Part Three Cost Accumulation, Tracing, and Allocation
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Transcript of Part Three Cost Accumulation, Tracing, and Allocation
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Part Three
Cost Accumulation, Tracing, and Allocation
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Introduction Did costs increase or decrease
from last year?
Who isresponsible?
Were actual costsconsistent withexpected costs?
Is our selling pricesufficient to cover costs
and provide foradequate profitability?
Who shouldbe rewarded?
How can improvementbe accomplished?
What is our costof goods sold?
What is ourinventory cost?
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Using Cost Drivers to Accumulate Costs
Machinehours
Labourhours
Unitsproduced
Kilometresdriven
A cost driver is anyfactor that causes or “drives”
an activity’s costs
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Using Cost Drivers to Accumulate Costs
Accumulated Minutes Rate per Cost Talked Minute
Minutes Talked
Tot
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Dis
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elep
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Bill
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Minutes talked isthe cost driver.
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Estimated Versus Actual Cost
Estimated CostsManagers use estimated costs tomake decisions about the future.
Actual CostsKnowledge of actual costs, after the fact,
may not be useful for planning and decision making.
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Estimated Versus Actual Cost
Relevant
PotentialInaccuracies
Timely
Estimated CostsManagers use estimated costs tomake decisions about the future.
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Estimated Versus Actual Cost
Estimated CostsMay be used to set prices, make bids,
evaluate proposals, distribute resources, plan production, and set goals.
Relevant
PotentialInaccuracies
Timely
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Assigning Cost to Objects in a Retail Business
Women's Men's Children's Total
Sales 190,000$ 110,000$ 60,000$ 360,000$
Department
Style, Inc. Department Store pays a bonus to eachdepartment manager based on departmental sales.
The incentive has increased departmental sales, but departmental profits have not increased accordingly.
Management has decided to base future bonuseson department profitability.
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Assigning Cost to Objects in a Retail Business
Women's Men's Children's Total
Sales 190,000$ 110,000$ 60,000$ 360,000$
Department
The first step in the development of the new bonusstrategy is to determine the costs of each department.
Costs that are easily traced todepartments are called direct costs.
Costs that cannot be easily traced todepartments are called indirect costs.
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Assigning Cost to Objects in a Retail Business
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Assigning Cost to Objects in a Retail Business
Direct and indirect costs may be either fixed or variable.
A cost can be either direct or indirectdepending on the cost object.
The store manager salary is indirect to any onedepartment, but is directly traceable to the store.
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Allocating Indirect Costs to Departments
Identify the most appropriate costdriver for each indirect cost.
Indirect costs should be allocated to reflecthow the departments consume resources.
Style, Inc. chosethese cost drivers:
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Allocating Indirect Costs to Departments
Use a two-step process to allocate indirect costs:
Allocation rate = total cost ÷ cost driver activity.
Allocated cost = allocation rate × weight of the cost driver activity.
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Assigning Cost to Objects in a Retail Business
$9,360 ÷ 3 departments = $3,120 per department
$3,120 × 1 department = $3,120
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Assigning Cost to Objects in a Retail Business
$18,400 ÷ 23,000 square metres = $0.80 per square metre
$0.80 × 12,000 Women’s square metres = $9,600
$0.80 × 7,000 Men’s square metres = $5,600
$0.80 × 4,000 Children’s square metres = $3,200
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Assigning Cost to Objects in a Retail Business
$2,300 ÷ 23,000 square metres = $0.10 per square metre
$0.10 × 12,000 Women’s square metres = $1,200
$0.10 × 7,000 Men’s square metres = $700
$0.10 × 4,000 Children’s square metres = $400
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Assigning Cost to Objects in a Retail Business
$7,200 ÷ $360,000 sales = $0.02 per sales dollar
$0.02 × $190,000 Women’s sales = $3,800
$0.02 × $110,000 Men’s sales = $2,200
$0.02 × $60,000 Children’s sales = $1,200
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Assigning Cost to Objects in a Retail Business
$900 ÷ $360,000 sales = $0.0025 per sales dollar
$0.0025 × $190,000 Women’s sales = $475
$0.0025 × $110,000 Men’s sales = $275
$0.0025 × $60,000 Children’s sales = $150
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Assigning Cost to Objects in a Retail Business
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Assigning Cost to Objects in a Retail Business
Now let’s combine thecosts and revenues andsee how departmental
profitability looks.
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Assigning Cost to Objects in a Retail Business
Women's Men's Children's Total
Sales 190,000$ 110,000$ 60,000$ 360,000$
Cost of Goods Sold 120,000 58,000 38,000 216,000
Sales Commissions 9,500 5,500 3,000 18,000
Supervisors' Salary 5,000 4,200 2,800 12,000
Amortization 7,000 5,000 4,000 16,000
Store Manager Salary 3,120 3,120 3,120 9,360
Store Rental 9,600 5,600 3,200 18,400
Utilities 1,200 700 400 2,300
Advertising 3,800 2,200 1,200 7,200
Supplies 475 275 150 900
Departmental Profit 30,305$ 25,405$ 4,130$ 59,840$
Department
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The Effects of Cost Behaviour on Cost Driver SelectionDoes this mean that I
should use different costdrivers for variable and
fixed overhead?
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Using Volume Measures to Allocate Variable Manufacturing Overhead
Increases in the volume of production willcause variable overhead costs to increase.
Increases in the volume of production willcause variable overhead costs to increase.
Volume measuresserve as good cost drivers
for the allocation ofvariable overhead.
UnitsProduced
LabourHours
MaterialsUsed
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Using Volume Measures to Allocate Variable Manufacturing Overhead
Filmier Furniture CompanyProduction and Cost Information
Use the two-step process to allocate indirect materialscost using the three volume measures as cost drivers.
Chairs Tables Total
Units of Production 4,000 1,000 5,000
Direct Labour Hours 3,500 2,500 6,000
Direct Materials Cost 1,000,000$ 500,000$ 1,500,000$
Indirect Materials Cost 60,000
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Chairs Tables Total
Units of Production 4,000 1,000 5,000
Direct Labor Hours 3,500 2,500 6,000
Direct Materials Cost 1,000,000$ 500,000$ 1,500,000$
Indirect Materials Cost Chairs Tables 60,000$
Allocation of Indirect Materials Cost Based on:
Units of Production 48,000$ 12,000$ 60,000$
Direct Labour Hours
Direct Materials Cost
Product
Using Volume Measures to Allocate Variable Manufacturing Overhead
$60,000 ÷ 5,000 units = $12 per unit
$12 per unit × 4,000 chairs = $48,000
$12 per unit × 1,000 tables = $12,000
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Using Volume Measures to Allocate Variable Manufacturing Overhead
Chairs Tables Total
Units of Production 4,000 1,000 5,000
Direct Labor Hours 3,500 2,500 6,000
Direct Materials Cost 1,000,000$ 500,000$ 1,500,000$
Indirect Materials Cost Chairs Tables 60,000$
Allocation of Indirect Materials Cost Based on:
Units of Production 48,000$ 12,000$ 60,000$
Direct Labour Hours 35,000 25,000 60,000
Direct Materials Cost
Product $60,000 ÷ 6,000 hours = $10 per hour
$10 per hour × 3,500 hours = $35,000
$10 per hour × 2,500 hours = $25,000
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Using Volume Measures to Allocate Variable Manufacturing Overhead
Chairs Tables Total
Units of Production 4,000 1,000 5,000
Direct Labor Hours 3,500 2,500 6,000
Direct Materials Cost 1,000,000$ 500,000$ 1,500,000$
Indirect Materials Cost Chairs Tables 60,000$
Allocation of Indirect Materials Cost Based on:
Units of Production 48,000$ 12,000$ 60,000$
Direct Labour Hours 35,000 25,000 60,000
Direct Materials Cost 40,000 20,000 60,000
Product $60,000 ÷ $1,500,000 of material = $0.04 per $
$0.04 per $ × $1,000,000 = $40,000
$0.04 per $ × $500,000 = $20,000
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Selecting the Best Cost Driver
So which volume measure should
I use?
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Selecting the Best Cost Driver
Judgement and reasoning are necessary.
Considerations
Relationship between cost driver activity and use of resources.
Availability of information.
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Allocating Fixed Overhead Costs
Objective
Distribute a fair share of theoverhead cost to each product.
There are novolume based cost
drivers forfixed overhead.
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Allocating Fixed Overhead Costs
Lednicky Bottling Company Information
Units Produced 2,000,000
Units Sold 1,800,000
Units in Ending Inventory 200,000
Fixed Rental Cost 28,000$
Use the two-step process to allocate the rentalcost to units sold and to units in ending inventory.
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Allocating Fixed Overhead Costs
$28,000 ÷ 2,000,000 units = $0.014 per unit
$0.014 per unit × 1,800,000 units = $25,200
$0.014 per unit × 200,000 units = $2,800
Units Produced 2,000,000
Units Sold 1,800,000
Units in Ending Inventory 200,000
Fixed Rental Cost 28,000$
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Allocating Costs to Solve Timing Problems
Allocating fixed costs can be complicated when thevolume of production varies from month to month.
January February
Supervisor's Salary 3,000$ 3,000$
Units Produced 800 1,875
Salary Cost per Unit Produced 3.75$ 1.60$
If prices are based on these costs, units produced inJanuary will be higher than those produced in February.
Will customers think this is reasonable?
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Allocating Costs to Solve Timing Problems
We solve this problem by using estimatedcosts and estimated production for the year toobtain a predetermined overhead rate (POHR).
Estimated overhead the year
Estimated allocation base for the yearPOHR =
$36,000
18,000 unitsPOHR = = $2.00 per unit
$2.00 allocated to each unit producedfor all months during the year.
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Cost Allocation: The Human Factor Is it fair to divide
the College ofBusiness copy
budget equally?
I think weconsider the
number offaculty.
I think weconsider the
number ofstudents.
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Cost Allocation: The Human Factor
Academic Departments
Number of Faculty
Number of Students
Actual Cost Prior Year
Management 29 330 12,000$ Accounting 16 360 10,000 Finance 12 290 8,000 Marketing 15 220 6,000 Totals 72 1,200 36,000
Let’s see how the allocation of budgeted amounts will effect the different departments.
We will begin by allocating equal amounts.
Let’s see how the allocation of budgeted amounts will effect the different departments.
We will begin by allocating equal amounts.
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Cost Allocation: The Human Factor
Academic Departments
Actual Cost Prior Year
Allocation Difference
Management 12,000$ 9,000 (3,000)$ Accounting 10,000 9,000 (1,000) Finance 8,000 9,000 1,000 Marketing 6,000 9,000 3,000 Totals 36,000 36,000 -
Who is happy? Who is unhappy?
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Cost Allocation: The Human Factor
Now let’s allocate the $36,000 budget based
on the number of faculty in each department.
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Cost Allocation: The Human Factor
Academic Departments
Actual Cost Prior Year
Allocation Difference
Management 12,000$ 14,500 2,500$ Accounting 10,000 8,000 (2,000) Finance 8,000 6,000 (2,000) Marketing 6,000 7,500 1,500 Totals 36,000 36,000 -
Who is happy? Who is unhappy?
$36,000 ÷ 72 faculty = $500 per faculty member
$500 × 29 faculty members = $14,500
$500 × 16 faculty members = $8,000
$500 × 12 faculty members = $6,000
$500 × 15 faculty members = $7,500
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Cost Allocation: The Human Factor
Now let’s allocate the $36,000 budget based
on the number of students in each
department.
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Cost Allocation: The Human Factor
Academic Departments
Actual Cost Prior Year
Allocation Difference
Management 12,000$ 9,900 (2,100)$ Accounting 10,000 10,800 800 Finance 8,000 8,700 700 Marketing 6,000 6,600 600 Totals 36,000 36,000 -
Who is happy? Who is unhappy?
$36,000 ÷ 1,200 students = $30 per student
$30 per student × 330 students = $9,900
$30 per student × 360 students = $10,800
$30 per student × 290 students = $8,700
$30 per student × 220 students = $6,600
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Establishing Cost Pools
IndirectCost 1
IndirectCost 3
IndirectCost 2
IndirectCost 4
IndirectCost 5
Product3
Product1
Product2
This is the problem when we don’tuse cost pools to allocate costs.
This is the problem when we don’tuse cost pools to allocate costs.
15 allocations
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Establishing Cost Pools
IndirectCost 1
IndirectCost 3
IndirectCost 2
IndirectCost 4
IndirectCost 5
CostPool
Product3
Product1
Product2
Threeallocations
Cost pools reduce the numberof cost allocation computations.
Cost pools reduce the numberof cost allocation computations.
Contains indirect costs relatedto a common cost driver.
Contains indirect costs relatedto a common cost driver.
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Allocating Joint Costs
Joint Costs
Product
Product
Product
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Key terms
Joint products – products resulting from a process with a common input.
Split-off point – the stage of processing where joint products are separated.
Joint cost – costs of processing joint products prior to the split-off point.
Key terms
Joint products – products resulting from a process with a common input.
Split-off point – the stage of processing where joint products are separated.
Joint cost – costs of processing joint products prior to the split-off point.
Allocating Joint Costs
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Allocating Joint Costs
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Consider the following example of an oil
refinery.We will assume only
two products,gasoline and oil.
Allocating Joint Costs
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JointInput
CommonProduction
Process
FinalSale
FinalSale
Split-OffPoint
JointCosts Oil
Gasoline SeparateProcessing
SeparateProcessing Costs
SeparateProcessing
SeparateProcessing Costs
Allocating Joint Costs
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Net realizablevalue method
Joint Cost Allocation Methods
Joint costs are allocated based on a
relative measure (weight, volume, etc.) of
the products atthe split-off point.
Physicalquantities method
Joint costs areallocated based onthe relative valuesof the products at
the split-off point.
Relative Sales Value Method
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Let’s look at anexample illustrating
the joint costallocation methods.
Joint Cost Allocation Methods
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CommonProduction
Process
Split-OffPoint
Oil
Gasoline
Physical Quantities Method
240,000 litres
360,000 litres
Joint material
cost = $275,000
Joint conversioncost = $225,000
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Physical Quantities Method
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Physical Quantities Method
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Physical Quantities Method
$225,000 joint conversion cost plus$275,000 joint material cost
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Joint material
cost = $275,000
CommonProduction
Process
Split-OffPoint
Joint conversioncost = $225,000 Oil
Gasoline
Relative Sales Value Method
$200,000sales value atsplit-off point
$600,000sales value atsplit-off point
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Relative Sales Value Method
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Relative Sales Value Method
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$225,000 joint conversion cost plus$275,000 joint material cost
Relative Sales Value Method
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By-Products
JointInput
JointProduction
Process
Split-OffPoint
JointCosts
By-productsRelatively low
value relative tomajor products.
MajorProduct
MajorProduct
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Joint Costs and the Issue of Relevance
The allocated portion of a joint cost is not relevant to a decision regarding further processing.
A product should be processed beyond the split-off point only if if the incremental revenue exceeds the incremental processing costs.
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Thanks for Your Attention