ACTG Chapter 6 Fundamentals of Product and Service Costing

Cost Management Systems Should be oriented to the needs of the decision makers Should provide information about the costs of the goods and services provided by the company Costs reported should be relevant to the managers’decisions Benefits should exceed costs

Basic Objective and Uses of Cost Accounting Systems Determine unit cost Uses of unit costs –Help set prices –Prices must cover “costs” –Cost plus pricing –Costs used in bidding for projects –Cost control –Set budgets and compare to actual figures –Decision Making

Basic Cost Flow Model Beginning Balance (BB) + = Transfers In (TI) Resources came from two places: We have them (BB) or we bought (made) them (TI). Therefore, BB + TI - TO Transfers Out (TO) + Ending Balance (EB) Resources go to two places: Sell them (TO) (transfer to next step) or still have them (EB). = EB

Direct/Indirect Costs Direct costs –DM and DL –Easily traced to cost object –Can see physical relationship Indirect costs –OH –Incidental costs to cost object –Must be allocated somehow to cost object

Predetermined Overhead Rates 1) AT BEGINNING OF PERIOD –Set overhead rate: Estimated overhead – Estimated allocation base 2) DURING PERIOD –Apply overhead based on actual activity –OH rate x actual activity 3) END OF PERIOD (Discussed in chapter 7) –Compare actual OH with applied OH –Distribute variance

Overhead Application Example 1) SET OVERHEAD RATE: Estimated overhead $1,000,000, Allocation base = machine hours, Estimated machine hours = 25,000 for same time period OH rate = $1,000,000/25,000 OH rate = $40 per machine hour

Overhead Application Example 2) APPLY OVERHEAD: Job 201B - Actual direct labor hours - 20, actual machine hours Since overhead rate was based on machine hours, we use ACTUAL machine hours to apply overhead to Job 201B Applied OH = 100 x $40 = $4,000

Choice of Allocation Base Traditional Measures: –Direct labor hours –Direct labor cost –Machine hours –Direct material cost Choice of base MAY make a big difference in final costs of products/services.

Multiple Predetermined Overhead Rates Plantwide rate –One rate used for entire plant or company –Easy to use but may not be representative of the overhead application Departmental rates –When you have more than one product –When different departments have overhead based on different cost drivers –Best to let each department determine their OH rates –Apply overhead of the individual department only by that OH rate –One department may be labor intensive – use DL hours –One department may be machine intensive – use MH hours

Cost Accumulation Systems Depends on products made –Unique or all the same? Type of manufacturing process –How made? –Does every unit goes through same procedures or different units in different procedures? Two main systems –Continuous flow process costing –Job-order costing

Continuous Flow Processing Costing Mass-produced items Continuously processed Cannot identify the products Accumulate costs for each department or process Determine average cost per department Total departmental averages to get total unit cost

Job-Order Costing Can separately identify product that we are making Accumulate cost on a job cost sheet Identify the product by name/number Sum direct materials, direct labor, and manufacturing overhead for each job Unit cost = total job costs/units produced

Operations Costing Hybrid system Combines parts of continuous flow processing costing and job order costing If products go through some similar steps, use continuous flow processing When the products vary in their steps, use job order costing.