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Economics for Engineering Prof. Andrea Sianesi academical year 2008/2009

Economics for Engineering Prof. Andrea Sianesi academical year 2008/2009. Cost Accounting JOB Costing / Process Costing. 1. Set of resources included in the general ledger.

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Economics for Engineering Prof. Andrea Sianesi academical year 2008/2009

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  1. Economics for Engineering Prof. Andrea Sianesiacademical year 2008/2009 Cost Accounting JOB Costing / Process Costing

  2. 1. Set of resources included in the general ledger • In determining the set of resources to be allocated to organizational units, products and services, there is a trade off between: • completeness of the measure adopted, and • precision of the measure adopted • Possible solution: • Wide set of resources • Separate indication of different costs EE – Introduction to Cost Accounting

  3. 2. Actual or standard costs • Resource can be evaluated with: • Actual costs: the value of resources consumed during a specified period by a cost object; • Standard costs: a target value of resources defined ex ante EE – Introduction to Cost Accounting

  4. Standard Costs • A standard cost is a predetermined target cost that should be obtained if the organisation is operating under efficient conditions. • It is pre-determined on the basis of production information and it represents the target for subsequent variance analysis; • It is necessary to modify cost standards according to changes which might occur to the production process: • technological innovation • learning curve EE – Introduction to Cost Accounting

  5. Standard costs • Direct material (q = quantity / p = purchasing price) N Cstd = i qstd(i) * pstd(i) i=1 • Direct labour (t = labour hours necessary o manufacture a unit) • Cstd = t * cstd(per hour) • Overhead OHstd tot Cstd = _______________ Allocation Basis i Allocation Basis tot EE – Introduction to Cost Accounting

  6. 3. Operating and supporting departments • Operating departments: organizational units which have a direct relation with products and services • Supporting departments: organizational units which provide supporting services to other functions • Direct systems: costs of supporting departments are directly allocated to products and services • Step-down systems: costs of supporting departments are allocated to operating departments; then costs of operating departments are allocated to products and services EE – Introduction to Cost Accounting

  7. There are 4 methods: Job order costing Process costing Operation costing Activity based costing 4. Allocation of costs to products and services EE – Introduction to Cost Accounting

  8. Costing Systems • Job costing: system accounting for distinct cost objects called Jobs. • Each job may be different from the next, and consume different resources • Wedding announcements, aircraft, advertising • Process costing: system accounting for mass production of same or similar products • Oil refining, orange juice, soda pop

  9. Job Order Costing (JOC) • Direct costs (materials and labour) are traced to the cost objects; this implies that we know the specific direct resource consumption by each object. • Indirect production costs (OVH) are allocated on the basis of an arbitrary criteria named Allocation Basis, like: • Cause-effect relations (e.g. consumption of maintenace materials is directly related to the production volume) • Benefits (e.g. promotion expenes are allocated on the basis of sales increase ratios of different products) • Profit (e.g. cost allocated to the most profitable product s) EE – Introduction to Cost Accounting

  10. Job Order Costing logical scheme DEP A DEP B DEP C Inventories D.M. JOB 1 D.L. OVH EE – Introduction to Cost Accounting

  11. Job Order Costing logical scheme Directmaterial Traced directly to each job Traced directly to each job Direct labor Manufacturingoverhead (OH) Applied to eachjob using apredeterminedrate The Job EE – Introduction to Cost Accounting

  12. JOC: the job-order record JOB N. _____ Date started ________ Customer_________ COD. ______ Date completed ________ Priority _________ Direct material Direct Labour Overhead TOT Date Code Quantity Cost Date Code Quantity Cost Date Code Quantity Cost EE – Introduction to Cost Accounting

  13. Job-Order CostingDocument Flow Summary Direct materials Indirect materials Materials usedmay be eitherdirect orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account EE – Introduction to Cost Accounting

  14. Job-Order CostingDocument Flow Summary Direct Labor Indirect Labor An employee’stime may be eitherdirect or indirect. Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account EE – Introduction to Cost Accounting

  15. Job-Order CostingDocument Flow Summary IndirectLabor AppliedOverhead IndirectMaterial EmployeeTime Ticket OtherActual OHCharges Manufacturing Overhead Account Job Cost Sheets MaterialsRequisition EE – Introduction to Cost Accounting

  16. JOC: General Approach for calculation • Identify the job. • Identify and trace direct costs to the job. • Identify the indirect costs associated with the job production. • Select the cost-allocation basis. • Compute the rate per unit of indirect cost. • Compute the indirect cost allocated to the job. • Compute the total cost of the job. EE – Introduction to Cost Accounting

  17. Sequence of Events in a Job-Order Costing System Charge direct material and direct labor costs to each job as work is performed. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3 EE – Introduction to Cost Accounting

  18. Sequence of Events in a Job-Order Costing System Direct Materials Apply overhead to each job using a predeter-mined rate. Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3 EE – Introduction to Cost Accounting

  19. Sequence of Events in a Job-Order Costing System EE – Introduction to Cost Accounting

  20. Application of Manufacturing Overhead Estimated total manufacturingoverhead cost for the coming period OVHR = Estimated total units in theallocation base for the coming period The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead. EE – Introduction to Cost Accounting

  21. Indirect-cost rates OVH BAi OVH i = Σ BAi OVHi: overhead allocated to job i OVH: total overhead BA: allocation basis EE – Introduction to Cost Accounting

  22. Actual vs Predetermined OVHR • Always use PREDETERMINED OVHR • At the end of the period (e.g. at the end of the year) it'spossible to checkif the POVHR was UNDER-ESTIMATED or OVER-ESTIMATED • Actual > POVHR -> under-estimate • Actual < POVHR -> over-estimate EE – Introduction to Cost Accounting

  23. General example of Job Costing A manufacturing company is planning to sell a batch of 25 special machines (Job 650) to a retailer for $114,800. Step 1: The cost object is Job 650. Step 2: Direct costs are: Direct materials = $50,000 Direct manufacturing labor = $19,000 EE – Introduction to Cost Accounting

  24. General example of Job Costing Step 3: The cost allocation base is machine-hours. Job 650 used 500 machine-hours. 2,480 machine-hours were used by all jobs. Step 4: Manufacturing overhead costs were $65,100. Step 5: Actual indirect cost rate is $65,100 ÷ 2,480 = $26.25 per machine-hour. Step 6: $26.25 per machine-hour × 500 hours = $13,125 EE – Introduction to Cost Accounting

  25. General example of Job Costing Step 7: Direct materials $50,000 Direct labor 19,000 Factory overhead 13,125 Total $82,125 EE – Introduction to Cost Accounting

  26. Sample Job Costing (more complex) Stock 1/1/2000: 150 RM 230 WIP 700 FP • Records 1/2000: • Purchase RM: 120 Sales finishedprod: 500 (cost of goodssold: 300) • Overhead: 150 Completion Job 101 and 02, StartJob 104 • Periodcosts: 120 • POVHR (DL) = 5 x DL • Operations recorded: EE – Introduction to Cost Accounting

  27. Sample Job Costing (more complex) EE – Introduction to Cost Accounting

  28. Sample Job Costing (more complex) RM WIP FP +150 +230 +700 +175 (MP) +120 +206 +30 (LD) -175 +140 =95 +150 (OVH) -300 -206 =746 -140 =239 STOCKS: Equal to non completed job (103 and 104): 137+102=239 EE – Introduction to Cost Accounting

  29. Sample Job Costing EE – Introduction to Cost Accounting

  30. Sample Job Costing EE – Introduction to Cost Accounting

  31. Sample Job Costing EE – Introduction to Cost Accounting

  32. Sample Job Costing EE – Introduction to Cost Accounting

  33. Process Costing • This is the simplest approach to cost allocation • Cost per unit = total costs of producing by the total number of units produced • Hypothesis: • 1. One product; • 2. Zero beginning inventory and zero ending inventory; • 3. A unique costs pool (DM + DL + OVH); EE – Introduction to Cost Accounting

  34. Equivalent units • Illustration: Suppose you have a part-time job in the office of your college’s president, and she asks you to compute the cost of education per full-time equivalent student at your college. The college’s vice president for finance provides the following information. Costs: Total cost of education $9,000,000 Student population: Full-time students 900 Part-time students 1,000

  35. Equivalent Units • Illustration: Part-time students take 60% of the classes of a full-time student during the year. To compute the number of full-time equivalent students per year, you would make the following computation. Cost of instruction per full-time equivalent student = Total cost of instruction $9,000,000 Number of full-time equivalent students / 1,500 $ 6,000

  36. Equivalent Units Weighted-Average Method • Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process. • Most widely used method. • Beginning work in process not part of computation of equivalent units.

  37. Process costing • If there is a variation in the WIP level • Degree of completion: the percentage of total costs, a product in process has already absorbed with respect to the total amount of resources absorbed by a finished product • Equivalent units: number of finish products a company could have realized using resources employed for WIP and finished goods for producing only finished products N Neq = Qc + i Qi * gci i=1 Qc= Units completed Qi = Units in WIP Gci = completion rate of unit i EE – Introduction to Cost Accounting

  38. EquivalentUnits - Weighted-Average Method • Illustration: The output of K Christel Company’s Packaging Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending work in process which are 70% complete. • Calculate the equivalent units of production. Completed units 10,000 Work in process equivalent units (5,000 x 70%) 3,500 13,500

  39. Activity Based Costing • Purpose: correct allocation of overheads to products • In job order costing (most precise traditional method), overheads are allocated proportionally to an item (arbitrary), or a set of items • Resource cost = k * allocation basis • In Activity Based Costing the overhead are allocated to the products in a way that is proportional to the rate of consumption of the specific kind of overhead (e.g. the salary of the maintenance is mainly allocated to the products that create the greater problems to tooling machines) EE – Introduction to Cost Accounting

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