Module 3: Traditional Costing Systems Flashcards
manufacturing costs are classified into 3 groups:
direct materials, direct labour, manufacturing overhead
how are direct costs assigned?
to appropriate cost object
how are indirect costs assigned?
collected into cost pools and then allocated to cost objects in a reasonable way and should reflect cause and effect relationship between long run use of a capacity resource by a cost object and the associated cost of that long run use
why do we use predetermined indirect cost rates?
because indirect total costs for the year are not known until after the year-end
how do we try to choose a cost driver?
one that best explains the long run behaviour of the indirect cost
4 commonly proposed activity levels used to compute cost driver rate
actual level of operations, planned, average, and practical capacity level of operations
explain actual level of operations
1) developed after completion of period by dividing actual indirect costs by actual level of cost driver
2) called actual costing
explain planned level of operations
1) planned indirect costs / planned level of cost driver
2) attempts to allocate all planned indirect costs
3) concerned with providing “accurate” costs
explain avg level of operations
1) avg use of capacity is the likely activity rate used to justify the acquisition of capacity,
2) would seem to reflect the economic basis for the level and cost of capacity
3) uses planned cost
explain practical capacity level of operations
1) provides clear decision-making insights and incentives related to dealing with the cost of idle capacity.
2) Estimating practical capacity begins with an estimate of the theoretical capacity available.
3) Subtract capacity that is not available.
- > Machines: equipment downtime for maintenance
- > Labor: vacation time, breaks, training
explain production process
beginning WIP, direct materials, direct labour, overhead -> production process -> ending WIP, units completed and transferred out
what does ending WIP become?
beginning WIP next period
5 steps to process costing
1) Identify the physical flow + percentage of completion
2) Compute equivalent units of production
3) Accumulate production costs
4) Compute production costs per equivalent unit of production
5) Allocate the production costs to ending WIP and goods completed and transferred out
template to identify physical flow in a problem and to compute equivalent units of materials and conversion
1) percentage completion of ending inventory
2) opening WIP
3) started this period
4) units to account for
5) completed and transferred out (EU and physical units of materials and conversion costs)
6) ending WIP (EU and physical units of materials and conversion costs)
7) units to account for
8) work done this period (EU of materials and conversion costs)
template to identify total materials and conversion costs to account for
1) cost in opening inventory (total production cost, material and conversion cost)
2) cost incurred this period (total production cost, material and conversion cost)
3) cost incurred to date (total production cost, material and conversion cost)
template to Allocate the production costs to ending WIP and goods completed and transferred out
1) WIP ending inventory and completed and transferred out
-> material (EU * production cost per equivalent unit of production)
-> conversion cost (EU * conversion cost per equivalent unit of production)
-> total cost of work in process
Total: total cost accounted for should be cost incurred to date
explain cost flows in organizations (what management accounting systems should reflect and the different patterns of cost flows)
In order to compute product costs, management accounting systems should reflect the actual cost flows in an organization.
define finished goods inventory
The costs of the resources for completed units that are not yet sold.
Explain cost flows in manufacturing organizations (first 3 steps)
1) materials are withdrawn from raw materials inventory as production begins
2) costs (direct materials) are moved from raw materials account to WIP account
3) manufacturing operation consumes labour and overhead items and these costs are added to WIP inventory
explain cost flows in organizations (the different patterns of cost flows and effect)
Manufacturing, retail, and service organizations have different patterns of cost flows resulting in different management accounting priorities.
explain cost flows in manufacturing organizations (last 3 steps)
4) When manufacturing is completed, the costs are transferred from work in process to the finished goods account
5) At this stage the goods are finished and are ready for sale.
6) When the goods are sold, their costs are moved from the finished goods account on the balance sheet to the cost of goods sold account on the net income statement.
graph of cost flows in manufacturing organizations
direct materials + direct labour + manufacturing overhead items -> work in process -> finished goods inventory -> cost of goods sold
graph of cost flows in retail organizations
purchases + overhead items -> store inventory -> cost of merchandise/goods sold when sale is made
examples of overhead items in retail organizations
depreciation, lighting, labor, heating
primary focus in retail organizations
profitability of product lines or departments.
graph of cost flows in service organizations
employee hours + overhead items -> project -> project cost
what is the major expense in service organizations?
employee pay
what is focus on in service organizations?
determining cost of a project or service
explain cost system distortions in service organization and why?
potential for cost system distortions is less for a service organization than a manufacturing operation because major expense is employee pay and that can be easily assigned to different projects/services
define: cost object
anything for which a cost is computed
examples of cost objects
activities, products, product lines, departments, or even entire organizations