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Chapter 5Chapter 5
Fundamentals of Product & Service Fundamentals of Product & Service CostingCosting
5-2
Learning ObjectivesLearning Objectives
2. Explain how cost allocation is used in a cost management system.
3. Explain how a basic product costing system works.
4. Understand how overhead cost is allocated to products.
5. Explain the operation of a two-stage allocation system for product costing.
6. Describe the three basic types of product costing systems: job order, process and operations.
1. Explain the fundamental themes underlying the design of cost systems.
5-3Cost Cost SystemSystem
Oriented to the needs of the decision makers
Keys to a good cost system
Designed so that benefits exceed costs
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Cost System ObjectiveL.O. 1 Explain the fundamental themes underlying the design of cost systems.
The cost system accumulates and reports costs about processes, products, and services.
Provide information about costs relevant for decision making.
5-5Why Calculate the Cost of a Why Calculate the Cost of a Product?Product?
What is the cost of inventory?
What is the cost of goods sold?
What should we sell?At what sales price?
For Decision Making
5-6
Designing a Cost SystemDesigning a Cost System
Cost-benefit
Focus
Different information for different purposes
Test
Financia
l the past
Managerial
the future
Decision making
5-7
Cost AllocationCost AllocationL.O. 2 Explain how cost allocation is used in a cost management system.
$ Direct materials
$ Direct labor
$ Overhead
Product A Product B
Traced Directly
Allocated using Direct labor $
DM DL OH
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The Inventory The Inventory AccountsAccounts
Balance SheetBalance Sheet
Raw Materials
Raw Materials Available for Production
=
Beg. Inventory+Purchases
Raw Materials Transferred to WIP
-
Work-In-ProcessBeg. Inventory
Direct Materials Transferred from Raw Materials
+
Manufacturing Overhead
+
Cost of Goods Completed and Transferred to Finished Goods
-
Ending Inventory=
Finished GoodsBeg. InventoryCost of Goods Completed and Transferred from WIP
+
Goods Available for Sale
=
Cost of Goods Sold
-
Ending Inventory
=
To the income statement
Ending Inventory
=
Total Manufacturing Costs
=
Direct Labor
+
Raw Materials Transferred to WIP
-
Cost of Goods Completed and Transferred to Finished Goods
-
5-9A Product Costing System at A Product Costing System at WorkWork
Beginning Balance
Transfers In
Transfers Out
Ending Balance
L.O. 3 Explain how a basic product costing system works.
How costs and units move through inventories.
BB
TI
TO EB
BB TI TO EB
True for
Raw Materials
Work-In-ProcessFinished Goods
RM
WIPFG
BB TI TO EB
5-10Product Costing System Product Costing System ContinuedContinuedHow costs and units move through inventories.
RM
BB Purchases
DM to WIP
EB
FG
BB Transfers from WIP
Cost of goods sold
EB
WIP BB
DMTransfers to FG
EB
IM to OH
DL
OH
To income statement
5-11Product Costing System Product Costing System ContinuedContinued
Baxter PaintApril WIP
Inventory
0 100,000 gallons
100,000 gallons
0
Units – gallons of paint
FG
BB TI TO EB
5-12
Costs
DM
DL
OH
$400,000
$100,000
$500,000
$1,000,000
$1,000,000
$0$0
A Product Costing System at A Product Costing System at WorkWork
Baxter PaintApril WIP
Inventory
FGCost per gallon
$1,000,000100,000
$10 per gallon
BB TI TO EB
5-13
What are the costs?
Work-In-Process Work-In-Process CostsCosts
Where are the costs at the end of the period?
DM
DL
OH
$400,000$100,000$500,000$1,000,000
$0$1,000,000
$0
FG
Let’s rewrite the basic cost flow model
BB TI TO EB
5-14Costing with Ending WIP Costing with Ending WIP InventoryInventory
Baxter PaintMay WIP
Units
0 110,000 gallons
90,000 gallons
20,000 gallonsThese gallons are half finished.
FG
BB TI TO EB
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Equivalent UnitsEquivalent UnitsEnding WIP Inventory
20,000 gallons
½ finished
Equivalent to
10,000 gallons finished
20,000
.5
How do we cost Baxter’s 20,000 gallons of paint that are only half finished?
Total equivalent units
90,000
10,000
100,000
To FG
Ending WIP
5-16
DM
DL
OH
$390,000
$100,000
$500,000
$990,000
? ?$0
Costs
Costing a Product Costing a Product ContinuedContinued
Baxter PaintMay WIP
FG
What is the cost of the 90,000 gallons transferred to FG and the 20,000 gallons still in WIP?
Where is the $990,000?
BB TI TO EB
5-17Costing a Product Costing a Product ContinuedContinuedCost Flow Diagram Product Costing at Baxter
PaintsDM DL OH
$390,000
$100,000
$500,000
FG WIP
$891,000
$99,000
90,000 gallons(90%
)
10,000 gallons(10%
)
Equivalent Gallons
Total $990,000
100,000
5-18
Costing Multiple ProductsCosting Multiple Products
Skis Snowboards
TotalUnits
Costs 75,000 15,000 90,000Direct Material
100,000
22,500 122,500
Direct Labor
Sammy’s Skis and Boards
500 150 650Units produced
4,000
900 4,900Direct labor hours 2,00
0450 2,450Machine hours
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Costing Multiple ProductsCosting Multiple Products
Cost Pools
Cost Objects
Direct Materials
Direct Labor
Skis
Snowboards
Direct Direct
$75,000
$15,000
$100,000
$22,500
$90,000 $122,500
5-20Predetermined Overhead Predetermined Overhead RatesRates
POHR is the cost per unit of the allocation base used to charge overhead to products.
OH is indirect. Where do indirect costs belong?
With the skis?
Or with the boards?
Indirect costs are allocated using a predetermined overhead rate. POHR
L.O. 4 Understand how overhead cost is allocated to products.
POHR $
Base
5-21
Predetermined Overhead Rates Predetermined Overhead Rates ContinuedContinued
What activity drives the overhead costs?
POHREstimated overhead $
Estimated allocation base
What are the estimated costs?
We need to cost products during the period.
We don’t know the exact amount of indirect costs until the end of the period.
Why use estimates?
5-22
Sammy’s Skis and BoardsSammy’s Skis and Boards
Estimated Overhead Costs
$98,000
POHR$98,000
4,900$20 / DLH
4,000 900 4,900Direct Labor hours
Skis
Snowboards
Total
5-23Allocating OH to the Allocating OH to the ProductsProducts
Cost Pool
Cost Allocation Rule
Cost Objects
OH
Skis
Snowboards
Direct Labor Hours $20 / DLH
$98,000
$80,000
$18,0004,000DL
H
$20 900DLH $20
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Sammy’s Skis and BoardsSammy’s Skis and Boards
Units produced 500 150 650
Direct Labor hours
4,000 900 4,900
Direct Material
$75,000
$15,000
$90,000
Direct Labor 100,000
22,500 122,500OH @ $20/DLH 80,00
018,000 98,00
0
Costs
Skis
Snowboards
TotalUnits
Total $255,000
$55,500
$310,500
Cost per unit $510 $370
5-25Two-Stage Allocation Two-Stage Allocation SystemsSystems
Cost Pool Overhead
Intermediate Cost Pools
Cost Allocation Rule
Labor-related Machine-related
Direct Labor Hours
Machine Hours
$98,000
$73,500
$24,500
L.O. 5 Explain the operation of a two-stage allocation system for product costing.
5-26
$18,000
$80,000
Two-Stage Allocation Systems Two-Stage Allocation Systems ContinuedContinued
Intermediate Cost Pools
Cost Allocation
Labor-related Machine-related
Direct Labor Hours
Machine Hours
$73,500
$24,500
Cost Objects Skis Snowboards
$15/DLH $10/MH
$60,000
$13,500
DL
$20,000
$4,500MH
2,4504,900
Allocated Overhead
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Sammy’s Skis and BoardsSammy’s Skis and Boards
Direct Material
$75,000
$15,000
$90,000
Direct Labor 100,000
22,500 122,500OH @ $15/DLH 60,00
013,500 73,50
0
Costs
Skis
Snowboards
Total
Total $255,000
$55,500
$310,500
Cost per unit $510 $370
OH @ $10/MH 20,000
4,500 24,500
5-28
Product Costing SystemsProduct Costing Systems
Job Costing
Process Costing
An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.
An accounting system used when identical units are produced through a series of uniform production steps.
L.O. 6 Describe the three basic types of product costing systems: job order, process, and operations.
Custom Homes
Movies
Services
Cornflakes
Facial Tissues
Paint
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Product Costing SystemsProduct Costing Systems
Job Costing Process Costing
An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.
An accounting system used when identical units are produced through a series of uniform production steps.
Operation Costing
A hybrid costing system often used in manufacturing of goods that have some common characteristics plus some individual characteristics.
Automobiles
Computers
Clothing
5-30
Chapter 5
