Professional Documents
Culture Documents
1-1
Classifications of Production
Processes
Unit production (ship builder) Pure job shop or job
costing.
Batch (or lot) production batch of identical items
moves from one factory work station to another. (100
fuel injectors)
Assembly line production jobs are separately
identifiable but tend to be similar (automobiles,
computers, refrigerators)
Process production outputs are not identifiable as
separate units (petroleum, chemicals, steel) Pure
process costing.
1-5
Job Order
Costing
Process
Costing
Schedule
jobs.
Begin
production.
Order
materials.
Materials
Allocate
Indirect
Factory
Overhead
Direct
Labor
Direct
Goods in
Process
Finished
Goods
Cost of
Goods
Sold
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Types of Processes
Sequential processing requires that units pass through
one process before they can be worked on in the next
process in the sequence.
Types of Processes
(continued)
Partially completed units (e.g., two subcomponents) can
be worked on simultaneously in different processes and
then brought together in a final process for completion.
Job-Order Costing
Process Costing
A homogeneous product is
produced on a continuous basis
or for long periods of time.
Costs are accumulated by
department.
The departmental production
report is the key document
showing the accumulation and
disposition of costs.
Unit costs are computed by
department on production
reports.
Choice of a system
Process cost: less bookkeeping.
Costs cannot be traced to specific units.
Less record keeping.
Backflush Accounting
No WIP inventory accounts.
Material charged to FG based on bill of
materials.
All conversion costs charged directly to
FG inventory.
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Criticisms of Traditional
Overhead Allocation
Assumes all overhead is volume-related
Factory-wide or departmental rates
All related to single activity measure
24
Activity-Based Costing
Purpose
Allocation of indirect costs based on causal
activities
Attempts to identify direct link between cost and
cost object
25
Activity-Based Costing
Traditional allocation method
Costs
Products
Activities
First stage
Products
Second stage
26
Overview of ABC
Identifies activities required to produce the
product or service
Determines the cost of the activities
Allocates costs to the cost object based
on the objects consumption of activities
27
29
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Establishing predetermined
rates
Prepare overhead budgets for various levels
of activity.
Identify costs as variable, fixed, semi-variable.
Activity
Centre A
Indirect Cost
Pool
Activity
Centre B
Resource Drivers
Activity
Centre C
2nd Stage
Allocation
Activity
Centre D
Activity
Drivers
Product 1
Product 2
Product 3
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Under-absorbed and
over-absorbed overhead
Actual overhead costs are charged to cost
center overhead clearing account.
Overhead clearing account is credited for the
amounts determined from predetermined
overhead rate.
Amount absorbed by product > actual costs,
overhead: over-absorbed (under-absorbed).
If over-absorbed (under-absorbed): credit (debit)
balance in overhead clearing account.
Balance is transferred to Overhead variance
account. Adjusts COGS or Inv.
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Accuracy of Costing
GAAP requires aggregate inventory and
COGS (not by product), to be materially
accurate.
For better decision making:
Some companies use activity based costing
primarily to estimate costs for profitability
analysis.
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Cross Subsidies
If actual cost structure is complex and a
simple overhead allocation approach is
used, some products costs will be
understated and some overstated.
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Examples of Drivers
Unit level drivers (number of units, direct labor hours,
direct labor dollars, machine hours) the more units the
more costs assigned to the product. Costs per unit stay
the same regardless of number of units.
Batch level drivers (number of orders processed, number
of production batches run) used to allocate costs
associated with setting up production or processing
orders. The larger the production run or order, the lower
the costs per unit.
Product level drivers (number of products) costs required
to design or maintain products are assigned based on
number of products.
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