overhead Actual Applied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Indirect Materials Overhead Applied to Work in Process Indirect Labor

Now let’s complete the goods and sell them. Still with me? Cost Accounting Systems Now let’s complete the goods and sell them. Still with me?

Cost Accounting Systems Work in Process Finished Goods Direct Materials Cost of Goods Mfd. Cost of Goods Mfd. Cost of Goods Sold Direct Labor Overhead Applied Cost of Goods Sold Cost of Goods Sold

Cost Accounting Systems A schedule of cost of goods manufactured is prepared to assist managers in understanding and evaluating the overall cost of manufacturing products.

Cost Accounting Systems Use the following information to prepare a statement of cost of goods manufactured for Cruisers, Inc. for April: Raw materials inventory: March 31 $126,900 April 30 $106,250 Raw materials purchases: April $347,860

Cost Accounting Systems

Finished goods inventory numbers are assumed amounts. The cost of goods manufactured during the period is used to compute cost of goods sold for the period.

Sales and expense numbers are assumed amounts. The income statement is prepared using established financial accounting procedures. Sales and expense numbers are assumed amounts.

Cost Accounting Systems Process Costing Job Order Costing 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 Process Costing Job Order Costing Typical job order cost applications: Special-order printing Building construction Also used in service industry Hospitals Law firms

Cost Accounting Systems Process Costing Job Order 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.

Cost Accounting Systems Process Costing Job Order Costing Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

Absorption and Variable Costing Absorption Costing Variable Costing Product Costs Period Costs Raw Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Product Costs Period Costs

Absorption and Variable Costing Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Work in Process Finished Goods Raw Materials Direct Labor Variable Manufacturing Overhead Absorption costing Cost of Goods Sold Selling and Administrative Fixed Manufacturing Overhead Variable costing Selling and Administrative Period Costs

Absorption and Variable Costing All manufacturing costs must be assigned to products to properly match revenues and costs. Fixed costs are not really the costs of any particular product. Variable Costing Absorption Costing

Absorption and Variable Costing Depreciation, taxes, insurance and salaries are just as essential to products as variable costs. These are capacity costs and will be incurred even if nothing is produced. Absorption Costing Variable Costing

Absorption and Variable Costing They are the numbers that appear on our external reports. Absorption costing product costs are misleading for decision making. Absorption Costing Variable Costing

Activity-Based Costing (ABC)

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. Assigning overhead is difficult. I agree!

Activity-Based Costing (ABC) TraditionalPlantwide Overhead Rate Level of Complexity Overhead Allocation

Activity-Based Costing (ABC) In the ABC method, we recognize that many activities within a department drive overhead costs. A B C

Activity-Based Costing (ABC) Identify activities and assign indirect costs to those activities. Central idea . . . Products require activities. Activities consume resources. A B C

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.

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.

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: Rate = Estimated overhead costs in activity cost pool Estimated number of activity units Overhead Actual Rate Activity ×

Activity-Based Costing Let’s look at an example comparing traditional costing with ABC. We will start with traditional 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:

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

Activity-Based Costing Let’s complete the table.

Activity-Based Costing

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.

End of Chapter 13