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PowerPointPowerPoint Presentation by Presentation by
LuAnn BeanLuAnn BeanProfessor of AccountingProfessor of AccountingFlorida Institute of TechnologyFlorida Institute of Technology
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CHAPTER GOAL
This chapter shows how the accounting system records and reports the flow of costs in organizations to answer questions such as these:To determine product/service costTo compare cost with management’s expectations
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DIRECT MATERIALS: DefinitionDIRECT MATERIALS: Definition
Can be easily traced directly to a product.
LO 1
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DIRECT LABOR: DefinitionDIRECT LABOR: Definition
Is labor of workers who transform materials into a
finished product.
LO 1
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MANUFACTURING OVERHEAD: Definition
MANUFACTURING OVERHEAD: Definition
Includes all other costs of transforming the materials to a finished product.
LO 1
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How are materials, labor not directly traceable to a product
categorized?
All costs, including materials and labor, not directly traceable to a
product are categorized as Manufacturing Overhead.
LO 1
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RESPONSIBILITY CENTER: Definition
RESPONSIBILITY CENTER: Definition
Is any organizational unit with its own manager or
managers.
LO 2
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Responsibility center
(department)
Records costs &assigns to products
Direct materials
Direct labor
Overhead
Management comparescosts to standards
LO 2
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ACCOUNTING SYSTEM PURPOSES
1) To record costs by responsibility for performance evaluation and control.
2) To assign manufacturing costs to units produced for product costing.
1) To record costs by responsibility for performance evaluation and control.
2) To assign manufacturing costs to units produced for product costing.
Normal costing advantagesSmoothes seasonal and other fluctuations that
don’t relate directly to activity levelsMore timely than actual because of estimating
process
LO 4
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USING NORMAL COSTING
Select a cost driver (allocation base) to apply overhead
Estimate dollar amount of overhead and level of activity for period
Compute predetermined (normal) overhead rate
Apply overhead to production
LO 4
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EXAMPLE
Plantimum Builders manually assembles small modular homes. Using prior year data, Plantimum estimated variable manufacturing overhead at $100,000, 50,000 direct labor hours, and $50,000 fixed manufacturing overhead.
What is Plantimum’s variable overhead rate?
LO 4
$100,000 / 50,000 dlh = $2.00 per direct labor hour
$ 50,000 / 50,000 dlh = $1.00 per direct labor hour
What is Plantimum’s fixed overhead rate?
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EXAMPLE
Actual direct labor hours for the month was 4,500.
How much variable overhead did Plantimum charge to production for the month?
LO 4
4,500 dlh X $2.00 per direct labor hour = $9,000
4,500 dlh X $1.00 per direct labor hour = $4,500
How much fixed overhead did Plantimum charge to production for the month?
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COST SYSTEMS
An effective cost system must haveDecision focus: meets needs of decision makersDifferent costs for different purposes
Variable costing for decision makingFull absorption for financial reporting
Cost-benefit test: benefits from cost system must exceed its costs
LO 5
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COST SYSTEMS: Examples
Job costingFor custom production jobsUsers: accounting and consulting firms, health care
organizationsProcess costing
For standardized productionUsers: drink makers (e.g., Coca Cola, etc.)
Operation costingA hybrid of job and process combinedUsers: Levi Strauss, Dell
LO 5
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PLANTIMUM PRODUCTION
Plantimum produced 3 modular homes during the month. Plantimum wonders whether they should use job order costing or process costing? What do you think?
Continued
LO 6
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PLANTIMUM PRODUCTION COSTS: Using Job Order
PLANTIMUM PRODUCTION COSTS: Using Job Order
Jobs
Direct
Labor
Direct
Materials
Overhead
($3/dlh)
Total
Cost
Job #1001 $ 8,000 $20,800 $1,200 $30,000
Job #1002 6,000 18,100 900 25,000
Job #1003 5,000 11,250 750 17,000
$19,000 $50,150 $2,850 $72,000
LO 6
Continued
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PLANTIMUM PRODUCT COSTING: Using Process
LO 6
Unit costs =
Total manufacturing costs / Units produced
(DL + DM + Overhead) / 3
($19,000 + $50,150 + $2,850) / 3
Average unit cost is $24,000 per modular house
Continued
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COMPARING COST SYSTEMSCOMPARING COST SYSTEMS
Nature of Production
Costing System Used
Heterogeneous Units
Each Unit Large
Job Costing
Homogeneous Units
Many Small Units
Continuous
Process
Process Costing
LO 7
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FLOW OF COSTS: A Service Company Example
LO 8
An accounting or consulting service firm collects costs by job or client and uses an accounting method similar to that used in manufacturing. The flow of costs accounted for include:
Materials and overhead costs are transferred into Work-in-Process accounts for each job.
Work-in-Process costs are transferred to Cost of Services Billed.
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FLOW OF COSTS REPORTING
The income statement reports: Revenue- Cost of services billed= Gross Margin- Expenses (e.g., unbilled direct labor,
JIT inventory methods attempt to obtain materials just in time for production or saleReduces/eliminates inventory and carrying costsLeads to immediate correction of defective unitsHelps expose production problemsRelies on high-quality materials, productionCharges all costs directly to cost of goods sold
LO 10
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What happens to inventory leftover after costs are charged to cost of goods sold in a JIT
system?
Cost of leftover inventory is “backflushed,” i.e., taken out of cost of goods sold and put into
finished goods inventory.
LO 10
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What are equivalent units?
Equivalent units (E.U.) represent the translation of partially completed work into equivalent whole units.
LO 11
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1. Summarize the Flow of Physical Units2. Compute Equivalent Units (For example, two
units, each 50 percent complete, represent one equivalent unit.)
3. Summarize Costs to Be Accounted For4. Compute Unit Costs for the Current Period5. Compute the Cost of Goods Completed and
Transferred Out of Work-in-Process and the Cost of Ending Work-in-Process Inventory
LO 11
The five steps required to compute product costs, the cost of ending Work-in- Process Inventory, and the cost of finished goods using equivalent units are:
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Costs flow from basic records of materials purchases, labor costs, and overhead costs to
Work-in-Process Inventory accounts that show the cost of ongoing work. When products are complete, they and their costs are transferred to Finished Goods Inventory. When sold, the
cost of the products is transferred out of Finished Goods Inventory to Cost of Goods Sold.
Costs flow from basic records of materials purchases, labor costs, and overhead costs to
Work-in-Process Inventory accounts that show the cost of ongoing work. When products are complete, they and their costs are transferred to Finished Goods Inventory. When sold, the
cost of the products is transferred out of Finished Goods Inventory to Cost of Goods Sold.
