| Introduction | Product Costing | ABC | Absorption & Variable Costing | Allocating Support Costs | Joint Costing | Part II | Part III |
Source:
Textbook: Managerial Accounting, Creating Value in a Dynamic Business Environment (Fifth edition), Ronald W. Hilton
Notes: Management Accounting A, 2003 Semester 1, University of Sydney
Web: http://www.mhhe.com/business/accounting/garrison/Student/olc/garrison9emgracct_s/index.htm
A product-costing system accumulates the costs of a production process and assigns them to the products that comprise the organization's output.
Four Purposes of product-costing
Optimal Product Costing System - Exhibit 5-13 (Page 194)
Flow of Costs (Basics)
Production takes place - All manufacturing costs are added to Work in process Inventory account (Debit to the WIP increase the cost-based valuation of the asset represented by the unfinished products
Products are completed - products costs are transferred from WIP to Finished Goods Inventory (Dr FG, Cr WIP)
Products are sold - product costs of inventory sold is removed from finished Goods inventory to COGS (Dr COGS, Cr FG)
Types of Traditional Product-Costing Systems
Job-Order Costing - in which costs are assigned to batches or job orders of production
Process Costing - Accumulates the costs of a production proocess and assigns them to the products that comprise the organization's output
Operation Costing (hybrid product-costing) - where the batch manufacturing operations have characteristics of both job-order and process costing environments
Alternative Product-Costing System
Throughout Costing (Chapter 19)
Overhead Application
Measure of productive activity as the basis of overhead application, e.g. DLH, DLC, MH
Predetermined overhead rate = Budgeted MOH cost / Budgeted amount of cost driver
Traditional Product costing system tend to rely on a single, volume-based cost driver.
Activity-based costing - use multiple cost drivers
Treatment for Under- and Over-applied overhead
(1) Closed to COGS, if underapplied (Dr COGS, Cr Manufacturing overhead)
(1) Closed to COGS, if overapplied (Dr Manufacturing overhead, Cr COGS)
(2) Proration over COGS, WIP and Finished Goods Inventory (Illustration, Page 94) (Text: Problem 3.54)
Overhead Application Issues (Page 97 - 101) | top |
Actual Overhead rate vs Predetermined Overhead rate
Trade-off exists between accuracy and timeliness. Accurate information is useful for decision making. Better pricing or cost-control decisions may result from more accurate product costs. However late information entails a cost in terms of missed opportunities and late responses to events.
Some MOH costs are seasonal, e.g. heating costs. Since OH costs are incurred unevenly throughout the year, the monthly overhead rate would fluctuate. The resulting inconsistency in product costs could give misleading signals for product pricing and other decisions that may depend on product cost information.
Actual and Normal Costing
Normal costing - Actual DM, DL and Applied overhead
Actual costing - Actual DM, DL and Allocated overhead (using an actual overhead rate)
Limitation of DL as traditional cost driver and new evolution of measure
Increased automation brings limitation. First, MOH costs represent a larger proportion of total production costs. Second, DL decreases in importance as a factor of production.
New evolution of measure - Machine hours, process time, throughput time (average amount of time required to convert raw materials into finished goods ready to be shipped to customers)
Plantwide and Departmental Overhead Rates (Page 109)
Two-Stage Cost Allocation (Page 101 - 102) | top |
Stage one - Cost Allocation / Cost Distribution
Manufacturing overhead costs are assigned to both production departments and service departments. Then, all service department costs are reassigned to the production departments through a process called service department cost allocation. It is to allocate service department costs on the basis of relative proportion of each service department's output that is used by various production departments.
Finally, all manufacturing overhead costs have been assigned to the production departments only.
Stage two - Overhead Application
All manufacturing overhead costs accumulated in each production department are assigned to the production jobs on which the department has worked. Overhead is applied according to cost driver rate. Cost driver rate may be different in different departments.
Job-Order Costing System (Page 80, 82 - 94) | top |
Job-order costing is used by companies with job-shop operations or batch-production operations.
In a job-shop environment, products are manufactured in very low volumes or one at a time, e.g. feature film production, ship building.
In a batch-production environment, multiple products are produced in batches of relatively small quantity, e.g. furniture manufacture, printing.
Source Documents in Job-order costing
Process Costing System (Page 81, 138 - 146) | top |
Process Costing is used in repetitive production environments, where large numbers of identical or very similar products are manufactured in a continuous flow.
Weighted-Average method of Process Costing
Stage 1: Analysis of Physical Flow of units - op WIP + started - completed and transferred = ending WIP
Stage 2: Calculation of Equivalent units - Completed and transferred + Ending WIP = Total Equivalent units
Key feature - the number of equivalent units of activity is calculated without making a distinction as to whether the activity occurred in the current accounting period or the preceding period.
Stage 3: Computation of unit costs - Total costs / total equivalent units (op WIP and Cost incurred in the period)
Stage 4: Analysis of Total costs - (Cost of goods transferred + Cost remaining in ending WIP)
Differences between Job Order and Process Costing | top |
Source: Group 1 Presentation
Job Order costing (e.g. Furniture manufacture)
Process Costing (e.g. Food processing)
Hybrid Product Costing System (Page 147 - 151) | top |
Common approach is called Operation Costing
It is used when conversion activities are very similar across product lines, but direct materials differ significantly.
Conversion costs are accumulated by department, by using process costing methods
Direct material costs are accumulated by job order or batch, by using job costing methods
Predetermined application rate for conversion = Budgeted conversion costs / Budgeted cost driver
Throughput Costing System (Page 819 - 820) | top |
An alternative to either absorption costing or variable costing for product costing and income reporting.
It assigns only the unit-level spending for direct costs as the cost of products or services. A unit-level cost is the one that is incurred every time a unit of product is manufactured and will not be incurred if another unit is not manufactured.
Example: Direct material in an automated process (only unit-level cost), all other manufacturing cost (non-throughput costs) e.g. Direct labor and manufacturing overhead are expensed as period costs regardless of how many units are produced.
Advantages