Costing Systems

EMBA 5403
Fall 2008
Available costing systems
 Absorption costing
 Actual Costing
 Normal Costing
 Standard Costing
 Variable costing
 Actual Costing
 Normal Costing
 Standard Costing

Fall 2008-2009 Mugan 2/37

Costing systems
Cost Actual Normal Standard
component
material Actual Actual Standard

labor cost Actual Actual Standard

Manufacturing Actual Applied Standard

Overhead-Variable

Manufacturing Actual Applied Standard

Overhead-Fixed Applied

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Variance
 Differences between the costs
according to the costing system used
and actual amounts
 Actual amounts are reflected in the
financial statements

Fall 2008-2009 Mugan 4/37

Absorption Costing
Absorption costing allocates
Cost of Goods
Manufactured variable and fixed
overhead costs to products.

Cost of Goods
Sold

Finished Goods
Inventory
Fall 2008-2009 Mugan Valuation 5/37
Product Costing Procedures
in Organizations

Process Job-order
Costing 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 2008-2009 Mugan 6/37
Product Costing Procedures
in Organizations

Process Job-order
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill
Fall 2008-2009 Mugan 7/37
Job-Order Costing Manufacturing
overhead (MOVH)
Applied (added) to
each
Direct
Direct Tra job using a
materials ced predetermined
materials d ir e
to e ctly rate
ach
jo b
The
The
l y
Job
Job
c t
dir e
ac ed j ob
Tr a ch
Direct
Direct to e
labor
labor
Fall 2008-2009 Mugan 8/37
 Job-Order Costing

Direct
Raw materials materials Part of the
could be used as and job cost
direct or indirect labor
product cost.
Materials
Requisition and
Time tickets
An employee’s
time may be either Manufacturing
Indirect
direct or indirect. Overhead
materials
Control
and labor
Account
Fall 2008-2009 Mugan 9/37
Job-Order Costing

wages Indirect
Labor

Other Manufacturing Job-Order

Applied
Actual OH Overhead Cost
Charges Control Overhead Sheets
Account

Material Indirect
usage Materials
Fall 2008-2009 Mugan 10/37
Job-Order Cost Sheet
XYZ Job-Order Cost Sheet
Job Number A - 143 Date Initiated 17 September 2008
Date Completed 17-Nov-08
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

Fall 2008-2009 Mugan 11/37

Job-Order System Cost Flows
Salaries and Work-in-Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor
Indirect Materials
Direct

Labor Labor
Overhead

Applied
Mfg. Overhead
Actual Applied IfIfactual
actualand
andapplied
applied

Indirect Overhead manufacturing
manufacturingoverhead
overhead
Materials Applied to are
arenotnotequal,
equal,aayear-end
year-end

Indirect Work in Mugan adjustment
adjustmentis isrequired.
required.
Fall 2008-2009 12/37
Labor Process
Job-Order System Cost Flows
Work-in-Process
(Job Cost Sheet) Finished Goods
 Direct
Cost of
 Cost of
 Cost of


Materials
Direct
Goods Goods Goods
Mfd. Mfd. Sold
Labor
Overhead

Applied
Cost of Goods Sold
Cost of
Goods
Fall 2008-2009 Sold 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 2008-2009 Mugan 14/37

Over- and Underabsorbed
Overhead

Overabsorbed
Overabsorbed overhead
overhead

Underabsorbed
Underabsorbed overhead
overhead

Fall 2008-2009 Mugan 15/37

 Over- and Underabsorbed
Overhead
XYZ’s actual overhead for the year was TL650,000 and
a total of 100,000 direct labor hours were worked.
Using XYZ’s predetermined overhead rate of
TL 6.00 per direct labor hour, how much overhead
was applied to XYZ’s jobs during the year?

SOLUTION
SOLUTION
Applied
AppliedOverhead
Overhead == POHR
POHR××Actual
ActualDirect
DirectLabor
LaborHours
Hours
Applied
AppliedOverhead
Overhead == TL
TL6.00
6.00per
perDLH
DLH××100,000
100,000DLH
DLH==TL
TL600,000
600,000
Fall 2008-2009 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, andand cost
cost of
of goods
goods
sold.
sold.
 Adjust
 Adjust cost
cost ofof goods
goods sold.
sold.
 Recalculate
 Recalculate thethe application
application rate
rate and
and
apply
apply to
to all
all the
the jobs
jobs during
during the
the
period.
period.

Fall 2008-2009 Mugan 17/37

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 2008-2009 Mugan 18/37

Allocation Base

IfIf overhead
overhead
costs Single
Single Overhead
Overhead
costs are
are Cost
accumulated
accumulated in in Cost Pool
Pool
aa single
single cost
cost Application
pool
pool and
and Rate
allocated
allocated usingusing
aa single
single
allocation
allocation base.base.
Products

Fall 2008-2009 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 Overhead
Overhead Overhead
Overhead
Cost
CostPool
Pool Cost
Cost Pool
Pool Cost
CostPool
Pool
AA BB CC

Application Application Application

Rate A Rate B Rate C

Fall 2008-2009 Products

Mugan 20/37
ABC and Multiple Allocation
Bases

 Improves planning and control.

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

Fall 2008-2009 Mugan 21/37

 Multistage Allocation Processes
Overhead
Overhead Overhead
Overhead Overhead
Overhead Overhead
Overhead
Cost
CostPool
Pool11 Cost
CostPool
Pool22 Cost
CostPool
Pool33 Cost
CostPool
Pool44
Separate
Application Rates

Department
DepartmentAA Department
DepartmentBB Department
DepartmentCC
Dept. Application Dept. Application
Rates Rates

Fall 2008-2009
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 toto completed
completed units
units
transferred
transferred out
out of
of the
the process
process and
and toto
incomplete
incomplete units
units remaining
remaining in
in the
the
process.
process.
Fall 2008-2009 Mugan 23/37
Process Costing
Costs
Costs are
are accumulated
accumulated for for aa period
period of
of
time
time for
for products
products inin 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 ofof
fully
fully completed
completed products.
products.

Fall 2008-2009 Mugan 24/37

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

+ =
So,
So, 8,000
8,000units
units 70
70percent
percent complete
complete
are
areequivalent
equivalenttoto5,600
5,600complete
completeunits.
units.
Fall 2008-2009 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 3030 percent
percent complete.
complete.
How
How many
many equivalent
equivalent units
units of
of production
production diddid
Ames
Ames havehave 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.
d. 15,000
15,000
Fall 2008-2009 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 3030 percent
percent complete.
complete.
How
How many
many equivalent
equivalent units
units of
of production
production diddid
Ames
Ames havehave 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.
d. 15,000
15,000
Fall 2008-2009 Mugan 27/37
Calculating and Using
Equivalent Units of Production

To calculate the cost per

equivalent unit for the period:

Cost per
Costs for the period
equivalent = Equivalent units for the period
unit

Fall 2008-2009 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 2008-2009 Mugan 29/37
 Equivalent Units Question

Now
Now assume
assume that
that Ames
Ames incurred
incurred $27,600
$27,600 inin
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 2008-2009 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 toto 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 2008-2009 Mugan 31/37
Equivalent Units Question
Work-in-process:
What portion
What portion of
of the
the $27,600
$27,600 in
in production
production
1,500 equivalent units @ $2.40 = $3,600
costs
costs was
was assigned
assigned to to work-in-process
work-in-process
inventory
inventory and
and what
what amount
Completed amount was
units: was assigned
assigned
to
to completed units
units for
10,000 equivalent
completed the
forunits
the @period?
$2.40 = $24,000
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 2008-2009 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 asas follows:
follows:
➊
➊ Work
Work to
to complete
complete beginning
beginning work-in-process
work-in-process
➋
➋ Work
Work on
on units
units started
started and
and completed
completed during
during
the
the period
period
➌ Work
➌ Work on
on units
units in
in ending
ending work-in-process
work-in-process

Fall 2008-2009 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-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 2008-2009 Mugan 34/37
Equivalent Units - Example

Since
Since30%
30% of
ofthe
thework
workwaswas done
doneon
on
these
these units
unitsin
inMay,
May, the
the remaining
remaining70%
70%ofof
the
the work
workisis done
done ininJune.
June.

Fall 2008-2009 Mugan 35/37

Equivalent Units - Example

Since
Since1,200
1,200units
unitswere
were started
startedduring
duringJune,
June, and
and 300
300 of
of
those
thoseunits
unitsare
arestill
still in
inwork-in-process
work-in-processon
onJune
June30,
30,
900
900 units
unitswere
werestarted
startedandandcompleted
completedduring
duringJune.
June.
Fall 2008-2009 Mugan 36/37
Equivalent Units - Example

40%
40% of
ofthe
thework
workwas
Fall 2008-2009 was done
done on these units in June.
Mugan on these units in June.
37/37