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PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Fundamentals of Product and Service Costing Chapter 6

6-3 Cost Management Systems LO 6-1 Explain the fundamental themes underlying the design of cost systems. The objective of the cost management system is to provide information about costs relevant for decision making. The cost management system accumulates and reports costs about processes, products, and services. LO 6-1

6-4 Cost Allocation and Product Costing LO 6-2 Explain how cost allocation is used in a cost management system. Basic Cost Flow Diagram Direct materials Direct labor Manufacturing overhead AlphaBeta Cost pools Cost objects Cost allocation rule Indirect (allocated by direct labor cost) Direct LO 6-2

6-5 Basic Cost Flow Model LO 6-3 Explain how a basic product costing system works. How costs and units move through inventories: Beginning balance Transfers in Transfers out Ending balance +–= BBTITOEB+–= This is true for the following accounts: – Raw Materials (RM) – Work-in-Process (WIP) – Finished Goods (FG) LO 6-3

6-6 Costing with No Work-in- Process Inventories Baxter Paint begins production on April 1. It starts and completes production of 100,000 gallons of paint in April and has no ending work-in-process inventory. Materials$ 400,000 Labor 100,000 Manufacturing overhead 500,000 Total$1,000,000 Cost of resources used in April: LO 6-3

6-7 What are the costs at the end of the period? $1,000,000 was added to work-in-process and then transferred out to finished goods. Since Baxter produced 100,000 gallons of paint, then the cost per gallon of paint is $10. LO 6-3 Costing with No Work-in- Process Inventories

6-8 Beginning inventory-0- Started in May110,000 Total110,000 Ending WIP (50% complete) 20,000 Transferred out 90,000 Production for Baxter Paint for May follows (gallons): LO 6-3 Costing with Ending Work-in- Process Inventories

6-9 How do we cost Baxter’s 20,000 gallons of paint that are only half finished? 20,000 gallons half finished is equivalent to 10,000 gallons finished. 90,000 gallons transferred out plus 10,000 equivalent gallons of finished paint equals 100,000 equivalent gallons of paint. Gallons of paint transferred out 90,000 Equivalent gallons of finished paint 10,000 Total equivalent gallons of paint100,000 LO 6-3 Costing with Ending Work-in- Process Inventories

6-10 Materials$390,000 Labor 100,000 Manufacturing overhead 500,000 Total$990,000 Costs incurred in May Year 2: $990,000/100,000 gallons = $9.90 per gallon Costs transferred to finished goods: 90,000 gallons × $9.90/gallon = $891,000 LO 6-3 Costing with Ending Work-in- Process Inventories

6-11 LO 6-3 Costing with Ending Work-in- Process Inventories

6-12 Predetermined Overhead Rates LO 6-4 Understand how overhead cost is allocated to products. Indirect costs are allocated using a predetermined overhead rate (POHR). POHR is the cost per unit of the allocation base used to charge overhead to products. POHR = $ ÷ Base LO 6-4

6-13 Predetermined Overhead Rates POHR= Estimated overhead $ Estimated allocation base What are the estimated costs? What activity drives the overhead costs? Why use estimates? Products need to have costs applied during the period. The exact amount of indirect costs are not known until the end of the period. LO 6-4

6-14 Multiple Allocation Bases and Two-Stage Systems LO 6-5 Explain the operation of a two-stage allocation system for product costing. We can use two or more allocation bases to allocate manufacturing overhead to products. LO 6-5

6-15 Product Costing Systems LO 6-6 Describe the three basic types of product costing systems: job order, process, and operations. Job costing: –An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods. (custom homes, movies, services) Process costing: –An accounting system used when identical units are produced through a series of uniform production steps. (cornflakes, facial tissues, paint) LO 6-6

6-16 Product Costing Systems Operation costing: –A hybrid costing system often used in manufacturing of goods that have some common characteristics plus some individual characteristics. (automobiles, computers, clothing) LO 6-6

6-17 End of Chapter 6