Managerial Accounting: An Introduction To Concepts, Methods, And Uses

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Managerial Accounting An Introduction To
Concepts, Methods, And Uses

• Chapter 2
• Measuring Product Costs

Maher, Stickney and Weil
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Learning Objectives (Slide 1 of 3)

• Understand the nature of manufacturing costs.
• Explain the need for recording costs by
  department and assigning costs to products.
• Understand how the Work-in-Process account both
  describes the transformation of inputs into
  outputs in a company and accounts for the costs
  incurred in the process.

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Learning Objectives (Slide 2 of 3)

• Compare and contrast normal costing and actual
  costing.
• Know various production methods and the different
  accounting systems each requires.
• Compare and contrast job costing and process
  costing systems.
• Compare and contrast product costing in service
  organizations to that in manufacturing companies.

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Learning Objectives (Slide 3 of 3)

• Understand the concepts of customer costing and
  profitability analysis.
• Identify ethical issues in job costing.
• Recognize components of just-in-time (JIT)
  production methods and understand how accountants
  adapt costing systems to them.
• Know how to compute end-of-period inventory book
  value using equivalent units of production
  (Appendix 2.1).

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What are the three manufacturing costs?
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Relation Between Departmental Costing Product
Costing (Slide 1 of 3)

• Manufacturing costs are first assigned to
  departments or responsibility centers
• A responsibility center is any organizational
  unit with its own manager
• e.g., divisions, territories, plants
• Aids in planning and performance evaluation

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Relation Between Departmental Costing Product
Costing (Slide 2 of 3)
Record Costs for Performance Evaluation
Assign Costs To Products
Product A
Assembly Dept.

• Direct Materials
• Direct Labor
• Manufacturing Overhead

Product B
Finishing Dept.
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Relation Between Departmental Costing Product
Costing (Slide 3 of 3)

• Actual manufacturing costs recorded in
  departments can be compared to standard or
  budgeted amounts
• Differences, called variances, can be
  investigated further
• Costs are then assigned to products
• Useful in managerial decision-making such as
  evaluating product profitability

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Draw the Flow of Costs through T-Accounts
Finished Goods Inventory
Cost of Goods Sold
WIP-Dept.2
WIP-Dept.1
Balance Sheet Accounts
Income Statement Accounts
Mktg. Admin.
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What is the basic cost flow equation?
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Cost Measures (Slide 1 of 2)Define Normal Costing

• Normal Costing--commonly used to assign costs to
  products
• Assigns actual direct materials and direct labor
  plus normal manufacturing overhead
• Overhead is applied to units produced using an
  application rate estimated before the accounting
  period begins

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Cost Measures (Slide 2 of 2)Define Actual Costing
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Applying Overhead Costs

• Normal costing works as follows
• Select a cost driver
• Estimate overhead and the level of activity for
  the accounting period
• Compute the predetermined manufacturing overhead
  rate
• Apply overhead to production by multiplying the
  predetermined overhead rate times the actual
  activity

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Overhead Rate Computation

• Predetermined manufacturing overhead rate is
  calculated as follows
• What is the equation?

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Example-Overhead Rate Computation

• Pizza Shack estimates that next year variable
  overhead will be 108,000 and direct labor will
  be 12,000 hours
• The predetermined overhead rate for next year
  will be

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Discuss Cost Systems
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Production Methods and Accounting Systems

• Type Production Accounting System Type Product
• Job Job Costing Customized
• (e.g.,
  Custom Homes)
• Operations Operation Costing Mostly
• Standardized
• (e.g., Cars)
• Continuous Flow Process Costing
  Standardized
• Processing
• 
  (e.g., Oil
  Refinery)

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Comment on Job Costing
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Comment on Process Costing
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Comment on Operation Costing
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Service Organizations

• Flow of costs is similar to that of a
  manufacturing company
• Providing a service requires labor, overhead,
  sometimes materials (called supplies)
• Costs are collected by the job or client
• Provides info for cost control, performance
  evaluation, and future pricing decisions

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Review Ethical Issues in Job Costing
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Just-In-Time (JIT) Methods

• Attempt to obtain materials or provide finished
  goods just in time
• Reduces or eliminates inventories and related
  carrying costs
• May allow production costs to be recorded
  directly to Cost of Goods Sold (COGS)
• May involve use of Backflush Costing
• Used to transfer costs back to inventories when
  production costs are initially recorded as COGS

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Spoilage Quality of Production

• Normal waste is typically included in the cost of
  work performed
• If waste is not normal it may be included in an
  expense account called Abnormal Spoilage
• Companies concerned about quality production may
  not treat any waste or spoilage as normal
• Prevents these costs from being buried in
  production costs

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Computing Costs of Equivalent Production

• What are the Five steps required to compute costs
  of products, ending inventory, and finished goods?

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• If you have any comments or suggestions
  concerning this PowerPoint Presentation for
  Managerial Accounting, An Introduction To
  Concepts, Methods, And Uses, please contact
• Dr. Michael Blue, CFE, CPA, CMA
• blue_at_bloomu.edu
• Bloomsburg University of Pennsylvania