Cost Management ACCT 431
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This 17 page Class Notes was uploaded by Troy Bins on Saturday September 12, 2015. The Class Notes belongs to ACCT 431 at West Virginia University taught by Staff in Fall. Since its upload, it has received 89 views. For similar materials see /class/202826/acct-431-west-virginia-university in Accounting at West Virginia University.
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Date Created: 09/12/15
ACCT431 Chapter 8 DeGeorge Spring 2006 Process Costing Page 1 of2 Some things we already know Material Used Beg RM Mtrl Purchased 7 Ending RM Indirect Material Material Used 7 Direct Material COGM Beg WIP Production Costs 7 Ending WIP Production Costs Direct Material Conversion Costs Conversion Costs Direct Labor Overhead Overhead includes indirect material and indirect labor COGS Beg FG COGM 7 Ending FG Direct Costs are those costs which can and are directly assigned to cost targets Indirect costs are all other production costs and must be allocated to cost targets Process Costing 7 Think Fluid and Think Buckets A 10 With no beginning or ending inventory B 20 A Material used in production and C AB B Conversion Cost C Cost of Goods Manufactured then C must 30 Eventually the cost of the output must equal the cost of inputs Process Costing captures input costs material and conversion costs and allocates such costs to units completed and equivalent units still in production WIP Inventory presents special problems for process costing Equivalent units total expected units X estimated percentage completion 5000 X 50 2500 equivalent units Because material is normally input at the beginning of a process we will often need to compute equivalent units as to material separate from equivalent units as to conversion costs ACCT431 Chapter 8 DeGeorge Spring 2006 Process Costing Page 2 of2 Making 2 quarts of Demiglace Process 1 make 7 quarts of beef stock Beef bones 14 quarts of water Ingredients 1200 Bring to boil reduce to simmer Labor 2000 Simmer until reduced by half 68 hours Overhead 1000 Total Cost 4200 7 Per quart 600 Process 2 make 2 quarts of espagnole sauce 4 quarts of beef stock mirepoiX mm and herbs Ingredients prepare mirepoiX of browned vegetables Stock 2400 carrots onions celery butter Other 800 make brown rouX Labor 1500 our 12 cup beef stock Overhead 500 Add remaining beef stock mirepoiX and herbs Total Cost 5200 2 Simmer until reduced by half 34 hours Per quart 2600 Process 3 making 2 quarts of Demi glace Ingredients 2 quarts of espagnole sauce espagnole 5200 3 quarts of beef stock stock 1800 12 quart dry red wine red wine 2500 12 quart creme sherry sherry 2500 Combine all ingredients Labor 2000 bring to boil reduce to simmer Overhead 1000 simmer until reduced by Total Costs 15000 2 two thirds 68 hours Per quart 7500 Process 1 Process 2 Process 3 Total Beginning Balance 000 000 Costs transferred in 000 Costs added 4200 15000 Total Costs 4200 15000 Remaining g 000 g 000 Output Costs 4200 15000 Total Ingredients 7000 Note mixing all 70 of ingredients Total Labor 5500 together in 1 step and reducing it until Total Overhead 2500 we are left with 2 quarts of liquid would Total Cost mm save roughly 13 of the total cost But we would not have Demi glace ACCT43l Chapter 16 DeGeorge Spring 2006 Standard Costing Page 1 of 4 Some things we know The objective of every business is to make money for the owners of the business now and in the future Companies make money by creating value Companies make more money by creating greater value and controlling costs Product costs are different than period costs Product costs include direct and indirect costs TC DC IC Direct Costs D Material D Labor Indirect Costs Overhead Therefore TC DM DL Overhead Direct costs can be and are directly assigned to cost targets Indirect costs must be allocated to cost targets IC TC 7 DC Allocation is a necessary evil and should be minimized Burden Rate Total Overhead Total Driver Predetermined versus Actual Applied Overhead Actual Driver X Burden Rate Plantwide versus Departmental versus ABC More detail more accuracy to a point then GIGO COGS Beginning Inventory Costs Incurred 7 Ending Inventory COGS Costs Incurred or the Change in inventory Absorption Costing 7 What did it cost us to produce a product Job Costing captures costs for specific and unique jobs Overhead is allocated using a volume based cost driver ABC 7 traces costs to specific jobs and or cost targets Overhead is allocated based on activity incurred Very detailed overhead allocation ABC techniques can extend beyond production costs NOT FOR GAAP Process Costing allocates costs to homogenous units of production cost per unit Operation Batch costing allocates costs to identifiable units produced Absorption costing is at best a detective control used at the end of a period Standard Costing is a detective control used during the production process thus allowing management to prevent problems from reoccurring ACCT43l Chapter 16 DeGeorge Spring 2006 Standard Costing Page 2 of 4 Standard Costing Standard an expected or desired outcome Actual the actual outcome Variance the difference between actual and standard Favorable Actual Cost lt Standard Actual Revenue gt Standard Unfavorable Actual Cost gt Standard Actual Revenue lt Standard All costs have two components volume and rate Costs Volume Component X Rate Component Raw Material Cost Quantity purchased X Cost per unit Raw Material Used Quantity used X Cost per unit Direct Labor Cost DL Hours X Hourly Rate Overhead Cost Cost Driver X Burden Rate Accordingly all costs will have two variances Volume Variance Standard Volume 7 Actual Volume X Standard Rate Rate Variance Standard Rate 7 Actual Rate X Actual Volume Note to insure that you have calculated the variances properly the sum of the two variances must be equal to the difference between the expected standard cost and the actual cost Flaming establishes standard eXpected desired outcomes Standard costing measures variances AS THEY OCCUR thus allowing management to adapt to deviations from the plan and or to take corrective action Standard costing applies accountability to the manufacturing process Materialsproducts are transferred within WIP at the standard cost Thus a departmentprocess is only held accountable for the process over which they have control ACCT431 Chapter 16 DeGeorge Spring 2006 Standard Costing Page 3 of 4 Illustration beginning on page 652 please note that I added the overhead component here We plan to manufacture 3000 tents Expected costs Material 288000 36000 meters 800 per meter D Labor 108000 6000 hours 1800 per hour Overhead 216 000 6000 hours 3600 per hour Total Expected Cost 612 000 1 We purchase 40000 meters of material for 326000 815 per meter Expected Cost 288000 7 Actual Costs 326000 38000 unexpected costs Raw Material 288000 Expected purchase Raw Material Q Variance 32000 4000 x 800 Material Price Variance 6000 40000 x 015 Accounts Payable 326000 Actual Purchase To record purchase of raw material Note the Raw material Q Variance would be a component of raw material inventory as we really did purchase more than we needed and we really do have that inventory to work with 2 We use 36400 meters of raw material to produce the 3000 tents Expected costs 288000 standard costs used 291200 3200 unexpected costs Work in Process 288000 Expected Costs DM volume variance 3200 400 X 800 Raw Material 291200 Standard RM Used To record issuance of Raw Material Note that the rate variance was computed and recorded above 3 We incurred 112100 of direct labor 5900 hours 1900 per hour during the process ofproducing 3000 tents Expected costs 108000 7 actual costs incurred 112100 4100 unexpected Work in Process 108000 Expected cost DL Rate Variance 5900 5900 X 100 DL Efficiency Variance 1800 100 X 1800 CashAccrued Payroll 112100 Actual cost incurred To record direct labor incurred in production or Manufacturing Overhead if payroll is debited there Work in Process 216000 Standard Overhead DL Efficiency Variance 3600 100 3600 Manufacturing overhead 212400 5900 3600 To apply manufacturing overhead at predetermined rate Note that we can not determine the actual overhead variance until the end of the period ACCT43 1 Chapter 16 DeGeorge Spring 2006 Standard Costing Page 4 of 4 At the end of the accounting period Actual Expected Difference Raw Material Purchased 326000 288000 38000 Direct Labor 112100 108000 4100 Overhead 211 900 216 000 14 100 Total Costs Incurred 650000 612000 38000 Less RM Inv Standard 1 28 800 0 1 28 800 Production costs 621 200 612 000 9 200 4 We need to close out the manufacturing overhead account Actual conversion costs incurred 324000 Direct Material applied 1 112 100 Actual overhead 21 1900 Overhead applied 1212 400 Preliminary balance 1 500 Manufacturing overhead 500 Overhead efficiency variance 500 To close manufacturing overhead 5 Transferred 3000 tents to FG during the period Finished Goods Inventory 612000 Work In Process 612000 To transfer WIP to FG 3000 standard 20400 per unit 6 We sold 2500 units during the period Cost of Goods Sold 510000 Finished Goods Inventory 510000 To record COGS 2500 standard 204 00 per unit Variance Report Purchase Quantity Variance 32000 Less DM Volume Variance 3 200 Inventory Variance 28800 Ending RM gt Expected Purchase Price Variance 6000 DM Volume Variance 3200 DL Rate Variance 5900 Note that our conversion DL Efficiency Variance 5400 costs were exactly what we OH Efficiency Variance 500 had planned Total production variances 1 9200 Total Variance 1 38 000 Actual Costs gt Expected Normally production variances are charged to expense in the accounting period incurred Accordingly COGS for this period would be equal to 519200 ACCT43l Chapter 3 Page 1 of 3 Spring 2006 DeGeorge Cost Accumulation for JobShop and Batch Production Operations Different types of operations lend themselves to different Cost Systems JobOrder Costing 7 each jobproduct order is unique and costs are captured at the job level Think big items or service Process Costing 7 the process creates large quantities of products that are relatively homogeneous and indistinguishable from one another Think uid Operations Costing 7 hybrid of JobOrder and Process Costing think batches Regardless of the operating process and therefore the speci c costing system absorption costing seeks to assign ALL production costs incurred during a particular period to the jobs or products produced during that time period For Absorption Costing all manufacturing costs are either direct or indirect Direct Costs are production costs that can be and are speci cally identi ed to a particular job or product Indirect Costs or manufacturing overhead are all production costs that are not direct costs Indirect costs must be allocated to products By its very nature the allocation of indirect costs to speci c jobsproducts causes errors If a cost could be directly assigned to a product it would not be an indirect cost Allocation is a necessary evil MINIMIZE IT ACCT431 Chapter 3 Page 2 of 3 Spring 2006 DeGeorge Allocating Indirect Costs Cost Driver Must be common to all allocation targets Qobsproducts Should cause the indirect cost Common cost drivers Direct Labor Dollars Machine Hours Direct Labor Hours Direct Material Burden Rate Total Costs to be allocated Total actual cost driver To apply overhead to a job Actual job speci c cost driver X Burden Rate Overhead to be applied See basic allocation spreadsheet Plant wide versus departmental burden rates If overhead varies from department to department rates or drivers and overhead is signi cant departmental burden rates may result in a more accurate allocation of overhead See Plantwide versus departmental spreadsheet Predetermined Burden Rates The actual burden rate for a period will not be known until after an accounting period is over CEO s and good cost managers don t like to wait until after the period is over to know how we are doing Accordingly cost systems estimate overhead during an accounting period by applying overhead to jobs using a predetermined rate Predetermined Overhead Rate Total Estimated Overhead Costs Total Estimated Cost Drivers Applied Overhead Actual job speci c cost driver X Predetermined Overhead Rate At the end of a period there will be a difference between the actual total overhead and the applied overhead This difference must be assigned to the jobsproduct produced during the period Unfortunately at the end of the period some of this product is in WIP some is in FG and some is in COGS The author and many companies allocates this unapplied allocation in proportion to the preliminary balances of WIP FG and COGS DeGeorge is not real wild about this See predetermined overhead spreadsheet ACCT431 Chapter 3 Page 3 of 3 Spring 2006 DeGeorge Did I mention that allocation is a necessary evil Minimize it Recording Inventory Activity The author does a very nice job depicting the ow of production costs through the four inventory accounts to arrive at COGS Debits Credits Raw Material Inventory Beginning Balance Direct Material to WIP RM Purchases Indirect Material to Mnfg Overhead Manufacturing Overhead Temporary Account 7 no beginning or ending Indirect Costs Including Indirect Mtrl And Indirect Labor Applied Overhead t0 WIP Inventory Overapplied AJE Underapplied AJE WIP Inventory Beginning Balance Direct Material from RM Direct Labor Applied Overhead from Mnfg Overhead COGM t0 FG Inventory Underapplied AJE OverApplied AJE Finished Goods Inventory Beginning Balance COGM from WIP COGS to COGS UnderApplied AJE OverApplied AJE Cost of Goods Sold COGS from FG UnderApplied AJE OverApplied AJE However please note that much of these entries are generated not from third party transactions but rather through transfers captured and identi ed by the costing system Also notice that actual costs incurred get lost in the ledger detail Knowing that COGS MUST Beg InV Costs Incurred 7 Ending Inventory DeGeorge suggests that you can run all of your costs to COGS and simply record the change in inventory as an adjusting entry Your costing system is already doing the work that you need it to do Every journal entry that you prepare and post has at least eight opportunities for errors Think about it and just like allocation minimize it ACCT431 Chapter 1 Page 1 of 4 Spring 2006 Financial versus Managerial Accounting Accounting the process of identi cation measurement and communication of nancial information about economic entities to interested parties Management actiVities which include planning controlling measuring and evaluating performance and making business decisions relating to the operation of a business entity Financial Accounting is the process of identifying measuring and communicating financial information about an entity that culminates in the preparation of financial reports on the enterprise as a whole for use by both internal and external parties Managerial Accounting is the process of identifying measuring analyzing and communicating financial information needed by management to plan evaluate and control an organization s operations ACCT431 Chapter 1 Page 2 of 4 Spring 2006 Objectives of nancial reporting SOC 1 The primary objective of nancial reporting is to provide information that is useful to present and potential investors and creditors and other users in making rational investment credit and similar decisions Speci cally nancial reporting requires disclosure about 1 A company s economic resources obligations and owners equity 2 A company s comprehensive income and its components 3 A company s cash ows 4 The stewardship responsibility of a company s management 5 Other information necessary to understand the preceding information These are accomplished by period speci c Balance Sheets Income amp m of J 39 39ve Income Statement of Cash Flows Statement of Owners Equity and Statements as a whole Note to Financial Statements What is the objective of managerialinternal reporting How does this affect the output of managerial reporting ACCT431 Chapter 1 Page 3 of 4 Spring 2006 Qualitative Characteristics of Useful Information SOC 2 Pervasive Constraint CostBene t Understandable Useful Relevant Reliable Predictive value Veri able Feedback value Representational faithfulness Timeliness Neutral Comparable Consistent Threshold Constraint Materiality Which of the above qualitative characteristics apply or do not apply to managerialinternal nancial information To accomplish comparability and neutrality nancial accountingreporting must have rules de nitions and criteria Separate entity Conservatism Continuity Period of Time Historical Cost Revenue Recognition Monetary Unit Matching Recognition criteria 1 t the de nition of the item to be recorded 2 be measurable 3 be relevant and reliable Revenue must also be earned and realized or realizable Expenses are recognized 1 if direct then 2 if longterm then 3 if neither then Timing is everything Managerial Accounting is not bound by these rules de nitions or criteria It s all about COSTBENEFIT and it s all about the future ACCT431 Chapter 1 Page 4 of 4 Spring 2006 The Role of the Managerial Accountant Cost Analyst Managerial Accounting is the process of identifying measuring analyzing and communicating nancial information needed by management to plan evaluate and control an organization s operations Management activities Planning Controlling Measuring and evaluating performance Decision Making Decision Making Process Know your objective Identify the problem Identify alternative courses of action Analyze the alternatives Quantitative considerations Qualitative considerations Make a decision and implement action Review and measure the outcomes The objective of every for pro t business is to earn pro t for the owners of the business now and in the future Pro ts are earned when the bene ts received by a company for goods or services provided exceed the costs incurred by the company Pro ts can be enhanced by either creating more value or reducing costs Decisionmaking is forward looking and accordingly is inherently subject to risk Ethics in Managerial Accounting Why the focus on Cost ACCT43l Chapter 10 Spring 2006 DeGeorge Managing and Allocating Support Services Page 1 of 1 Managing 7 Planning Control Performance Evaluation amp Decision Making Allocating 7 is a necessary evil Count how many times the author says that allocation is arbitrary discretionary andor may not be accurate Support Services are NON VALUE ADDED activities that are necessary in the operations of a business Human Resources Publications Storage Accounting Purchasing Maintenance Information Systems Janitorial Auto Fleet Risk Management Cash Management Air Fleet Payroll Processing Public Relations Stock Registers Internal or Outsourcing Quantitative cost of internal inef ciencies versus external pro t Qualitative considerations Knowledge base Security Reliability Quality Employee Morale Reasons for Charging Internal Service Costs to User Departments Required Reporting Cost Based Contracts Behavior In uence ForPro t versus NotFor Pro t mentality Full Employment for Accounting Major Graduates Charging Production Departments for support services internal or external gets in to a grey area for GAAP reporting purposes Only costs that t the de nition of inventory can be absorbed in to inventory rather than being eXpensed as incurred Internal reporting on the other hand has no rules and anything can be allocated to anything else Allocation Methods Direct Step Reciprocal ACCT43l Chapter 4 DeGeorge Spring 2006 Page 1 of3 ActivityBased Costing Systems ABC ActivityBased Costing ABM ActivityBased Management Primary underlying concept of ABC is that activities cause costs to be incurred Therefore the primary focus of ABM is to manage control costs by managing activities Please note that in its simplest form ABC is an acceptable meth od for assigningallocating manufacturing costs to products for purposes of valuing inventory under absorption costing ABM often applies ABC techniques beyond manufacturing costs In such cases the resulting information can and is used for decisionmaking purposes but it CANNOT be used for inventory valuation in accordance with GAAP ABC versus Traditional Costing Activity causes costs to be incurred Traditional costing uses broad cost drivers that do not re ect cause and effect 1 hour of activity A has different costs than 1 hour of activity B Accordingly under traditional costing cost targets products jobs customers involving complex costly activity tend to be undercosted while products involving simple less costly activities tend to be overcosted Recall the illustration and discussion of departmental vrs Plant wide burden rates ABC therefore assigns costs to cost targets based on the speci c activity that is used for a particular cost target ACCT43l Chapter 4 DeGeorge Spring 2006 Page 2 of3 ABC Methodology Step 1 Identify and classify the activities related to the company s products Alternative methods for identifying activities TopDown 7 Senior Management identi es what is done Participative Approach 7 the doers identify what is done Recycling Approach 7 using what is already documented TimeMotion studies 7 outside consultants observe what is done Classi cation of Activities Value Added versus NonValue Added Activities JIT Processing Unit Level Batch Level Note that as we move away from Productlevel unit level we begin to take in Customer Level nonmanufacturing costs Facility Level Step 2 Determine the Estimated Cost of each Activity identi ed in step 1 This step assignsallocates total costs incurred during a particular observation period to the activities incurred during that observation period Step 3 Calculate a Cost Driver Rate for the Activity Total cost of activity from step 2 Divided by the number of Cost Driver occurrences Equals the cost per occurrence or CostDrive Rate Step 4 Assign Activity Costs to Cost Targets jobs products customers Actual number of activity occurrences Times the Cost Driver Rate from step 3 Equals Assigned Traceable Costs Note that in this step the costing systems requires input actual activities amp target and has an output assigned or traceable cost of cost target ACCT43 1 Spring 2006 Chapter 4 DeGeorge Page 3 of3 ABC Output ABM Decision Making Tools Product and Customer Pro tability Revenues Less Traceable Costs Excess Revenues over Traceable Costs Less Untraceable Costs Total Costs less Traceable Costs Operating Income Departmental Ef ciency Actual Costs Incurred versus Traceable Costs Assigned If Traceable gt Actual department was ef cient If Traceable lt Actual department was inef cient Activity Based Costing Pro s amp Con s Pro s Con s Identi es NonValue Added Activities Identi es cost savings opportunities untraceable costs Provides very detailed costpro tability information Differentiates complex versus simple processes More data can lead to more information better decisions Very costly to implement and maintain Historical in nature same as traditional absorption costing Detail versus Accuracy GIGO Discourages novel approach s to processes Encourages activity Assumes equal and proportionate bene ts result from common activity Research Insight 41 on page 158 Does ABC Improve Firm Performance
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