Mgr Acct Ch 3-4
Classification of Activity Levels re:ch4, lo7
Unit-level activities Batch-level activities Product-level activities Facility-level activities
TRANSFER TO COST OF GOODS SOLD re:ch3, lo4
When items are sold, transfer from finished goods inventory to COGS
TRANSFER TO FINISHED GOODS re:ch3, lo4
When the last WIP is completed, transfer to finished goods inventory
predetermined overhead rate re:ch4, lo1
For job order costing, we assumed that direct labor cost was the relevant activity base for assigning all overhead costs to jobs. For process costing, we assumed that machine hours was the relevant activity base for assigning all overhead to the process or department
Compute Unit Production Costs (Step 3) re:ch3, lo6
For unit materials cost: Total materials cost ÷ Equivalent Units of materials For unit conversion costs: total conversion costs ÷ equivalent units of conversion costs
ABC Step 2 re:ch4, lo3
Identify Cost Drivers The cost driver must accurately measure the actual consumption of the activity by the various products (# setups, # mach hrs)
ABC Step 1 re:ch4, lo3
Identify and Classify Activities and Allocate Overhead to Cost Pools This analysis should identify all resource-consuming activities (setting up machines, machining, inspecting, etc)
Equivalent units re:ch3, lo5
Multiply the # in WIP by the percentage complete. This gives you the equivalent of complete # of units. They measure the work done during the period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product.
Benefits of ABC re:ch4, lo5
more accurate product costing because: ABC leads to more cost pools being used ABC leads to enhanced control over overhead costs ABC leads to better management decisions
Product-level activities re:ch4, lo7
performed every time a company produces a new type of product eg: product design, engineering changes
Batch-level activities re:ch4, lo7
performed every time a company produces another batch of a product eg: equipment setups, purchase orders...
When is it inappropriate to use direct labor as the basis for assigning overhead costs? re:ch4, lo1
When there is not a correlation between direct labor and overhead. Companies that use overhead rates based on direct labor when this correlation does not exist experience significant product-cost distortions.
When are separate unit cost computations needed for materials and conversion costs? re:ch3, lo5
Whenever the two types of costs do not occur in the process at the same time.
Activity in ABC re:ch4, lo1
any event, action, transaction, or work sequence that incurs cost when producing a product or providing a service
cost driver re:ch4, lo1
any factor or activity that has a direct cause-effect relationship with the resources consumed. They measure the number of individual activities undertaken or performed to produce products or provide services.eg, #of setups, #of orders, etc
process cost systems re:ch3, lo1
apply costs to similar products that are mass-produced in a continuous fashion
Facility-level activities re:ch4, lo7
required to support or sustain an entire production process. These costs do not vary as a function of the number of units, batches, or products. eg: plant mgt salaries, property taxes, plant depreciation, utilities
To assign overhead costs to an individual product, the activity-based overhead rate is multiplied by
the number of cost drivers used per product
ABC allocates overhead in a two-stage process re:ch4, lo1
1. Allocate overhead costs to activity cost pools. 2. Assign the overhead allocated to the activity cost pools to products, using cost drivers
In order to complete a production cost report, the company must perform four steps, which, as a whole, make up the process cost system. re:ch3, lo6
1. Compute the physical unit flow. 2. Compute the equivalent units of production. 3. Compute unit production costs. 4. Prepare a cost reconciliation schedule.
When to Use ABC re:ch4, lo5
1. Product lines differ greatly in volume and manufacturing complexity. 2. Product lines are numerous and diverse, and they require differing degrees of support services. 3. Overhead costs constitute a significant portion of total costs. 4. The manufacturing process or the number of products has changed significantly—for example, from labor-intensive to capital-intensive due to automation. 5. Production or marketing managers are ignoring data provided by the existing system and are instead using "bootleg" costing data or other alternative data when pricing or making other product decisions.
Benefits of JIT Processing re:ch4,A4A
1. Significant reduction or elimination of manufacturing inventories. 2. Enhanced product quality. 3. Reduction or elimination of rework costs and inventory storage costs. 4. Production cost savings from the improved flow of goods through the processes.
Differences Between Job Order Cost (JOC) and Process Cost Systems (PCS) re:ch3, lo2
1. The # of WIP accounts used. A JOC system uses only one WIP but PCS uses multiple WIP accounts. 2. Documents used to track costs. A JOC charges individual jobs and summarizes them in a job cost sheet. A PCS uses a production cost report for each department. 3. The point at which costs are totaled. A JOC system totals costs when the job is completed. A PCS totals costs at the end of a period of time. 4. Unit cost computations. In a JOC system, the unit cost is the total cost per job divided by the units produced. In a PCS, the unit cost is total manufacturing costs for the period divided by the units produced during the period.
Similarities Between Job Order Cost and Process Cost Systems re:ch3, lo2
1. The manufacturing cost elements. Both track 3 manufacturing cost elements—DM, DL, and MOH 2. The accumulation of the costs of materials, labor, and overhead. Both costing systems debit raw materials to Raw Materials Inventory, factory labor to Factory Labor, and manufacturing overhead costs to Manufacturing Overhead. 3. The flow of costs. both systems accumulate all manufacturing costs by debits to Raw Materials Inventory, Factory Labor, and MOH. Both then assign these costs to the same accounts— WiP, Finished Goods Inventory, and Cost of Goods Sold.
Just-in-time (JIT) processing re:ch4,A4A
A processing system dedicated to having the right amount of materials, parts, or products arrive as they are needed, thereby reducing the amount of inventory.
Limitations of ABC re:ch4, lo5
ABC can be expensive to use Some arbitrary allocations continue. Even though more overhead costs can be assigned directly to products through ABC's multiple activity cost pools, certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours.
MATERIALS COSTS re:ch3, lo4
All raw materials issued for production are a materials cost to the producing department. A PCS may use materials requisition slips, but it generally requires fewer requisitions than in a JOC system, because the materials are used for processes rather than for specific jobs and therefore typically are for larger quantities.
Activity-Based Costing (ABC) re:ch4, lo1
An approach for allocating overhead costs. It allocates overhead to multiple activity cost pools, and it then assigns the activity cost pools to products and services by means of cost drivers. Products consume activities, and activities consume resources.
Unit production costs re:ch3, lo6
Are costs expressed in terms of equivalent units of production. When equivalent units of production are different for materials and conversion costs, we compute three unit costs: (1) materials, (2) conversion, and (3) total manufacturing.
ABC Step 4 re:ch4, lo4
Assign Overhead Costs to Products In assigning overhead costs, it is necessary to know the expected use of cost drivers for each product
ABC Step 3 re:ch4, lo4
Compute Activity-Based Overhead Rates by dividing the estimated overhead per activity by the number of cost drivers expected to be used per activity
Elements of JIT Processing re:ch4,A4A
Dependable suppliers. A multiskilled work force A total quality control system
TRANSFER TO NEXT DEPARTMENT re:ch3, lo4
In PCS make an entry (at the end of the month) to transfer from one WIP to the next one or the appropriate account
Similarities and Differences Between Job Order Cost and Process Cost Systems re:ch3, lo2
In a job order cost system, companies assign costs to each job. In a process cost system, companies track costs through a series of connected manufacturing processes or departments, rather than by individual jobs. Thus, companies use process cost systems when they produce a large volume of uniform or relatively homogeneous products.
FACTORY LABOR COSTS re:ch3, lo4
In a process cost system, as in a job order cost system, companies may use time tickets to determine the cost of labor assignable to production departments. Since they assign labor costs to a process rather than a job, they can obtain, from the payroll register or departmental payroll summaries, the labor cost chargeable to a process.
Objective of JIT re:ch4,A4A
Is to eliminate all manufacturing inventories by using a "pull approach" in manufacturing
Process Cost Flow re: ch3, lo3
Manufacturing costs (raw materials, factory labor, MOH) go to WIP1 and poss to WIP2 then from WIP2 to Fin good inv then to COGAS then to COGS
Compute the Physical Unit Flow (Step 1) re:ch3, lo6
Physical units are the actual units to be accounted for during a period, irrespective of any work performed. To keep track of these units, add the units started into production during the period to the period's beginning WIP. This amount is referred to as the total units to be accounted for.
Prepare a Cost Reconciliation Schedule (Step 4) re:ch3, lo6
Prepare a cost reconciliation schedule to assign these costs to (a) units transferred out and (b) ending work in process.
MANUFACTURING OVERHEAD COSTS re:ch3, lo4
The objective in assigning overhead in a process cost system is to allocate the overhead costs to the production departments on an objective and equitable basis. That basis is the activity that "drives" or causes the costs. A primary driver of overhead costs in continuous manufacturing operations is machine time used, not direct labor. Thus, companies widely use machine hours in allocating manufacturing overhead costs using predetermined overhead rates
Conversion costs re:ch3, lo5
The sum of labor costs and overhead costs normally, the ending work in process is 100% complete as to materials cost because materials were added at the beginning of the process, and ?0% complete as to conversion costs because while they are in WIP, the OH and DL have not been added yet.
total units re:ch3, lo6
The total units then are accounted for by the output of the period. The output consists of units transferred out during the period and any units in process at the end of the period. This amount is referred to as the total units accounted for.
operations costing re:ch3, lo6
This hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product. At the same time, the product may have some customized, individual features that require the use of a job order cost system.
just-in-case philosophy re:ch4,A4A
This philosophy often results in a "push approach," in which raw materials and subassembly parts are pushed through each process. Traditional processing often results in the buildup of extensive manufacturing inventories.
Activity-based management (ABM) re:ch4, lo6
a comprehensive management tool that focuses on reducing costs and improving processes and decision-making. A refinement of ABC used in ABM is the classification of activities as either value-added or non-value-added.
To achieve accurate costing re:ch4, lo4
a high degree of correlation must exist between the cost driver and the actual consumption of the overhead costs in the cost pool.
Unit-level activities re:ch4, lo7
are performed for each unit of production eg: machining, drilling, assembling
Value-added activities re:ch4, lo6
are those activities of a company's operations that increase the perceived worth of a product or service to customers.
Non-value-added activities re:ch4, lo6
are those activities that, if eliminated, would not hinder the company's operations or reduce the perceived worth of its product or service. These activities simply add cost to, or increase the time spent on, a product or service without increasing its perceived value.
If there is little or no correlation between changes in the cost driver and consumption of the overhead cost re:ch4, lo1
inaccurate product costs are inevitable.
production cost report re:ch3, lo6
is the key document that management uses to understand the activities in a department; it shows the production quantity and cost data related to that department.
activity cost pool re:ch4, lo1
the overhead cost attributed to a distinct type of activity (e.g., ordering materials or setting up machines)
Weighted-Average Method re:ch3, lo5
to compute equivalent units of production use: Units completed and transferred out + Equivalent units of ending WIP = Equivalent units of production
Compute the Equivalent Units of Production (Step 2) re:ch3, lo6
we need two computations of equivalent units: one for materials and one for conversion costs. NOTE: Materials are not always added at the beginning of the process. For example, materials are sometimes added uniformly during the process. NOTE: Ignore the beginning work in process in this computation.
When is it appropriate to use direct labor as the basis for assigning overhead cost to products? re:ch4, lo1
when (a) direct labor constitutes a significant part of total product cost, and (b) a high correlation exists between direct labor and changes in the amount of overhead costs
Assigning Manufacturing Costs—Journal Entries re:ch3, lo4
• Companies debit all raw materials to Raw Materials Inventory at the time of purchase. • They debit all factory labor to Factory Labor as the labor costs are incurred. • They debit overhead costs to Manufacturing Overhead as these costs are incurred.