B 1.3 Cost Measurement Methods and Techniques

The steps that a company, using a traditional cost system, would take to implement activity-based costing include:

1. Evaluation of the existing system to assess how well the system supports the objective of an activity based cost system and II. Identification of the activities for which cost information is needed with differentiaiton between value adding and non-value adding activites

***Weighted Average Equivalent Units Components

2 Elements should be considers to figure out Weighted Average Equivalent Units: a) Units Completed during the month (Units Completed) b) Units partially complete / WIP completed @ the end of the period (*Ending WIP x % of Ending WIP Completed*) Weighted Average Equivalent Units => (Units Completed) + (Ending WIP x % of Ending WIP Completed)

a) Cost Flow Assumptions ***FIFO Equivalent Units Components *3 Steps*

3 Elements should be considers to figure out FIFO Equivalent Units: a) Completion of Units on Hand & WIP that is *Not* Completed @ the Beginning of the Period *(Beginning WIP x % of Beginning WIP to be complete)* b) Units Started and Completed during the Period *(Units Completed - Total Beginning WIP)* c) Units Partially complete & WIP completed @ the End of the Period *(Ending WIP x % of Ending WIP Completed)* (Beginning WIP x % of Beginning WIP to be complete) +(Units Completed - Total Beginning WIP) +(Ending WIP x % of Ending WIP Completed) =*FIFO Equivalent Units*

Conversion cost

= *DL* + FOH FOH= include InDirect Cost (can NOT be Easily Traced) such as indirect labor, indirect materials

Prime cost

= DM + *DL*

Product cost

= DM+DL+FOH *Applied* are *ALL* cost related to the Manufacturing of the Product -> Product Cost is *NOT* expensed *UNTIL* the Product is *SOLD* (Matching Principle) -> Product Cost are "*Inventoriable*" [i.e. consider an asset (on B/S) until the product is Sold (on I/S)]

Job Order Costing *Used for Internal and External Purpose both

It is a Cost Accumulation System. When there are relatively few units produced *OR* when each unit is Unique or Easily Identifiable *(Custom Product).* Under Job Order Costing, Cost is allocated to a specific job as it moves through the manufacturing process (*Sequentially*).

Joint cost allocation

Joint costs will most likely be allocated based upon relative unit volume, relative sales value at split off, or net realizable value. Flexible budget amounts are not used to allocate joint costs ====>Physical measures, such as weights or volume, are a recognized method of allocating joint costs Flexible budget amounts are *NOT* used to allocate joint costs

Cost Allocation

is referred to as "Distribution of Overhead Costs". essential for measuring income and assets for external reporting

Seacraft Inc received a request for a competitive bid for the sale of one of its unique boating products with a desired modification. Seacraft is now in the process of manufacturing this product but with a slightly different modification for another customer. These unique products are labor intensive and both will have long production runs. What methods should Seacraft use to estimate the cost of the new competitive bid? A. Learning curve analysis.B. Continuous probability simulation.C. Regression analysis.D. Expected value analysis.

答案解析： Learning curve analysis states that the more experience people have with doing a task, the more efficient they become in doing that task. As production involves intensive labor usage, learning curve analysis is appropriate to use to use to estimate the cost of the new competitive bid. Seacraft is placing a bid to produce a customized, unique product. The company has had previous experience in producing a similar product for another customer. Because of Seacraft's previous experience, its costs to produce a similar product will be less time consuming and consequently lower than if the company had never produced this type of product before. Seacraft can therefore set its bid lower because of its anticipated lower costs.Simulation is a process of changing key variables to determine the possible change in the optimal solution because of changes in the variables. It is used to define how sensitive the project (sales for example) is to a change in those variables. Continuous probability simulation is not the best method for Seacraft to use to estimate the cost of the new competitive bid.Regression analysis is a quantitative method that is used to find an equation for the linear relationships between or among variables. That result can be used to draw conclusions and make forecasts. To use regression analysis, historical data is required for the variable that we are forecasting or for the variables that are causal to this variable. If historical data is not available, regression analysis cannot be used. Even when historical data is available, if there has been a significant change in the conditions surrounding that data, its use is questionable for predicting the future. Regression analysis is not the best method for Seacraft to use to estimate the cost of the new competitive bid.Expected value analysis is an effective method to use in conditions of risk. It is calculated by multiplying each possible outcome by related probability added up together. In other words it is weighted average of possible outcomes. It is used to select the best of given alternatives. Expected value analysis is not the best method for Seacraft to use to estimate the cost of the new competitive bid.

*Under/Over applied Manufacturing overhead* Mason Company uses a job-order cost system and applies manufacturing overhead to jobs using a predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200% of direct-labor dollars. This rate was calculated last December and will be used throughout the current year. Mason had one job, No. 150, in process on August 1 with raw materials costs of $2,000 and direct-labor costs of $3,000. During August, raw materials and direct labor added to jobs were as follows: No.150 No.151 No.152 Raw materials $ - $4,000 $1,000 Direct labor 1,500 5,000 2,500 Actual manufacturing overhead for the month of August was $20,000. During the month, Mason completed Job No.150 and 151. For August, manufacturing overhead was *A. Underapplied by $2,000* B. Overapplied by $4,000 C. Underapplied by $7,000 D. Underapplied by $1,000

(A) Since manufacturing overhead is applied on the basis of direct labor dollars, the total of the direct labor dollars for August must first be determined: $1,500 + $5000 + 2500 = $9000 Manufacturing overhead is applied at the rate of 200%, so (9000 x 200%= 18,000), so 18,000 was applied for the month of August. Actual manufacturing overhead for August was $20,000, so manufacturing overhead was underapplied by $2,000 {20,000 actual -18,000 applied}.

*physical units method to allocate joint production costs* Lankip Company produces two main products and a by-product out of a joint process. The ratio of output quantities to input quantities of direct material used in the joint process remains consistent from month to month. Lankip employs the physical units method to allocate joint production costs to the two main products. *The net realizable value of the by-product is used to reduce the joint production costs before the joint costs are allocated to the main products.* Data regarding Lankip's operations for the current month are presented below. During the month, Lankip incurred joint production costs of $2,520,000. The main products are not marketable at the split-off point and, thus, have to be processed further. *First Main Product //Second Main Product// By-Product* Monthly output in pounds 90,000 150,000 60,000 Selling price per pound $30 $14 $2 Separable process costs $540,000 $660,000 The amount of joint production cost that Lankip would allocate to the Second Main Product by using the *physical units method to allocate joint production costs* would be: a. $1,200,000. b. $1,260,000. *c. $1,500,000* d. $1,575,000. e. $1,650,000.

(C) $1,500,000 joint cost is allocated to the second main product by using the physical volume method. Joint costs: $2,520,000 Less net realizable value of byproduct (60,000 lbs x $2 sp -$0 cost) (120,000) =Net joint costs to be allocated $2,400,000 150,000 pounds of second main product / 240,000 pounds total (first +second) main products X $2,400,000 = $1,500,000

New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more equitably, New-Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen makeup. *Activity* Incoming material *Cost Driver* Type of material inspection *Cost Rates* $11.50 per type *Quantity for Satin Sheen* 12 types *Activity* In-process inspection *Cost Driver* Number of units *Cost Rates* $0.14 per unit *Quantity for Satin Sheen* 17,500 units *Activity* Product certification *Cost Driver* Per order *Cost Rates* $77 per order *Quantity for Satin Sheen* 25 orders *The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing (ABC) is* A. $88.64 per order. B. $525.50 lower than the cost using the traditional system. C. $8,500.50 D. $525.50 higher than the cost using the traditional system.

(D) Activity based costing of $4,513 is $525.5 higher than the $3,987.5 cost using the traditional system Incoming material inspection cost rates $11.5 x total quantity 12 = Costs $138 In-process inspection cost rates $0.14 x total quantity 17,500 = Costs 2,450 Product certification cost rates $77 x total quantity 25 = Costs 1,925 Total activity based cost (ABC) 4,513 Traditional cost Cost Rates 14.5% x Total quantity $27,500 = 3,987.5 Excess of ABC over traditional $525.50

*relative net realizable value method of allocating joint costs* A processing department produces joint products Ajac and Bjac, each of which incurs separable production costs after split-off. Information concerning a batch produced at a $60,000 joint cost before split-off follows: Separable costs Ajac $8,000 Separable costs Bjac 22,000 Total *$30,000* Sales value Bjac 40,000 Sales value Ajac $80,000 Total *$120,000* What is the joint cost assigned to Ajac if costs are assigned using the relative net realizable value? A. $16,000 B. $52,000 C. $40,000 *D. $48,000*

(D) Using *relative net realizable value method* of allocating the *joint costs*, the net realizable value of both products needs to be caclculated: (NRV=SP-Cost to sell) Sales A 80,000 Separable cost A (8000) =NRV $72,000 Sales B 40,000 Separable costs (22,000) =NRV $18,000 The joint costs are allocated based on relative net realizable values. The two products together have a net realizable value of $90,000 ($72,000 +$18,000) Ajac contributes 80% of this total (72,000 / 90,000= 80%). 80%of the joint costs are thus allocated to Ajac: 80% x $60,000 = $48,000. When net realizable method of allocating joint costs is used and given units produced and units sold......we use units produced amount to multiply by the selling price to arrive at total SP which we minus cost from to get NRV.....we do not use units sold

What is the cost of ending inventory given the following factors? Beginning inventory $5,000 Total production costs 60,000 Cost of good sold $55,000 Direct labor $40,000 a. $45,000 *b. $10,000* c. $5,000 d. $50,000

(b) *B*..eginning inventory $5,000 *A*..dd: production costs 60,000 total manufacturing cost available $65,000 *S*..ubtract: Cost of goods sold (55,000) =*E*..nding inventory $10,000 Total production costs include direct labor, direct material and applied overhead. The information provided regarding direct labor for $40,000 is a distracter. Beg inv +Purch =COGAFS -COGS =EI

The accountant for Champion Brake, Inc. applies overhead based on machine hours. The budgeted overhead and machine hours for the year are $260,000 and 16,000, respectively. The actual overhead and machine hours incurred were $275,000 and 20,000. The cost of goods sold and inventory data compiled for the year is as follows: Direct Materials $ 50,000 COGS 450,000 WIP (units) 100,000 Finished Goods (units) 150,000 What is the amount of over/underapplied overhead for the year? a. $15,000 b. $50,000 c. $65,000 d. $67,000

(b) Budgeted does *NOT* equal applied...have to used budgeted amount and divide by budgeted hours to get rate...than multiply rate by actual hours incurred to get applied *Compute the standard rate per driver (machine hour)* Total standard costs / Total standard hours = Application rate per hour $260,000 budgeted OH / 16,000 machine hours = $16.25 per hour *Compute amount applied* Total actual hours x application rate per hour = Total applied over head 20,000 actual mach hours x 16.2 application rate = 325,000 total OH applied ------------------OH--------------- Actual OH // Applied OH ==================================== 275,000//325,000 ============================= Cr. 50 overapplied DR. bal=underapplied//Cr. bal=overapplied

*Direct Costs and Value-adding costs* Gram Co. develops computer programs to meet customer's special requirements. How should Gram categorize payments to employees who develop these programs? *Direct Costs* // *Value-adding costs* a. Yes//No b. No//No *c. Yes//Yes* d. No//No

(c) *Direct costs* are easily traceable to a product. Payments to employees who develop computer programs are considered part of direct labor. *Value-added costs* increase the worth of the product or service to customers. Employees who develop these programs are adding value to the computer programs.

Jonathan Mfg. adopted a job-costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In addition, budgeted variable and fixed factory overhead were $50,000 and $25,000, respectively. Actual costs and hours for the year were as follows: Direct labor hours 21,000 Direct labor costs $110,000 Machine hours 35,000 For a particular job,1,500 direct labor hours were used. Using direct labor hours as the cost driver, what amount of overhead should be applied to this job? A. $5,625 B. $5,357 *C. $7,500* D. $3,214

(c) Using direct labor hours, the overhead applied consists of both variable overhead and fixed overhead. The calculation is as follows: Variable overhead rate = $50,000 budgeted VOH / 20,000 budgeted cost driver activity levels for direct labor hours = $2.50 per direct labor hour Fixed overhead rate = $25,000 budgeted FOH / 20,000 budgeted cost driver activity levels for direct labor hours = $1.25 per direct labor hour Total overhead rate = $2.50 +$1.25 = $3.75 Overhead applied to the job = $3.75 total OH rate x 1,500 DL hours used = $5,625

During May 1990, Mercer Company completed 50,000 units costing $600,000, exclusive of spoilage allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000 units, costing $80,000, were 50 percent complete at May 31. All units are inspected between the completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the month was $20,000, and abnormal spoilage of $50,000 was also incurred during the month. The portion of total spoilage that should be charged against revenue in May is: a. $50,000 b. $20,000 c. $70,000 *d. $60,000*

(d) *% sold*=25,000 units sold / 50,000 units completed =0.5 Normal spoilage = 20,000 x 0.5 % sold= *10,000* normal spoilage for month of May Normal spoilage is inventory cost until sold, that means, it sits on the Balance sheet as an asset until sold. Entire *$50,000* of abnormal spoilage is period expense so that will be expensed immediately. (abnormal spoilage is charged to I/S) =total spoilage charged against revenue 10,000 normal spoilage + 50,000 abnormal spoilage = *$60,000*

In an activity based costing system, what should be used to assign a department's manufacturing overhead costs to products produced in varying lot sizes? a. A product's ability to bear cost allocations b. A single cause and effect relationship c. Relative net sales values of the products *d. Multiple cause and effect relationships*

(d) Activity based costing assigns costs to activities or transactions and allocates them to products according to their use of each activity. This method means multiple cause and effect relationships may exist. Assigning costs to department should be based on each departments;s appropriate share of these costs, based on cause and effect.

Which of the following costs would decrease if production levels were increased within the relevant range? a. Total fixed costs b. Variable costs per unit c. Total variable costs *d. Fixed cost per unit*

(d) In the relevant range, fixed costs are constant in total, but decrease per unit as production levels increase Fixed cost-->Total cost constant-->per unit cost change Variable costs per unit remain unchanged in the relevant range, but increase in total as unit volume increases Variable cost-->total cost change-->per unit fixed Total variable costs increase as total unit volume increases in the relevant range Total fixed costs are constant in total in the relevant range

Merry Co. has two major categories of factory overhead: material handling and quality control. The costs expected for these categories for the coming year are as follows: Material handling $120,000 Quality inspection 200,000 The plan currently applies overhead based on direct labor hours. The estimated direct labor hours are 80,000 per year. The plant manager is asked to submit a bid and assembles the following data on a proposed job: Direct materials $4,000 Direct labor (2,000 hours) $6,000 What amount is the estimated product cost on the proposed job? a. $ 8,000 b. $10,000 c. $14,000 d. *$18,000*

(d) Overhead is applied at a rate of $4.00 per direct labor hour [(Material handling $120,000 + Quality inspection $200,000) ÷ 80,000 estimated direct labor hours]. Overhead costs allocated to the job would be *$8,000* ($4.00 × 2,000 direct labor hours). Therefore, the estimated cost is *$18,000* (*$4,000 direct materials + $6,000 direct labor+ $8,000 overhead allocated (applied)*). the estimated product cost is equal to sum of prime costs (DM + DL) and *Applied* overhead

*Materials are added at the beginning of the production process cost per equivalent unit eg.* The following information pertains to Lap Co.'s Palo Division for the month of April: *Number of units* // *Cost of materials* Beginning work in process *15,000 $5,500* Started in April *40,000 18,000* Units completed *42,500* Ending work in process *12,500* All materials are added at the beginning of the process. Using the weighted average method, the cost per equivalent unit for materials is a. $0.59 b. $0.55 c. $0.45 d. $0.43

(d) Under the weighted-average method, equivalent units of production and cost per unit are based on all work (this period's and last period's) done on units completed plus all work done to date on the units in ending work in process. Since *materials are added at the beginning of the production process*, both the units completed and the ending work in process are 100% complete with respect to materials. *Weighted avg equiv units (2 steps)* Units completed + End WIP * % Completed =42,500 + 12,500 * 100% =42,500 + 12,500 =55,000 total weighted avg equiv units *Cost per equiv unit* Beg cost + Current cost / equiv units (from above calcu) $5,500 +18,000 / 55000 =23,500/55000 *=0.43 rounded*

Activity Based Costing (ABC) - Not for external reporting but for internal reporting ======> ABC uses cause and effect relationships to capitalize costs to inventory. This is *NOT* acceptable for external reporting and useful for internal reporting to managment A basic assumption of activity-based costing (ABC) is that: *Products or services require the performance of activities, and activities consume resources*

*ABC* uses *Multiple O/H* rates by department, whereas *Traditional* costing assigns O/H as a single cost pool. ABC is more focused and more detail approach. *Note:* ABC is more accurate way of doing costing. *Cost Drivers* Traditional Costing ---> One Volume Activity Based Costing ---> Multiple Volume

Madtack Company's beginning and ending inventories for the month of November are: November 1 November 30 Direct materials $67,000 $62,000 Work-in-process 145,000 171,000 Finished goods 85,000 78,000 Production data for the month of November: Direct labor $200,000 Actual factory overhead 132,000 Direct materials purchased 163,000 Transportation in 4,000 Purchase returns and allowances 2,000 Madtack uses one factory overhead control account and charges factory overhead to production at 70% of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end.

*DM T account Prime Cost* Prime Cost = DM Used + DL Used *Madtack company's prime cost for November is* DM Beg Bal 67,000 +DM purchases 163,000 +Transportation in 4000 -Purchase returns and allowances 2000 =Net purchases 23,2000 *//* DM Used *Plug* 170,000 ======= End DM 62,000 DM Beg Bal 67,000+ DM purchases 163,000 +Transportation in 4000 -Purchase returns and allowances 2000 - END DM 62000=DM used 170,000 DM used + DL used = Prime cost\ 170,000 + 200,000 = *370,000* *Madtack company's total manufacturing cost for November is:* Manufacturing Costs (treated as "Product Cost"): are ALL cost related to the Manufacturing of the Product (DM+DL+FOH Applied) Total Manufacturing Cost = DM USED + DL USED + FOH Applied FOH Applied = % x driver =.7 x 200,000 DL =140,000 =DM Used+ DL Used + FOH *Applied* =170,000+200,000+140,000 *=510,000* *Madtrack Company's cost of goods transferred to finished goods inventory for November is* COG transferred to FG = COGM in WIP T account Beg WIP 145,000 +DM Used 170000 +DL Used 200000 +FOH Applied 140000 =655000 // COGM squeeze 484,000 ======== END 171,000 *Madtack Company's cost of goods sold for November is:* COGS = DR in FG Beg FG 85,000 +COGM 484,000 =COGAFS 569,000 //COGS squeeze 491,000 ========== End FG 78,000 *Madtack Company's net change to factory overhead control for the month of November is:* At the end of a period, if manufacturing overhead account shows a debit balance, it means the overhead is underapplied. On the other hand; if it shows a credit balance, it means the overhead is over-applied. ------------------OH--------------- Actual OH // Applied OH ==================================== DR. bal=underapplied//Cr. bal=overapplied OH Dr. 95 Acutal///Cr. 90 Applied ============================= Dr. 5 Balance goes under bigger amount.... since 95 is bigger...the 5 balance goes under Dr....so underapplied by 5....5 dr. 95-90=5 *More on applied (right) side than over applied cr....More on actual (left) side than under applied* Factory OH applied (70% of DL) $140,000 Actual OH incurred 132,000 =Amount OH Overapplied 8000 Dr. Actual 132,000//140,000 Applied -------------------------------------- =================>8 CR. overapplied Actual is a DR......Applied is a CR. More Applied...which is Cr.....so balance goes under Cr........

Kimbeth Manufacturing uses a cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May: Beg WIP inventory 16,000 units Started in production during May 100,000 units Completed production during May 92,000 units Ending WIP inventory, May 31 24,000 units The beginning inventory was 60 percent complete for materials (that means 40% left to be complete) and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs Costs pertaining to the month of May are as follows: -Beginning inventory costs are: materials $54,560; direct labor $20,320; and factory overhead, $15,240. -Costs incurred during May are: materials used, $468,000; direct labor $182,880; and factory overhead, $391,160.

*FIFO Equivalent Units Components E.G:* Using the first-in, first-out (FIFO) method, the *equivalent units of production for materials* are: *a. 104,000 units* b 107,200. units c. 108,000 units d. 113,600 units (Beginning WIP x % of Beginning WIP *to be complete*)=====> scenario says 60 percent complete already for *materials*.....so amount of % left to complete is 40% which is the percentage used here..... *(16,000 units x .4 percent left to complete)= 6400* +(Units Completed - Total Beginning WIP) *(92,000 - 16,000)=76,000* (Ending WIP x % of Ending WIP Completed) *(24,000 x .9)=21,600* =6400+76,000+21,600=*104,000 equivalent units of production* Using FIFO method, the equivalent units of production for *conversion costs* are: a. 95,200 units b. 101,600 c. 88,800 *d. 98,400* (Beginning WIP x % of Beginning WIP *to be complete*)=====> scenario says 20 percent complete already for *conversion costs*.....so amount of % left to complete is 80% which is the percentage used here..... *(16,000 units x .8 percent left to complete)= 12,800* +(Units Completed - Total Beginning WIP) *(92,000 - 16,000)=76,000* (Ending WIP x % of Ending WIP Completed) *(24,000 x .4)=9600* =12,800+76,000+9,600=*98,400 equivalent units of production*

*Split Off Point:* When during production process for the main product, new product is created as "Individual product".

*Net sales value at split off:* Sales price less cost to complete is defined as the net sales value at split off. In other words, this is the additional contribution to income generated by completing the product

Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.

*Physical quantity allocation* *Assuming no further processing work is done after the split-off point, the amount of joint cost allocated to commercial building lumber (CBL) on a *physical quantity allocation basis would be:* a. $75,000 *b. $180,000* c. $225,000 d. $120,000 (B) The question requires allocation based on physical quantity, as follows: MSB 60,000 units CBL 90,000 units = Total units 150,000 MSB 60,000 units / 150,000 total units =.40 CBL 90,000 units / 150,000 total units= .60 *Allocation of joint costs of $300,000* MSB .40 x $300,000 = $120,000 CBL .60 x $300,000 = *$180,000* ====================> $300,000 *Relative sales value basis* *If there are no further processing costs incurred after the split-off point, the amount of joint cost allocated to the mine support braces (MSB) on a relative sales value basis would be:* a. 180,000 b. 120,000 *c. 75,000* d. 225,000 *Relative Sales Value* MSB 60,000 units x $2/unit = $120,000 CBL 90,000 units x $4/unit = 360,000 Total sales value===========> $480,000 MSB $120,000/ 480,000 total units =.25 CBL $360,000 / 480,000 total units= .75 *Allocation of Joint Costs of $300,000* MSB .25 x $300,000 = $75,000 CBL .5 x $300,000 = 225,000 *If Sonimad Sawmil chose not to process the mine support braces beyond the split-off point, the contribution from the joint milling process would be:* Contribution Margin= Product price -Variable costs===> represents total earnings available to pay for fixed expenses and to generate a profit Sales price with coating $5 per unit Sales price without coating (2) per unit = Additonal revenue from coating $3 per unit Units of MSB x 60,000 units =Additonal revenue from coating 180,000 Less cost of applying coating (100,000) =*Contribution margin foregone $80,000*

*Note:* Now, Goal is to come up with Cost$/Unit under each Methodology (Weighted Average and FIFO) *To come up with the Cost under FIFO:* *Using the FIFO method, the equivalent unit cost of materials for Materials is:* => Current Cost Only / Equivalent Units 468,000 / 104,000 = $4.5 equivalent unit cost cost per unit of materials *Using the FIFO method, the equivalent unit conversion cost for May is:* => Current Cost Only / Equivalent Units =182,880 director labor + 391,160 FOH / 98,400 =574,040/98,400 =$5.83 equivalent unit cost per unit of conversion cost

*Using the FIFO method, the total cost of units in the ending WIP inventory at May 31 is:*===> Applying unit costs to equiv units in E/I *End WIP x % completed x Cost per unit* Materials EI Actual Units 24,000 x .90 % complete = 21,600 equiv units x $4.5 unit cost = *$97,200 total cost* Conversion costs EI Actual Units 24,000 x .40 % complete= 9,600 Equiv Units x $5.83 unit cost=*$55,968 total cost* Ending Inventory 24,000 Actual Units *Total cost= $97,200 + $55,968= $153,168* Note that the unit costs for materials ($4.50) and conversion costs ($5.83) are calculated below in Notes A and B.

*To come up with the Cost under Weighted Average: // Cost $ per unit* Units completed + (END WIP x % Completed) = Weighted avg equiv units Using the weighted average method, the equivalent unit cost of materials for May is:* =92.000 + (24,000 x .9) =92,000 + 21,600 =*113,600* Cost per unit Beg cost + Current cost / Equiv Units Weighted Avg =54,560 + 468,000 / 113,600 =522,560 / 113,600 *=$4.60* *Using the weighted average method, the equivalent unit conversion cost for May is* Units completed + (END WIP x % Completed) = Weighted avg equiv units =92,000 + (24,000 x .4) =92,000 + 9600 =*101,600* Beg cost + Current cost / Equiv Units Weighted Avg =BEG labor 20,320 + Beg FOH 15,240 + Curr labor 182,880 + Curr FOH 391,160 / 101,600 equiv units =Beg 35,560 + Curr 574,040 / 101,600 equiv units =609,600/101,600 *= $6.00*

*Using the weighted average method, the total cost of units in the ending WIP inventory at May 31 is:*===> Applying unit costs to equiv units in E/I *End WIP x % completed x Cost per unit* Materials EI Actual Units 24,000 x .90 % complete = 21,600 equiv units x $4.6 unit cost = $99,360 total cost Conversion costs EI Actual Units 24,000 x .40 % complete= 9,600 Equiv Units x $6.00 unit cost=$57,600 total cost Ending Inventory 24,000 Actual Units *Total cost= $99,360 + $57,600= $156,960* Note that the unit costs for materials ($4.60) and conversion costs ($6.00) are calculated below in Notes A and B.

*WIP* *_________________________________________[* Beg bal +DM used +DL used +FOH Applied = End Bal (to B/S)

*]_____________________________________________* - COGM*==>* *Cost of good manufactured AKA cost of jobs completed uses APPPLIED OH NOT ACTUAL OH* *Factory OH Applied: On the exam, they will give you a rate like 80% to be applied to something like DL. Just take the rate x DL and plug it into the WIP calc. If you are given an amount of Indirect Materials put into production and also given an amount for Manufacturing OH, ignore the Indirect Materials amount because it is included in the Manufacturing OH number - it is there to trick you into giving a wrong answer* *Memory Trick: Both WIP and Finished Goods have a COG credit - one is COGM and one is COGS. You SELL Finished Goods, so it gets Cost of Goods SOLD (COGS).*

*FG* *_________________________________________[* Beg bal +COGM OR purchases (IF Purchases Include Freight In) =COGAS =End bal (to B/S)

*]_____________________________________________* -COGS (To I/S)

*T Accounts* *Direct Materials* *_________________________________________[* Beg Balance +Net Purchases (Include +Freight In)*!* =Ending Balance (To B/S) *!*Purchases + Transportation In - purchase returns and allowances

*]_____________________________________________* -Direct Materials used *===>*

*What are the characteristics of Activity Based Costing?* vs Traditional costing ABC costing is an accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers

-> It applies a more Focused and detailed approach. -> It focuses on Multiple causes (activities) and effects (cost) and then assign costs to them. -> ABC *can be* part of a Job Order System (Unique) OR a Process Cost System (Mass) *Note:* Activity Based Costing is also called *"Transacting Based Costing".* ==>Activity-based costing (ABC) tends to increase both the number of cost pools and the number of allocation bases. ABC breaks down a production process into many activities. It then accumulates costs by activity (i.e., cost pools) using an appropriate allocation base for each activity. Vs. *Traditional cost system* would use one cost and one allocation base (i.e., fro factory overhead). On the other hand, ABC would designate many activities within the process and allocate costs by activity using a different base for each activity. The use of the activity based costing normally results in a *substantially greater unit costs for low volume products than is reported by traditional product costing* Activity bases costs anticipates increased cost pools and increased allocation bases. The determination of the amounts that go in these pool and their related cost drivers will likely be *more costly than traditional systems. Increased costs of ABC represent a limitation of the system* The benefit that management can expect from *traditional costing* includes using a common departmental or factory wide measure of activity, such as direct labor hours or dollars, to distribute manufacturing overhead to products ==> ABC provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decsions. ==>ABC streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times, optimal plant layout, and improved quality ==>ABC lead to a more competitive position by evaluating cost drivers, i.e., costs associated with the complexity of the transaction rather than the production volume ==>ABC refines product cost information because the cost system emphasizes long-term product analysis (when fixed costs become variable costs)

Spoilage (Or Shrinkage)

1. *Normal Spoilage (Inventory Cost)*==> Considered a necessary cost of production and is a product (inventoriable) cost. Normal spoilage occurs under regular operating conditions and is *included in the standard cost* of the manufactured product (*It is part of the Inventory Cost = Product Cost*). 2. AbNormal Spoilage (Period Expense)==> considered unnecessary and is a period cost AbNormal spoilage should *NOT* occurs under regular operating conditions and is *NOT included in the standard cost* of the manufactured product (It is part of the Normal Operating Expense = Period Cost). e.g. Sales commissions are selling and administrative expenses that are period (not product), and abnormal spoilage is charged against income of the period as a separate componet of cost of goods sold

*Cost Behavior* Whether Cost is *Fixed Cost* OR *Variable Cost* OR *Semi-Variable Cost*

1. *Variable Cost:* *Total Cost* that *changes* proportionally with the Cost Driver (eg: Typical Cost drivers include sales volume and production volume). So, Total Cost Varies with output. Under Variable Cost, *Per Unit* Amount stays *Constant BUT Total Amount Varies* (As production volume increases or decreases, the *total* variable cost will *change*, but the Variable *cost per unit* will always remain the *same*). eg. Fudge Bar's $1 each 1 unit=$1 2nd unit=$1 Total cost $2 3rd unit $1 Total cost $3====> *Total cost changes in proportion to the cost driver whichis the units* *Per unit cost remains the same at $1 per unit* 2. Fixed Cost: *Total Cost* does *NOT* changes when the Cost Driver changes. Under Fixed Cost, *Per Unit Amount Varies BUT Total Amount stays Constant* (As production volume increases or decreases, the total Fixed cost will stay the same, but the Fixed cost per unit will Change). eg. Rent cost $50,000 1 unit= rent total cost $50,000 2 units= rent total cost still $50,000 3 units= rent total cost still $50,000 creating more unit does not affect your total cost of rent==> Fixed cost stays same in respect to total cost 1 unit= 50,000 rent / 1 unit = 50,000 2 units = 50,000 rent / 2 units =25,000 cost per unit==> fixed cost of 50,000 per unit decreased as it is being spread over more units 3 units = 50,000 / 3 = 16,667 Per unit changes while total cost remains same 3. Semi-Variable Cost: It contains BOTH Fixed and Variable Cost (Like Manufacturing O/H). e.g. Utility costs are semivariable. Utility costs share the characteristics of both fixed and variable costs over the relevant range. They are unchanged for the first 5,000 gallons (fixed) and then increase per gallon used in excess of 5000 gallons after the threshold (variable)

Cost driver

A Cost Driver is a casual factor (the cause) that increase the cost (the effect) of a Cost Objective. Cost drivers are activities that cause costs to increase as the activity increases. The cost driver is often *Non-Financial.*

Equivalent units

An equivalent unit of production is an indication of the *amount of work done* by manufacturers who have partially completed units on hand at the end of an accounting period. *Basically the fully completed units and the partially completed units are expressed in terms of fully completed units*

Inventoriable Costs

Are assets until sold, when they become "cost of goods sold"

Weighted average and first in, first out (FIFO) equivalent units would be same in the period when which of the following occurs? No beginning inventory exists

FIFO and weighted average produce the same equivalent units when there is no beginning inventory. FIFO is a three step process, while weighted average is a two-step process. The major difference between the two method is consideration of beginning inventory amounts by FIFO Fifo: (Beginning WIP x % of Beginning WIP to be complete) *+(Units Completed - Total Beginning WIP) +(Ending WIP x % of Ending WIP Completed) =FIFO Equivalent Units* weighted average: *(Units Completed) +(Ending WIP x % of Ending WIP Completed)* =Weighted average

Example- Spoilage Application

Fresh Baked Company produces ready-to-serve fruit pies for local restaurants and supermarkets, During the month of April, the company had the following costs related to the production of 20,000 pies: Pie ingredients $45,000 *======>Product* Baking Labor 24,000 *======>Product* Plant production overhead 11,000 *======>Product* Sales and marketing expenses 500 *======>Period* Gen and admin expenses 1,200 *======>Period* Normal spoilage 400 *======>Product* Abnormal spoilage 200 *======>Period* Question 1: What is the per unit cost of the pies assigned to inventory for April? Question 2: What amount will the company assign as a period expense for April? Solution 1: Step 1: Determine inventory costs. Pie ingredients: 45,000 Baking labor: 24,000 Plant production overhead: 11,000 *Normal spoilage*: 400 Total inventory costs: *$80,400* Step 2: Determine per unit cost. Per unit cost (of pies) = $80,400 / 20,000 pies = *$4.02* Solution 2: The period expenses assigned to April are as follows: Sales and marketing expenses: $500 Gen & Admin exp 1,200 Abnormal spoilage 200 Total period expenses *$1,900*

Determining gross profit when Beg FG, End FG , sales, and COGM given

Gross profit= Sales - COGS Plug in known variables in FG t account to determine *COGS*, than subtract COGS from sales to get gross profit

Job costing system vs Process costing system *Job costing* is used in the production of *tailor-made or unique goods*, including: - construction of buildings or ships - Aircraft assembly -printing -special-purpose machinery (microcomputer manufacturer) -Public accounting firm -Management consulting firm -Repair shops -Industrial research projects *Process costing* is used where the product is composed of mass produced *homogenous* units such as: -Gasoline and oil -Chemicals -Steel -Textiles (wallpaper) -Plastics -Paints -Flour -Meatpacking -Canneries -Rubber -Lumber -Food processing (beverage drink manufacturer) -Glass -Mining -Cement -Check clearing in banks -Mail sorting in post offices -Food preparation in fast food outlets -Premium handling in insurance companies

If the Cost Object is a *Custom Order* (like for Vehicle with different VIN No's) ---> *Job Costing System* is Used ====> Under Job Order Costing, Cost is allocated to a specific job as it moves through the manufacturing process *(Sequentially).* If the Cost Object is a *Mass Produced Homogeneous Product* (like Pencil) ---> *Process Costing System* is Used ====> Process Costing is a method of product costing that *Averages Costs* and applies them to a large number of homogenous items. ====>Process costing is a method of allocating production costs to products and services by averaging the cost over the total units produced. Costs are usually accumulated by department rather than by job

Mixed Cost

Includes both fixed and variable costs

Stores control and FOH control

Indirect Materials are included in Factory Overhead Costs as they are used in the production process. Therefore, the issue of indirect material would *decrease stores control* and *increase factory overhead control.*

Process Costing *Used for Internal and External Purpose both

It is a Cost Accumulation System. Process Costing is a method of product costing that Averages Costs and applies them to a large number of homogenous items.

Managerial Accounting

focuses on the needs of Internal Users (managers) and in data relevant for decision making. focuses on *future costs* and the impact of decisions on future profitability

Cost Management

is referred to as "Control of Costs".