5-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL.

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HANSEN & MOWENHANSEN & MOWEN

Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL

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Product and Service Costing: Product and Service Costing: Job-Order SystemJob-Order System

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1Manufacturing Firms versus Service Manufacturing Firms versus Service FirmsFirms

Manufacturing involves joining together direct materials, direct labor, and overhead to produce a new product. The product is tangible and can be inventoried.

A service is intangible. It cannot be separated from the customer and cannot be inventoried.

Managers must be able to track the costs of services rendered just as precisely as they must track the costs of goods manufactured.

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Features of Service Firms and Their Interface with the Cost Management System

Features of Service Firms and Their Interface with the Cost Management System

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Unique versus Standardized Products and ServicesUnique versus Standardized Products and Services

Firms that produce unique products in small batches that incur different product costs must track the costs of each product or batch separately. This is called a job-order costing system.

Examples: Cabinet makers, home builders, dental and medical services

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Unique versus Standardized Products and ServicesUnique versus Standardized Products and Services

Some firms produce identical units of the same product. The costs of each unit are also the same. This is called a process-costing costing system.

Examples: Food, cement, petroleum and chemicals

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Setting Up the Cost Accounting SystemSetting Up the Cost Accounting System 2

Relationship of Cost Accumulation, Cost Measure- ment, and Cost Assignment

Relationship of Cost Accumulation, Cost Measure- ment, and Cost Assignment

The cost accounting system must satisfy the needs for cost accumulation, cost measurement and cost assignment.

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Cost accumulation refers to the recognition and recording of costs. Source documents can be designed to supply information that can be used for multiple purposes.

Cost measurement refers to classifying the costs and determining the dollar amounts for direct materials, direct labor and overhead.

Cost measurement methods:

Actual costing

Normal costing

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Cost assignment occurs after costs have been accumulated and measured. Total product costs associated with the units is divided by the number of units produced to determine unit cost.

Unit costs in manufacturing firms are used for:

Valuing inventory

Determining income

Decision making

Unit costs in nonmanufacturing firms are used for:

Determining profitability

Determining feasibility of new services

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Unit cost is made up of

direct materials

direct labor

overhead

Overhead is applied using a predetermined rate based on budgeted overhead costs and budgeted amount of driver. Commonly used drivers include:

1. Units produced

2. Direct labor hours

3. Direct labor dollars

4. Machine hours

5. Direct materials dollars or cost

traced directly to units

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Activity level must be predicted for the coming year to calculate the predetermined overhead rate.

Four different measure of activity level:

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The Job-Order Costing System: The Job-Order Costing System: General DescriptionGeneral Description 3

Overview of the Job-Order Costing SystemOverview of the Job-Order Costing System

Job-order industries produce a wide variety of products or jobs that are distinct.

Costs are accumulated by job in a job-order costing system. Each job is documented on a job-order cost sheet.

Total manufacturing costs for the job are divided by the number of units produced to determine unit cost.

The work-in-process inventory is the collection of all job-order cost sheets.

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The Job-Order Cost SheetThe Job-Order Cost Sheet

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Materials Requisition FormMaterials Requisition Form

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Time TicketTime Ticket

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Overhead is assigned to jobs using a predetermined overhead rate. The actual amount of the driver used as a base must be collected and recorded.

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Job-Order Costing: Specific Job-Order Costing: Specific Cost Flow DescriptionCost Flow Description 4

Summary of Direct Materials Cost FlowsSummary of Direct Materials Cost Flows

+

=

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Summary of Direct Labor Cost FlowsSummary of Direct Labor Cost Flows

+

=

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Summary of Overhead Cost FlowsSummary of Overhead Cost Flows

+

=

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Completed Job-Order Cost SheetCompleted Job-Order Cost Sheet

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Summary of Finished Goods Cost FlowsSummary of Finished Goods Cost Flows

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Statement of Cost of Goods ManufacturedStatement of Cost of Goods Manufactured

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Statement of Cost of Goods SoldStatement of Cost of Goods Sold

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All Signs Company Summary of Manufacturing Cost FlowsAll Signs Company Summary of Manufacturing Cost Flows

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Income StatementIncome Statement

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5

Departmental Overhead Costs and ActivityDepartmental Overhead Costs and Activity

=Plantwide overhead

rate

$240,000 20,000

= $12 per direct labor hour

Department A overhead rate

=$60,000 15,000

= $4 per direct labor hour

Department B overhead rate

=$180,000

15,000= $12 per direct labor hour

Job-Order Costing: Specific Job-Order Costing: Specific Cost Flow DescriptionCost Flow Description

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Production Data for Jobs 23 and 24Production Data for Jobs 23 and 24

Job 23 overhead: $12 500 DLH = $6,000

Job 24 overhead: $12 1 DLH = $12

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Overhead assigned using multiple overhead rates

Department A Department B

Overhead cost $60,000 $180,000Cost driver 15,000 DLH 15,000 MHrDepartment overhead rate $4/DLH $12/MHrOverhead applied to Job 23 $2,000 —Overhead applied to Job 24 — $6,000

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Overhead assigned using multiple overhead rates

Compare to overhead assigned using a single overhead rate:

Job 23 overhead: $12 500 DLH = $6,000

Job 24 overhead: $12 1 DLH = $12

Department A Department B

Overhead cost $60,000 $180,000Cost driver 15,000 DLH 15,000 MHrDepartment overhead rate $4/DLH $12/MHrOverhead applied to Job 23 $2,000 —Overhead applied to Job 24 — $6,000

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End of End of Chapter 5Chapter 5

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5-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL.

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