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Transcript of 13-1 CHAPTER 13 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Cost...
13-1
CHAPTER 13
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Cost Accounting and Reporting Systems
13-2
Decision Making
Strategic, Operational,and Financial (Planning)
Planning and Control Cycle
Executing operational
activities (Managing)
Performance analysis: Plans vs.
actual results (Controlling)
L O 1
Implement Plans
Rev
isit
Pla
ns
Data collection and Performance Feedback
13-3
Cost Accounting
FinancialAccounting
Focus onExternalReporting
ManagerialAccounting
Focus onInternal
ReportingCostAccounting
Focus onCost Accumulation
& Assignment
L O 1
13-4
Costs for Cost Accounting Purposes
Financial Accounting
Cost is a measure of resources used or
given up to achieve a stated purpose.
Financial Accounting
Cost is a measure of resources used or
given up to achieve a stated purpose.
Managerial Accounting
Costs are assigned to products and become
expenses when products are sold.
Managerial Accounting
Costs are assigned to products and become
expenses when products are sold.
L O 1
13-5
Researchand
DevelopmentThe sequence of
functions and activitiesthat, over the lifeof the product or
service, adds valuefor the customer.
Value Chain Functions
Design
Production Marketing Distribution
CustomerService
DesiredROI
L O 2
13-6
Cost Accumulation and Assignment
CostPool
CostObject
Cost Assignment
CostObject
Cost Assignment
CostObject
Cost Assignment
Cost objects are products, jobs, and services.Cost objects are products, jobs, and services.
L O 2
13-7
Direct Costs and Indirect Costs
Direct costs Can be easily and
conveniently traced to a unit of product or other cost objective.
Would not be incurred if the product or activity was discontinued.
Indirect costs Cannot be easily and
conveniently traced to a unit of product or other cost object.
Would be incurred even if the product or activity was discontinued.
L O 3
13-8
Manufacturers . . .Buy raw materials.
Produce and sell finished goods.
Merchandisers . . .Buy finished goods.
Sell finished goods.
MegaLoMart
Costs for Cost Accounting PurposesL O 4
13-9
Merchandiser Current Assets
Cash
Receivables
Prepaid Expenses
Merchandise Inventory
Manufacturer Current Assets
• Cash
• Receivables
• Prepaid Expenses
• InventoriesRaw Materials
Work in Process
Finished Goods
Costs for Cost Accounting PurposesL O 4
13-10
Costs for Cost Accounting Purposes
ManufacturerManufacturer
MerchandiserMerchandiser
Ingredients
Human effort
Machine support
+
+
Balance SheetInventory
Income StatementCost of Goods Sold
= Manufacturedproduct
Purchasedproduct
Sold toCustomers
Sold toCustomers
L O 4
13-11
The ProductThe Product
RawMaterials
RawMaterials
DirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
Product Costs L O 4
13-12
Raw materials are theingredients of the product.
Example: A radio installed in an automobileExample: A radio installed in an automobile
Product Costs L O 4
13-13
Direct labor is the effort provided by workers who are directly involved with
the manufacture of the product.
Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers
Product Costs L O 4
13-14
Manufacturing overhead includes all manufacturing costs except raw materials
and direct labor.
Examples
• Wages of maintenance workers, janitors,security guards.
• Production supervision salaries.
• Factory utilities, property taxes, and insurance.
• Depreciation for factory buildings and equipment.
Examples
• Wages of maintenance workers, janitors,security guards.
• Production supervision salaries.
• Factory utilities, property taxes, and insurance.
• Depreciation for factory buildings and equipment.
Product CostsL O 4
13-15
FinishedGoods
Work in Process
Cost of GoodsSold
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Selling andAdministrative
Period Costs
Raw MaterialsMaterial Purchases
ManufacturingOverhead
Selling andAdministrative
Product Costs and Period Costs L O 4
13-16
Planning andcontrol
functions.
Providingproducts or services tocustomers.
Assessing theefficiency andeffectivenessof operations.
Determining unitmanufacturing
costs.
Cost accounting systems provide the
INFORMATIONthat supports successful decision-making.
Cost Accounting SystemsL O 5
13-17
Discloseinventoriesand cost ofgoods sold.
Track resourcesconsumed byproducts and
services.
Manage activitiesthat consume
resources.
Evaluate andreward
employeeperformance.
Cost accounting systems are the proceduresand techniques used by management.
Cost Accounting SystemsL O 5
13-18
THE JOB
Rawmaterial
Direct labor
Traced directly to each job
Traced directly
to each job
Manufacturingoverhead (OH)
Applied to eachjob using a
predeterminedrate
Cost Accounting SystemsL O 5
13-19
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
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.
Cost Accounting SystemsL O 6
13-20
Overhead applied = POHR × Actual activity
Actual amount of the cost driver such as units produced, direct labor hours, or machine hours
incurred during the period.
Based on estimates, and determined before
the period begins.
Cost Accounting SystemsL O 6
13-21
Cruisers, Inc., applies overhead based on direct labor hours. Total estimated
overhead for the year is $4,200,000. Total estimated labor hours are 300,000.
What is Cruisers’ predeterminedoverhead rate?
Cost Accounting SystemsL O 6
13-22
For each direct labor hour worked on a job, $14.00 of factory overhead will be
applied to the job.
POHR = $14.00 per DLH
$4,200,000
300,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Cost Accounting SystemsL O 6
13-23
Cost Accounting Systems
Cruisers, Inc., produced 86 SeaCruiser sailboats during the month working a total of 20,640 labor hours and incurring these costs: raw materials $368,510; and direct
labor $330,240.
What is the cost per SeaCruiser sailboat?
L O 6
13-24
Cost Accounting Systems
Raw Materials 368,510$ Direct Labor 330,240 Overhead 20,640 DLH × $14 per DLH 288,960 Total manufacturing cost incurred 987,710$
Cost per boat $987,710 ÷ 86 boats 11,485$
Raw Materials 368,510$ Direct Labor 330,240 Overhead 20,640 DLH × $14 per DLH 288,960 Total manufacturing cost incurred 987,710$
Cost per boat $987,710 ÷ 86 boats 11,485$
L O 6
13-25
What will Cruisers do if
actual and applied overhead
are not equal?
Cost Accounting SystemsL O 6
13-26
Cost Accounting Systems
Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours.
How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined
overhead rate of $14.00 per direct labor hour.
L O 6
13-27
Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours.
How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined
overhead rate of $14.00 per direct labor hour.
Cost Accounting Systems
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $14.00 per DLH × 310,000 DLH = $4,340,000
L O 6
13-28
Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours.
How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined
overhead rate of $13.00 per direct labor hour.
Cost Accounting Systems
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $14.00 per DLH × 310,000 DLH = $4,340,000
Applied Overhead $4,340,000Actual Overhead $4,250,000Overapplied by $90,000
Overhead has been overapplied for the year. What will Cruisers do?
L O 6
13-29
Work inProcess
FinishedGoods
Cost of Goods Sold
$90,000may be allocated
to these accounts.
$90,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
Smaller amounts
OR
Cost Accounting SystemsL O 6
13-30
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
Smaller amounts
Cost Accounting SystemsL O 6
13-31
Let’s examine the cost flows in a
product costing system. We will use T-accounts and start with
materials.
Cost Accounting SystemsL O 6
13-32
Raw MaterialsMaterial
PurchasesDirect
Materials
Direct Materials
Mfg. Overhead
Indirect Materials
Work in Process
Indirect Materials
Actual Applied
Cost Accounting SystemsL O 6
13-33
Next let’s add labor costs and
applied manufacturing overhead to the cost flows. Are you with me?
Cost Accounting SystemsL O 6
13-34
Direct Labor
Mfg. Overhead
Salaries and Wages Payable Work in Process
Direct
Materials
OverheadApplied to
Work inProcess
IndirectLabor
Direct Labor
Overhead Applied
IndirectLabor
Indirect Materials
Actual AppliedIf actual and applied
manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
Cost Accounting SystemsL O 6
13-36
Cost ofGoodsMfd.
Finished Goods
Cost ofGoodsSold
Cost ofGoodsMfd.
Cost of Goods Sold
Cost ofGoodsSold
Work in ProcessDirect
MaterialsDirect
LaborOverhead
Applied
Cost Accounting SystemsL O 6
13-37
A schedule of cost of goods manufactured is prepared to assist
managers in understanding and
evaluating the overall cost of manufacturing
products.
A schedule of cost of goods manufactured is prepared to assist
managers in understanding and
evaluating the overall cost of manufacturing
products.
Cost Accounting SystemsL O 7
13-38
Use the following informationto prepare a statement of cost
of goods manufactured for Cruisers, Inc. for the month of April:
Raw materials inventory:
March 31 $126,900
April 30 $106,250
Raw materials purchases:
April $347,860
Direct labor costs: $330,240
MOH Applied: $288,960
Assume no WIP inventories
Use the following informationto prepare a statement of cost
of goods manufactured for Cruisers, Inc. for the month of April:
Raw materials inventory:
March 31 $126,900
April 30 $106,250
Raw materials purchases:
April $347,860
Direct labor costs: $330,240
MOH Applied: $288,960
Assume no WIP inventories
Cost Accounting SystemsL O 7
13-40
The cost of goods manufactured
during the period is used to compute
cost of goods sold for the period.
The cost of goods manufactured
during the period is used to compute
cost of goods sold for the period.
Beginning and ending
finished goods
inventory amounts
are assumed values.
Beginning and ending
finished goods
inventory amounts
are assumed values.
L O 7 Cost Accounting Systems
13-41
The income statement is
prepared using
established financial
accounting procedures.
Sales andexpense numbers
are assumed amounts.
Sales andexpense numbers
are assumed amounts.
L O 7 Cost Accounting Systems
13-42
ProcessCosting
Job OrderCosting
Costs are accumulated by job.
Used for production of large, unique, high-cost items.
Built to order rather than mass produced.
Many costs can be directly traced to each job.
Cost Accounting Systems - AbsorptionL O 8
13-43
Typical job order cost applications: Special-order printing Building construction
Also used in service industries Hospitals Law firms
ProcessCosting
Job OrderCosting
LO 8 Cost Accounting Systems - Absorption
13-44
Costs are accumulated by departments.
Used for production of small, identical, low-cost items.
Mass produced in an automated continuous process.
Costs cannot be directly traced to each unit of product.
Production is stated in “equivalent” units.
ProcessCosting
Job OrderCosting
LO 8 Cost Accounting Systems - Absorption
13-45
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill
ProcessCosting
Job OrderCosting
L O 8 Cost Accounting Systems - Absorption
13-46
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
VariableCosting
AbsorptionCosting
ProductCosts
PeriodCosts
ProductCosts
PeriodCosts
Cost Accounting SystemsL O 8
Absorption Costing and Variable Costing
13-47
Variable costing
Balance Sheet Costs Inventories
Income StatementExpenses
Cost of GoodsSold
Selling andAdministrativePeriod Costs
Work in Process
FinishedGoods
Raw Materials
VariableManufacturing
Overhead
Material Purchases
Direct Labor
Selling andAdministrative
FixedManufacturing
Overhead
Absorption costin
g
Absorption and Variable CostingL O 8
13-48
Fixed costs arenot really the costs
of any particularproduct.
VariableCosting
AbsorptionCosting
All manufacturingAll manufacturingcosts must be assignedcosts must be assignedto products to properlyto products to properlymatch revenues andmatch revenues and
costs.costs.
Absorption and Variable CostingL O 8
13-49
AbsorptionCosting
These are capacitycosts and will be
incurred even if nothingis produced.
VariableCosting
Depreciation,taxes, insurance andsalaries are just as
essential to productsas variable costs.
Absorption and Variable CostingL O 8
13-50
VariableCosting
Absorptioncosting product costs
are misleading fordecision making.
They are the numbers that appear on our
external reports.
AbsorptionCosting
Absorption and Variable CostingL O 8
13-52
One of the most difficult tasks in
computing accurate unit costs lies in determining the
proper amount of overhead cost that should be assigned
to each job.
Assigningoverhead is
difficult. I agree!
Activity-Based Costing (ABC)L O 9
13-53
Level of C
omplexity
Overhead Allocation
Traditional Plantwide Overhead
Rate
Activity-Based Costing (ABC)L O 9
AA
CB
13-54
In the ABC method, we recognize that many
activities within a department drive overhead costs.
In the ABC method, we recognize that many
activities within a department drive overhead costs.A
B CA
CB
Activity-Based Costing (ABC)L O 9
13-55
Identify activities and assign costs to those activities.
Central idea . . .
Products require activities.
Activities consume resources.
Activity-Based Costing (ABC)
A
B CA
CB
L O 9
13-56
More detailed measures of costs. Better understanding of activities. More accurate product costs for . . .
– Pricing decisions.– Product elimination decisions.– Managing activities that cause costs.
Benefits should always be compared tocosts of implementation.
The Benefits of ABCL O 9
13-57
Most cost drivers are related to either volume or complexity of production.
Examples: machine time, machine setups, purchase orders, production orders.
Three factors are considered in choosing a cost driver:
Causal relationship.
Benefits received.
Reasonableness.
Identifying Cost Drivers L O 9
13-58
Overhead Actual Rate Activity×
Rate = Estimated overhead costs in activity cost pool
Estimated number of activity units
1. Identify activities that consume resources.
2. Assign costs to a cost pool for each activity.
3. Identify cost drivers associated with each activity.
4. Compute overhead rate for each cost pool:
5. Assign costs to products:
Activity-Based Costing ProceduresL O 9
13-59
Let’s look at anexample comparingtraditional costing
with ABC. We will start with
traditional costing.
Activity-Based CostingL O 9
13-60
Cruisers, Inc. manufactures sailboats and canoes. Overhead is applied at the rate of $14 per direct
labor hour. Production for May was 100 sailboats requiring 24,000 hours, and 1,000 canoes requiring
13,000 hours.
Overhead applied using traditional costing is:
Sailboats CanoesDirect labor hours (DLH) 24,000 13,000 Overhead rate per DLH 14$ 14$ Overhead applied 336,000$ 182,000$
Traditional Costing vs. ABCL O 9
13-61
Estimated Annual
Activity CostProduction orders 135,000$ 180 orders 750$ per orderHull & deck setup 2,140,000 1,000 setups 2,140 per setupRaw material acquisition 650,000 26,000 receipts 25 per receiptMaterial handling 450,000 9,000 moves 50 per moveQuality inspection 750,000 6,000 inspections 125 per inspectionCleanup & waste disposal 75,000 250 loads 300 per loadTotal Overhead 4,200,000$
Estimated TotalActivity
Predetermined rateper unit of activity
Activity-Based Costing
Same amount of annual total overhead used earlier in the chapter.Same amount of annual total overhead used earlier in the chapter.
Cruisers plans to adopt activity-based costing and identifies these activities and costs for computing overhead rates.
L O 9
13-62
Using the following activity center data, determine the amount of overhead applied to the two
products using activity-based costing.
ActivityProduction orders 13 orders 1 orderHull & deck setup 103 setups 1 setupRaw material acquisition 222 receipts 10 receiptsMaterial handling 732 moves 50 movesQuality inspection 408 inspections 1,000 inspectionsCleanup & waste disposal 20 loads 20 loads
Sailboats CanoesActivity Required
Activity-Based CostingL O 9
13-63
Activity-Based Costing
Let’s complete the table.
Actual Cost Actual Cost Units of Allocated Units of Allocated
Activity Rate Activity to Product Activity to ProductProduction orders 750$ per order 13 9,750$ 1 750$ Hull & deck setup 2,140 per setup 103 ? 1 ?Raw material acquisition 250 per receipt 222 ? 10 ?Material handling 50 per move 732 ? 50 ?Quality inspection 125 per inspection 408 ? 1,000 ?Cleanup & waste disposal 300 per load 20 ? 20 ?Total Overhead ? ?
Cost Allocated to Product = Actual Units of Activity × Rate
Sailboats Canoes
L O 9
13-64
Activity-Based Costing
Actual Cost Actual Cost Units of Allocated Units of Allocated
Activity Rate Activity to Product Activity to ProductProduction orders 750$ per order 13 9,750$ 1 750$ Hull & deck setup 2,140 per setup 103 220,420 1 2,140 Raw material acquisition 250 per receipt 222 55,500 10 2,500 Material handling 50 per move 732 36,600 50 2,500 Quality inspection 125 per inspection 408 51,000 1,000 125,000 Cleanup & waste disposal 300 per load 20 6,000 20 6,000 Total Overhead 379,270$ 138,890$
Cost Allocated to Product = Actual Units of Activity × Rate
Sailboats Canoes
L O 9
13-65
This result is not uncommon when activity-based costing is used. Many companies have found that lower volume, more complex products have greater overhead
costs than previously realized.
Traditional Costing ABCSailboats Canoes Sailboats Canoes
Overhead applied 336,000$ 182,000$ 379,270$ 138,890$
Comparison of Overhead Applied
Activity-Based CostingL O 9