Cost Accounting Pt. 3 Flashcards
Fact: traditional costing systems assign overhead as a single cost pool with a single plant-wide overhead application rate using a single allocation base
these rates generally use volume-based cost drivers such as direct labor hours or machine hours; assigning overhead costs based on volume can distort the amount of costs assigned to various product lines because all overhead costs do not fluctuate with volume
Fact: activity-based costing (ABC) refines traditional costing methods and assumes that the resource-consuming activities with specific purposes cause costs
ABC assumes that the best way to assign indirect costs to products (cost objects)is based on the product’s demand for resource-consuming activities; application of ABC techniques attempts to improve cost allocation by emphasizing long-term product analysis
Common terminology
activity - any work performed inside a firm
resource - an element that is sued to perform an activity
cost drivers - a factor that has the ability to change total costs; are identified by ABC and are related to one of multiple cost pools for cost allocation (applies overhead costs to cost objects)
resource cost driver - the amount of resources that will be used by an activity
activity cost driver - the amount of activity that a cost object will use, and it is used to assign the costs to the cost objects
activity centers - an operation necessary to produce a product
cost pool - a group of costs (DM or DL) or a specially identified cost center (a department or a manager) in which costs are grouped, assigned, or collected
What is a value chain (value-added activities)?
a series of activities in which customer usefulness is added to the product; support activities directly support value-added activities
What are non-value-added activities?
they do not increase product value or service and are targeted for elimination; often, these types of activities (ex. warehousing) should be eliminated
What is the basic operation of ABC?
identify the cost drivers
accumulate the costs in cost pools
trace indirect costs to activity centers
allocate remaining indirect cost pools
divide assigned costs by level of activity for the cost center
cost the product
Fact: companies in all sector of the economy allocate service department costs to production or user departments and ultimately the final products produced
the direct method is the most widely used (and least complex) method to allocate service costs; each service department’s total costs are directly allocated to the production departments without recognizing that service departments themselves may use the services from other service departments
the step-down method (sequential method) is a more sophisticated approach to allocate service costs in more complex situations; service department costs are also allocated to other service departments as well as production departments; stepdown allocations assume that once a service department’s costs have been allocated to another service department, there can be no subsequent costs allocated back to the other service departments
Joint product costing and by-product costing (common cost allocation) terminology
joint products - two or more products that are generated from a common input
by-products - minor products of relatively small value that incidentally result from the manufacture of the main product
split-off point - the point in the production process at which the joint products can be recognized as individual products
joint product costs ( or joint costs) - costs incurred in producing products up to the split-off point
separable costs - costs incurred on a product after the split-off point
Fact: net realizable value (NRV) equals sales value less cost of completion and disposal
relative sales value at split-off point is used purely for inventory costing and is of little use for cost planning and control purposes
if sales values at split-off are not available because there are no markets for the joint products at split-off, then sales values at split-off must be derived using the following formula:
sales value at split-off = final selling price - identifiable costs incurred after split-off
Fact: by-products have relatively low sale values that are not sufficient to cover their share of common costs (otherwise they would be joint products)
revenue accounting can take one of two forms:
applied to main product - any proceeds from the sale of by-products are a reduction to common costs for joint product costing; the revenue earned from their sale is credited to joint costs incurred either at the time of products or the time of the sale
miscellaneous income - as an alternative, revenue form the sale of by-products may be credited to miscellaneous income
the decision to use by-product costing or joint costing is a practical one, and it depends on relative demand
