Cost_Accounting - 1 Flashcards
What are Product Costs?
- Product cost (aka Inventory Costs) is costs associated with the manufacturing process that are capitalized in inventory; generally, they are the costs that add value to the units produced.
- Costs are accounted for as if they are “absorbed” by the units and stay with them through work-in-process and finished goods inventory (as the value of the units in inventory) and into cost of goods sold when the unit is sold.
- Product costs attach to a physical unit and become an expense in the period in which the unit to which they attach is sold.
- Product cost includes Direct labor + Direct materials + Manufacturing overhead.
Activity-based costing (ABC)
Activity-based costing (ABC) is a cost system that focuses on activities, determines their costs, and then uses appropriate cost drivers to trace costs to the products based on the activities.
Activity-based costing systems identify several activities and the resources (i.e., overhead costs) related to those activities. Then, appropriate cost drivers are identified and activity costs calculated. These activity costs are then assigned to products based on the products’ consumption of activities.
Activity-based costing would be appropriate if the client’s products heterogeneously consume resources (each takes different levels of resources).
Cost drivers
- Cost drivers are those factors that explain changes in cost for a particular activity.
- In activity-based costing models (ABC), cost drivers are not the same as activity drivers.
- Cost drivers can be either quantitative or qualitative in nature. They serve as indicators of change. They are used by management to both anticipate cost changes and to help control cost levels.
- In activity-based costing systems (ABC), each activity will have its own defined set of cost drivers to be used in managing that activity. Activity drivers, on the other hand, are used to assign costs of activities to products or other cost objects.
The treatment of spoilage costs
- Spoilage is output units that do not meet quality standards and are discarded or sold at a disposal value. They are defective units that cannot be reworked.
- Spoilage may be:
- Normal (planned)—expected and arises under efficient operating conditions. It is a necessary cost of good units produced and borne by them as part of inventoriable cost (expensed as part of cost of goods sold). Product Cost
- Abnormal—not expected to arise under efficient operating conditions and should not be considered a necessary cost of good units produce. It should be expensed as a loss for the period. Period cost
- Scrap - generally charged to cost of good manufactured
Entries usually used to account for spoilage:
Normal (common to all jobs):
Inventory xx
Department Factory OH Control xx
Work-in-process (WIP) xx
Normal (unique to specific units):
Inventory xx
Work-in-process (WIP) xx
Abnormal:
Inventory xx
Special Loss Account xx
Work-in-process (WIP) xx
Period costs
Period costs cannot be associated (or matched) with manufactured goods (e.g., advertising expenditures).
Period costs become expenses when incurred.
Absorption costing
- Absorption costing is a method of costing in which fixed costs are treated as a product cost and assigned to the units produced. Fixed costs follow the units through work-in-process and finished goods as an inventoriable cost and are expensed through cost of goods sold when the units are sold. Absorption costing is required by GAAP for external reporting and by the IRS for tax purposes. Variable costing is often used for internal purposes.
- The central issue that distinguishes variable from absorption costing is the question of the timing of the recognition of fixed costs as an expense—
- variable costing recognizes these costs as incurred
- while absorption costing recognizes these costs when the goods are sold.
- The difference between the profits derived by the two methods is shown as follows:
Absorption Profit - Variable Profit = (Total Fixed OH /Volume Produced) x (Volume Produced - Volume Sold)
OR
Difference in Profits = Fixed OH/Unit x Change in Inventory(units)
- Absorption costing does not give exactly the same results in all entities due to other differences in inventory costing(LIFO, FIFO, weighted average)and differences in overhead application.
Overhead
Overhead is all costs of the manufacturing process other than direct labor and direct materials.
Overhead is all costs that cannot be economically traced to individual units of finished product and includes indirect labor (e.g., foremen’s salaries), indirect materials (e.g., oil and lubrication for machinery), and miscellaneous indirect costs (e.g., depreciation, manufacturing utilities costs, rent, insurance).
What are included in Prime Costs?
Prime costs are costs that can, economically, be traced directly to units of finished product:
- Direct Material Used - Have become part of the product or had a direct impact on the product
- Direct Labor Used - Employees who worked on product and had direct impact
Conversion costs
Conversion costs are manufacturing costs required to convert raw materials into a finished product: Direct labor + Manufacturing overhead
Absorption (full Costing) Approach - Formula
Revenue
Less : COGS ( DM+DL+ Var MOH+ Fixed MOH) - period cost
= Gross Profit
Less: Operating expenses (Fixed SG&A + Var SG&A)
= Net Income
Variable Direct (Costing Approach) Formula
Revenue
Less : Variable Cost ( DM+DL+ Var MOH+ Var SG&A)
= Contribution Margin
Less: Fixed cost (Fixed MOH + Fixed SG&A)
= Net Income
The relationship between variable costing (VC) income and absorption costing (AC) income follows:
The relationship between variable costing (VC) income and absorption costing (AC) income follows:
- Sales = Production (no change in inventory) ⇒ No difference in income
- Sales > Production (inventory decreases) ⇒ VC income greater than AC income
- Sales < Production (inventory increases) ⇒VC income less than AC income
Normal profit
Normal profit is an economic concept (not an accounting concept). Normal profits are the minimum returns to capital and risk-taking just necessary to prevent the owners from withdrawing from the industry.
Process Costing
Process costing is a system for allocating costs to homogeneous units of a mass-produced product.
Under process costing- how are the Accounted for calculated?
Beginning Inventory
+ Units Started
= Unit account for
OR
Unit completed
+ Spoilage
+ End inventory
= Unit account for
Process costing - Weighted Average (formula)
1) Cost in Beg work in process (WIP)
+ Cost incurred during period
= Total Cost to be allocated
2) Units completed during period
+ Equivalent Units in ending WIP
= Total equivalent production
3) Total Cost to be allocated
/ Total equivalent production
= Average cost per equivalent unit
4) Unit completed during the period
x Average cost per equivalent unit
= Amount allocated to finished goods
5) Equivalent unit in ending inventory
x Average cost per equivalent unit
= Amount allocated to ending WIP
