ACCT 230 Exam 2

cost accounting

measuring, recording, and reporting of product costs

cost accounting deals with

product costs

how is costing information used?

pricing decisions

product mix decisions

new product offerings

financial reporting

non-manufacturing costs

"selling & administrative expenses" or "operating expenses"

treatment of non-manufacturing costs

expense in the period incurred

manufacturing costs

direct material, direct labor, manufacturing overhead

treatment of manufacturing costs

costs incurred, recorded as asset, expensed when inventory is sold

actual costing

assign actual DM used, DL cost, and MOH cost to each unit

problem with actual costing

MOH costs are indirect costs of production and not always known at time of production

normal costing

assign actual DM used, DL cost, and allocated MOH to each unit

job order costing

costs assigned to each job or batch

a job may be

a unit or a batch of units

key feature of job order costing

inventory is customized or made to customer specifications

job order costing measures costs

for each job completed - not set time periods

job cost sheet

records costs related to specific job on daily basis

average cost per unit

total product costs for job/number of units in job

process cost system

costs accumulated by department for specific time period

process cost system is used when

large volume of similar products are manufactured

process cost computes

average cost per unit for each deparment

raw materials

direct and indirect materials that have been purchased but not yet used in production

work in process (WIP)

inventory that has been started in production but not yet completed

finished goods

inventory that has been completed in production but not yet sold

when incurred, manufacturing costs are assigned to

WIP inventory

when job is completed, cost is transferred to

FG inventory

When units are sold, cost is transferred to

COGS

direct materials costs assigned

directly to each job when USED

direct labor costs assigned

directly to each job

bill of materials

shows materials needed for a job

materials requisition form

written authorization for materials to be taken from storeroom and used in production

DL costs consist of

gross earnings, employer payroll taxes on earnings, fringe benefits incurred by employer for factory labor

manufacturing overhead costs use

allocation process if normal costing is used

overhead applied

assigned to each job

MOH account keeps track of

actual overhead costs incurred

overhead costs assigned to inventory

use predetermined overhead rate to

assign estimated amount of overhead cost to inventory

predetermined overhead rate established

at beginning of period

predetermined OH rate based on

activity that causes MOH costs to be incurred

choosing appropriate allocation base

is key to job cost accuracy

job cost sheet formula

Beginning Costs

DM used

DL

OH applied

= Total Job Cost

predetermined OH rate can be comprised of

variable and fixed component

can calculate both

plant-wide and departmental OH rates

balance in OH is closed

to COGS at end of period

underapplied overhead

actual OH > applied OH

overapplied overhead

actual OH < applied OH

service companies incur

only non-inventoriable costs

service companies need to know

cost of job or "unit" of service provided

service companies assign

direct costs to each job and allocate indirect costs based on cost allocation rate

raw materials purchased

RM inv. XX

cash or AP XX

direct materials used

WIP inv. XX

RM inv. XX

indirect materials used

manufacturing OH XX

RM inv. XX

direct labor recorded

WIP inv. XX

cash or wages pay. XX

indirect labor recorded

manufacturing OH XX

cash or wages pay. XX

debit MOH when

actual overhead costs incurred

credit MOH when

overhead costs assigned to inventory

close overhead account by

adjusting COGS or allocating among WIP, FG, and COGS

COGS for service company

none

COGS for merchandising company

Beginning Inventory

+ Purchases

= COGAS

- Ending Inventory

= COGS

to find COGS for manufacturing company

compute COGM

compute COGS

DM Used schedule

Beginning DM Inventory

+ DM Purchases

= DM Available for Use

- Ending DM Inventory

= DM Used

COGM schedule

Beginning WIP Inventory

+ DM Used

+ DL

+ MOH Applied

- Ending WIP Inventory

= COGM

COGS schedule

Beginning FG Inventory

+ COGM

= COGAS

- Ending FG Inventory

= COGS before Adjustment

+/- under- or over-applied OH

= COGS after Adjustment

Income Statement

Sales

- COGS

= Gross Margin

- Operating Expenses

= Net Operating Income

activity based costing is not

required by GAAP

traditional costing system

allocates MOH using predetermined OH rate

DL used for traditional costing when

high correlation between changes in DL and changes in OH costs

machine hours used for traditional costing when

highly automated manufacturing environment

traditional costing assumes

one volume-based activity causes MOH costs to be incurred to produce each unit

traditional costing good if

product lines are very similar

cost distortion

products are diverse in how they consume resources

activity based costing

assign OH costs to products based on activity that causes costs to be incurred

ABC OH allocation step 1

allocate costs to activities/cost pools

ABC OH allocation step 2

calculate activity rate for each cost pool and allocate costs to products

key differences between traditional costing and ABC

some nonmanufacturing costs may be assigned to products under ABC

some manufacturing costs may not be assigned to inventory under ABC

ABC uses numerous OH activity rates to assign OH costs

ABC is designed to

provide managers with cost information to make decisions as SUPPLEMENT to traditional costing

4 activity levels

facilitate allocation of OH cost to appropriate activity cost pools

unit-level activities

performed for each unit of production

examples of unit-level

electricity to power machines, indirect material used

batch-level activities

performed for each batch of products processed, regardless of number of units

examples of batch-level

processing purchase orders, setting up machines

product-level activities

support of entire product line, regardless of amount of units produced or batches run

examples of product-level

maintaining parts for product line, product design and redesign, issuing engineering change notices

facility-level activities

required to support organization

examples of facility-level

factory management salaries, insurance, depreciation

ABC step 1

define activities and cost pools

ABC step 2

identify cost driver for each cost pool

ABC step 3

calculate activity rates

ABC step 4

assign overhead costs to cost objects

benefits of ABC

more accurate product costing

better understanding & control of OH costs

limitations of ABC

expensive to implement & maintain

some arbitrary allocations remain

two factors indicating ABC is cost effective

product lines differ greatly in volume and/or manufacturing complexity

overhead costs constitute significant portion of total costs

use of ABC to determine cost of serving customers

assign customer-related costs to specific customers or customer-types (ex: tech support)

use of ABC to determine cost associated with suppliers

assign supplier-related costs to specific suppliers or supplier-types (ex: defect rate, delays on shipping)

is job order costing or process cost more expensive?

job order costing

use process cost system when

homogenous/similar products produced in continuous production process

use job order cost system when

customized or products are distinguishable

similarities between job order costing and process cost

recording production costs

same journal entries

differences between job order costing and process cost

process cost:

WIP inventory recorded in each department

costs flow sequentially through departments

costs accumulate as inventory moves through departments

process cost system requires

WIP account for each manufacturing department

costing inventory in process costing

allocate costs between:

cost of completed units

cost of ending WIP

cost per unit =

(DM used + DL + OH applied)/units produced

equivalent units

measure of work done during period expressed in fully completed units