1. Cost Accounting and Reporting Systems
CHAPTER 13
Cost Accounting and Reporting Systems

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

3. 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)

4. 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

5. 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.

6. 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.

7. 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.

8. Costs for Cost Accounting Purposes
Merchandisers . . .
Buy finished goods.
Sell finished goods.
Manufacturers . . .
Buy raw materials.
Produce and sell finished goods.
MegaLoMart

9. 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

10. 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

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

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

13. 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

14. 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.

15. 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.

16. 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.

17. 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

18. 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

19. 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.

20. 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.

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

22. 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.

23. 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?

24. Cost Accounting Systems

25. 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?

26. 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.

27. 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

28. 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

29. 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

30. Cost Accounting Systems
Smaller amounts

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

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

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

34. 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

35. 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?

36. 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

37. 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.

38. 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 $126,900
April $106,250
Raw materials purchases:
April $347,860

39. Cost Accounting Systems

40. 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.

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

42. 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.

43. 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

44. 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.

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

46. 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

47. 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

48. 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

49. 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

50. 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

51. Activity-Based Costing (ABC)

52. 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!

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

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

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

56. 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.

57. 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.

58. 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 ×

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

60. 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:

61. 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.

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

63. Activity-Based Costing
Let’s complete the table.

64. Activity-Based Costing

65. 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.

66. End of Chapter 13