ACTG 3310 - Chapter 6

1. ACTG 3310 - Chapter 6 Fundamentals of Product and Service Costing

2. Cost Management Systems • Should be oriented to the needs of the decision makers • Should provide information about the costs of the goods and services provided by the company • Costs reported should be relevant to the managers’decisions • Benefits should exceed costs

3. Basic Objective and Uses of Cost Accounting Systems • Determine unit cost • Uses of unit costs • Help set prices • Prices must cover “costs” • Cost plus pricing • Costs used in bidding for projects • Cost control • Set budgets and compare to actual figures • Decision Making

4. Basic Cost Flow Model Beginning Balance (BB) + = Transfers In (TI) Resources came from two places: We have them (BB) or we bought (made) them (TI). Therefore, BB + TI - TO Transfers Out (TO) + Ending Balance (EB) Resources go to two places: Sell them (TO) (transfer to next step) or still have them (EB). = EB

5. Direct/Indirect Costs • Direct costs • DM and DL • Easily traced to cost object • Can see physical relationship • Indirect costs • OH • Incidental costs to cost object • Must be allocated somehow to cost object

6. Predetermined Overhead Rates • 1) AT BEGINNING OF PERIOD • Set overhead rate: Estimated overhead • Estimated allocation base • 2) DURING PERIOD • Apply overhead based on actual activity • OH rate x actual activity • 3) END OF PERIOD (Discussed in chapter 7) • Compare actual OH with applied OH • Distribute variance

7. Overhead ApplicationExample • 1) SET OVERHEAD RATE: • Estimated overhead $1,000,000, Allocation base = machine hours, Estimated machine hours = 25,000 for same time period • OH rate = $1,000,000/25,000 • OH rate = $40 per machine hour

8. Overhead ApplicationExample • 2) APPLY OVERHEAD: • Job 201B - Actual direct labor hours - 20, actual machine hours - 100 • Since overhead rate was based on machine hours, we use ACTUAL machine hours to apply overhead to Job 201B • Applied OH = 100 x $40 = $4,000

9. Choice of Allocation Base • Traditional Measures: • Direct labor hours • Direct labor cost • Machine hours • Direct material cost • Choice of base MAY make a big difference in final costs of products/services.

10. Multiple Predetermined Overhead Rates • Plantwide rate • One rate used for entire plant or company • Easy to use but may not be representative of the overhead application • Departmental rates • When you have more than one product • When different departments have overhead based on different cost drivers • Best to let each department determine their OH rates • Apply overhead of the individual department only by that OH rate • One department may be labor intensive – use DL hours • One department may be machine intensive – use MH hours

11. Cost Accumulation Systems • Depends on products made • Unique or all the same? • Type of manufacturing process • How made? • Does every unit goes through same procedures or different units in different procedures? • Two main systems • Continuous flow process costing • Job-order costing

12. Continuous Flow Processing Costing • Mass-produced items • Continuously processed • Cannot identify the products • Accumulate costs for each department or process • Determine average cost per department • Total departmental averages to get total unit cost

13. Job-Order Costing • Can separately identify product that we are making • Accumulate cost on a job cost sheet • Identify the product by name/number • Sum direct materials, direct labor, and manufacturing overhead for each job • Unit cost = total job costs/units produced

14. Operations Costing • Hybrid system • Combines parts of continuous flow processing costing and job order costing • If products go through some similar steps, use continuous flow processing • When the products vary in their steps, use job order costing.