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Accumulating and Assigning Accumulating and Assigning Costs to Products Costs to Products

Chapter 4

© 2012 Pearson Prentice Hall. All rights reserved.

Cost Flows in OrganizationsCost Flows in Organizations In order to compute product costs, management

accounting systems should reflect the actual cost flows in an organization

Manufacturing, retail, and service organizations have different patterns of cost flows resulting in different management accounting priorities

Cost Flows in a Manufacturing Cost Flows in a Manufacturing OrganizationOrganization

3

Cost Flows in a Retail Cost Flows in a Retail OrganizationOrganization

4

Cost Flows in a Service Cost Flows in a Service OrganizationOrganization

5

© 2012 Pearson Prentice Hall. All rights reserved.

Cost TermsCost Terms Cost Object—is anything for which a cost is

computed– Examples of cost objects are: activities, products,

product lines, departments, or even entire organizations

Resource CostsResource Costs

Consumable Resource Consumed or used up by the

production process Cost of depends on how

much of the resource is used Examples

– Wood in furniture making– Engines in auto making– Processors in laptop making

Capacity-Related Resource Supports the production

process Cost depends on how much

of the resource is acquired Examples

– Supervisory labour– Warehouse space– Admin Employees

7

© 2012 Pearson Prentice Hall. All rights reserved.

Cost TermsCost Terms Direct Cost—a cost that is uniquely and

unequivocally attributable to a single cost object– Almost all variable costs are direct costs

Indirect Cost—a cost that fails the test of being direct is classified as indirect– Most capacity-related costs are indirect

Which costs are direct/indirect of you going to WLU?

Direct vs. IndirectDirect vs. Indirect

TuitionJoining a sororityBuying a laptopAdditional fees on Laurier bill (excl tuition)Books

Costing System ArchitectureCosting System Architecture

10

Applied and Incurred Indirect Applied and Incurred Indirect CostsCosts

11

How are Indirect Costs How are Indirect Costs Applied?Applied?

12

The Best Arguments for Using The Best Arguments for Using Practical CapacityPractical Capacity

Provides a solid basis to compute long run cost Isolates the cost of idle capacity which is charged

to the income statement instead of being included in inventory valuations

13

Product CostingProduct Costing

Job Order

Allocates costs to productsthat are readily identifiable

Common in construction,print shops, unique goods

Accumulate costs forspecific 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

Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct Charge direct material and material and direct labour direct labour costs to each costs to each job as work is job as work is

performed.performed.

Charge direct Charge direct material and material and direct labour direct labour costs to each costs to each job as work is job as work is

performed.performed.

Job-Order Costing – An Job-Order Costing – An OverviewOverview

Direct MaterialsDirect Materials

Direct LabourDirect Labour

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect labourindirect labour, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect labourindirect labour, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Direct Manufacturing CostsDirect Manufacturing Costs

Direct MaterialsDirect Materials

Direct LabourDirect Labour

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead

Manufacturing Overhead