Description
it explains product costing systems and basic job order costing for manufacturing and service companies.
Methods of Costing
Topics to be Discussed
Introduction
Product Costing Systems
Basic Job-Order Costing for Manufacturing and Service Companies
Introduction
How do managerial accountants determine the cost of the products or services being produced and sold by a company?
Introduction
How is the cost of the product used?
Determining the selling price Buying or making a component
Product Costing Systems
Job Costing
Customized Production: Home,
Furniture, Print Order
Customized Service:
Tax Return, Audit, Patient
Product Costing Systems
Process Costing: A homogenous product being produced on a continuous basis.
Oil refineries, Breweries, Paint and Paper Manufacturers
Product Costing Systems
Operations Costing: A hybrid of job and process costing
Used by manufacturers who make products in batches Automobiles, Clothing
Basic Job-Order Costing
Cost Sheet for Job 101
Northern Lights Custom Cabinets
Job Number: 101 Date Started: March 6 Description: Smith House Direct Materials Direct Labor Type Oak Cost $875 Employee Hrs. Amount Staley 12.6 $255.15 Customer: Robyn Gray Date Finished: March 9
Manufacturing Overhead
Hours 22.4 Rate Amount $16.67 $373.41
Basic Job-Order Costing
Cost Sheet for Job 101 Summary Cost Summary
Direct Materials $1883.00
Direct Labor
Manufacturing Overhead Total
453.61
373.41 $2,710.02
Direct Labor or Overhead?
Idle time?
Overtime premiums?
Measuring and Tracking Manufacturing Overhead
Rent
Depreciation
Repairs and maintenance
Utilities
Indirect Labor Indirect Materials
Measuring and Tracking Manufacturing Overhead
Key Concept
Overhead cannot be directly tracked to products and services but must instead be allocated using cost drivers.
Allocation of Manufacturing Overhead
The choice of an allocation base requires a thorough understanding of what causes overhead costs to be incurred. Allocate based on the number of units produced.
Allocate based on the number of direct labor hours or machine hours.
More Topics to Discuss
The Role of Cost Pools and Cost Drivers Departmental Overhead Rates
The Use of Estimates in Predetermined Overhead Rates
The Role of Cost Pools and Cost Drivers
Key Concept
Understanding what causes overhead costs to be incurred (what drives them) is the key to allocating overhead.
Cost Pools
Instead of identifying cost drivers for each component of overhead, companies have traditionally lumped overhead into similar Cost Pools to simplify the task. May have one cost pool for the entire factory. May have separate pools of overhead for each department. May have a cost pool for each activity performed in making a product.
Cost Pools
Pause and Reflect
In a law firm, overhead costs consist of the cost of office space for attorneys, the salaries of secretaries, the cost of research material, and so on.
What allocation base might be used as a cost driver for overhead in a law firm?
Which Overhead Rate Do We Use?
Define the Problem
A new product requires substantial machine time to manufacture, but requires very little direct labor. Which is used to allocate overhead?
Which Overhead Rate Do We Use?
Identify Objectives
Develop a method of allocating overhead to products that will provide accurate costs for both their traditional labor-intensive product and their new product.
Which Overhead Rate Do We Use?
Identify and Analyze Available Options
Should multiple overhead rates be used? What factors are likely to be relevant in their decision?
Which Overhead Rate Do We Use?
Select the Best Option
Single Plant-wide Rate or Multiple Departmental Overhead Rates
The Use of Estimates
Key Concept
Accuracy in overhead application has become much more important as overhead costs have increased and make up a larger portion of the total costs of products.
Which Overhead Rate Do We Use?
Key Concept
In order to provide relevant information for decision making, overhead must often be estimated. Using estimates smoothes out or normalizes seasonal and random fluctuations in overhead costs.
Predetermined Overhead Rates
Key Formula
Predetermined Overhead Rate (for a Cost Pool)
=
Estimate Overhead for the Cost Pool
Estimated Units of the Cost Driver
Predetermined Overhead Rates
A company identifies overhead costs and estimates that these costs should total about $120,000 in the next year. The company is very labor intensive and has chosen labor hours as the cost drive and estimates using 10,000 labor hours this year.
Estimated Overhead Estimated Allocation Base
=
$120,000 10,000
= $12 per labor hour
Predetermined Overhead Rates
If a job required 24 labor hours, how much overhead would be allocated to that job?
$12 (overhead rate) x 24 (labor hours) = $288
The Problem of Over- and Underapplied Overhead
Overapplied Overhead: Applied overhead is greater than actual overhead Underapplied Overhead: Applied overhead is less than actual overhead
The Problem of Over- and Underapplied Overhead
What do you do with the under- or overapplied overhead? Allocate this amount to work in process, finished goods, and cost of goods sold or if the amount of the adjustment is small, adjust only the cost of goods sold account.
Additional Topics in Product Costing
Basic Process Costing
Backflush Costing
Basic Process Costing
Direct material and direct labor costs are tracked by department, and costs are assigned evenly to the products that pass through each department. Overhead is applied to each department and assigned evenly to each product.
Basic Process Costing
Direct materials Direct labor Manufacturing Overhead Cost of Goods Sold Process A Process B
Process C
Finished Goods
Basic Process Costing
Equivalent Units
+
=
One Full Glass
1/2
1/2
Basic Process Costing
Multiple WIP accounts are used: one for every process. As products are moved from one process to another, the costs of the previous process are transferred to the next process. Blending and pouring paint
Backflush Costing
For companies using JIT: All manufacturing costs are flushed directly into cost of goods sold. If the company has small amounts of inventory on hand at the end of the period, manufacturing costs are backflushed into the appropriate materials inventory, WIP inventory or finished goods inventory.
doc_777904144.ppt
it explains product costing systems and basic job order costing for manufacturing and service companies.
Methods of Costing
Topics to be Discussed
Introduction
Product Costing Systems
Basic Job-Order Costing for Manufacturing and Service Companies
Introduction
How do managerial accountants determine the cost of the products or services being produced and sold by a company?
Introduction
How is the cost of the product used?
Determining the selling price Buying or making a component
Product Costing Systems
Job Costing
Customized Production: Home,
Furniture, Print Order
Customized Service:
Tax Return, Audit, Patient
Product Costing Systems
Process Costing: A homogenous product being produced on a continuous basis.
Oil refineries, Breweries, Paint and Paper Manufacturers
Product Costing Systems
Operations Costing: A hybrid of job and process costing
Used by manufacturers who make products in batches Automobiles, Clothing
Basic Job-Order Costing
Cost Sheet for Job 101
Northern Lights Custom Cabinets
Job Number: 101 Date Started: March 6 Description: Smith House Direct Materials Direct Labor Type Oak Cost $875 Employee Hrs. Amount Staley 12.6 $255.15 Customer: Robyn Gray Date Finished: March 9
Manufacturing Overhead
Hours 22.4 Rate Amount $16.67 $373.41
Basic Job-Order Costing
Cost Sheet for Job 101 Summary Cost Summary
Direct Materials $1883.00
Direct Labor
Manufacturing Overhead Total
453.61
373.41 $2,710.02
Direct Labor or Overhead?
Idle time?
Overtime premiums?
Measuring and Tracking Manufacturing Overhead
Rent
Depreciation
Repairs and maintenance
Utilities
Indirect Labor Indirect Materials
Measuring and Tracking Manufacturing Overhead
Key Concept
Overhead cannot be directly tracked to products and services but must instead be allocated using cost drivers.
Allocation of Manufacturing Overhead
The choice of an allocation base requires a thorough understanding of what causes overhead costs to be incurred. Allocate based on the number of units produced.
Allocate based on the number of direct labor hours or machine hours.
More Topics to Discuss
The Role of Cost Pools and Cost Drivers Departmental Overhead Rates
The Use of Estimates in Predetermined Overhead Rates
The Role of Cost Pools and Cost Drivers
Key Concept
Understanding what causes overhead costs to be incurred (what drives them) is the key to allocating overhead.
Cost Pools
Instead of identifying cost drivers for each component of overhead, companies have traditionally lumped overhead into similar Cost Pools to simplify the task. May have one cost pool for the entire factory. May have separate pools of overhead for each department. May have a cost pool for each activity performed in making a product.
Cost Pools
Pause and Reflect
In a law firm, overhead costs consist of the cost of office space for attorneys, the salaries of secretaries, the cost of research material, and so on.
What allocation base might be used as a cost driver for overhead in a law firm?
Which Overhead Rate Do We Use?
Define the Problem
A new product requires substantial machine time to manufacture, but requires very little direct labor. Which is used to allocate overhead?
Which Overhead Rate Do We Use?
Identify Objectives
Develop a method of allocating overhead to products that will provide accurate costs for both their traditional labor-intensive product and their new product.
Which Overhead Rate Do We Use?
Identify and Analyze Available Options
Should multiple overhead rates be used? What factors are likely to be relevant in their decision?
Which Overhead Rate Do We Use?
Select the Best Option
Single Plant-wide Rate or Multiple Departmental Overhead Rates
The Use of Estimates
Key Concept
Accuracy in overhead application has become much more important as overhead costs have increased and make up a larger portion of the total costs of products.
Which Overhead Rate Do We Use?
Key Concept
In order to provide relevant information for decision making, overhead must often be estimated. Using estimates smoothes out or normalizes seasonal and random fluctuations in overhead costs.
Predetermined Overhead Rates
Key Formula
Predetermined Overhead Rate (for a Cost Pool)
=
Estimate Overhead for the Cost Pool
Estimated Units of the Cost Driver
Predetermined Overhead Rates
A company identifies overhead costs and estimates that these costs should total about $120,000 in the next year. The company is very labor intensive and has chosen labor hours as the cost drive and estimates using 10,000 labor hours this year.
Estimated Overhead Estimated Allocation Base
=
$120,000 10,000
= $12 per labor hour
Predetermined Overhead Rates
If a job required 24 labor hours, how much overhead would be allocated to that job?
$12 (overhead rate) x 24 (labor hours) = $288
The Problem of Over- and Underapplied Overhead
Overapplied Overhead: Applied overhead is greater than actual overhead Underapplied Overhead: Applied overhead is less than actual overhead
The Problem of Over- and Underapplied Overhead
What do you do with the under- or overapplied overhead? Allocate this amount to work in process, finished goods, and cost of goods sold or if the amount of the adjustment is small, adjust only the cost of goods sold account.
Additional Topics in Product Costing
Basic Process Costing
Backflush Costing
Basic Process Costing
Direct material and direct labor costs are tracked by department, and costs are assigned evenly to the products that pass through each department. Overhead is applied to each department and assigned evenly to each product.
Basic Process Costing
Direct materials Direct labor Manufacturing Overhead Cost of Goods Sold Process A Process B
Process C
Finished Goods
Basic Process Costing
Equivalent Units
+
=
One Full Glass
1/2
1/2
Basic Process Costing
Multiple WIP accounts are used: one for every process. As products are moved from one process to another, the costs of the previous process are transferred to the next process. Blending and pouring paint
Backflush Costing
For companies using JIT: All manufacturing costs are flushed directly into cost of goods sold. If the company has small amounts of inventory on hand at the end of the period, manufacturing costs are backflushed into the appropriate materials inventory, WIP inventory or finished goods inventory.
doc_777904144.ppt