Costing Systems

EMBA 5403
Fall 2010
Available costing systems
 Absorption costing
 Actual Costing
 Normal Costing
 Standard Costing
 Variable costing
 Actual Costing
 Normal Costing
 Standard Costing

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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

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

Cost of Goods
Sold

Finished Goods
Inventory
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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
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Product Costing Procedures
in Organizations

Process Job-order
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill
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Job-Order Costing Manufacturing
overhead (MOVH)
Applied (added) to
each
Direct job using a
materials predetermined
rate

The
Job

Direct
labor
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 Job-Order Costing

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

Indirect
wages
Labor

Other Manufacturing Job-Order

Applied
Actual OH Overhead Cost
Overhead
Charges Control Sheets
Account

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

Labor Labor
Overhead

Applied
Mfg. Overhead
Actual Applied If actual and applied
Indirect Overhead manufacturing overhead
Materials Applied to are not equal, a year-end
Indirect Work in Mugan adjustment is required.
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Labor Process
Job-Order System Cost Flows
Work-in-Process
(Job Cost Sheet) Finished Goods
Direct

Materials Cost of
 Cost of
 Cost of

Goods Goods Goods
Direct
Mfd. Mfd. Sold
Labor
Overhead
Applied
Cost of Goods Sold
Cost of

Goods
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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

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Over- and Underabsorbed
Overhead

Overabsorbed overhead
Applied Actual
Overhead > Overhead
Costs Costs

Underabsorbed overhead
Applied Actual
Overhead < Overhead
Costs Costs

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 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
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = TL 6.00 per DLH × 100,000 DLH = TL 600,000
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Accounting for Over- and
Underabsorbed Overhead
Three basic approaches
 Prorate among work-in-process,
finished goods, and cost of goods
sold.
 Adjust cost of goods sold.
 Recalculate the application rate and
apply to all the jobs during the
period.

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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

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Allocation Base

If overhead
costs are Single Overhead
accumulated in Cost Pool
a single cost
pool and Application
Rate
allocated using
a single
allocation base.
Products

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Multiple Allocation Bases
Many companies use Activity Based Costing where multiple cost
pools and a different allocation base for each cost pool.

Overhead Overhead Overhead

Cost Pool Cost Pool Cost Pool
A B C

Application Application Application

Rate A Rate B Rate C

Fall 2010 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.

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 Multistage Allocation Processes
Overhead Overhead Overhead Overhead
Cost Pool 1 Cost Pool 2 Cost Pool 3 Cost Pool 4
Separate
Application Rates

Department A Department B Department C

Dept. Application Dept. Application

Rates Rates

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ProductsMugan 22/37
Process Costing
Identical units of product are
produced
in a continuous flow through a series
of manufacturing steps or processes.

Costs are assigned to completed units

transferred out of the process and to
incomplete units remaining in the
process.
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Process Costing
Costs are accumulated for a period of
time for products in work-in-process
inventory.
Equivalent units is a concept
expressing these partially completed
products as a smaller number of
fully completed products.

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Equivalent Units
Two one-half completed products are
equivalent to one completed product.

+ =
So, 8,000 units 70 percent complete
are equivalent to 5,600 complete units.
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Equivalent Units Question
For the current period, Ames started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Ames have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
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Equivalent Units Question
For the current period, Ames started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Ames have for the period?
a. 10,000
10,000 units + (5,000 units × .30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
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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

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 Equivalent Units Question
Now assume that Ames incurred $27,600 in
production costs for the 11,500 equivalent
units. What was Ames’ average cost per
equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
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 Equivalent Units Question
Now assume that Ames incurred $27,600 in
production costs for the 11,500 equivalent
units. What was Ames’ average cost per
equivalent unit for the period?
a. $1.84
$27,600 ÷ 11,500 equivalent units
b. $2.40
= $2.40 per equivalent unit
c. $2.76
d. $2.90
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 Equivalent Units Question
What portion of the $27,600 in production
costs was assigned to work-in-process
inventory and what amount was assigned
to completed units for the period?
a. $0 and $27,600
b. $7,600 and $20,000
c. $3,600 and $24,000
d. $12,000 and $15,600
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Equivalent Units Question
Work-in-process:
What portion of the $27,600 in production
1,500 equivalent units @ $2.40 = $3,600
costs was assigned to work-in-process
inventory and what amount
Completed units: was assigned
to completed units forunits
10,000 equivalent the @period?
$2.40 = $24,000

a. $0 and $27,600
b. $7,600 and $20,000
c. $3,600 and $24,000
d. $12,000 and $15,600
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Equivalent Units

When there are partially completed units

in beginning inventory, work efforts
during the period can be categorized as
follows:
 Work to complete beginning work-in-process
 Work on units started and completed during
the period
 Work on units in ending work-in-process

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 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
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 Equivalent Units - Example

% of work
done this Equivalent
units period units
Work to complete
250 70% 175
beginning work-in-process
Work on units started and
900 100% 900
completed
Work on ending work-in-
Since 30% of the work
300 was done
40% on 120
processthese units in May, the remaining 70% of
Total equivalent units 1,195
the work is done in June.

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 Equivalent Units - Example

% of work
done this Equivalent
units period units
Work to complete
250 70% 175
beginning work-in-process
Work on units started and
900 100% 900
completed
Work on ending work-in-
300 40% 120
process
Since 1,200 units were started during June, and 300 of
Total equivalent
those units
units are 1,195
still in work-in-process on June 30,
900 units were started and completed during June.
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 Equivalent Units - Example

% of work
done this Equivalent
units period units
Work to complete
250 70% 175
beginning work-in-process
Work on units started and
900 100% 900
completed
Work on ending work-in-
300 40% 120
process
Total equivalent units 1,195

40% of the work was done

Fall 2010 Mugan
on these units in June.
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