BU247 Chapter 3: Chapter 3- Accumulating and Assigning Costs to Products

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BU247 Chapter 3: Accumulating and Assigning Costs to Products
Cost Management Systems
-Cost management systems measure the costs of products, services, and customers
-Job order costing and process costing used to cost products and services
-Cost management systems differ in the way they assign indirect costs to cost objects
Cost Flows in Organizations
Manufacturing Organizations
-Direct materials, direct labour, and manufacturing overhead
-Materials withdrawn from raw materials inventory as production begins  cost entered into
production moved from raw materials account to work-in-process inventory account
-When manufacturing is completed, work is transferred to finished goods inventory and costs
are moved from work-in-process inventory account to finished goods inventory account
-When goods are sold, their costs are moved from finished goods inventory to COGS
-Idea behind manufacturing costing systems: To determine that products accumulate as they
consume organization resources during manufacturing
Retail Organizations
-As goods are purchased, their cost is entered into an account that accumulates the cost of
merchandise inventory in the store  stores incur overhead costs (e.g. labour, depreciation on
store, lighting, heating)
-Primary focus of retail operations: Profitability of product lines or departments
-Costing focuses on how to allocate various overhead costs to determine, e.g., the cost of
purchasing and selling products or department costs
-Merchandise costs in retail organizations can exceed 80% of total costs to purchase and sell
goods
-Potential for distorting the cost of purchasing and selling products through inappropriate
allocations of overhead costs is lower in retail organizations than in manufacturing
organizations
Service Organizations
-In service organizations, the major cost item is the employee pay
-Focus is on determining the cost of a project
-Salaries and wages comprise 80% or more of total projected related costs and they can be
easily assigned to different projects or services  cost system distortions is less than a
manufacturing organization
Some Important Cost Terms
-Cost Object: Anything for which a cost is computed (e.g. activities, products, product lines,
departments, or even entire organizations)
-Consumable Resource/Flexible Resource: Cost depends on amount of resource that’s used
(e.g. wood in a furniture factory, iron ore in a steel mill)
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Cost of consumable resource often called a variable cost b/c total cost depends on how
much resource is consumed
-Capacity Related Resources: Cost depends on amount of resource capacity that’s acquired and
not how much capacity is used (e.g. depreciation on production equipment, salaries paid to
employees)
Cost of capacity-related resource often fixed cost because cost of resource is
independent of how much resource is used in short run
-Direct Cost: Cost that’s uniquely and unequivocally attributable to a single cost object
-Indirect Cost: Any cost that fails the test of being a direct cost
Most capacity related costs are indirect  whether organization would have no use for
the resource if the cost object was abandoned
Handling Indirect Costs in a Manufacturing Environment
-First step: Classify cost as direct or indirect
Direct: Assign directly to the appropriate cost object
Indirect: Assigned to an indirect cost pool (one or many)
-Simplest structure in manufacturing system is to have a single indirect cost pool for entire
manufacturing system
-Fixed Manufacturing Overhead: Heating, lighting, depreciation on factory equipment, factory
taxes, and supervisory salaries
-Variable Overhead: Costs for such items as machine electricity usage, minor materials grouped
as indirect materials (thread, glue, etc.), and machine supplies
Variable overhead costs are too costly and too immaterial to trace individual cost
objects
Variable costs are accumulated in a variable cost account and can be assigned as direct
costs
-Applied Indirect Costs: Indirect costs allocated as production occurs during the year
-Total indirect costs aren’t known until after year end, when all costs have been accumulated,
organizations allocate indirect costs to production during the year using a predetermined
indirect cost rate
Determine the basis (cost driver) which will be used to allocate the indirect cost to
production
Cost analysts try to choose cost driver that best explains long-run behaviour of indirect
cost
Once cost driver is chosen, cost analysts divide expected indirect factory costs by
number of cost driver units to compute the predetermined indirect cost rate
-Predetermined Indirect Cost Rate = Estimated Total Factory Indirect Cost/Practical Capacity
in Cost Driver Units
Multiple Indirect Cost Pools
-Use multiple indirect cost pools to improve costing (ability of costing system to more
accurately reflect the cause-and-effect relationship between the cost object and the cost of the
resources used by the cost object)
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Document Summary

Bu247 chapter 3: accumulating and assigning costs to products. Cost management systems measure the costs of products, services, and customers. Job order costing and process costing used to cost products and services. Cost management systems differ in the way they assign indirect costs to cost objects. Materials withdrawn from raw materials inventory as production begins cost entered into production moved from raw materials account to work-in-process inventory account. When manufacturing is completed, work is transferred to finished goods inventory and costs are moved from work-in-process inventory account to finished goods inventory account. When goods are sold, their costs are moved from finished goods inventory to cogs. Idea behind manufacturing costing systems: to determine that products accumulate as they consume organization resources during manufacturing. As goods are purchased, their cost is entered into an account that accumulates the cost of merchandise inventory in the store stores incur overhead costs (e. g. labour, depreciation on store, lighting, heating)

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