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Chapter 4

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Greg Clark

BU247 Chapter 4 – Accumulating and Assigning Costs to Products Week 4/5 Cost Management Systems -Cost management systems measure the costs of products, services, and customers -Historically, two cost management systems, job order costing and process costing have been used to cost products and services -Cost management systems differ in the way that they assign indirect costs to cost objects Cost Flows in Organizations -To compute product costs, management accounting systems should reflect the actual cost flows in organizations Manufacturing Organizations -Manufacturing costs are usually classified into three groups: direct materials, direct labour and manufacturing overhead -When manufacturing is completed, work is transferred to finished goods inventory, and costs are moved from the work-in-process inventory account to the finished goods inventory account Retail Organizations -As goods are purchased, their cost is entered into an account that accumulates the cost of merchandise inventory in the store -Costing attention focuses on how to allocate various overhead costs to determine, for example, the cost of purchasing and selling products, or department costs Service Organizations -In service organizations the major cost item is usually employee pay Some Important Cost Terms -Cost object- anything for which a cost is computed – Ex. Activities, products, etc. -Consumable/flexible resource – its cost depends on the amount of resource that is used – Ex. Wood in a furniture factory -Capacity-related resources – its cost depends on the amount of resource capacity that is acquired and not on how much of the capacity is used -Direct cost – a cost that is uniquely and unequivocally attributable to a single cost object -Indirect cost – any cost that fails the test of being a direct cost Cost Classiication and Context -The classification of a resource as direct or indirect is context specific BU247 Chapter 4 – Accumulating and Assigning Costs to Products Week 4/5 Going Forward -Costing systems first classify costs as direct or indirect -We assume that costs that are direct can be reasonably identified and assigned to the appropriate cost object Handling Indirect Costs in a Manufacturing Environment -If the cost is direct it is assigned directly to the appropriate cost object -I the cost is indirect, it is assigned to an indirect cost pool -The simplest structure in a manufacturing system is to have a single indirect cost pool for the entire manufacturing operation -Some organizations create another category called variable overhead, which includes costs for such items as machine electricity usage, minor materials grouped as indirect materials and machine supplies -Organizations use a separate account to record applied indirect costs (indirect costs allocated as production occurs during the year) -Once the cost driver is chosen, cost analysts divide expected indirect factory costs by the number of cost driver units to compute what is called the predetermined indirect cost rate – called the predetermined overhead rate/cost driver rate predetermined indirect cost rate = estimated total factory indirect cost practical capacity in cost driver units Multiple Indirect Cost Pools -Most organizations use multiple indirect cost pools in order to improve costing -Indirect cost pool design is considered to be one of the most important choices in costing system design and requires a considerable amount of skill and understanding of the manufacturing process in the organization -Costing system distortions relate to the handling of indirect costs -The two-rate system tracks t
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