Business Erivironineni-and Concepts

'COST ACCOUNTING
jA. Cost accounting refers to any accounting method by which costs are accumulated
during production so that the cost of the finished goods can be determined.
1. During production, all costs are accumulated in a Work in Process (WIP) account.
When units are completed, their cost (cost of goods manufactured) is transferred to a
Finished Goods account. When items are sold, cost is transferred to a Cost of Goods
Sold account.
2. Three separate cost figures are accumulated in WIP account. -.- --,•-.*—
a. Direct material is the cost of any materials that are traceable to the product being
manufactured.
b. Direct labor is the cost of labor that is used in the actual manufacturing process.
c. Factory overhead is any manufacturing cost other than direct material and direct labor. '
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d. Statement of Financial Accounting Standards (SFAS) 151 amended ARB 43 to
require the allocation of fixed production overhead to inventory based on the normal
capacity of the production facilities. Normal capacity is the production expected to be
achieved over a number of periods or seasons under normal circumstances. The actual
level of production may be used if it approximates normal capacity. Therefore, for
financial reporting purposes companies must use normal capacity to allocate fixed
overhead, but the actual activity level is used to allocate variable overhead.
3. Direct labor and factory overhead are sometimes combined and called conversion
costs. Direct materials and direct labor are sometimes combined and called prime
costs.
4. The costs incurred for the various types of factory overhead can take a significant
amount of time to accumulate. To get usable cost figures more quickly, factory
overhead is often estimated (called "applied").
a. A rate is determined based on some cause and effect relationship. A change in one
item (the number of units, for example, or the direct labor cost) is identified that
causes a change in factory overhead.
b. A factor (such as direct labor cost) that is believed to affect factory overhead is
called a cost driver. As this factor increases during a period, more factory overhead
cost is applied to the WIP account based on the rate in use.
c. Any final difference between the amount of factory overhead applied to the WIP
account and the actual amount incurred is usually recorded in the Cost of Goods Sold
account. , :
B. Job order cost accounting is a system where a separate WIP account is
maintained for each f "• individual job. In this way, the resulting cost figures for a
particular job should be very accu-I—-* rate. When the job is finished, its specific
cost is transferred to finished goods. This method is used when the items being
produced are individually unique such as a house, for example,
Jor a boat. ' "•! Process cost accounting is a system where a total cost is kept for a
large number of items t being mass produced. The average cost of the units is
determined but the cost of any specific item is unknown.
1. Usually the manufacturing process is divided into departments and a separate WIP
account is maintained for the items as they move through each department.
Cost Accounting - 51