Professional Documents
Culture Documents
McGraw-Hill/Irwin
Process production.
Outputs are not identifiable as separate units (e.g., petroleum, chemicals, steel).
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Goal:
Arrive at full production cost for one unit of product. Requires averaging some total costs.
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Cost of Sales
Process Costing
Collects costs by process (i.e. department). Use of equivalent units of production.
6 physical units halfway completed would be 3 equivalent units of production. Unit cost = total production costs equivalent units of production.
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Process Costing
Direct materials may be accounted for separately from conversion costs (i.e., direct labor plus overhead).
When? Direct materials is added at a point in time rather than continuously. Total unit cost is materials equivalent unit cost plus conversion equivalent unit cost.
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Choice of a System
Nature of production process usually determines system choice. Variations used in practice.
Hybrid systems. Backflush accounting (i.e., no work in process inventory account, charge production costs directly to finished goods inventory).
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Choice of a System
Job cost system.
Use when requires costs traced to specific units (e.g., repair shop). Easier to identify existence of and source of cost problems.
Summary: Direct costs can be variable or fixed. Indirect costs can be variable or fixed.
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Responsibility center.
Organization unit headed by a manager. Could be one or more cost centers.
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2.
3.
1. Initial Assignment
Directly assign any cost item uniquely associated with cost center (e.g., cost center supervisors). Overhead costs that benefit several centers are jointly allocated to those centers (e.g., heating cost).
Utilize different allocation bases for different costs (e.g., square footage, headcount).
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2. Reassignment
Step down method.
Allocate service costs in a prescribed order.
E.g., first allocating costs of service centers that provides the most services to others. E.g., first allocating costs of service centers that receives the fewest services from others.
Direct method.
Service centers costs are only allocated to production centers (ignoring services provided to other service centers).
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3. Allocation to Products
In a process cost system: In a job cost system:
Total overhead Equivalent units of production = Overhead cost per unit.
More complex; may use multiple overhead rates. Overhead is assigned to product using some activity measure (e.g., direct labor hours, machine hours). Overhead rate: Total overhead costs Total units of activity measure. For each job: Overhead costs allocated (applied) = Overhead rate x Units of activity measure used by job.
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Estimate average level of activity expected in each production cost center for coming year (i.e., standard volume). Calculate an overhead rate for each production center (i.e., Budgeted overhead cost at standard volume Standard volume). Some companies use a plantwide overhead rate instead of by individual production cost center.
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If absorbed costs are greater (less) than actual costs, overhead is overabsorbed (underabsorbed). Balance is transferred to Overhead Variance account.
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Activity-Based Costing
Minimizes cross-subsidization among products. Recognizes that complexity is the single largest driver of cost. Utilizes more service center cost pools (called activities or activity centers). Utilizes more cost drivers (i.e., unit-level, batch-level and product-level).
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Activity-Based Costing
Examples of cost drivers used:
Unit level drivers.
E.g., number of units, direct labor hours, direct labor dollars, machine hours. Costs per unit stay the same regardless of number of units.
Activity-Based Costing
Each activity is allocated based on the cost driver determined to be most appropriate for that pool of costs. Activitys costs may be assigned directly to product (rather than through a production cost center). Pitfall? Increased recordkeeping. Time-based activity-based costing.
Activity-Based Management
Supported by activity-based costing. Purpose is to focus company on finding more profitable businesses or finding ways to perform tasks better, faster, and cheaper. May involve:
Total quality management. Quality function deployment. Process improvement. Reengineering. Elimination of non-value-added activities.
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