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ADMS 2510 notes.docx

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Administrative Studies
Course Code
ADMS 2510
Nelson Waweru

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ADMS 2510 Notes Chapter 4 Similarities between job-order and process costing: 1. Both systems have basic purposes-to assign materials, labour, and over-head cost to produce and to provide a mechanism for computing unit costs. 2. Both systems use the same basic manufacturing accounts, including Manufacturing Overhead, Raw Materials, WIP, and Finished Goods. 3. The flow of costs through the manufacturing accounts is basically the same in both systems. Under process costing you, accumulate costs by department rather than by job as in job-order costing. Job cost sheet is not used in process costing rather a production report is used which summarizes all the activity in a department’s WIP account during a period and contains three parts a quantity schedule, a computation of equivalent units and a computation of total and unit costs and cost reconciliation. Processing Department: any location in an organization where work is performed on a product and where materials, labour, or overhead costs are added to the product. Transferred in cost: The cost attached to products that have been received from a prior processing department. Equivalent Units= # of partially completed units X % of completion Each unit transferred out of a department is counted as an equivalent unit. Weighted Average Method of Equivalent units is: Equivalent Units of Production= Units transferred to the next department or finished goods + Equivalent units in ending work in process inventory Conversion cost is the direct labour + mnfg overhead The weighted average method is concerned only with the equivalent units that are in the ending inventories and in units transferred out to the next department. It is not concerned with the fact that the beginning inventory was already partially complete. The equivalent units computed using the weighted average method includes work that was accomplished in prior periods. Conversion costs are considered the last step in the total cost so if the unit has been through conversion cost it’s considered an equivalent unit. WA method of cost per equivalent unit method: Cost per equivalent unit= (Cost of beginning WIP inventory + Cost added during the period)/Equiv. Units FIFO Method of Equivalent units is: Equivalent units of production= Equivalent units to complete beginning WIP inventory + Units started and competed during the period + Equivalent units in ending WIP inventory ADMS 2510 Notes Equivalents units to complete beginning WIP inventory= Units in beginning WIP inventory X (100% - Percentage completion of beginning WIP inventory) Or Equivalent units of production= Units transferred out + Equivalent units in ending WIP inventory – Equivalent units in beginning WIP inventory FIFO method of cost per equivalent unit method: Cost per equivalent unit= Cost added during the period/Equivalent units of production Chapter 5 Activity Based Costing: A costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed cost. Used for internal decisions and is used as a supplement to the external reports. In Activity Based Costing: 1. Non-manufacturing and manufacturing costs may be assigned to products, but only on a cause- and-effect basis 2. Some manufacturing costs may be excluded from product costs 3. Numerous overhead pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity 4. Overhead rates, or activity rates, may be based on level of activity at capacity rather than on the budgeted level of activity In ABC an activity is any event that causes the consumption of overhead resources Activity Cost Pool: A bucket in which costs are accumulated that relate to a single activity measure in the ABC system Activity Measure: An allocation base in an ABC system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool, also called a cost driver Transaction Driver: a simple count of the number of times an activity occurs Duration Driver: amount of time required to perform an activity Unit-level Activities: are performed each time a units is produced Batch-level Activities: are performed each time a batch is handled or processed, regardless of how many units are in the batch Product-level Activities: relate to specific products and typically must be carried out regardless how many batches are run or units of product are produced or sold. ADMS 2510 Notes Customer-level Activities: relate to specific customers and include activities such as sales calls, catalogue mailings, and general technical support that are not tied to any specific product Organization-sustaining Activities: are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made Implementation process of ABC is as follows: 1. Identify and define activities, activity cost pools, and activity measures 2. Assign overhead costs to activity cost pools 3. Calculate activity rates 4. Assign overhead costs to cost objects using the activity rates and activity measures 5. Prepare management reports In ABC, you are looking for costs that are incurred
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