1. Product Costing Process Costing Job Order Allocates costs to products
that are readily identifiable
Common in construction,
print shops, unique goods
Accumulate costs for
specific jobs
Produce for sale
Process Costing
Average costs over large number of nearly identical units
Common in chemical, textiles, lumber, glass, food processing
Accumulate costs
by departments
Produce for inventory

2. Job-Order versus Process Costing
Job-Order Costing
Job 100
Direct materials
Direct labour
Factory overhead
Finished
Goods
Inventory
Cost of Goods
Sold
Job 101
Job 102
Process Costing
Process A
Direct materials
Direct labour
Factory overhead
Process B
Finished
Goods
Inventory
Cost of Goods
Sold
Process C

3. Similarities Between Job-Order and Process Costing
4-3
Similarities Between Job-Order and Process Costing
Both systems assign material, labour and overhead costs to products and they provide a mechanism for computing unit product cost.
Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
The flow of costs through the manufacturing accounts is basically the same in both systems.

4. Differences Between Job-Order and Process Costing
4-4
Differences Between Job-Order and Process Costing
Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each period.
Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.
Process costing systems use department production reports to accumulate costs. Job-order costing systems use job cost sheets to accumulate costs.
Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.

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Process Costing
Process costing is used when all products are identical such as soda drinks and breakfast cereal
Process costing systems use two different cost terms:
Direct material
Conversion costs—all manufacturing costs that are not direct material costs
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6. Equivalent Units of Production
4-6
Equivalent Units of Production
Equivalent units are the product of the number of partially completed units and the percentage completion of those units.
We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory.

7. Equivalent Units – The Basic Idea
4-7
Equivalent Units – The Basic Idea
Two half completed products are equivalent to one completed product. + = 1
So, 10,000 units 70% complete are equivalent to 7,000 complete units.

8. Compute and Apply Costs
4-8
Compute and Apply Costs
The formula for computing the cost per equivalent unit is :
Cost per equivalent unit =
Cost of beginning work in process inventory
Cost added during the period
Equivalent units of production +

9. Compute and Apply Costs
4-9
Compute and Apply Costs
Beginning work in process: units
Materials: % complete $ 9,600
Conversion: 30% complete 5,575
Production started during May 5,000 units
Production completed during May 4,800 units
Costs added to production in May
Materials cost $ 368,600
Conversion cost ,900
Ending work in process units
Materials: 40% complete
Conversion: 25% complete

10. Weighted-Average Example
4-10
Weighted-Average Example
Double Diamond Skis reported the following activity in Shaping and Milling Department for the month of May:

11. Weighted-Average Example
4-11
Weighted-Average Example

12. Compute and Apply Costs
4-12
Compute and Apply Costs
Here is a schedule with the cost and equivalent unit information.
$356,475 ÷ 4,900 units = $72.75
$378,200 ÷ 4,960 units = $76.25

13. Computing the Cost of Units Transferred Out
4-13
Computing the Cost of Units Transferred Out

14. Activity-Based Cost Systems
Chapter 5
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15. Traditional Costing
Also called cost smoothing or peanut butter costing
Spread the costs of conversion uniformly among products and services
Appropriate if:
Indirect costs are a small proportion of total costs
Activities are consumed uniformly in the production process
Inappropriate otherwise: leads to overcosting and undercosting of products and services
Copyright  2010 Pearson Education Canada

16. Traditional Manufacturing Costing Systems
Typical volume-based cost drivers include:
Direct labor hours
Machine hours
Direct labor dollars
Adequate for companies with high-volume products with similar production volumes and batch sizes
Can lead to product cost distortion in an environment of high product variety
© 2012 Pearson Prentice Hall. All rights reserved.

17. Traditional Cost System
Direct
Material
Costs
Direct
Labour
Costs
Overhead
Costs
Direct
Trace
Direct
Trace
DLH
Allocation
Products

18. ABC Cost System Overhead Costs Direct Material Costs Direct Labour
Machining
activity
costs
Assembly
activity
costs
Inspection
activity
costs
Processing
Hours
# of parts
# of
inspections
Direct
Trace
Direct
Trace
Products

19. Activity-Based Cost Systems
Activity-based cost systems have been developed to eliminate distortion
Time-driven activity-based costing systems (TDABC or Time-Driven ABC) estimate two parameters and then assign indirect costs similar to the way direct costs are assigned
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20. TDABC – First Parameter
Cost rate for each type of indirect resource
Identify all costs incurred to supply the resource
Identify the practical capacity supplied by the resource
Determine the capacity cost rate of the resource by dividing its cost by the practical capacity
Capacity cost rate
Cost of capacity supplied =
Practical capacity of resources supplied
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21. Capacity Cost Rate Example
Assume that indirect labor employees supply 2,500 hours of labor in total each quarter at a cost of $84,000
The practical capacity (at 80% of theoretical) is about 2,000 hours per quarter, leading to a unit cost (per hour) of supplying indirect labor capacity of:
$84,000
Indirect labor cost per hour =
2,000 hours
= $42 per hour
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22. TDABC – Second Parameter
Estimation of how much of each resource’s capacity is used by the activities performed to produce the products and services
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Time-Driven ABC
Use parameter estimates to assign indirect costs:
Cost of using resource i by product j =
Capacity cost rate of resource i
x Quantity of capacity of resource i used by product j
© 2012 Pearson Prentice Hall. All rights reserved.

24. TDABC Profitability Report
Managers may use insights from TDABC cost analysis to improve operations
Possible actions include:
Reduce setup times
Reduce time required for purchasing
Reduce time required for scheduling production orders
Increase prices on unprofitable products
Impose minimum customer order sizes
Make decisions on desired product mix
© 2012 Pearson Prentice Hall. All rights reserved.

25. Measuring the Cost of Unused Resource Capacity
Activity cost driver rates are frequently but incorrectly calculated based on capacity actually used; this leads to:
rates that are too high
the cost of unused capacity being applied to products actually produced
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26. Cost of Unused Capacity
The cost of unused capacity should not be assigned to products produced or customers served during a period
The cost of unused capacity remains someone’s, or some department’s, responsibility
Usually you can assign the cost of unused capacity after analyzing the decision that authorized the level of capacity supplied
Such an assignment is done on a lump-sum basis; it will not be assigned to individual units of products
© 2012 Pearson Prentice Hall. All rights reserved.

27. Activity-Based Costing Systems
Three things to consider to improve an existing costing system:
Direct-cost tracing
Reduce indirect costs by classifying more costs as direct
Indirect-cost pools
Expand the number of indirect-cost pools until the costs in each pool are homogeneous – the amount varies directly as activity varies
Activity-cost drivers
A measure of the activity performed for each cost driver
The denominator that is divided into the indirect cost pool to calculate the activity cost rate
Copyright  2010 Pearson Education Canada

28. Define Activities, Activity Cost Pools, and Activity Measures
5-28
Define Activities, Activity Cost Pools, and Activity Measures
At Classic Brass, the ABC team, selected the following activity cost pools and activity measures:

29. Define Activities, Activity Cost Pools, and Activity Measures
5-29
Define Activities, Activity Cost Pools, and Activity Measures
Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders.
Product Designs - assigned all costs of resources consumed by designing products.
Order Size - assigned all costs of resources consumed as a consequence of the number of units produced.
Customer Relations – assigned all costs associated with maintaining relations with customers.
Other – assigned all overhead costs that are not associated with the other cost pools.

30. Activity-Based Costing at Classic Brass
5-30
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labour
Shipping
Costs
Overhead Costs
Traced
Cost Objects:
Products, Customer Orders, Customers

31. Activity-Based Costing at Classic Brass
5-31
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labour
Shipping
Costs
Overhead Costs
First-Parameter Allocation
Order
Size
Customer
Orders
Product
Design
Customer
Relations
Other
Cost Objects:
Products, Customer Orders, Customers

32. Activity-Based Costing at Classic Brass
5-32
Activity-Based Costing at Classic Brass
Direct
Materials
Direct
Labour
Shipping
Costs
Overhead Costs
First-Parameter Allocation
Customer Orders
Product
Design
Order Size
Customer
Relations
Other
Second-Parameter Allocations
$/Order
$/Design
$/MH
$/Customer
Cost Objects:
Products, Customer Orders, Customers
Unallocated

33. Calculate Activity Rates
5-33
Calculate Activity Rates

34. Assigning Overhead to Customers
5-34
Assigning Overhead to Customers

35. ABC at Service Companies
Although ABC had its origins in manufacturing companies, many service organizations today are obtaining great benefits from this approach
In practice, the actual construction of an ABC model is nearly identical for both types of companies
This should not be surprising since, in manufacturing companies, the ABC system focuses on the “service” component of the company
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36. ABC at Service Companies
Service companies in general are ideal candidates for activity-based costing
Virtually all costs are indirect and appear to be fixed
They often do not have direct, traceable costs to serve as convenient allocation bases
They must supply virtually all their resources in advance to provide the capacity to perform work for customers during each period
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