Chapter 6: Fundamentals of Product and Service Costing

Fundamentals of Productand Service CostingChapter 6Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinCost Management SystemsL.O. 1 Explain the fundamental themes underlying the design of cost systems. The objective of the cost management system is to provide information about costs relevant for decision making. The cost system accumulates and reports costs about processes, products, and services.6 - *Reasons to Calculate Productor Service Costs For decision making For deciding what to sell For setting prices For knowing the cost of goods sold For knowing the cost of inventoryLO16 - *Cost Allocation and Product CostingL.O. 2 Explain how cost allocation is used in a cost management system.Basic Cost Flow DiagramDirectmaterialsDirectlaborManufacturingoverheadAlphaBetaCostpoolsCostobjectsCostallocationruleIndirect (allocated by direct labor cost)Direct6 - *Basic Cost Flow ModelL.O. 3 Explain how a basic product costing system works. How costs and units move through inventories: This is true for the following accounts: – Raw Materials (RM) – Work-in-Process (WIP) – Finished Goods (FG)6 - *Costing with No Work-in-Process Inventories Baxter Paint begins production on April 1. It starts and completes production of 100,000 gallons of paint in April and has no ending work-in-process inventory.Materials $ 400,000Labor 100,000Manufacturing overhead 500,000 Total $1,000,000Cost of resources used in April:LO36 - *Costing with No Work-in-Process Inventories What are the costs at the end of the period? $1,000,000 was added to work-in-process and then transferred out to finished goods. Since Baxter produced 100,000 gallons of paint, then the cost per gallon of paint is $10.LO36 - *Costing with Work-in-Process InventoriesBeginning inventory -0-Started in May 110,000 Total 110,000Ending WIP (50% complete) 20,000Transferred out 90,000Production for Baxter Paint for May follows (gallons):LO36 - *Costing with Work-in-Process InventoriesFGLO36 - *Costing with Work-in-Process Inventories How do we cost Baxter’s 20,000 gallons of paint that are only half finished? 20,000 gallons half finished is equivalent to 10,000 gallons finished. 90,000 gallons transferred out plus 10,000 equivalent gallons of finished paint equals 100,000 equivalent gallons of paint.Gallons of paint transferred out 90,000Equivalent gallons of finished paint 10,000Total equivalent gallons of paint 100,000LO36 - *Costing with Work-in-Process InventoriesDirect material + Direct labor + Overhead($990,000)Finished goodsinventory$891,000Work-in-processinventory$99,000Equivalent gallons90,000gallons(90%)10,000gallons(10%)LO36 - *Predetermined Overhead RatesL.O. 4 Understand how overhead cost is allocated to products. Indirect costs are allocated using a predetermined overhead rate (POHR). POHR is the cost per unit of the allocation base used to charge overhead to products.POHR = $ ÷ Base6 - *Multiple Allocation Basesand Two-Stage SystemsL.O. 5 Explain the operation of a two-stage allocation system for product costing. We can use two or more allocation bases to allocate manufacturing overhead to products.6 - *Multiple Allocation Basesand Two-Stage SystemsManufacturing overheadMachine-relatedcostsDirect labor-relatedcostsC-27sC-20sCostpoolCostobjectsCostallocationrulesIndirect costsIndirect costs(allocated in proportionto machine hours)(allocated in proportionto direct labor costs)SecondstageFirst stageLO56 - *Multiple Allocation Basesand Two-Stage SystemsCostpoolCost allocationruleIntermediatecost poolsOverhead$180,000Labor-related$108,000Machine-related$72,000Direct laborcostsMachinehoursLO56 - *Product Costing SystemsL.O. 6 Describe the three basic types of product costing systems: job order, process, and operations. Job costing: – An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods. (custom homes, movies, services) Process costing: – An accounting system used when identical units are produced through a series of uniform production steps. (cornflakes, facial tissues, paint)6 - *End of Chapter 6Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin