Cost Accounting Chapter 5 & 6 Exam 2

job order costing

* Used for unique units with unique costs of production • Used by both service and manufacturing firms

categories of completed unit for FIFO costing method

- BWIP units - units started and completed during the current period

process costing system

- accumulates production cost by process - has a WIP account for every process

job order costing system

- accumulates production costs by job - uses a single WIP account

what are the ways to measure costs associated with production?

- actual costing system - normal costing system

Overview of job order costing system

- costs are accumulated by the job - Upon completion of a job, the unit cost equals total manufacturing costdivided by the number of units produced

benefits of source documents

- data acquired are recorded in a database - provides flexibility in analysis of subsets - Helps identify if relevant costs are recorded in the general ledger and posted to appropriate accounts

Job-order costing system must be able to identify the quantity of:

- direct materials - direct labor - applied manufacturing overhead

importance of unit cost

- helps submit meaningful bids - influences decisions regarding product design and new product introduction - essential to make decisions about whether to: * make or buy a product * accept or reject a special order * keep or drop a product line

approaches that help deal with prior period output and costs

-FIFO costing method - weighted average method

cost information section

-costs to account for -costs accounted for

basic features of process costing system

1. Homogeneous units pass through a series of similar processes. 2. Each unit in each process receives a similar dose of manufacturing costs. 3. Manufacturing costs are accumulated by a process for a given period of time. 4. There is a work-in-process account for each process. 5. Manufacturing cost flows and the associated journal entries are generally similar to job-order costing. 6. The departmental production report is the key document for tracking manufacturing activity and costs. 7. Unit costs are computed by dividing the departmental costs of the period by the output of the period.

Steps in Building a Production Report for ProcessCosting

1. Preparation of a physical flow schedule which provides an analysis of the physical flow units 2. Calculation of the period's equivalent units 3. Unit cost calculation4. Valuation of inventories 5. Cost reconciliation Costs in beginning WIP and costs incurred during the current period should equal the total costs assigned to goods transferred out and to goods in ending W IP

Impact on Cost Management System: Heterogeneity

A strong systems approach is needed. Productivity measurement is ongoing. Total quality management is critical.

theoretical activity level

Absolute maximum production activity of a manufacturing firm

normal activity level

Average activity usage that a firm experiences in the long term

operation costing

Blend of job-order and process-costing procedures applied to batches ofhomogeneous products

normal spoilage

Caused because of the nature of the production process

operational process system

Characterized by a large number of homogeneous products passing through a series of processes

Relationship to Business: Inseparability

Consumer is involved in service process Services are difficult to mass produce.

normal cost of goods sold

Cost of goods sold before adjustment for anoverhead variance

Impact on Cost Management System: Inseparability

Costs are accounted for by customer type. System must be generated to encourage consistent quality.

practical activity level

Maximum output that can be realized if everything operates efficiently

equivalent units schedule

Output for the period must take into consideration the work done on units fully completed as well as the work done on partially completed units. Thus, equivalent units become the relevant output measure

expected activity level

Production level the firm expects to attain for the coming year

unit cost calculation

Provides the cost of finished goods inventory at any point in time

adjusted cost of goods sold

Result after adjustment for the period's overheadvariance takes place

Relationship to Business: Perishability

Service benefits expire quickly. Service may be repeated often for one customer.

Relationship to Business: Heterogeneity

Services are difficult to standardize. It is difficult to ensure quality control of services

Relationship to Business: Intangibility

Services cannot be stored. Services cannot be patented. Pricing is complicated.

Impact on Cost Management System: Perishability

There are no inventories. There needs to be a standardized system to handle repeat customers.

Impact on Cost Management System: Intangibility

There are no inventory accounts. There is a strong ethical code. Costs must be related to entireorganization

abnormal spoilage

Unexpected and not part of normal operations - charged to loss from abnormal spoilage

normal costing system

Uses actual cost of direct materials and labor butapplies overhead using predetermined estimate

actual costing system

Uses actual costs for direct materials, direct labor, andoverhead to determine unit cost

job order costing with activity based costing

Using a single rate based on direct labor hours may result in inaccurate cost assignments o Solved by assigning departmental overhead rates and using activity-based costing • Affect only the application of overhead • Activity cost is applied to each job by multiplying the activity rate by the job's use of the associated driver

overhead variances

Usually immaterial and is therefore closed to the cost of goods sold account

transferred in cost

a cost transferred from a prior process to a subsequent process

work orders

are used to collect production costs for each batch and initiate production

work in process inventory file

collection of all job cost sheets

______________ affects costing methods

degree of uniqueness

operation costing

hybrid of job order and process costing

job order cost sheet

identifies each job and accumulates its manufacturing costs - created upon receipt of a production order - contains a job order number that identifies the new job

source document

keeps track of costs as they occur and describes a transaction

disadvantage of weighted average method

may impair accuracy and performance measurement

manufacturing firms

o Combine direct materials, direct labor, and overhead to produce a new product o Produce goods that are tangible and can be inventoried and transported

operational process system

o Each process is responsible for one or more operations that bring a product one step closer to completion • May require materials, labor, and overhead inputs • Upon completion of a particular process, the partially completed goods aretransferred to another process

service firms

o Service is characterized by its intangible nature • Not separable from the customer and cannot be inventoried

operation costing

o Uses job-order procedures to assign direct materials costs to batches o Uses process procedures to assign conversion costs

normal spoilage

o When spoilage doesn't result from a particular job, it is subsumed in the overhead rate and spread across all jobs through applied overhead o When spoilage is caused due to the exacting nature of the job, extra cost is added to that job's cost

cost measurement

refers to classifying costs

cost accumulation

refers to the recognition and recording of costs

advantage of weighted average method

simplicity

unit information section

units to account for units accounted for

process costing system

used when units are homogeneous

role of activity-based costing (ABC) in manufacturing process

• Assign overhead shared by processes or cells to the individual processes and cells o Overhead located within the cell belongs exclusively to the product, and activities may be shared by processes (cells) • Activity rates are used to assign overhead to individual processes

production of unit cost information

• Both cost measurement and cost assignment are required o Normal costing is preferred because it provides information on a more timely basis o Direct materials and direct labor costs are traced to units of production o Actual costs are used since the actual costs of materials and labor are known at any point in time o Overhead is applied using a predetermined rate

equivalent units of output

• Complete units that could have been produced given the total amount of productive effort expended for the period under consideration • Every transferred-out unit is an equivalent unit

accounting for finished goods inventory

• Cost of a completed job is debited to finished goods inventory and credited to work-in-process

accounting for cost of goods sold

• Cost of a completed job is: o Debited to Cost of Goods Sold inventory o Credited to Finished Goods Inventory

treatment of transferred in goods

• Cost of this material is the cost of the goods transferred out computed in the prior department • Units started in the subsequent department correspond to the units transferred out from the prior department • Units of the transferring department may be measured differently than the units of the receiving department o Goods transferred in must be converted to the units of measure used by the second department

how does the weighted average method differ from FIFO

• Differs from FIFO on: o How output is calculated o What costs are used for calculating the period's unit cost • BWIP + Current costs

accounting for finished goods inventory

• Direct materials, direct labor, and applied manufacturing overhead are totaled for completed job so Yields the manufacturing cost of the job • Cost of a completed job is debited to finished goods inventory and credited to work-in-process o Finished goods inventories are carried at normal cost rather than actual cost

closing the overhead variance account

• Done once at the end of a year • Variances are expected each month because of non uniform production and overhead actual costs o Over time, these costs should largely offset each other • Debiting Cost of Goods Sold is equal to adding the underapplied amount to the normal cost of goods sold o If overhead variance had been overapplied, Cost of Goods Sold would be credited

JIT manufacturing firms

• Emphasize continuous improvement and the elimination of waste • Strive to minimize inventories • Objective - Simplification • Create work cells that produce a product or subassembly from start to finish • Unit costs are computed by dividing the costs of the period by output of the period

FIFO costing method

• Equivalent units and manufacturing costs in beginning work in process are excluded from the current period unit cost calculation • Recognizes that the work and costs carried over from the prior periodlegitimately belong to that period

overhead application

• Jobs are assigned overhead costs with a predetermined overhead rate o Direct labor hours are used as the measure to calculate overhead • When overheads are assigned based on drivers other than direct labor, the other drives must also be accounted for

accounting for nonmanufacturing costs

• Nonmanufacturing costs include selling and general administrative expenses o Period costs and are never assigned to inventory accounts o Do not belong to the overhead category o Accumulated in the controlling accounts o Flow to the income statement at the end of the period

cost assignment

• Refers to association of production costs with the units produced • Costs are assigned to units of product manufactured or units of service delivered - Once costs have been accumulated, measured, and assigned, unit costs can be calculated

Production report

• Traces the flow of units through a department and identifies the costs charged o Shows the computation of unit costs and reveals the disposition of the department's costs for the reporting period • Divided into unit information and cost information sections

weighted average costing method

• Treats beginning inventory costs and accompanying equivalent output as if they belong to the current period • Merges prior period output and manufacturing costs found in beginning work in process with the current period output and manufacturing costs

accounting for cost of goods sold

• When a job is shipped to the customer, the cost of the finished job becomes a cost of goods sold • Cost of a completed job is: o Debited to Cost of Goods Sold inventory o Credited to Finished Goods Inventory