Bernardus Alan Handoko

IUP Accounting 2011

11/311392/EK/18212

CHAPTER 4 :
ACCUMULATING AND ASSIGNING COSTS TO
PRODUCTS
Summary :
1. Cost Flows in Organizations
Divided into three major organizations which have different management
accounting priorities :
Manufacturing Organizations
The cost of raw materials moved to Work in Process account. The direct
labor and overhead items assigned to Work in Process. When
manufacturing complete, work transferred to Finished Goods Inventory
and when sold their cost moved to Cost of Goods Sold.
Retail Organizations
The primary focus in retail operations is the profitability of the product
lines. Therefore, costing attention focuses on how to allocate various
overhead costs to determine.
Service Organizations
In service organizations the major cost item is usually employee
salaries. Since salaries comprise most of total project related cost, the
potential for cost system distortions is less than in manufacturing
organizations.
2. Important Cost Terms
Cost Object
Anything for which a cost is computed.
Consumable Resources
Cost depends on the amount of resource that is used. Also called
variable cost or flexible resource.
Capacity Related Resources
Cost depends on the amount of resource capacity that is acquired and
not on how much of the capacity is used.
Direct and Indirect Costs
Direct cost is a cost that is uniquely and unequivocally attributable to a
single cost object. Indirect cost is any cost that fails the test of being
direct cost.
Cost Classification and Context
The classification of a resource as direct or indirect is context specific.
Going Forward
The allocation ideally should reflect the cause and effect relationship
between the long run use of a capacity resource by a cost object and
the associated cost of that long run use.
3. Cost System
Cost systems first classify costs as either direct or indirect.

Bernardus Alan Handoko

IUP Accounting 2011
11/311392/EK/18212
The classification of a resource as direct or indirect is context specific.
Direct costs are assigned to the appropriate cost object.
Indirect costs are collected into cost pools and then allocated to cost
objects in a reasonable way and should reflect a cause and effect
relationship.
An appropriate portion of the indirect cost is then allocated from the
cost pool to the cost object.
Costing distortions can arise when indirect cost pools include costs that
have different cost drivers.

4. Indirect Cost Pools

The simplest structure in a manufacturing system is to have a single
indirect cost pool for the entire manufacturing operation.
Indirect cost pools may have separate pools for variable and fixed
overhead costs and then allocated to the cost object.
Organizations use a separate account, Indirect Cost Applied, to record
indirect costs applied as production occurs during the year.
5. Predetermined Overhead Rates
Determine the cost driver which will be used to allocate the indirect
costs to production.
The indirect factory costs are divided based on the number of cost
drivers to generate the predetermined overhead rate.
Most organizations use multiple-indirect cost pools in order to more
accurately cost the resources used by the cost object.
Design of the indirect cost pools is considered to be one of the most
important choices in costing system design and requires an
understanding of the manufacturing system.
One indirect cost pool collects the actual indirect costs incurred for the
period.
A second indirect pool accumulates the indirect costs that has been
applied to production for the same period.
6. Reconciling Actual and Applied Capacity Costs
There are three options available to reconcile the differences in the cost
pools:
Charge the difference directly to cost of goods sold.
Identify the difference between work in process inventory, finished
goods inventory, and cost of goods sold based on the ending balances
for these accounts.
7. Job Order Costing
Indirect overhead are allocated to the job.
Once the work is completed, the collected costs are summarized.
To accumulate the cost of a specific job because each job is different.

Bernardus Alan Handoko

IUP Accounting 2011
11/311392/EK/18212

8. Process Costing
Process costing is used when all products are identical.
Process costing systems use two different cost terms: Direct material
and Conversion costs (all manufacturing costs that are not direct
material costs).