Week 3 Flashcards
What are product costing systems?
When product related costs are accumulated and use procedures to assign them to the final products. They include production costs
Why would you want to know the cost of a product?
Value of inventory on hand Determine costs of goods sold Assist management of resources Assist pricing decisions Determine product line profitability
Different types of product costs
Cost for inventory valuation for external reporting includes manufacturing costs only
For longer term decisions about products wider definition may be used to include other costs
For short term strategic decisions a wider definition can be used which includes sunk costs
How to design product costing systems?
Identify the managers needs
Costs and benefits of providing various cost estimates must be compared
What are manufacturing costs made up of?
Direct material, direct labour and manufacturing overhead
How to allocate manufacturing costs?
Aggregate overhead costs into cost pools
Identify the overhead costs driver(s)
Calculate a predetermined (or budgeted) overhead rate per unit of cost driver
Apply manufacturing overhead costs to products at the budgeted overhead rate, multiplied by the quantity of the cost driver consumed by the product
How to account for manufacturing overhead?
Two types of accounting overhead are recorded in the accounting system
- actual manufacturing overhead (debited to the manufacturing overhead account)
- applied manufacturing overhead (applied to the products at the pre determined rate, credited to the manufacturing account)
How is the manufacturing overhead account cleared at end of period?
Either - close the under applied or over applied over to cost of goods sold
- prorate to cost of goods sold, work in process inventory and finished goods inventory
When do most firms clear manufacturing overhead account?
Mostly end of year, monthly fluctuations may average out over the year
What are the two types of product costing systems
Job costing - assigns production costs to individual jobs
Process costing - assigns production costs to processes or departments, and averages them across all units produced
Or combination of both
What are differences between service and manufacturing businesses?
Most service outputs are intangible Service outputs are often heterogeneous Selfies are consumed when produced Services are perishable Remember most manufactures provide services with their product, upstream and downstream of the value chain may produce services
When should firms estimate their service costs?
There are no external reporting requirements to do so
Service costing systems will be implemented where benefits exceed costs
If there is a relevance for managers
How does service costing work?
Job costing is common in professional service firms and some service shops
Costing systems in service firms tend to focus on the costs of responsibility centres
The benefits of such a system need to be compared to the cost of the system
Work in progress for service firms?
Some service firms do need to account for work in process, this consists of accumulated costs of jobs where fees have not been realised
How does costing work in retail or wholesale businesses?
COGS = inventory at beginning + purchases - inventory at end
