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Managerial Accounting Chapter Three Notes

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University of Guelph
ACCT 2230
Elliot Currie

Chapter Three Systems Design Job Order Costing y Product costing is the process of assigning costs to the products and services provided by a company y The essential purpose of any managerial costing system should be to provide cost data to help managers plan control direct and make decisions y External financial reporting and tax reporting requirements often heavily influence how costs are accumulated and summarized in managerial reports y We are going to use absorption costs approach to determine product costs Absorption costing is all manufacturing costs fixed and variable are signed to units of product unit are said to fully absorb manufacturing costs The absorption costing approach is also known as the full cost approach y We must keep in mind that the essential purpose of any costing system is to accumulate costs for managerial use It is a managerial tool in that it exists to provide managers with the cost data needed to direct the affairs of organizations y The level of detail and sophistication in a cost accounting system will influence its cost of development and operation More sophistication yields more benefit by providing more relevant information But when the additional cost of providing added sophistication equals the benefit from the added relevance the systems designer is an optimal point in the costbenefit trade off and thus the added sophistication should stop y Physical characteristics represent a fundamental consideration to the higher level and more subjective costbenefit trade offy Process and Job Order Costing o Process Costing A process costing system is a costing system used in those manufacturing situations where a single homogeneous product such as cement or flour is produced for long periods of timeProcess costing systems accumulate costs in a particular operating or department for an entire period month quarter year and the divide this total cost by the number of units produced during the period The basic formula for the process costing is Unit product cost per litre kilogram bottletotal manufacturing costtotal units produced litres kilogram bottle Since one unit of product is indistinguishable from any other unit of product each unit is assigned the same average cost o Job Order CostingA job order costing is a costing system used in situations where many different products jobs or services are produced each period In a job order costing system costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at the average cost per unitHospitals law firms move studios accounting firms advertising agencies and repair shops all use a variation of job order costing to accumulate costs for account and billing purposes The essential difference for service organizations is the lack of raw material in the cost of their services Job order costing system requires more effort than process costing system But more than half the manufacturing in North Americay Job Order Costing An Overview o Measuring Direct Materials CostA bill of materials is a document that lists the type of quantity of each item of the materials needed to complete a unit of productA production order is issued when an agreement has been reached with the customer concerning the quantities prices and shipment date for the order
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