KTQTCP_Chap 6_Fundamentals of Product and Service Costing

Cost of Goods Completed and Transferred from WIP + Goods Available for Sale = Cost of Goods Sold - Ending Inventory = To the income statement Ending Inventory = Total Manufac[r]

Chapter 6 Fundamentals of Product

& Service Costing

Learning Objectives:

LO1 Explain the fundamental themes underlying the

design of cost systems.

LO2 Explain how cost allocation is used in a cost

management system.

LO3 Explain how a basic product costing system works.

LO4 Understand how overhead cost is allocated to

products.

LO5 Explain the operation of a two-stage allocation system

for product costing.

LO6 Describe the three basic types of product costing

systems: job order, process, and operations.

LO1

Explain the fundamental themes

systems.

Cost System

Cost Management System

The cost system accumulates and reports costs about

processes, products, and services

Provide information about costs

relevant for decision making.

Why Calculate the Cost of a Product?

What is the cost of

Designing a Cost System

Manageria

l

the futur e

Decision making

LO2 Explain how cost allocation is used in

a cost management system.

Cost Allocation and Product Costing

The Inventory Accounts

Work-In-Beg Inventory

Direct Materials Transferred

from Raw Materials

+

Manufacturing Overhead

+

Cost of Goods Completed and Transferred to Finished Goods

-Ending Inventory

=

Finished Goods

Beg

Inventory Cost of Goods

Completed and Transferred from WIP

+

Goods Available for Sale

=

Cost of Goods Sold

-Ending Inventory

=

To the income statement

Ending

Inventory

=

Total Manufacturing Costs

=

Direct Labor

-LO3 Explain how a basic product costing system works.

A Product Costing System at Work

Beginnin

g

Balance

Transfer

s In Transfers Out Ending Balance

How costs and units move through inventories

B

BTrue

for Raw MaterialsWork-In-Process

Finished Goods

RMWIPFG

Product Costing System

How costs and units move through inventories.

To income statement

Product Costing System, Continued .

Example: At the beginning of April, Baxter Paint had no work-in-process inventory 100,000 gallons of paint were started

during the month of April All 100,000

gallons were finished and transferred out

of work-in-process and in to finished

goods How many gallons left at ending of April.

Product Costing System, Continued .

Baxter Paint

April WIP Inventory

0 gallons

100,00

0 gallons

Product Costing System, Continued .

Example: Work-in-process costs

Baxter Paint had no beginning balance

During April Baxter added the following costs

to work-in-process: direct materials of

$400,000, direct labor of $100,000, and

overhead of $500,000 Total costs added to work-in-process equaled $1 million All of the paint, and therefore, all of the costs, were

transferred out of work-in-process and in to finished goods If Baxter Paint produced

100,000 gallons of paint at a cost of

$1,000,000, How much is the cost per

gallon of paint?.

A Product Costing System at Work

Cost

s

DM DL OH

April WIP Inventory

FGCost per

gallon

$1,000,00 0

100,00 0

$10 per gallon

B

Work-In-Process Costs

What are the

costs?

Where are the

costs at the end

of the period?

DM DL OH

$400,00 0$100,00 0$500,00 0

$1,000,00 0

Another Example: Costing with Ending WIP Inventory

Now let’s look at an example where some products remain in ending inventory

Suppose during May Baxter Paint started 110,000 gallons of paint, completed and transferred out 90,000 gallons and had

20,000 gallons that were half finished still

in work-and-process at the end of the

month How much paint did Baxter

Paint produce in May?

Another Example: Costing with Ending WIP Inventory

Given:

Baxter

Paint May WIP

Unit

s

0 gallons

90,000 gallons 20,000 gallons

These gallons are half finished.

FG

B

Gallons Beginning WIP -0- Started in May

Total 110,000 Ending WIP (50%

Complete) 20,000Transferred Out 90,000

Costing with Ending WIP Inventories

Equivalent Units

Ending WIP

Inventory

20,000 gallons ½ finished

gallons finished20,000 5

How do we cost Baxter’s 20,000 gallons

of paint that are only half finished?

Total equivalent units

=

90,000+10,00

Costing a Product

If Baxter Paint transferred in $990,000 of

cost during the month of May; the question

we ask is : Where are those costs at the end

of the period? What is the cost of the

90,000 gallons transferred to finished

goods and what is the cost of the 20,000

gallons still in work-in-process to produced 100,000 equivalents gallons of paint?

Costing a Product, Continued .

DM DL OH

FG

What is the cost of the 90,000 gallons

transferred to FG and the 20,000 gallons still in WIP?

Where is the

$990,000?

B

Total

$990,000

100,000

LO4

Understand how overhead cost

is allocated to products.

Costing in a Multiple Product,

Discrete Process Industry

Direct costs (DM and DL) can be directly traced

or assigned to the products.

MOH can be allocated to the various products.

Costing in a Multiple Product,

Discrete Process Industry

28

Costing in a Multiple Product,

Discrete Process Industry

29

Choice of the Allocation Base

33

 Two reasons why a particular allocation base is

chosen:

 Cost system already captures information about the

allocation base by product line.

 Managers believe that the allocation base reflects the

amount of “effort” that goes into each product.

 Choice of the allocation base is somewhat arbitrary:

If management chooses DL cost as the allocation base,

thenThe rate becomes 120% ($180,000 ÷ $150,000)

of DL cost.

LO5 Explain the operation of a

two-stage allocation system for product costing.

Multiple Allocation Bases and Two-Stage Systems

Multiple Allocation Bases and Two-Stage Systems

Multiple Allocation Bases and Two-Stage Systems

Multiple Allocation Bases and Two-Stage Systems

LO6 Describe the three basic types of

product costing systems: job order, process, and operations.

Product Costing Systems

Product Costing Systems

Chapter 6: END