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Fundamentals of Product and Service Costing

Fundamentals of Product and Service Costing. Cost Accounting-II Dr. Salah Hammad Lecture 1. 6 - 1. Cost System. Keys to a good cost system:. Oriented to the needs of the decision makers. Designed so that benefits exceed costs. 6 - 2. Cost Management Systems.

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Fundamentals of Product and Service Costing

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  1. Fundamentals of Productand Service Costing Cost Accounting-II Dr. SalahHammad Lecture 1 6 - 1

  2. Cost System Keys to a good cost system: • Oriented to the needs of the decision makers • Designed so that benefits exceed costs 6 - 2

  3. Cost Management Systems • The objective of the cost management system • is to provide information about costs relevant • for decision making. • The cost system accumulates and reports costs • about processes, products, and services. 6 - 3

  4. Reasons to Calculate Productor Service Costs • For decision making • For deciding what to sell • For setting prices • For knowing the cost of goods sold • For knowing the cost of inventory 6 - 4

  5. Cost Allocation and Product Costing Basic Cost Flow Diagram Cost pools Direct materials Direct labor Manufacturing overhead Cost allocation rule Indirect (allocated by direct labor cost) Direct Cost objects Alpha Beta 6 - 5

  6. Fundamental Themes Underlyingthe Design of Cost Systems • Cost systems should have a decision focus. • Different cost information is used for • different purposes. • Cost information for managerial purposes • must meet the cost-benefit test. 6 - 6

  7. Basic Cost Flow Model • How costs and units move through inventories: Beginning balance + Transfers in – Transfers out = Ending balance BB + TI – TO = EB • This is true for the following accounts: • – Raw Materials (RM) • – Work-in-Process (WIP) • – Finished Goods (FG) 6 - 7

  8. Costing with No Work-in-Process Inventories • Baxter Paint begins production on April 1. • It starts and completes production of 100,000 • gallons of paint in April and has no ending • work-in-process inventory. Cost of resources used in April: Materials $ 400,000 Labor 100,000 Manufacturing overhead 500,000 Total $1,000,000 6 - 8

  9. Costing with No Work-in-Process Inventories BB + TI – TO = EB 0 + 100,000 gallons – 100,000 gallons = 0 FG 6 - 9

  10. Costing with No Work-in-Process Inventories • What are the costs at the end of the period? • $1,000,000 was added to work-in-process • and then transferred out to finished goods. • Since Baxter produced 100,000 gallons of • paint, then the cost per gallon of paint is $10. 6 - 10

  11. Costing with Work-in-Process Inventories Production for Baxter Paint for May follows (gallons): Beginning inventory -0- Started in May 110,000 Total 110,000 Ending WIP (50% complete) 20,000 Transferred out 90,000 6 - 11

  12. Costing with Work-in-Process Inventories BB + TI – TO = EB 0 + 110,000 gallons – 90,000 gallons = 20,000 gallons (50% complete) FG 6 - 12

  13. Costing with Work-in-Process Inventories • How do we cost Baxter’s 20,000 gallons of paint that • are only half finished? • 20,000 gallons half finished is equivalent to 10,000 • gallons finished. • 90,000 gallons transferred out plus 10,000 equivalent gallons • of finished paint equals 100,000 equivalent gallons of paint. Gallons of paint transferred out 90,000 Equivalent gallons of finished paint 10,000 Total equivalent gallons of paint 100,000 6 - 13

  14. Costing with Work-in-Process Inventories Costs incurred in May: Materials $390,000 Labor 100,000 Manufacturing overhead 500,000 Total $990,000 $990,000/100,000 gallons = $9.90 per gallon 90,000 gallons × $9.90/gallon = $891,000 6 - 14

  15. Costing with Work-in-Process Inventories Direct material + Direct labor + Overhead ($990,000) 90,000 gallons (90%) 10,000 gallons (10%) Equivalent gallons Finished goods inventory $891,000 Work-in-process inventory $99,000 6 - 15

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