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Managerial Accounting

Managerial

Accounting

2002e

2002e

Belverd E.

Belverd

E. Needles,

Needles, Jr.

Jr.

Susan Crosson

Susan

Crosson

- - - - - - - - - - -

Multimedia Slides by:

Harry Hooper Santa Fe Community College

Managerial Accounting Managerial Accounting 2002e 2002e Belverd E. Belverd E. Needles, Needles, Jr. Jr. Susan Crosson

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Chapter

Chapter 22

Cost Concepts

Cost

Concepts and

and

Cost

Cost Allocation

Allocation

LEARNING OBJECTIVES

LEARNING

OBJECTIVES

  • 1. State how managers use information about costs in the management cycle.

  • 2. Identify various approaches managers use to classify costs.

  • 3. Define and give examples of the three elements of product cost and compute a product unit cost for a manufacturing organization.

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LEARNING OBJECTIVES

LEARNING

OBJECTIVES

  • 5. Describe the flow of product-related activities, documents, and costs through the Materials Inventory, Work in Process Inventory, and Finished Goods Inventory accounts.

  • 6. Prepare a statement of cost of goods manufactured and an income statement for a manufacturing organization.

  • 7. Define cost allocation and explain how cost objects, cost pools, and cost drivers are used to apply manufacturing overhead.

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LEARNING OBJECTIVES

LEARNING

OBJECTIVES

  • 7. Calculate product unit cost using the traditional allocation of manufacturing overhead costs.

  • 8. Calculate product unit cost using activity-based costing to allocate manufacturing overhead costs.

  • 9. Apply costing concepts to a service organization.

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Costs Information

Costs

Information and

and the

the

Management Cycle

Management

Cycle

OBJECTIVE 1

State how managers use information about costs in the management cycle.

Operating Costs

Operating

Costs and

and the

the Management

Management Cycle

Cycle

Operating Costs Operating Costs and and the the Management Management Cycle Cycle Co ri ht ©

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Planning Stage

Planning

Stage

Uses of operating cost information and product costs in the planning stage.

Develop budgets.

Determine selling prices or fees for

services and products.

Plan human resource needs.

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Executing Stage

Executing

Stage

Uses of operating cost information

and product costs in the executing stage..

Make decisions about dropping a service line, product line, or segment.

Evaluate outsourcing opportunities. Estimate margins and income. Bid on special orders. Negotiate a selling price or fee.

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Reviewing Stage

Reviewing

Stage

Uses of operating cost information

and product costs in the reviewing stage.

Calculate variances between estimated and actual costs.

Help managers determine the causes of cost overruns and enable them to adjust future actions to reduce potential problems.

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Reporting Stage

Reporting

Stage

Uses of operating cost information and

product costs in the reporting stage.

Report actual results of operating activities on the income statement.

Report the value of inventory on the balance sheet.

Report performance related to products or services.

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Examples of

Examples

of Types

Types and

and

Uses Uses of of Operating Operating Cost Cost Information Information Type of Organization Manufacturing Retail Service
Uses
Uses of
of Operating
Operating Cost
Cost Information
Information
Type of Organization
Manufacturing
Retail
Service
Cost information
needed by management
Cost to
manufacture
the product
Cost to
purchase
the product
Cost to
provide
the service
Uses of cost information:
To measure historical or
future profits
Yes
Yes
Yes
To decide the selling price
for regular or special sales
or services provided
Yes
Yes
Yes
To value finished goods or
merchandise inventories
Yes
Yes
N/A
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Discussion

Discussion

  • Q. Q.

What are three uses of operating cost

information and product costs in the

planning stage?

  • A. A.

1. Develop budgets.

  • 2. Determine selling prices or fees.

  • 3. Plan human resource needs.

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Classifying Costs

Classifying

Costs

OBJECTIVE 2

Identify various approaches managers use to classify costs.

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Cost Classifications

Cost

Classifications and

and Their

Their Uses

Uses

Common Cost Classifications:

Classification Breakdown Purpose

Traceability

Indirect

Direct

Control costs by tracing

costs to a cost object

BehaviorVariable Calculate number of units certain profit.

Fixed

that must be sold to obtain a

Activity Based

Value adding

Non-value adding

Identify the costs that add

value to the consumer.

Financial Reporting statements.

Period

Product Classify costs for the

preparation of financial

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Overview of

Overview

of Cost

Cost Classification

Classification

Overview of Overview of Cost Cost Classification Classification Co ri ht © b Hou hton Mifflin

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Cost Traceability

Direct

Direct Cost

Cost – conveniently traced to a cost object.

Indirect

Indirect Cost

Cost – cannot be conveniently traced to a

cost object.

[Cost Object: individual product, service, department,

sales territory, etc.]

Cost Behavior

Variable

Variable Cost

Cost – changes in direct proportion to a

change in volume.

Fixed

Fixed Cost

Cost – remains constant within a range of

activity or for a defined time period.

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Value-Adding Versus Non-Value Adding Costs

Value Adding

Value

Adding Cost

Cost – increases the market value of a product or service.

Non-Value Adding

Non-Value

Adding Cost

Cost – adds cost to a product or service but does not

increase its market value.

Costs for Financial Reporting

Product (Inventoriable)

Product

(Inventoriable) Costs

Costs – costs such as direct materials, direct labor,

and manufacturing overhead, that are assigned to inventory as an asset,

until sold.

[Product Costs may be Prime Costs (Direct Materials and Direct Labor) or

Conversion Costs (Direct Labor and Manufacturing Overhead)].

Period (Non-inventoriable)

Period

(Non-inventoriable) Costs

Costs – costs of resources consumed, expensed

as incurred, during the accounting period and not assigned to products.

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The Management

The

Management Cycle

Cycle

OBJECTIVE 3

Define and give examples of the three

elements of product cost and compute a

product unit cost for a manufacturing

organization.

Elements of

Elements

of Product

Product Costs

Costs

  • 1. Direct materials can be conveniently and economically traced to specific units of product.

  • 2. Direct labor can be conveniently and economically traced to specific units of product.

  • 3. Manufacturing overhead includes all manufacturing costs that are not direct

materials or direct labor costs. Also called factory overhead or indirect manufacturing costs.

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Manufacturing Overhead

Manufacturing

Overhead

The following are examples of manufacturing overhead:

Indirect materials. Indirect labor.

Depreciation associated with manufacturing operations.

Machinery and tool maintenance, taxes, insurance, rent, and utilities relating to manufacturing.

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Product Unit

Product

Unit Cost

Cost

The manufacturing cost of a single unit of

product.

= Direct Material + Direct Labor + Mfg. Overhead

Number of Units Produced

Or

= Sum of Costs per Unit for each Element

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Actual Costing

Actual

Costing Method

Method

The actual costing method uses the

actual cost information from the job

to calculate the unit cost of a product.

At the end of an accounting period, or

At the end of a job.

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Normal Costing

Normal

Costing Method

Method

The normal costing method combines

the actual direct materials and direct

labor costs with the estimated

manufacturing overhead costs to

determine product costs.

Used when total actual overhead costs

are not known until the end of the year.

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Standard Costing

Standard

Costing Method

Method

The standard costing method uses

estimated product cost information that is

used:

As a benchmark or target for evaluating

subsequent performance.

For budgeting purposes.

For bidding on a future job.

For controlling product costs.

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Summary of

Summary

of the

the Use

Use of

of Actual

Actual

or Estimated

or

Estimated Costs

Costs inin

Three Cost-Measurement

Three

Cost-Measurement Methods

Methods

Product Cost Actual Normal Standard Elements Costing Costing Costing Direct Actual Actual Estimated materials costs costs
Product Cost
Actual
Normal
Standard
Elements
Costing
Costing
Costing
Direct
Actual
Actual
Estimated
materials
costs
costs
costs
Direct labor
Actual
Actual
Estimated
costs
costs
costs
Manufacturing
Actual
Estimated
Estimated
overhead
costs
costs
costs
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Relationships Among

Relationships

Among Product

Product Costs

Costs

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Discussion

Discussion

  • Q. Q.

What are the three elements of

product cost?

  • A. A.

1. Direct materials costs.

  • 2. Direct labor costs.

  • 3. Manufacturing overhead

costs.

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Manufacturing

Manufacturing Inventory

Inventory Accounts

Accounts

OBJECTIVE 4

Describe the flow of product-related

activities, documents, and costs through

the Materials Inventory, Work in

Process Inventory, and Finished Goods

Inventory accounts.

Document Flows

Document

Flows

Activity

Purchasing Materials

Documents

Purchase Request

Purchase Order

Receiving Report

Vendor’s Invoice

Materials Requisition and Conversion

Materials Request

Time Card

Job Order Cost Card

Vendors’ Invoices for Overhead

Product Completion and Sale

Job Order Cost Card

Sales Invoice

Shipping Document

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Cost

Cost Flows

Flows

Direct materials, labor, and overhead are

accumulated in the Work in Process

Inventory account.

When goods are completed the costs are

transferred to Finished Goods Inventory.

When the goods are sold, the costs are

transferred to Cost of Goods Sold.

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Co

Manufacturing Manufacturing Cost Cost Flow Flow Direct Materials Work in Process Inventory Account Inventory Account Balance
Manufacturing
Manufacturing Cost
Cost Flow
Flow
Direct Materials
Work in Process
Inventory Account
Inventory Account
Balance 12/31/x3: Used during
Balance 12/31/x3: Completed
$10,000
20x4:
$ 2,000
during 20x4:
Total direct
$25,000
$30,000
materials
Direct materials
purchased
during 20x4:
used during 20x4:
25,000
20,000
Direct labor 20x4:
12,000
Balance
12/31/x4:
Manufacturing
overhead 20x4:
$5,000
6,000
Balance 12/31/x4
$15,000
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Manufacturing Manufacturing Cost Cost Flow Flow Factory Payroll Work in Process Account Inventory Account Direct labor
Manufacturing
Manufacturing Cost
Cost Flow
Flow
Factory Payroll
Work in Process
Account
Inventory Account
Direct labor
earned during
20x4:
Balance 12/31x3:
$12,000
$ 2,000
Completed
during 20x4:
20x4:
$30,000
$12,000
Direct materials
used during 20x4:
25,000
Direct labor 20x4:
12,000
Balance
12/31/x4:
Manufacturing
overhead 20x4:
$ 0
6,000
Balance 12/31/x4
$15,000
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Manufacturing Cost

Manufacturing

Cost Flow

Flow

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Manufacturing Overhead Work in Process Control Account Inventory Account Total manufacturing overhead incurred during 20x4: Balance
Manufacturing Overhead
Work in Process
Control Account
Inventory Account
Total
manufacturing
overhead
incurred during
20x4:
Balance 12/31/x3: Completed
$ 6,000
$2,000
during 20x4:
$30,000
20x4:
Direct materials
used during 20x4:
$ 6,000
25,000
Direct labor 20x4:
12,000
Balance
12/31/03:
Manufacturing
overhead 20x4:
$ 0
6,000
Balance 12/31/x4
$15,000
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Manufacturing Cost

Manufacturing

Cost Flow

Flow

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Work in Process Inventory Account Finished Goods Inventory Account Balance 212/31/x3:Completed Balance 12/31/x3: Sold during 20x4:
Work in Process
Inventory Account
Finished Goods
Inventory Account
Balance 212/31/x3:Completed
Balance 12/31/x3: Sold during 20x4:
$2,000
during 20x4:
$6,000
$24,000
$30,000
Direct materials
used during 20x4:
Completed
during 20x4:
25,000
30,000
Direct labor 20x4:
12,000
Manufacturing
overhead 20x4:
Balance
12/31/x4:
6,000
$12,000
Balance 12/31/x4
$15,000
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Manufacturing Cost

Manufacturing

Cost Flow

Flow

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Finished Goods Cost of Goods Sold Inventory Account Account Balance 12/31x3: Sold during 20x4: Sold during
Finished Goods
Cost of Goods Sold
Inventory Account
Account
Balance 12/31x3:
Sold during 20x4:
Sold during
$6,000
$24,000
20x4:
$24,000
Completed
during 20x4:
30,000
Balance
12/31/x4:
$12,000
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Discussion

Discussion

  • Q. Q.

What are the three manufacturing

inventory accounts?

  • A. A.

1. Materials Inventory.

  • 2. Work in Process Inventory.

  • 3. Finished Goods Inventory.

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Manufacturing

Manufacturing and

and Financial

Financial

Reporting

Reporting

OBJECTIVE 5

Prepare a statement of cost of goods

manufactured and an income

statement for a manufacturing

organization.

Cost of

Cost

of Goods

Goods Manufactured

Manufactured

Cost of goods manufactured is a key

component of the income statement for a

manufacturing company.

Costs of Goods Manufactured Account (for

a manufacturing co.) replaces Purchases

Account (for a merchandising co.)

Finished Goods Inventory replaces

Merchandise Inventory.

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Cost of

Cost

of Goods

Goods Manufactured

Manufactured

Determining the cost of goods

manufactured involves three steps.

  • 1. Computing the cost of materials used.

  • 2. Computing direct labor and manufacturing overhead.

  • 3. Computing cost of goods manufactured, adjusting for beginning and ending work in process.

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Cost of

Cost

of Goods

Goods Manufactured

Manufactured

The cost of goods manufactured is

used on the income statement to

compute the cost of goods sold.

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Statement of

Statement

of

Cost of

Cost

of Goods

Goods Manufactured:

Manufactured: Step

Step 11

Co

Angelo’s Rolling Suitcases, Inc. Statement of Cost of Goods Manufactured For the Year Ended December 31,
Angelo’s Rolling Suitcases, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 20x4
Direct Materials Used:
Direct Materials Inventory, 12/31/x3
Direct Materials Purchased
$10,000
20,000
Cost of Direct Materials Available for Use
Less Direct Materials Inventory, 12/31/x4
$30,000
5,000
Cost of Direct Materials Used
$25,000
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Statement of

Statement

of

Cost of

Cost

of Goods

Goods Manufactured:

Manufactured: Step

Step 22

Co

Angelo’s Rolling Suitcases, Inc. Statement of Cost of Goods Manufactured For the Year Ended December 31,
Angelo’s Rolling Suitcases, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 20xx
Cost of Direct Materials Used
Direct Labor
Manufacturing Overhead
$25,000
12,000
6,000
Total Manufacturing Costs
$43,000
Note: Total Manufacturing Costs Cost of Goods Manufactured
= Product Costs added during the
manufacturing period.
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Statement of

Statement

of

Cost of

Cost

of Goods

Goods Manufactured:

Manufactured: Step

Step 33

Co

Angelo’s Rolling Suitcases, Inc. Statement of Cost of Goods Manufactured For the Year Ended December 31,
Angelo’s Rolling Suitcases, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 20x4
Total Manufacturing Costs
Add Work in Process Inventory, 12/31/x3
Total Cost of Work in Process During the Year
Less Work in Process Inventory, 12/31/x4
$43,000
2,000
$45,000
15,000
Cost of Goods Manufactured
$30,000
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Income Statement

Income

Statement

Co

Angelo’s Rolling Suitcases, Inc. Income Statement For the Year Ended December 31, 20x4 Sales $50,000 Cost
Angelo’s Rolling Suitcases, Inc.
Income Statement
For the Year Ended December 31, 20x4
Sales
$50,000
Cost of Goods Sold:
Finished Goods Inventory, 12/31/x3
$ 6,000
Cost of Goods Manufactured
30,000
Total Cost of Finished Goods
Available for Sale
Less Finished Goods Inventory,
$36,000
12/31/x4
12,000
Cost of Goods Sold
Gross Margin
Selling & Administrative Expenses
Net Income
24,000
$26,000
16,000
$10,000
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  • Q. Q.

  • A. A.

Discussion

Discussion

What are the three steps needed to

determine the cost of goods?

1. Compute the cost of materials used.

  • 2. Compute total manufacturing costs for

period.

the

  • 3. Compute cost of goods manufactured,

adjusting for beginning and ending

work in process.

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Cost

Cost Allocation

Allocation

OBJECTIVE 6

Define cost allocation and explain the

process of manufacturing overhead

allocation using cost objects, cost

pools, and cost drivers.

Cost

Cost Allocation

Allocation

Cost allocation is the process of assigning

collected indirect costs to specific cost

objects using an allocation base that

represents a major function of the

business.

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Cost

Cost Allocation

Allocation

A cost object is a:

product

process

department

activity

that the organization wishes to cost.

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Cost

Cost Allocation

Allocation

A cost pool is a pool of overhead costs related

to a cost object.

A cost driver is an activity that causes the

cost pool to increase in amount as the cost

driver increases.

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Allocation of

Allocation

of

Manufacturing Overhead

Manufacturing

Overhead

The

The allocation

allocation of

of manufacturing

manufacturing

overhead requires

overhead

requires the

the following:

following:

The pooling of manufacturing overhead costs that are

affected by a common activity.

The selection of a cost driver whose activity level causes

a change in the cost pool.

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Manufacturing

Manufacturing

Overhead

Overhead Allocation

Allocation

The process of manufacturing

overhead allocation includes four

steps:

  • 1. Planning.

  • 2. Application.

  • 3. Recording actual costs.

  • 4. Reconciliation.

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The Manufacturing

The

Manufacturing

Overhead

Overhead Allocation

Allocation Process

Process

 

Step 1: Planning

Description:

Calculate a predetermined manufacturing

overhead rate.

When:

Before accounting period.

Procedure:

Divide the cost pool of total estimated

overhead costs by the total estimated

cost driver level.

Journal entry?

No

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The Manufacturing

The

Manufacturing

Overhead

Overhead Allocation

Allocation Process

Process

   

Step 2: Application

 

Description:

Apply manufacturing overhead costs

 

to production.

When:

During accounting period as units are

 

produced.

Procedure:

Multiply the predetermined overhead

 

rate for each cost pool by the actual

cost driver level.

Journal entry?

Yes

Increase Work in Process Inventory

 

account

Decrease Manufacturing Overhead

 

Control account

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The Manufacturing

The

Manufacturing

Overhead

Overhead Allocation

Allocation Process

Process

   

Step 3: Recording Actual Costs

 

Description:

Record actual manufacturing overhead

 

costs.

When:

During accounting period as costs

 

are incurred.

Procedure:

Record actual manufacturing overhead

 

costs when incurred.

Journal entry?

Yes

Increase Manufacturing Overhead

 

Control account

Decrease asset accounts

 

Increase contra-assets or liability

accounts

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The Manufacturing

The

Manufacturing

Overhead

Overhead Allocation

Allocation Process

Process

   

Step 4: Reconciliation

 

Description:

Calculate the difference between applied

and actual manufacturing overhead costs.

When:

At the end of the accounting period.

 

Procedure:

Calculate and record the difference

between the actual and applied

manufacturing overhead costs.

Journal entry?

Yes

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The Manufacturing

The

Manufacturing

Overhead

Overhead Allocation

Allocation Process

Process

   

Step 4: Reconciliation

 

Journal entry?

Yes

If applied > actual, then increase

 

Manufacturing Overhead Control

account

Decrease Cost of Goods Sold Account

 

If applied < actual, then increase Cost

of Goods Sold account

Decrease Manufacturing Overhead

Control account

Note: If difference is material, allocate to Cost of Goods Sold,

 

Finished Goods and Work-in-Process.

 

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The Manufacturing

The

Manufacturing

Overhead

Overhead Allocation

Allocation Process

Process

Year Year Year 2001 2000 2002 January 1 December 31 Step 1: Step 4: Planning Reconciliation
Year
Year
Year 2001
2000
2002
January 1
December 31
Step 1:
Step 4:
Planning
Reconciliation
Step 2:
Application
Step 3:
Recording Actual Costs
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Allocation of

Allocation

of Manufacturing

Manufacturing Overhead

Overhead

The successful allocation of manufacturing overhead costs depends on two factors:

A careful estimate of total manufacturing overhead costs.

A good forecast of the activity level used as the cost driver.

Errors in either estimate can cause product unit costs to be over or under estimated, resulting in bad pricing decisions.

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Discussion

Discussion

  • Q. Q.

What are the four steps in the

manufacturing overhead

allocation process?

  • A. A.

1. Planning.

  • 2. Application.

  • 3. Recording actual costs.

  • 4. Reconciliation.

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Manufacturing Overhead

Manufacturing

Overhead

Allocation Using

Allocation

Using the

the Traditional

Traditional

Approach

Approach

OBJECTIVE 7

Calculate product unit cost using

the traditional allocation of

manufacturing overhead costs.

Predetermined Overhead

Predetermined

Overhead Rate

Rate

The use of one predetermined overhead

rate to apply manufacturing overhead to

a product is appropriate if

organizations:

  • 1. Manufacture only one product, or

  • 2. Manufacture a few very similar products that require the same production processes and production-related activities.

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Normal Costing

Normal

Costing Method

Method

The normal costing method applies

manufacturing overhead costs to a

product’s cost by:

Estimating a predetermined

manufacturing overhead rate, and

Multiplying that rate by the actual level

of the cost driver consumed by that

Co

product.

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Traditional Activity

Traditional

Activity Bases

Bases

Traditional activity bases are volume-

related bases such as:

Direct

labor hours.

Direct

labor costs.

Machine hours.

Units of production.

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Product Unit

Product

Unit Cost

Cost

The total manufacturing overhead cost

is added to the actual costs of direct

materials and direct labor in order to

determine the total product cost.

The product unit cost is calculated by

dividing total product cost by total units

produced.

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Using the

Using

the Traditional

Traditional Approach

Approach toto Assign

Assign Manufacturing

Manufacturing

Overhead Costs

Overhead

Costs toto Production

Production

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Assignment of

Assignment

of Manufacturing

Manufacturing Overhead

Overhead

Costs:

Costs:

Co

Traditional Traditional Approach Approach Step 1: Calculate the predetermined overhead rate. $200,000 Predetermined = Overhead Rate
Traditional
Traditional Approach
Approach
Step 1: Calculate the
predetermined overhead rate.
$200,000
Predetermined
=
Overhead Rate
40,000 Direct
Labor Hours
$5 per Direct
=
Labor Hour
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Assignment of

Assignment

of Manufacturing

Manufacturing Overhead

Overhead

Costs:

Costs:

Co

Traditional Traditional Approach Approach Step 2: Apply manufacturing overhead costs to production. Regular Cost Driver Level
Traditional
Traditional Approach
Approach
Step 2: Apply manufacturing
overhead costs to production.
Regular
Cost Driver Level
Cost Applied
Overhead costs applied:
Manufacturing overhead:
$5 per DLH
X 25,000 DLH
$125,000
Number of units
 10,000
Manufacturing overhead
$
12.50
cost per unit
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Assignment of

Assignment

of Manufacturing

Manufacturing Overhead

Overhead

Costs:

Costs:

Co

Traditional Traditional Approach Approach Step 2: Apply manufacturing overhead costs to production. Deluxe Cost Driver Level
Traditional
Traditional Approach
Approach
Step 2: Apply manufacturing
overhead costs to production.
Deluxe
Cost Driver Level
Cost Applied
Overhead costs applied:
Manufacturing overhead:
X 15,000 DLH
$ 75,000
$5 per DLH
Number of units
5,000
Manufacturing overhead
$
15.00
cost per unit
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Product Unit

Product

Unit Cost:

Cost:

Co

Traditional Traditional Approach Approach Step 3: Product Unit Cost Regular Deluxe Rolling Suitcase Rolling Suitcase Product
Traditional
Traditional Approach
Approach
Step 3: Product Unit Cost
Regular
Deluxe
Rolling Suitcase
Rolling Suitcase
Product costs per unit:
Direct materials
$40.00
$42.00
Direct labor
37.50
45.00
Manufacturing overhead
12.50
15.00
Product unit cost
$90.00
$102.00
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Discussion

Discussion

  • Q. Q.

What are some traditional activity bases?

  • A. A.

1. Direct labor cost.

  • 2. Direct labor hours.

  • 3. Machine hours.

  • 4. Units of production.

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Manufacturing Overhead

Manufacturing

Overhead

Allocation Using

Allocation

Using ABC

ABC

OBJECTIVE 8

Calculate product unit cost using

activity-based costing to assign

manufacturing overhead costs.

ABC

ABC Approach

Approach

When ABC is used, manufacturing

costs are grouped into smaller activity

cost pools.

Because more cost pools are used,

each with their own cost driver for

allocation to products, a more

accurate product cost is obtained.

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ABC

ABC Approach

Approach

Costs from activity cost pools are assigned

to cost objects using cost drivers.

Cost drivers are identified and cost driver

levels are estimated for each cost pool.

Each cost pool rate is calculated by dividing

the estimated cost amount by the cost driver

level.

Manufacturing overhead is applied to the

product’s cost by multiplying the cost pool

rate by the actual cost driver amount.

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ABC Systems

ABC

Systems

ABC systems assign costs to cost objects

based on each cost object’s relative use of

overhead resources.

The total applied manufacturing overhead

cost is added to the cost of direct materials

and direct labor to determine the total

product cost.

The product unit cost is the total product

cost divided by the total units produced.

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Using ABC

Using

ABC toto Allocate

Allocate Manufacturing

Manufacturing Overhead

Overhead Cost

Cost toto Production

Production

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ABC Costing

ABC

Costing Systems

Systems

Problems with product costs produced by

traditional volume-based costing systems

include:

Traditional volume based system, low volume

products are under-costed and high volume

products are over-costed.

Organizations face greater risk of making poor

decisions when significant product cost

distortions exist.

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Discussion

Discussion

  • Q. Q.

What are two problems with traditional

volume-based costing systems?

A.

A.

  • 1. Low-volume products are undercosted and high-volume products are overcosted.

  • 2. Greater risk of making poor decisions.

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Step

Step 1:

1: Cost

Cost Driver

Driver Level

Level

   

Estimated Cost Driver Level

Cost Driver

 

Regular

Deluxe

Total

Number of setups

300

400

700

Number of inspections

150

350

500

Packaging hours

600

1,400

2,000

Machine hours

4,000

6,000

10,000

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Step

Step 1:

1: (cont’d)

(cont’d)

Activity Pool

Cost Driver Level

Activity Cost Rate

Setup $70,000

  • 700 setups

=

$100 per setup

Inspection $60,000

  • 500 inspections

=

$120 per inspection

Packaging $50,000

2,000 packaging hours =

$25 per packaging hour

Building $20,000

10,000 machine hours

=

$2 per machine hour

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Step

Step 2:

2: Apply

Apply Overhead

Overhead Costs

Costs toto Production

Production

Regular Suitcase

Activity Cost Rate

Cost Driver Level

Cost Applied

 

$100 per setup

X

  • 300 setups

=

$30,000

 

$120 per inspection

X

  • 150 inspections

=

$18,000

 

$25 per packaging hr X

  • 600 packaging hours =

$15,000

 

$2 per machine hr

X

4000 machine hours =

$8,000

 
 

Total

$71,000

 10,000 units

=

$7.10

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Step

Step 2:

2: Apply

Apply Overhead

Overhead Costs

Costs toto Production

Production

(cont’d…)

(cont’d…)

Deluxe Suitcase

Activity Cost Rate

Cost Driver Level

Cost Applied

$100 per setup

X

  • 400 setups

=

$40,000

$120 per inspection

X

  • 350 inspections

=

$42,000

$25 per packaging hr

X

1,400 packaging hrs =

$35,000

$2 per machine hr

X

6,000 machine hrs

=

$12,000

 

Total $129,000

 5,000 units

=

$25.80

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Step

Step 3:

3: Calculate

Calculate Product

Product Unit

Unit Cost

Cost

Product Costs

Regular

Deluxe

per Unit

Suitcase

Suitcase

 

Direct Materials

$40.00

$42.00

Direct Labor

37.50

45.00

Manufacturing

7.10

25.80

Overhead

   

Product Unit

$84.60

$112.80

Cost

   
 

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Cost

Cost Allocation

Allocation inin

Service Organizations

Service

Organizations

OBJECTIVE 9

Apply costing concepts to a

service organization.

Service Organizations

Service

Organizations

A service organization does not have a

physical product that can be:

Assembled.

Stored.

Valued.

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Service Organizations

Service

Organizations

The most important cost in a service

organization is the professional labor cost

(like product cost in manufacturing.)

Service related overhead is the other

principal component of the cost of services

rendered (like manufacturing overhead.)

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Discussion

Discussion

  • Q. Q.

What is the most important cost

in a service organization?

  • A. A.

Professional labor cost.

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OK, LET’S

OK,

LETS REVIEW

REVIEW

.. ..

..

  • 1. State how managers use information about costs in the management cycle.

  • 2. Identify various approaches managers use to classify costs.

  • 3. Define and give examples of the three elements of product cost and compute a product’s unit cost for a manufacturing organization.

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WE ALSO

WE

ALSO COVERED

COVERED

.. ..

..

  • 4. Describe the flow of product-related activities, documents, and costs through the Materials Inventory, Work in Process Inventory, and Finished Goods Inventory accounts.

  • 5. Prepare a statement of cost of goods manufactured and an income statement for a manufacturing organization.

  • 6. Define cost allocation and explain the process of manufacturing overhead allocation using cost objects, cost pools, and cost drivers.

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AND FINALLY

AND

FINALLY

.. ..

..

  • 7. Calculate product unit cost using the traditional allocation of manufacturing overhead costs.

  • 8. Calculate product unit cost using activity-based costing to assign manufacturing overhead costs.

  • 9. Apply costing concepts to a service organization.

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