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CHAPTER 13

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CHAPTER 13

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  1. CHAPTER 13 Cost Accounting and Reporting Systems

  2. FinancialAccounting ManagerialAccounting Focus onExternalReporting Focus onInternalReporting CostAccounting Focus onCost Accumulation& Assignment Cost Accounting

  3. Revisit plans Implement plans Data collection andperformance feedback Decision Making Strategic, Operational,and Financial Planning Planning and control cycle Performance analysis: Plans vs. actual results (Controlling) Executing operational activities (Managing)

  4. DesiredROI Design Customer Service Production Marketing Distribution Value Chain Functions Research and Development The sequence offunctions and activitiesthat, over the lifeof the product orservice, adds valuefor the customer.

  5. CostObject Cost Assignment Cost Object Cost Assignment Cost Assignment Cost Object Cost Accumulation and Assignment Cost Pool Cost objects are products, jobs, and services.

  6. Direct costs Can be easily and conveniently traced to a unit of product or other cost objective. Would not be incurred if the product or activity were discontinued. Indirect costs Cannot be easily and conveniently traced to a unit of product or other cost object. Would be incurred even if the product or activity were discontinued. Direct Costs and Indirect Costs

  7. Costs for Cost Accounting Purposes Financial Accounting Cost is a measure of resources used or given up to achieve a stated purpose. Managerial Accounting Costs are assigned to products and become expenses when products are sold.

  8. Manufacturers . . . Buy raw materials. Produce and sell finished goods. Merchandisers . . . Buy finished goods. Sell finished goods. Costs for Cost Accounting Purposes MegaLoMart

  9. Costs for Cost Accounting Purposes Merchandiser Current Assets • Cash • Receivables • Prepaid Expenses • Merchandise Inventory • Manufacturer • Current Assets • Cash • Receivables • Prepaid Expenses • Inventories • Raw Materials • Work in Process • Finished Goods

  10. Sold to Customers Sold to Customers = Manufacturedproduct Purchasedproduct Costs for Cost Accounting Purposes Income Statement Cost of Goods Sold Balance Sheet Inventory Manufacturer Ingredients + Human effort + Machine support Merchandiser

  11. RawMaterials DirectLabor ManufacturingOverhead Costs for Cost Accounting Purposes The Product

  12. Costs for Cost Accounting Purposes Raw materials are theingredients of the product. Example:A radio installed in an automobile

  13. Costs for Cost Accounting Purposes Direct labor is the effort provided by workers who are directly involved withthe manufacture of the product. Example:Wages paid to automobile assembly workers

  14. Costs for Cost Accounting Purposes Manufacturing overhead includes all manufacturing costs except raw materialand direct labor. • Examples • Wages of maintenance workers, janitors,security guards. • Factory utilities, property taxes, and insurance. • Depreciation for factory buildings and equipment. • Production supervision salaries.

  15. Cost Accounting Systems Determining unitmanufacturingcosts. Planning andcontrolfunctions. Cost accounting systems provide information supporting decisions making the business successful. Assessing theefficiency andeffectivenessof operations. Providingproducts or services tocustomers.

  16. Cost Accounting Systems Evaluate andrewardemployeeperformance. Discloseinventoriesand cost ofgoods sold. Cost accounting systems are the proceduresand techniques used by management. Manage activitiesthat consumeresources. Track resourcesconsumed byproducts andservices.

  17. Raw Materials Work in Process Cost of GoodsSold FinishedGoods Period Costs Selling andAdministrative Cost Accounting Systems Income StatementExpenses Balance Sheet Costs Inventories Material Purchases Direct Labor ManufacturingOverhead Selling andAdministrative

  18. Cost Accounting Systems Manufacturingoverhead (OH) Applied to eachjob using apredeterminedrate Rawmaterial Traced directly to each job THE JOB Traced directly to each job Direct labor

  19. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period Cost Accounting Systems The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead.

  20. Cost Accounting Systems Based onestimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actualamount of thecost driversuch as units produced, direct labor hours, or machine hours. Incurred during the period.

  21. Cost Accounting Systems Cruisers, Inc., applies overhead based on direct labor hours. Total estimatedoverhead for the year is $4,200,000. Totalestimatedlabor hours are 300,000.What is Cruisers’ predeterminedoverhead rate?

  22. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period $4,200,000 POHR = 300,000 direct labor hours (DLH) Cost Accounting Systems POHR = $14.00 per DLH For each direct labor hour worked on a job, $14.00 of factory overhead will be applied to the job.

  23. Cost Accounting Systems Cruisers, Inc., produced 86 SeaCruiser sailboats during the month working a total of 20,640 labor hours and incurring these costs: raw materials $368,510; and direct labor $330,240.What is the cost per SeaCruiser sailboat?

  24. Cost Accounting Systems

  25. What will Cruisers do if actual and applied overhead are not equal? Cost Accounting Systems

  26. Cost Accounting Systems Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours. How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined overhead rate of $14.00 per direct labor hour.

  27. Cost Accounting Systems Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours. How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined overhead rate of $14.00 per direct labor hour. SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $14.00 per DLH × 310,000 DLH =$4,340,000

  28. Cost Accounting Systems Cruisers’ actual overhead for the year was $4,250,000 for a total of 310,000 direct labor hours. How much total overhead was applied to Cruisers’ jobs during the year? Use Cruisers’ predetermined overhead rate of $14.00 per direct labor hour. Overhead isoverapplied for the year by$90,000. What willCruisers do? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $14.00 per DLH × 310,000 DLH =$4,340,000

  29. Cost Accounting Systems Smaller amounts $90,000may be allocatedto these accounts. $90,000 may beclosed directly to cost of goods sold. OR Work inProcess FinishedGoods Cost of Goods Sold Cost of Goods Sold

  30. Cost Accounting Systems Smaller amounts

  31. Let’s examine the cost flows in a product costing system. We will use T-accounts and start withmaterials. Cost Accounting Systems

  32. Cost Accounting Systems Work in Process Raw Materials • Direct Materials • Direct Materials • Material Purchases • Indirect Materials Mfg. Overhead Actual Applied • Indirect Materials

  33. Next let’s addlabor costs andapplied manufacturing overhead to the cost flows. Are you with me? Cost Accounting Systems

  34. Cost Accounting Systems Salaries and Wages Payable Work in Process • Direct Labor • Direct Materials • IndirectLabor • Direct Labor • Overhead Applied Mfg. Overhead Actual Applied If actual and applied manufacturing overheadare not equal, a year-end adjustment is required. • Indirect Materials • OverheadApplied to Work inProcess • IndirectLabor

  35. Now let’s complete the goods and sell them. Still with me? Cost Accounting Systems

  36. Cost Accounting Systems Finished Goods Work in Process • Direct Materials • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labor • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold

  37. Cost Accounting Systems A schedule of cost of goods manufacturedis prepared to assist managers in understanding and evaluating the overall cost of manufacturing products.

  38. Cost Accounting Systems Use the following informationto prepare a statement of costof goods manufactured for Cruisers, Inc. for April: Raw materials inventory: March 31 $126,900 April 30 $106,250 Raw materials purchases: April $347,860

  39. Cost Accounting Systems

  40. Finished goodsinventory numbersare assumed amounts. The cost of goods manufactured during the period is used to compute cost of goods sold for the period.

  41. The income statement is prepared using established financial accounting procedures. Sales andexpense numbersare assumed amounts.

  42. Used for production of large, unique, high-cost items. • Built to order rather than mass produced. • Many costs can be directly traced to each job. Cost Accounting Systems ProcessCosting Job OrderCosting

  43. Typical job order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals • Law firms Cost Accounting Systems ProcessCosting Job OrderCosting

  44. Used for production of small, identical, low-cost items. • Mass produced in automated continuous production process. • Costs cannot be directly traced to each unit of product. Cost Accounting Systems ProcessCosting Job OrderCosting

  45. Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill Cost Accounting Systems ProcessCosting Job OrderCosting

  46. ProductCosts Raw Materials ProductCosts Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead PeriodCosts PeriodCosts Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Absorption and Variable Costing AbsorptionCosting VariableCosting

  47. Raw Materials Work in Process Absorption costing Cost of GoodsSold FinishedGoods Variable costing Selling andAdministrative Absorption and Variable Costing Balance SheetCosts Inventories Income StatementExpenses Material Purchases Direct Labor VariableManufacturing Overhead FixedManufacturing Overhead Selling andAdministrative Period Costs

  48. All manufacturingcosts must be assignedto products to properlymatch revenues andcosts. Fixed costs arenot really the costsof any particularproduct. VariableCosting AbsorptionCosting Absorption and Variable Costing

  49. These are capacitycosts and will beincurred even if nothingis produced. Depreciation,taxes, insurance andsalaries are just asessential to productsas variable costs. VariableCosting AbsorptionCosting Absorption and Variable Costing

  50. They are the numbers that appear on our external reports. VariableCosting AbsorptionCosting Absorption and Variable Costing Absorption costing product costs are misleading for decision making.