Ch6 Costing - Methods Flashcards
two ways of allocating costs to one unit of inventory
1) Job costing - for intermittent production with customized and costs can be tracked / heterogeneous production process, and usually produce on demand [customized construction, print job or lawyer’s legal service]
2) Process costing - for continuous production with uniform / homogeneous mass production, and usually produce for stock [consumer goods manufacturing]
two approaches to determine inventoriable costs (under job costing)
Timing difference in operating income because portion of fixed OH is included in inventory until sold
1) vairiable costing - only variable manufacturing OH is inventoriable, all fixed manufacturing OH and non-manufacturing variable costs are treated as period cost because they have been incurred regardless of units produced and expensed in the period incurred [ for internal use only and in contribution margin format]
2) absorption costing - fixed manufacturing OH is inventoriable because it is incurred for production [ required by external reporting]
Spoilage - Normal vs Abnormal
Ignor opportunity cost of spoilage
Ebook Chapter 7
1. Normal spoilage:
1) remove from WIP and charge to OH
2) increase costs of all job and units
3) no attention drawn to costs; not
encourage investigation or quality
improvement
2. Normal spoilage for specific job:
1) cost remains in the job and not
charged to OH
2) increase costs of specific job
3) no attention drawn to costs; not
encourage investigation or quality
improvement
3. Abnormal spoilage:
1) cost removed from WIP and assigned to a loss account (period cost)
2) no attention drawn to costs; not
encourage investigation or quality
improvement
4. Abnormal spoilage for specific job:
1) cost remained in WIP
2) can be allocated to good units
2) attention may or may not drawn to costs;
Process costing typically uses absorption costing so that all costs associated with the production are captured
Equivalent units (EU)
EU are a way of referring to all units in reference to the number of fully completed units they represent. For example, if you have two units 50% complete, that would be equal to one EU.
Two methods to cost Equivalent Units
- Weighted average
EU produced = Units transferred to next process OR finished goods + EU in ending WIP
DM cost per EU = Total DM costs / ( Units finished + EU DM WIP)
Conversion cost (DL+OH) per EU = Total conversion costs / (Units finished + EU conversion costs WIP)
- FIFO
1) costs incurred during the current period (including costs transferred in) are used to calculate the cost of units completed
2) Both beginning and ending WIP inventories are converted to an EU basis.
3)This method is theoretically superior because it accounts for the fact that beginning WIP was not fully produced in the current period.
Both WA and FIFO are acceptable, however, as the impact of this adjustment tends to be minor when spread over a larger period of time.
Process costing typically uses absorption costing so that all costs associated with the production are captured.
EU costing method 1 - Weighted Average
The five-step guide to process costing is as follows:
* Step 1: Compute units to be accounted for
* Step 2: Compute output in terms of EU
* Step 3: Compute costs to account for
* Step 4: Compute cost per EU
* Step 5: Assign total costs to units completed and to ending WIP
ABC costing - Five steps
Step 1: Identify the cost objective (one product / customer: all costs related to creating and selling to the cost objective should be included)
Step 2: Identify activities (cost pool) and cost drivers
Step 3: Assign indirect costs to cost pools
Step 4: Calculate activity rates
Step 5: Assign indirect costs to cost objectives
ABC costing - disadvantages
1) often fail: ineffective implementation, too complicated, more monitoring
2) good for companies with high proportion of indirect costs and high variation in resource usage across products, customers or product lines
ABM - management tool using ABC
1) improve efficiency on a wide range of decisions such as pricing, product emphasis, keeping or dropping a product or customer, or allocation of limited capacity
2) identify areas of inefficiency e.g. using onstraint theory to focus efforts on addressing the inefficiency
3) identify key areas for improvement as part of continuous improvement initiatives
Under / Over- applied OH
Applied OH - credit
Actual OH - debit
Debit balance of OH - Under-applied
Credit balance of OH - Over-applied
The difference can be allocated:
1) between WIP, FG or COGS
2) to COGS in full
Joint cost allocation methods (3)
None is accurate but arbitrary!
1) Physical output
2) Sales value at split-off point
3) Net realizable value (finaal selling price - separate related cost)
4) constant gross margin over NRV
Service department cost allocation (3)
1) Direct allocation
*S-department costs are allocated to operating dept. directly based on an allocation base
*no other service department costs are allocated to other service department - cost of each s-department are understated - don’t reflect the full cost of services
2) Step-down allocation
*only some of the concurrent use of support services are accounted for among s-departments (no reciprocal)
S1->S2->Operating
(x)S1<-S2
*best choice when few interactions among s-departments
3) Reciprocal allocation
*most accurate allocation method - accounting for services provided to all service departments
Equivalent units
two units 50% completed equals to one equivalent unit
(used in WIP where inventory is not completed)
