Costing Systems

EMBA 5403
Fall 2010
Fall 2010 Mugan 2/37
Available costing systems
E Absorption costing
Actual Costing
Normal Costing
Standard Costing
E Variable costing
Actual Costing
Normal Costing
Standard Costing
Fall 2010 Mugan 3/37
Costing systems
Cost
component
Actual Normal Standard
material Actual

Actual

Standard
labor cost Actual

Actual

Standard
Manufacturing
Overhead-
Variable
Actual

Applied Standard
Manufacturing
Overhead-Fixed
Actual

Applied Standard
Applied
Fall 2010 Mugan 4/37
Variance
E Differences between the costs
according to the costing system used
and actual amounts
E Actual amounts are reflected in the
financial statements
Fall 2010 Mugan 5/37
Absorption Costing
Absorption costing allocates
variable and fixed
overhead costs to products.
Finished Goods
Inventory
Valuation
Cost of Goods
Sold

Cost of Goods
Manufactured

Fall 2010 Mugan 6/37
Product Costing Procedures
in Organizations
Process
Costing
Job-order
Costing
Distinct jobs or batches of units.
Costs accumulated separately by job.
Typical job order cost applications:
Special-order printing
Building construction
Also used in service industry
Hospitals
Law firms
Fall 2010 Mugan 7/37
Product Costing Procedures
in Organizations
Process
Costing
Job-order
Costing
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill
Fall 2010 Mugan 8/37
Job-Order Costing
The
Job
Direct
labor
Direct
materials
Manufacturing
overhead (MOVH)
Applied (added) to
each
job using a
predetermined
rate
Fall 2010 Mugan 9/37
Job-Order Costing

Part of the
job cost
Materials
Requisition and
Time tickets
Direct
material
s
and
labor
Indirect
materials
and labor
Manufacturing
Overhead
Control
Account
Raw materials
could be used as
direct or indirect
product cost.
An employees
time may be either
direct or indirect.
Fall 2010 Mugan 10/37
Job-Order Costing

wages
Job-Order
Cost
Sheets
Material
usage
Other
Actual OH
Charges
Indirect
Materials
Indirect
Labor
Applied
Overhead
Manufacturing
Overhead
Control
Account
Fall 2010 Mugan 11/37
Job-Order Cost Sheet
XYZ Job-Order Cost Sheet
Job Number A - 143 Date Initiated 17 September 2008
Date Completed
Department A4 Units Completed 2
Item Steel water tank
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
MR 1041 TL 1200 20 8 TL 160 8 TL 6 TL 48
Cost Summary Units Shipped
Direct Materials TL 1200 Date Number Balance
Direct Labor TL 160
Manufacturing Overhead TL 48
Total Cost 1408
Unit Cost 704 11/17/08 1 1
17-Nov-08
Fall 2010 Mugan 12/37
Job-Order System Cost Flows
Direct
Labor
Mfg. Overhead
Salaries and
Wages Payable
Work-in-Process
(Job Cost Sheet)
Direct
Materials
Overhead
Applied to
Work in
Process
Indirect
Labor
Direct
Labor
Overhead
Applied
Indirect
Labor
Indirect
Materials
Actual Applied
If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
Fall 2010 Mugan 13/37
Job-Order System Cost Flows
Cost of
Goods
Mfd.
Finished Goods
Cost of
Goods
Sold
Cost of
Goods
Mfd.
Cost of Goods Sold
Cost of
Goods
Sold
Work-in-Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied
Fall 2010 Mugan 14/37
Allocation Process
Define the cost objects.
Accumulate indirect costs in cost pools.
Choose an allocation base.
Estimate an application rate.
Allocate indirect costs based on use of
the allocation base
Fall 2010 Mugan 15/37
Over- and Underabsorbed
Overhead
Overabsorbed overhead



Underabsorbed overhead
Applied
Overhead
Costs
<
Actual
Overhead
Costs
Applied
Overhead
Costs
>
Actual
Overhead
Costs
Fall 2010 Mugan 16/37
Over- and Underabsorbed
Overhead
SOLUTION
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = TL 6.00 per DLH 100,000 DLH = TL 600,000
XYZs actual overhead for the year was TL650,000
and a total of 100,000 direct labor hours were
worked.
Using XYZs predetermined overhead rate of
TL 6.00 per direct labor hour, how much overhead
was applied to XYZs jobs during the year?
Fall 2010 Mugan 17/37
Accounting for Over- and
Underabsorbed Overhead
Three basic approaches
O Prorate among work-in-process,
finished goods, and cost of goods
sold.
O Adjust cost of goods sold.
O Recalculate the application rate and
apply to all the jobs during the
period.
Fall 2010 Mugan 18/37
Accounting for Over- and
Underabsorbed Overhead
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation
UNDERABSORBED INCREASE INCREASE
Cost of Goods Sold Work-in-Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold
OVERABSORBED DECREASE DECREASE
Cost of Goods Sold Work-in-Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
Fall 2010 Mugan 19/37
Allocation Base
Products
Application
Rate
If overhead
costs are
accumulated in
a single cost
pool and
allocated using
a single
allocation base.
Single Overhead
Cost Pool
Fall 2010 Mugan 20/37
Many companies use Activity Based Costing where multiple cost
pools and a different allocation base for each cost pool.
Products
Application
Rate A
Overhead
Cost Pool
A
Overhead
Cost Pool
B
Overhead
Cost Pool
C
Application
Rate B
Application
Rate C
Multiple Allocation Bases
Fall 2010 Mugan 21/37
E Improves planning and control.
E Activity Based Costing (ABC) is one
method of using multiple allocation
bases.
ABC and Multiple Allocation
Bases
Fall 2010 Mugan 22/37
Multistage Allocation Processes
Overhead
Cost Pool 1
Overhead
Cost Pool 2
Overhead
Cost Pool 3
Overhead
Cost Pool 4
Separate
Application Rates
Department A Department C Department B
Products
Dept. Application
Rates
Dept. Application
Rates
Fall 2010 Mugan 23/37
Process Costing
Identical units of product are
produced
in a continuous flow through a series
of manufacturing steps or processes.

Costs are assigned to completed units
transferred out of the process and to
incomplete units remaining in the
process.
Fall 2010 Mugan 24/37
Costs are accumulated for a period of
time for products in work-in-process
inventory.
Equivalent units is a concept
expressing these partially completed
products as a smaller number of
fully completed products.
Process Costing
Fall 2010 Mugan 25/37
Two one-half completed products are
equivalent to one completed product.
+
=
So, 8,000 units 70 percent complete
are equivalent to 5,600 complete units.
Equivalent Units
Fall 2010 Mugan 26/37
For the current period, Ames started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Ames have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Equivalent Units Question
Fall 2010 Mugan 27/37
For the current period, Ames started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Ames have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units .30)
= 11,500 equivalent units
Equivalent Units Question
Fall 2010 Mugan 28/37
Calculating and Using
Equivalent Units of Production
To calculate the cost per
equivalent unit for the period:
Cost per
equivalent
unit
=
Costs for the period
Equivalent units for the period
Fall 2010 Mugan 29/37
Now assume that Ames incurred $27,600 in
production costs for the 11,500 equivalent
units. What was Ames average cost per
equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Equivalent Units Question
Fall 2010 Mugan 30/37
Now assume that Ames incurred $27,600 in
production costs for the 11,500 equivalent
units. What was Ames average cost per
equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 11,500 equivalent units
= $2.40 per equivalent unit
Equivalent Units Question
Fall 2010 Mugan 31/37
What portion of the $27,600 in production
costs was assigned to work-in-process
inventory and what amount was assigned
to completed units for the period?
a. $0 and $27,600
b. $7,600 and $20,000
c. $3,600 and $24,000
d. $12,000 and $15,600
Equivalent Units Question
Fall 2010 Mugan 32/37
What portion of the $27,600 in production
costs was assigned to work-in-process
inventory and what amount was assigned
to completed units for the period?
a. $0 and $27,600
b. $7,600 and $20,000
c. $3,600 and $24,000
d. $12,000 and $15,600
Work-in-process:
1,500 equivalent units @ $2.40 = $3,600

Completed units:
10,000 equivalent units @ $2.40 = $24,000
Equivalent Units Question
Fall 2010 Mugan 33/37
Equivalent Units
When there are partially completed units
in beginning inventory, work efforts
during the period can be categorized as
follows:
Work to complete beginning work-in-process
g Work on units started and completed during
the period
@ Work on units in ending work-in-process
Fall 2010 Mugan 34/37
Equivalent Units - Example
ACE started June with 250 partially completed
units in work-in-process (30% complete).
During June, ACE completed the units in work-
in-process and started an additional 1,200
units.
There were 300 units in ending work-in-process
on June 30. They were 40% complete.
How many total equivalent units
did ACE produce during June?

Continue
Fall 2010 Mugan 35/37
units
% of work
done this
period
Equivalent
units
Work to complete
beginning work-in-process
250 70% 175
Work on units started and
completed
900 100% 900
Work on ending work-in-
process
300 40% 120
Total equivalent units 1,195
Equivalent Units - Example
Since 30% of the work was done on
these units in May, the remaining 70% of
the work is done in June.
Fall 2010 Mugan 36/37
units
% of work
done this
period
Equivalent
units
Work to complete
beginning work-in-process
250 70% 175
Work on units started and
completed
900 100% 900
Work on ending work-in-
process
300 40% 120
Total equivalent units 1,195
Equivalent Units - Example
Since 1,200 units were started during June, and 300 of
those units are still in work-in-process on June 30,
900 units were started and completed during June.
Fall 2010 Mugan 37/37
Equivalent Units - Example
units
% of work
done this
period
Equivalent
units
Work to complete
beginning work-in-process
250 70% 175
Work on units started and
completed
900 100% 900
Work on ending work-in-
process
300 40% 120
Total equivalent units 1,195
40% of the work was done on these units in June.