Costing Systems

EMBA 5403
Fall 2010

Available costing systems

Absorption costing

Actual Costing
Normal Costing
Standard Costing

Variable costing

Actual Costing
Normal Costing
Standard Costing
Fall 2010

Mugan

2/37

Costing systems
Cost
component

Actual

Normal

Standard

material

Actual

Actual

Standard

labor cost

Actual

Actual

Standard

Manufacturing
OverheadVariable

Actual

Applied

Standard

Manufacturing
Overhead-Fixed

Actual

Applied

Standard
Applied

Fall 2010

Mugan

3/37

Variance

Differences between the costs

according to the costing system used
and actual amounts
Actual amounts are reflected in the
financial statements

Fall 2010

Mugan

4/37

Absorption Costing
Cost of Goods
Manufactured

Absorption costing allocates

variable and fixed
overhead costs to products.
Cost of Goods
Sold

Fall 2010

Finished Goods
Inventory
Valuation 5/37
Mugan

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
Fall
2010 firms
Mugan

6/37

Product Costing Procedures

in Organizations

Process
Costing

Job-order
Costing

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

Fall 2010

Mugan

7/37

Job-Order Costing

Manufacturing
overhead (MOVH)
Applied (added) to

Direct
Trac
Direct
ed d
materials
irec
materials to
t ly
eac
h jo
b
tly
c
e
ir
d
ed
b
c
o
a
j
r
T
h
c
a
to e

Direct
Direct
labor
labor
Fall 2010

each
job using a
predetermined
rate

The
The
Job
Job
Mugan

8/37

Job-Order Costing

Raw materials
could be used as
direct or indirect
product cost.

Direct
materials
and
labor

Part of the
job cost

Materials
Requisition and
Time tickets

An employees
time may be either
direct or indirect.
Fall 2010

Indirect
materials
and labor
Mugan

Manufacturing
Overhead
Control
Account
9/37

Job-Order Costing
wages

Other
Actual OH
Charges

Material
usage
Fall 2010

Indirect
Labor

Manufacturing Applied
Overhead
Overhead
Control
Account

Job-Order
Cost
Sheets

Indirect
Materials
Mugan

10/37

Job-Order Cost Sheet

Fall 2010

Mugan

11/37

Job-Order System Cost Flows

Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Indirect
Work in
Fall 2010
Labor
Process

Work-in-Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

IfIfactual
actualand
andapplied
applied
manufacturing
manufacturingoverhead
overhead
are
arenot
notequal,
equal,aayear-end
year-end
adjustment
adjustmentis
isrequired.
required.

Mugan

12/37

Job-Order System Cost Flows

Work-in-Process
(Job Cost Sheet)
Direct

Cost of
Goods
Mfd.

Direct
Materials
Labor
Overhead
Applied

Finished Goods
Cost of
Goods
Mfd.

Cost of
Goods
Sold

Cost of Goods Sold

Cost of
Goods
Sold

Fall 2010

Mugan

13/37

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

14/37

Over- and Underabsorbed

Overhead
Overabsorbed
Overabsorbed overhead
overhead

Underabsorbed
Underabsorbed overhead
overhead

Fall 2010

Mugan

15/37

Over- and Underabsorbed

Overhead
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?

SOLUTION
SOLUTION
Applied
AppliedOverhead
Overhead == POHR
POHRActual
ActualDirect
DirectLabor
LaborHours
Hours
Applied
AppliedOverhead
Overhead == TL
TL6.00
6.00per
perDLH
DLH100,000
100,000DLH
DLH==TL
TL600,000
600,000
Fall 2010

Mugan

16/37

Accounting for Over- and

Underabsorbed Overhead
Three
Three basic
basic approaches
approaches

Prorate
Prorate among
among work-in-process,
work-in-process,

finished
finished goods,
goods, and
and cost
cost of
of goods
goods
sold.
sold.

Adjust
Adjust cost
cost of
of goods
goods sold.
sold.

Recalculate
Recalculate the
the application
application rate
rate and
and
apply
apply to
to all
all the
the jobs
jobs during
during the
the
period.
period.

Fall 2010

Mugan

17/37

Accounting for Over- and

Underabsorbed Overhead
If Manufacturing
Overhead is . . .
UNDERABSORBED

Alternative 1
Close to Cost
of Goods Sold

Alternative 2

INCREASE
Cost of Goods Sold

INCREASE
Work-in-Process
Finished Goods
Cost of Goods Sold

DECREASE
Cost of Goods Sold

DECREASE
Work-in-Process
Finished Goods
Cost of Goods Sold

(Applied OH is less
than actual OH)
OVERABSORBED
(Applied OH is greater
than actual OH)

Fall 2010

Mugan

Allocation

18/37

Allocation Base
IfIf overhead
overhead
costs
costs are
are
accumulated
accumulated in
in
aa single
single cost
cost
pool
pool and
and
allocated
allocated using
using
aa single
single
allocation
allocation base.
base.

Single
Single Overhead
Overhead
Cost
Cost Pool
Pool
Application
Rate

Products
Fall 2010

Mugan

19/37

Multiple Allocation Bases

Many
Manycompanies
companiesuse
useActivity
ActivityBased
BasedCosting
Costingwhere
wheremultiple
multiplecost
cost
pools
poolsand
andaadifferent
differentallocation
allocationbase
basefor
foreach
eachcost
costpool.
pool.

Overhead
Overhead
Cost
CostPool
Pool
AA
Application
Rate A

Fall 2010

Overhead
Overhead
Cost
CostPool
Pool
BB

Overhead
Overhead
Cost
CostPool
Pool
CC

Application
Rate B

ProductsMugan

Application
Rate C

20/37

ABC and Multiple Allocation

Bases

Improves planning and control.

Activity Based Costing (ABC) is one
method of using multiple allocation
bases.

Fall 2010

Mugan

21/37

Multistage Allocation Processes

Overhead
Overhead
Cost
CostPool
Pool11

Overhead
Overhead
Cost
CostPool
Pool22

Overhead
Overhead
Cost
CostPool
Pool33

Overhead
Overhead
Cost
CostPool
Pool44

Separate Application
Rates

Department
DepartmentAA

Department
DepartmentBB

Dept. Application
Rates
Fall 2010

Department
DepartmentCC

Dept. Application
Rates

ProductsMugan

22/37

Process Costing
Identical
Identical units
units of
of product
product are
are
produced
produced
in
in aa continuous
continuous flow
flow through
through aa series
series
of
of manufacturing
manufacturing steps
steps or
or processes.
processes.
Costs
Costs are
are assigned
assigned to
to completed
completed units
units
transferred
transferred out
out of
of the
the process
process and
and to
to
incomplete
incomplete units
units remaining
remaining in
in the
the
process.
process.
Fall 2010

Mugan

23/37

Process Costing
Costs
Costs are
are accumulated
accumulated for
for aa period
period of
of
time
time for
for products
products in
in work-in-process
work-in-process
inventory.
inventory.
Equivalent
Equivalent units
units is
is aa concept
concept
expressing
expressing these
these partially
partially completed
completed
products
products as
as aa smaller
smaller number
number of
of
fully
fully completed
completed products.
products.

Fall 2010

Mugan

24/37

Equivalent Units
Two
Twoone-half
one-halfcompleted
completedproducts
productsare
are
equivalent
equivalent to
toone
onecompleted
completedproduct.
product.

So,
So,8,000
8,000units
units70
70percent
percentcomplete
complete
are
areequivalent
equivalent to
to5,600
5,600complete
completeunits.
units.
Fall 2010

Mugan

25/37

Equivalent Units Question

For
For the
the current
current period,
period, Ames
Ames started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in
in process
process 30
30 percent
percent complete.
complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Ames
Ames have
have for
for the
the period?
period?
a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 13,500
13,500
d.
15,000
d. Fall
15,000
2010
Mugan
26/37

Equivalent Units Question

For
For the
the current
current period,
period, Ames
Ames started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in
in process
process 30
30 percent
percent complete.
complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Ames
Ames have
have for
for the
the period?
period?
a.
a. 10,000
10,000
10,000 units + (5,000 units .30)
b.
b. 11,500
11,500
= 11,500 equivalent units
c.
c. 13,500
13,500
d.
15,000
d. Fall
15,000
2010
Mugan
27/37

Calculating and Using

Equivalent Units of Production
To calculate the cost per
equivalent unit for the period:

Cost per
equivalent

Costs for the period

Equivalent units for the period

unit

Fall 2010

Mugan

28/37

Equivalent Units Question

Now
Now assume
assume that
that Ames
Ames incurred
incurred $27,600
$27,600 in
in
production
production costs
costs for
for the
the 11,500
11,500 equivalent
equivalent
units.
units. What
What was
was Ames
Ames average
average cost
cost per
per
equivalent
equivalent unit
unit for
for the
the period?
period?
a.
a. $1.84
$1.84
b.
b. $2.40
$2.40
c.
c. $2.76
$2.76
d.
d. $2.90
$2.90
Fall 2010

Mugan

29/37

Equivalent Units Question

Now
Now assume
assume that
that Ames
Ames incurred
incurred $27,600
$27,600 in
in
production
production costs
costs for
for the
the 11,500
11,500 equivalent
equivalent
units.
units. What
What was
was Ames
Ames average
average cost
cost per
per
equivalent
equivalent unit
unit for
for the
the period?
period?
a.
a. $1.84
$1.84
$27,600 11,500 equivalent units
b.
b. $2.40
$2.40
= $2.40 per equivalent unit
c.
c. $2.76
$2.76
d.
d. $2.90
$2.90
Fall 2010

Mugan

30/37

Equivalent Units Question

What
What portion
portion of
of the
the $27,600
$27,600 in
in production
production
costs
costs was
was assigned
assigned to
to work-in-process
work-in-process
inventory
inventory and
and what
what amount
amount was
was assigned
assigned
to
to completed
completed units
units for
for the
the period?
period?
a.
a. $0
$0 and
and $27,600
$27,600
b.
b. $7,600
$7,600 and
and $20,000
$20,000
c.
c. $3,600
$3,600 and
and $24,000
$24,000
d.
d. $12,000
$12,000 and
and $15,600
$15,600
Fall 2010

Mugan

31/37

Equivalent Units Question

Work-in-process:
What
portion
of
the
$27,600
in
production
What portion
of
the
$27,600
in
production
1,500 equivalent units @ $2.40
= $3,600
costs
costs was
was assigned
assigned to
to work-in-process
work-in-process
inventory
what
Completed
units:
inventory and
and
what amount
amount was
was assigned
assigned
10,000 equivalent
$2.40 = $24,000
to
units
the
period?
to completed
completed
units for
forunits
the @
period?
a.
a. $0
$0 and
and $27,600
$27,600
b.
b. $7,600
$7,600 and
and $20,000
$20,000
c.
c. $3,600
$3,600 and
and $24,000
$24,000
d.
d. $12,000
$12,000 and
and $15,600
$15,600
Fall 2010

Mugan

32/37

Equivalent Units
When
When there
there are
are partially
partially completed
completed units
units in
in
beginning
beginning inventory,
inventory, work
work efforts
efforts during
during
the
the period
period can
can be
be categorized
categorized as
as
follows:
follows:
Work
Work to
to complete
complete beginning
beginning work-in-process
work-in-process
Work
Work on
on units
units started
started and
and completed
completed during
during
the
the period
period

Work
Work on
on units
units in
in ending
ending work-in-process
work-in-process

Fall 2010

Mugan

33/37

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-inprocess 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

34/37

Equivalent Units - Example

Since
Since30%
30%of
ofthe
thework
workwas
was done
doneon
on
these
theseunits
unitsin
inMay,
May,the
theremaining
remaining 70%
70%of
of
the
thework
work is
isdone
done in
in June.
June.
Fall 2010

Mugan

35/37

Equivalent Units - Example

Since
Since1,200
1,200units
unitswere
werestarted
startedduring
duringJune,
June, and
and300
300of
of
those
thoseunits
unitsare
arestill
stillin
inwork-in-process
work-in-processon
onJune
June30,
30,
900
900units
unitswere
werestarted
started and
and completed
completedduring
duringJune.
June.
Fall 2010

Mugan

36/37

Equivalent Units - Example

40%
of
the
these
40%Fall
of2010
thework
workwas
was done
doneon
onMugan
these units
units in
inJune.
June.
37/37