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Copyright 1998 Dekker, Ltd. 2
3 Product Costing Systems Understand the use of multiple cost drivers vs. single cost drivers Evaluate a cost system for product cost distortion Understand the relevance of performing variance analysis Understand the use of multiple cost drivers vs. single cost drivers Evaluate a cost system for product cost distortion Understand the relevance of performing variance analysis
Copyright 1998 Dekker, Ltd. 4 Job Bid Sheet Panel 1 Panel 2 Panel 3 Panel 4 Panel 5
Copyright 1998 Dekker, Ltd. 5 Job Bid Sheet Panel 1
Copyright 1998 Dekker, Ltd. 6 Job Bid Sheet Panel 2
Copyright 1998 Dekker, Ltd. 7 Job Bid Sheet Panel 3
Copyright 1998 Dekker, Ltd. 8 Job Bid Sheet Panel 4
Copyright 1998 Dekker, Ltd. 9 Job Bid Sheet Panel 5
Copyright 1998 Dekker, Ltd. 10 Activity Cost Driver Rate R = Normal activity costs Normal level of cost driver Where Normal activity costs are the costs of the resources committed to the particular activity and The normal level of the cost driver is the long-term capacity made available by the amount of resources committed to the activity Where Normal activity costs are the costs of the resources committed to the particular activity and The normal level of the cost driver is the long-term capacity made available by the amount of resources committed to the activity
Copyright 1998 Dekker, Ltd. 11 C o s t P o o l Each subset of total support costs that can be associated with a distinct cost driver
Copyright 1998 Dekker, Ltd. 12 How Many Cost Pools? A separate cost pool should be used if the productivity of resources is different and if the pattern of demand varies across products The optimal number of cost pools will change over time as an organization changes A separate cost pool should be used if the productivity of resources is different and if the pattern of demand varies across products The optimal number of cost pools will change over time as an organization changes
Copyright 1998 Dekker, Ltd. 13 Materials Requisition Note Note telling the stores department to issue material to the shop floor in order to begin production Translates in summary form to the Job Cost Sheet
Copyright 1998 Dekker, Ltd. 14 Worker Time Card A form used to record the hours spent by each worker each day or week on different jobs Pertinent summary information translates to the job cost sheet
Copyright 1998 Dekker, Ltd. 15 Job Cost Sheet Panel 1 Panel 2 Panel 3 Panel 4 Panel 5
Copyright 1998 Dekker, Ltd. 16 Panel 1
Copyright 1998 Dekker, Ltd. 17 Panel 2
Copyright 1998 Dekker, Ltd. 18 Panel 3
Copyright 1998 Dekker, Ltd. 19 Panel 4
Copyright 1998 Dekker, Ltd. 20 Panel 5
Copyright 1998 Dekker, Ltd. 21 Basic Variance Analysis Variances are differences between actual and estimated costs and are a necessary step for managers who are attempting to understand why a difference occurred
Copyright 1998 Dekker, Ltd. 22 Cost Estimate for 290 Valves
Copyright 1998 Dekker, Ltd. 23 First-level Variance Calculation First-Level Variance = Estimated Costs - Actual Costs
Copyright 1998 Dekker, Ltd. 24 Favorable/Unfavorable Variances F Favorable variances signify that actual costs were less than estimated costs U Unfavorable variances signify that actual costs were greater than estimated costs F Favorable variances signify that actual costs were less than estimated costs U Unfavorable variances signify that actual costs were greater than estimated costs
Copyright 1998 Dekker, Ltd. 25 First-Level Analysis of Variances
Copyright 1998 Dekker, Ltd. 26 Direct Materials Price Variance Where AP = Actual price of materials SP = Estimated or standard price of materials AQ = Actual quantity of materials used (AP - SP) * AQ (AP - SP) * AQ
Copyright 1998 Dekker, Ltd. 27 Direct Materials Usage Variance Where AQ = Actual quantity of materials used SQ = Estimated or standard quantity of materials required SP = Estimated or standard price of materials (AQ - SQ) * SP (AQ - SQ) * SP
Copyright 1998 Dekker, Ltd. 28 Total Direct Materials Variance Usage variance + Price variance = = (AQ - SQ) * SP + (AP - SP) * AQ = (AP * AQ) - (SQ * SP) = (AP * AQ) - (SQ * SP)
Copyright 1998 Dekker, Ltd. 29 Second-Level Analysis of Variances Further analysis of a first-level variance into efficiency (use) and price variances
Copyright 1998 Dekker, Ltd. 30 Wage Rate Variance Where AR = Actual wage rate SR = Estimated or standard wage rate AH = Actual number of direct labor hours (AR - SR) * AH (AR - SR) * AH
Copyright 1998 Dekker, Ltd. 31 Labor Efficiency Variance Where AH = Actual number of direct labor hours SH = Estimated or standard number of direct labor hours SR = Estimated or standard number of direct labor hours (AH - SH) * SR (AH - SH) * SR
Copyright 1998 Dekker, Ltd. 32 Total Direct Labor Variance Labor Efficiency + Wage Rate = = (AH + SH) * SR + (AR - SR) * AH = (AR * AH) - (SR * SH) = (AR * AH) - (SR * SH)
Copyright 1998 Dekker, Ltd. 33 Second-Level Analysis of Variances Like materials usage variances, direct labor variances can be broken into efficiency and rate variances. What is the significance of the efficiency variances?
Copyright 1998 Dekker, Ltd. 34 Comparison of Costing Systems Factors Job Order Costing System Mulitstage Process Costing System Production (a) Carried out in many different jobs (a) Carried out continuously, semi-continuously, or in large batches Production Requirements (b) Different for different jobs (b) Homogeneous for individual process stages Costs (c) Measured for individual jobs (c) Measured for individual process stages Variances (d) Between actual and estimated direct material and direct labor costs are determined for individual jobs (d) Between actual and estimated costs are determined for individual processes
Copyright 1998 Dekker, Ltd. 35 Multistage Process Product Costs Identify the costs of the material input required at various stages Add the estimated conversion costs for all the process stages to the material costs 1 2
Copyright 1998 Dekker, Ltd. 36 Applying the Concepts Job costing Exercise #1 What is the source of the information to estimate the cost of materials? Job costing Exercise #1 What is the source of the information to estimate the cost of materials?
Copyright 1998 Dekker, Ltd. 37 Applying the Concepts Job costing Exercise #1 What is the source of the information to estimate the cost of materials? Quantity required is based on standard engineering specifications. Price of each item is obtained from the purchasing department. Job costing Exercise #1 What is the source of the information to estimate the cost of materials? Quantity required is based on standard engineering specifications. Price of each item is obtained from the purchasing department.
Copyright 1998 Dekker, Ltd. 38 Applying the Concepts Job costing Exercise #2 What is a cost pool? Why are multiple cost pools required? Job costing Exercise #2 What is a cost pool? Why are multiple cost pools required?
Copyright 1998 Dekker, Ltd. 39 Applying the Concepts Job costing Exercise #2 What is a cost pool? A cost pool is a portion of the total support costs associated with a DISTINCT cost driver. Why are multiple cost pools required? Multiple cost pools are required when support costs are driven by more than one factor (cost driver). Job costing Exercise #2 What is a cost pool? A cost pool is a portion of the total support costs associated with a DISTINCT cost driver. Why are multiple cost pools required? Multiple cost pools are required when support costs are driven by more than one factor (cost driver).
Copyright 1998 Dekker, Ltd. 40