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Chapter 3

Chapter 3 - ACTG 2020.docx

10 Pages

Course Code
ACTG 2020
Sylvia Hsingwen Hsu

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Chapter 3 - Product costing is the process of assigning costs to the products and services provided by a company. - Absorption costing: all manufacturing costs, fixed and variable, are assigned to units of product – units are said to fully absorb manufacturing costs o Aka full costing - Absorption costing is a popular approach for determining the cost of goods sold and the cost of inventories for financial accounting and income taxes. Process and Job-Order Costing - Process costing system used in situation where co produces many units of a single product (such as frozen orange juice concentrate) for long periods at a time. Examples include mixing cement at St. Mary's Cement, refining oil at Petro-Canada - **Homogenous product flows through production process on continuous basis - Unit Product Cost (per L, kg, etc) = TOTAL MANUFACTURING COST/ TOTAL UNITS PRODUCED (litres, kg, etc) o Each unit assigned same avg cost Job order costing - Used where diff products 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 an average cost per unit. - Applicable in services industry as well – but no raw materials in the cost of their services Measuring Direct Materials Cost - Bill of materials is a record that lists the type and quantity of each item of the materials needed to complete a unit of product. - A production order is issued when an agreement has been reached with the customer concerning the quantities, prices, and shipment date for the order. - PDN deptmt then prepares a materials requisition form which is a detailed source doc which 1) specifies the type and quantity of materials to be drawn from the storeroom, and (2) identifies the job to which the costs of the materials are to be charged. - The form serves as a means for controlling the flow of materials into production and also for making entries in the accounting records. - Direct materials: materials that are traced to product/service directly - Raw materials: ingredients converted into finished product Job cost sheet - After being notified that the production order has been issued, the Accounting Department prepares a job cost sheet o Which is a form made for each sep job which records materials, labour, and overhead costs charged to the job - Job cost sheet allows for charging to individual jobs, but also serves as a key part of firm’s accounting records Measuring DL Cost - Labour charges which can be traced to particular job - Those that cannot be traced are treated as part of manufacturing overhead o Indirect labour: maintenance, supervision, and cleanup for ex - Workers use time tickets to record time spent on each job and task – is hour-by-hour summary of worker’s activities throughout the day - Time tickets sent to acctg department at the end of the day, where direct labour-hours and costs are recorded on individual job cost - Serve as source docs that can be used as basis for labour cost entries into accounting records Calculating POHR - MOH is product cost so must be included with DM and DL on job cost sheet - Assigning MOH to units of product can be hard: o MOH is indirect cost – hard to impossible to trace to particular product/job o Consists of many diff items (small and big) o Even though output may fluctuate due to season or production schedule, MOH costs tend to remain relatively constant due to fixed costs o Timing of payment of MOH varies; property taxes for land on which factory built may be paid once per year, but others quarterly, monthly, or as acquired  But we produce finished items continuously and uniformly all year long - We thus need an allocation process; accomplished by selecting an allocation base common to all of co’s products or services o Ex. DLH or MH - MOH applied to products using predetermined overhead rate: o - This is based on estimate not actual results – why? B/c computed BEFORE period begins and used to apply overhead cost to jobs THROUGHOUT the period** - The process of assigning overhead cost to jobs is called overhead application. - Formula for determining amt of overhead cost to apply to particular formula: - Note that this is not the actual amount of overhead caused by the job. There is no attempt to trace actual overhead costs to jobs—if that could be done, the costs would be direct costs, not overhead. - The overhead assigned to the job is simply a share of the total overhead that was estimated at the beginning of the year o Doing this - - x’ing actual activity by POHR = normal cost system - Overhead may be applied when DLH are charged to jobs, or all of OH can be applied at once when the job is completed - If job not completed at year-end though, overhead should be applied to jobs to value WIP inventory Need for predetermined rate - Co could wait till end of actg period to compute actual OHR based on actual total mfting costs and actual total units in allocation base for the period - - but mgers cite many reasons for using predetermined overhead rates instead of actual overhead ones 1. Mgers would like to know actg system’s valuation of jobs BEFORE end of period; COGS would be unknown till close of the year even though job was completed and shipped to customer before (this could be solved by computing actual OH more often…but:) 2. If actual OH rates were computed frequently, seasonal factors in OH costs or in allocation base could produce fluctuations** in OHR; ex: two identical jobs, one in winter and one in spring, would be assigned different costs if the overhead rate was computed on a monthly or quarterly basis a. Managers feel that such fluctuations in OHR and costs serve no useful purpose and are misleading 3. Simplifies record-keeping** Choice of Allocation Base for Overhead Cost - Allocation base used should drive OH cost; cost driver: is a factor that causes overhead costs, such as machine-hours, beds occupied, computer time, or flight-hours - If a base is used to compute overhead rates that does not “drive” overhead costs, then the result will be inaccurate overhead rates and distorted product costs - Most manufacturing companies in North America continue to use direct labour as the primary or secondary allocation base for manufacturing overhead. - The key point is that the allocation base used by the company should really drive, or cause, overhead costs, and direct labour is not always an appropriate allocation base. Computation of Unit Costs - After applying manufacturing overhead to the job cost sheet, there are two final steps: first, totals for DM, DL, and MOH are transferred to cost summary section and added to get total cost o Second, total cost is divided by number of units to get unit cost - Unit cost is an average cost and should not be interpreted as the cost that would actually be incurred if another unit was produced - OH wouldn’t change if another unit was produced so incremental cost of additional unit is < than avg unit cost - Job sheet used for computing unit costs and valuing ending inventories and COGS Job-Order Costing – Flow of Costs - Purchase and Issue of Materials: o Raw Materials Inventory 60,000 Accounts Payable 60,000 - Issue of direct and indirect Materials: o Work in Process Inventory 50,000 Manufacturing Overhead 2,000 Raw Materials Inventory 52,000 o Raw materials can be direct and indirect** -- the $2k represents indirect materials used in production during the period  The purpose of the Manufacturing Overhead account is to accumulate all manufacturing overhead costs as they are incurred during a period. - Work in Process account contains a summarized total of all costs appearing on the individual job cost sheets for all jobs in process at any given point in time.—because the costs already went through as direct materials first, then went into WIP -- but the charge for materials is still recorded on the cost sheet even though the materials turn into WIP on the books o **makes sense - WIP is summary which = the subsidiary ledger (the individual entries in the job cost sheet must add up to equal it) - Manufacturing Overhead Costs o All costs of operating the factory other than direct materials and direct labour are classified as manufacturing overhead costs. o These costs are entered directly into the Manufacturing Overhead account as they are incurred. o o Makes sense as to why the 2k of indirect costs would be dr into MOH - ALL MANUFACTURING COSTS ARE RECORDED DIRECTLY INTO THE MOH ACCOUNT AS THEY ARE INCURRED DAY-BY-DAY THROUGHOUT THE PERIOD - MOH is a control account – for thousands of SUBSDIARY accounts like indirect materials, indirect labour, utilities - MOH is debited for costs during a period The Application of MOH - Manufacturing costs are assigned to WIP through the POHR b/c actual manufacturing overhead costs are assigned to MOH*** - So just take POHR x number of actual hours worked to calculate it and then o Work in Process 90,000 Manufacturing Overhead 90,000 - Refer to figure 3-8 on pg 83 if confused** (the 60+30 add up to 90**) - So actual manufacturing costs go straight through MOH (i.e. debited for the cost while the corresponding payable/cash/asset credited) while APPLIED overhead costs must be taken away from MOH and debited to WIP o ST
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