22.1PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. ACCOUNTING Financial and Organisational Decision Making Chapter 22 Costing systems Slides written by Sandra Porritt designed byTony Van Eekelen

Chapter 22: Costing systems 22.2PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives In this chapter you will be introduced to: –the different kinds of inventory that might exist in a manufacturing environment –the flow of costs through the accounts of a conventional product costing system –job order costing and process costing

Chapter 22: Costing systems 22.3PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives –how to apply overheads using a conventional overhead application rate method –the use of equivalent full units inproduct costing

Chapter 22: Costing systems 22.4PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. –how to determine over- or under-applied overhead, inventory, cost of goods sold and profit using both job order costing and process costing approaches to product costing –the use of activity-based costing to ascertain the cost of products Learning Objectives

Chapter 22: Costing systems 22.5PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Introduction Cost of goods sold –manufacturer –merchandiser Accounting for inventory –manufacturer Raw materials inventory Work-in-progress inventory Finished goods inventory –merchandiser (only one type of inventory)

Chapter 22: Costing systems 22.6PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Flow of costs in conventional product costing STAGE 1. Resources to make product are collected STAGE 2. Product is made using resources plus overhead costs STAGE 3. Product is finished ready for sale STAGE 4. Product sold

Chapter 22: Costing systems 22.7PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Product costing methods specific system of product costing for inventory valuation based on two general approaches to product costing –job order costing - where jobs are identified separately –process costing - for mass-production of like units

Chapter 22: Costing systems 22.8PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Job order costing apply costs specific to a job direct materials are issued to the job time sheete are coded to job number costs are accumulated by type to a job which then can be summarised the progressive totals for each job is in the work-in-progress account

Chapter 22: Costing systems 22.9PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Applying manufacturing overhead to production the total manufacturing overhead costs = manufacturing overhead control account these costs are not traceable to an individual product these costs can be related to another activity the labour content of the product or the machine hours used to produce the product

Chapter 22: Costing systems 22.10PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Predetermined overhead application rate On the basis of direct labour hours = total manufacturing overhead for the period total direct labour hours worked for the period The normal method of charging overhead to jobs is a predetermined application rate (based on the expected overheads)

Chapter 22: Costing systems 22.11PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Completion and sale of jobs jobs on completion are transferred to finished goods inventory on sale the goods would be despatched from finished goods inventory accounting records must show the transfer from work - in - progress

Chapter 22: Costing systems 22.12PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Preparation of the profit and loss statement cost of the goods manufactured in the period equals opening work-in-progress plus costs of resources used in production less closing work-in-progress

Chapter 22: Costing systems 22.13PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Reconciliation of manufacturing overhead a reconciliation is done between the estimates and the actuals the difference between applied overhead and actual overhead

Chapter 22: Costing systems 22.14PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Process costing used where the process is continuous - mass production –the processing of chemicals, oil, textiles and food focal point shifts to the operation which is usually done in departments –process costing therefore accumulates costs by department

Chapter 22: Costing systems 22.15PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Flow of costs in processing operation direct materials, direct labour and manufacturing overhead are the same as for job costing work-in-progress accounts are kept for each operation or department

Chapter 22: Costing systems 22.16PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Inventory valuation in process operation when product is being produced continuously the problem is the split for manufacturing costs between the quantity of production completed and the work-in-progress

Chapter 22: Costing systems 22.17PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Concept of equivalent unit assume that manufacturing process can be divided by departments

Chapter 22: Costing systems 22.18PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Departmental production cost reports focal point of product costing is the processing department. Costs for each department are collected common assumption made in process costing - weighted average method

Chapter 22: Costing systems 22.19PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Some extensions of product costing manufacturing environment becoming increasingly automated, will have greater direct materials cost than labour costs in the product cost mix adaptation of production equipment for change in product is called set-up

Chapter 22: Costing systems 22.20PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Activity-based costing examines the essential activity underlying each overhead item this is to more accurately apply costs to the product based on their use or need of the overhead activity overhead costs are classified by activity such as material handling

Chapter 22: Costing systems 22.21PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Summary developing product and project costs for determining –the profit of the organisation –valuing its inventories manufacturing organisations have three types of inventories –raw materials, work-in-progress, finished goods absorption costing used to allocate overhead