Operations Management (Cost Measurement,Methods & Techniques) Flashcards
Prime Costs (Direct Costs)
Direct Materials + Direct Labor
Prime Conversion
Costs Costs
———————————— —————————————–
Direct Materials + Direct Labor + Overhead Applied
____________________________________________
Total Work In Process
to
Finished Goods
to
COGS
Conversion Costs
Direct Labor + Overhead Applied
DM, DL & Factory O/H
Work In Progress
Finished Goods
All Assets on the Balance Sheet
(Inventory)
Product Costs
Not Expensed Until Product is SOLD (Matching Principle)
DM + DL + MFG OH Applied
Direct Materials, Direct Labor, Mfg. Overhead Applied
Components of Product Costs
Direct Materials, Direct Labor and Manufacturing O/H applied
Period Costs
Are expensed in the period when they are incurred NOT INVENTORIABLE. Examples:
Selling, General and Administrative expenses & interest (financing) expense.
Component of Mfg Costs - “Direct Costs”
Direct materials & Direct Labor
Component of Mfg Costs - “Indirect Costs”
Overhead=Indirect Materials + Indirect Labor + Factory Costs
Nonmanufacturing Costs - Expensed in the Period Incurred Are NOT capitalized!
S,G & A Costs (Selling, General and Administrative Costs)
and
Interest
Cost Accounting (“PIE”)
Measuring Cost Objects or Objectives for:
Product Costing
Income
Efficiency
Cost Accumulation Systems
Assign costs to products
If item produced is Custom Order
Use “Job Costing” to assign costs
If item is mass-produced homogeneous product
ex. - steel
Use “Process Costing” to assign costs
If item is essentially worthless until it is complete
Use “Backflush Costing” assigns costs when item is complete. There would be no “work in process” inventory.
Another variation of assigning costs - combines job-order and process-costing
This is called “Operations Costing” has some of both.
To Compute Direct Materials Used (if not given)
Beginning Raw Materials \+ Purchased Raw Materials =Raw Materials Availabile -Ending Inv. of Raw Materials =Raw Materials Used
To Compute Cost of Goods Manufactured
Work in Process Inventory "Beginning" \+ Direct Materials Used \+ Direct Labor \+Manufacturing Overhead APPLIED = Total Manufacturing Costs Incurred -- Work In Process Inventory "Ending" = Cost Of Goods Manufactured (Completed this Period)
Overhead Allocation Using Cost Drivers
(Assign factory Overhead to Individual Products)
Allocation basis can be direct labor $ or direct labor hrs
or machine hours.
Budgeted Overhead Costs/Budgeted Dir Labor(cost driver)
Budgeted Overhead Costs=Variable + Fixed Overhead
Job Order Costing - Each Unit is Unique/Easily Identifiable
Usually customized production environment such as: construction, aircraft assembly, printing, etc.
Cost is allocated to a specific job as it moves sequentially through the manufacturing process.
Use Materials Requisitions, Labor Time Tickets
Process Costing - Have a large # of Homogeneous items.
Method of product costing that AVERAGES costs & applies them to a large group of homogeneous items.
Product Costing Five Steps to Compute Cost of Goods Remaining in WIP(Inv) and Cost of Goods Transferred Out
- Summarize the flow of physical units (beginning with the Product Report.
- Calculate “equivalent unit” output.
- Accumulate the total costs to be accounted for (Production Report)
- Calculate the unit costs based on total costs and equivalent units.
- Apply the average costs to the units completed and the units remaining in ending WIP.
Production Report (for Product Costing of Mass Produced Homogeneous Units)
Keeps Track of NUMBER of Units & COSTS
Quantities (Need to Balance)
Charged to Department:
Beginning # in Process 5,000
+ # Transferred In 20,000
Total # Charged to Dept. 25,000
Units Accounted For:
# Transferred Out 15,000
+ Ending # in Process 10,000
Total # Accounted for 25,000
———————————————————————————–
Costs (Need to Balance)
Charged to Department:
Beginning $ in Process
+ Costs During the Period
Total $ Charged to Dept.
Costs Accounted For:
$ Transferred Out
+ Ending $ in Process
Total $ Costs Accounted For
Equivalent Units (Express Partially Completed Items In Equivalent Units)
Example: At the end of the period you have 10,000 units that are 75% complete with respect to conversion costs. That is equivalent to 7,500 equivalent units.
Costing Issues - Cost FLOW Assumptions
Are you using FIFO or Weighted Average
FIFO Equivalent Units Components (3)
- Amt NEEDED TO COMPLETE Beginning Units on Hand
- Units Started AND Completed during the period
(without including Beginning WIP) - Units Partially complete at the END of the Period.
Weighted Average Equivalent Units Components (2)
- Units Completed during the month
2. Units Partially completed at the End of the Period
Example of FIFO & Weighted Average Equivalent Units Computation
Beginning WIP 100 Units, 25% complete
Units Completed & Transferred Out 600 Units
Ending WIP 200 Units, 40% complete
FIFO (3 Steps)
1. Amount needed to complete Beg WIP 75
(100-25%=75% x 100 units)
2. Units completed during Period - Beg Units
(600-100 beginning=500) 500
3. Ending WIP Units (40% x 200 units) 80
____________________________________________
Total Equivalent Units of Production (FIFO) 655
Weighted Avg. (2 Steps)
1. Units completed during the month 600
2. Ending Work in Process (200 x 40%) 80
____________________________________________
Total Equivalent Units of Production (Wt Avg)
Cost Per Equivalent Units
FIFO = Current Costs Only
_______________
Equivalent Units
Weighted Avg = Beginning Cost + Current Cost
________________________
Equivalent Units
Spoilage (Shrinkage) Normal vs. Abnormal
Normal Spoilage - INCLUDED in part of your Inventory Cost on the Balance Sheet.
Abnormal Spoilage - NOT Included in Inventory Cost on the Balance Sheet. It’s not normal and therefore it is a PERIOD COST.
Activity Based Cost Drivers - 2 types
- Volume Based (Traditional Costing System) Uses a SINGLE cost pool, with a Single plant-wide application rate, Use VOLUME based cost drivers such as:
direct labor hrs. or machine hrs. Can distort the amount of costs assigned to various product lines (since all overhead costs do not fluctuate with volume). - Activity-Based (ABC) Uses MULTIPLE O/H rates by DEPARTMENT. Assumes the best way to assign costs to products (cost objects) is based on the product’s demand for resource-consuming activities.
Cost Drivers (The thing that causes the cost to Change)
Traditional Costing - One Driver - Usually volume
vs.
Activity Based Costing - Multiple - Ex. machine hrs. & labor hrs.
Pass Key from Book Re: Cost Drivers
A cost driver is a factor that has the ability to CHANGE total costs. Cost drivers (including nonfinancial, statistical measurements of activities such as sales or production volume) are identified by Activity Based Costing and are related to one of multiple cost pools for cost allocation.
For Ex.-If a production item is totally automated, then labor hrs. has NOTHING to do with the cost of producing that item. A better driver would be machine hrs.
Activity Centers (Cost “Pools”)
Traditional - One Cost Pool for the entire factory
ABC - Multiple Cost Pools by department
In Job Order Costing (Keep Cost Sheets or Job Orders of Total Costs per Job - use when relatively few units & each unit is unique)
The Denominator (bottom of the fraction) is always Whatever is Identified as the”Cost Driver”.
Consider Dir Mat+Dir Labor+OH
MFG Overhead T Account is also referred to as “CONTROL ACCT”.
Job Order T Account for MANUFACTURING OVERHEAD
Dr. Side of T Acct = ACTUAL Costs Incurred:
Indirect Labor Indirect Materials Utilities Deprec. on Bldg. & Eq. Taxes (payroll & property) Fire Ins. Other Indirect Costs
Cr. Side of T Acct = Overhead Applied:
- Budgeted Overhead/Budgeted Cost Driver = Rate
- Rate x Actual = Overhead Applied
If you end up with a Dr. balance on left side of T Acct. - This is BAD. It means your actual overhead was MORE than what was budgeted.
If you end up with a Cr. bal. on right side of T Acct. -
This is GOOD. It means your actual overhead was LESS than what was budgeted.
Remember “BASE” mnemonic for determining the components of inventory costs. (PASS KEY)
INVENTORY-RAW Materials
B. Beginning inv. of raw materials
A. Add Purchases of raw materials
(subtotal) Raw Materials Inv. available for use
S. Subtract raw materials used
E. Ending inv. of raw materials
INVENTORY-WIP
B. Beginning inv. of WIP
A. Add Raw Mat.+Direct Labor+Overhead Used
(subtotal) WIP Inv. available to be finished
S. Subtract Inventory Transferred to Finished Goods
E. Ending inv. of WIP
INVENTORY FINISHED GOODS
B. Beginning Inv. of Finished Goods
A. Inventory transferred from WIP
(subtotal) FG Inv. avail. for sale
S. Subtract COGS
E. Ending Inv. of Finished Goods
