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Introduction toManagerial Accounting
Chapter One
Prepared and Taught by Lecturer: YIN SOKHENG,Master in Finance
E-mail: [email protected]
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Managerial accounting provides infor-mation formanagers of an organization whodirect and control its operations.
Financial accounting provides infor-
mation for stockholders, creditors and otherswho are outside the organization.
Lecturer YIN SOKHENG, Master in Finance 2
I. Definition of Managerial Accounting
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Financial Accounting Managerial Accounting
1. Users External persons who
make financial decisions
Managers who plans for
and control an
organization
2. Time focus Historical perspective Future emphasis
3. Verifiabilityversus relevance
Emphasis onverifiability
Emphasis on relevancefor planning and control
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5. Subject Primary focus is on
the whole organization
Focuses on segments of
an organization
6. G.A.A.P Must follow GAAP
and prescribed formats
Need not follow GAAP
or any prescribed format
7. Requirement Mandatory for
external reports
Not mandatory
Differences Between Financial and Managerial Accounting
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Lecturer YIN SOKHENG, Master in Finance 4
Controlling
Directing
and
Motivating
Planning
II. Work of Management
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Select a best
alternative
Planning
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Develop budgets
Identify
alternatives
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Directing and motivating involves managing day-to-dayactivities to keep the organization running smoothly.
Employee work assignments.
Routine problem solving.
Conflict resolution.
Effective communications.
Directing and Motivating
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Feedback in the form of performance reports
that compare actual result with the budgets
are an essential part of the control function.
The control function ensures
that plans are being followed.
Controlling
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Planning and Control Cycle
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BeingFormulating long and
short term plans
(Planning)
Comparing actual
to planed performance
(Controlling)
Measuring
performance
(Controlling)
Implementing plans(Directing and
Motivating)
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Corporate Organization Chart
Organization Structure
Lecturer YIN SOKHENG, Master in Finance
Board of Directors
President/CEO
Purchasing Personnel Vice presidentoperations Chief FinancialOfficer (CFO)
Treasurer Controller
9
Decentralization is the delegation of
decision-making authority throughout anorganization
Manager Manager
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Staff positions supportand assist line positions.Example: Cost
accountants.
Line position aredirectly related toachievement of the
basic objectives of anorganization.Example: Productionsupervisors .
Line and Staff Relationships
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The Chief Financial Officer (CFO)
A member of the top manager team (CFO) responsiblefor:
Providing the timely and relevant data to
support planning and control activities. Preparing financial statement for external
users.
The treasurer is responsible for:
handing cash flows,managing capital expenditures decisions, and
making financial plans.
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A just-in-time manufacturer produces goods toship to customers rather than producing goods forinventory.
Production is initiated by a customer order, asystem referred to as "demand pull," rather than adesire to build inventory for potential orders.
When applied in a manufacturing company, JITsystems minimize raw materials, work in process,and finished goods inventories.
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III. Just-in-Time (JIT) System
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The Steps in JIT System processing
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Receivecustomer
orders.
Scheduleproduction.
Complete partsjust-in-time for
assembly into products.
Receive materialsjust-in-time for
production.
Complete productsjust-in-time to
ship customers.
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Key Elements for a Successful JIT System
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Improvedplant layout
Reducedsetup time
Zero productionDefects
Flexibleworkforce
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Cost Terms, Concepts, and
Classifications
Chapter Two
E-mail: [email protected]
Prepared and Taught by Lecturer: YIN SOKHENG,Master in Finance
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Classifying CostsBy Behavior
- Variable Costs
- Fixed Costs
By Traceability/ Cost Objects
- Direct Costs
- Indirect Costs
By Function- Product Costs
- Period Costs
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I. Cost Classifications by BehaviorCost Behavior: How a cost will react to changes in
the level of business activity.
Variable Costs:
- Total variable costs change when the level ofactivity changes.
- The variable cost per unit remains the same
over wide ranges of activity . Example: direct materials cost, direct labour
cost, sale commissions, cost of goods sold
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Total Variable Cost
Your telephone bill is based on how many minutesyou talk.
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A variable cost is one that change in total inproportion to change in the volume of activity
TotalTelephoneBill
Minutes Talked
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Variable Cost Per Unit
The cost per minute talked is constant.
For example, 10 cents per minute.
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On a per unit basis, a variable cost remainconstant over a wide range of activity
PerM
inute
Telephon
eCharge
Minutes Talked
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Cost Classifications by Behavior Fixed Costs:
- Total fixed costs remain unchanged when thelevel of activity changes.
- The fixed cost per unit goes down as activitylevel goes up.
Example: depreciation, supervisory salaries, and
rent
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Fixed Cost Per Unit
The average cost per local call decreases as morelocal calls are made.
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On a per unit basis, a fixed cost changesas the volume of activity changes
Month
lybasic
Telephon
eCharge
perLocalCall
Number of Local Calls
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II. Cost Classifications by Traceability
Direct Costs:
Costs that can easily and conveniently traced to aunit of product or other cost objective.
Examples: Direct materials cost, Direct labour cost.
Indirect labour Costs:
Costs that cant easily and conveniently traced to a
unit of product or other cost objective.Example: Manufacturing overhead
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III. Cost Classifications by Function:
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Manufacturing Costs/Product Costs Direct MaterialDirect labour Overhead
NonmanufacturingCosts/ Period Costs Selling & marketing
expenses General and
administrativeexpenses
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Classification of Manufacturing Costs/
Product CostsManufacturing costs are often classified as follows:
Lecturer YIN SOKHENG, Master in Finance 11
Manufacturing
Costs
Direct Labor
ConversionCost
Prime Cost
DirectMaterial
ManufacturingOverhead
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Manufacturing Costs
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DirectMaterial
DirectLabour
ManufacturingOverhead
Product Costs
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Direct Materials Direct materials are raw materials that become an
integral part of the finished product and that can bephysically and conveniently traced directly to it.
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Non-manufacturing Costs/ Period Costs
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Marketing orSelling Costs
AdministrativeCosts
All executive ,organizational,and clerical costs.
Costs necessary toget the order anddeliver product.
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Comparing Merchandising and Manufacturing
Activities
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Merchandisers- Buy finished goods- Sell finished goods
Manufacturing- Buy raw materials- Produce and sell
finished goods
LUCKY GOODS
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IV. Cost Classifications on
Financial Statement
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Partial Balance Sheet
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MerchandiserCurrent assets:
Cash
ReceivablePrepaid expenseMerchandiseInventory
ManufacturerCurrent assets:
Cash
ReceivablePrepaid expenseInventories- Raw Materials- Work in Process
- Finished Goods
Fully completed productsawaiting sale.
Partially completeproducts-somematerial, labour, oroverhead has been
added.
Materials waitingto be processed.
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Income Statement
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Merchandiser CompanyCost of goods sold:
Beg. merchandiseinventory $14,200
+Purchase 234,150Goods available
for sale $248,350-Ending
merchandise
inventory (12,100)
=Cost of goods sold $236,250
Manufacturing CompanyCost of goods sold:
Beg. Finishedgoods invent. $ 14,200
+Cost of goodsmanufactured 234,150Goods available
for sale $248,350-Ending
finished goodsinventory (12,100)
=Cost of goods sold $236,250
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Lecturer YIN SOKHENG, Master in Finance 22
Beginningbalance
Basic Equation for Inventory Accounts
+ = +Additionsto inventory
Endingbalance
Withdrawalsfrom inventory
Inventory Flows
Available WithdrawalsEndingbalance
Beginningbalance
AvailableAdditions+ =
=-
Or
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Merchandising Company
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Beginningmerchandise
inventory
Cost of Goods Sold
+ = +Purchased
Endingmerchandise
inventory
Cost of goodssold
Beginning
merchandiseinventory
Cost of Goods Sold
= + -Purchased
Ending
merchandiseinventory
Cost of goodssold
or
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Manufacturing Company
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Beginningfinished goods
inventory
Cost of Goods Sold
+ = +Ending finished
goods inventory
Cost ofgoods sold
Cost of Goods Sold
= + -
or
Cost of goodsmanufactured
Cost of
goods sold
Beginning
finished goodsinventory
Cost of goodsmanufactured
Ending finished
goods inventory
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Schedule of Cost of Goods
Manufactured It calculates the cost of raw material, direct
labor and manufacturing overhead used in
production. It also calculates the manufacturing costs
associated with goods that were finished
during the period.
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Product Costs
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Finished GoodsWork inProcess
Total manufacturingcosts
+ Beginning work inprocess inventory
= Total work inprocess
- Ending work inprocess inventory
= Cost of goodsmanufactured
Beginning finishedgoods inventory
+Cost of goodsmanufactured
= Cost of goodsavailable for sale
- Ending finishedgoods inventory
= Cost ofgoods sold
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The Schedule of Costs of Goods Manufactured
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Raw MaterialsBeginning raw material inventory xx+ Raw materials purchased xx= Raw materials available for use xx- Ending raw materials inventory (xx)
= Direct materials use in product xx+ Direct labour xx+ Manufacturing OH xx= Total manufacturing costs xx
+ Beginning work in process inventory xx= Total work in process xx-Ending work in process inventory (xx)= Cost of goods manufactured xx
Finished Goods
Beginning finishedgoods inventory
+Cost of goodsmanufactured
= Cost of goodsavailable for sale
- Ending finishedgoods inventory
= Cost ofgoods sold
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Beginning raw materials inventory is the inventorycarried over from the prior period.
As items are removed from raw materials inventoryand placed in to the production process, thy are celleddirect materials.
Conversion costs ( direct labour + MOH/ FOH) are
costs incurred the convert the direct material in to afinished product.
Total manufacturing costs are all manufacturing costsincurred during the period and added to the
beginning balance of work in process. Cost of goods manufactured: Costs associated with the
goods that are completed during the period aretransferred to finished goods inventory.
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Lecturer YIN SOKHENG, Master in Finance 30
Manufacturing Cost Flows
Balance SheetInventories
IncomeStatementExpensesCosts
Materials Purchases
Direct Labour
ManufacturingOverhead
Work inProcess
Finished
Goods
Cost of
Goods Sold
Selling andAdministrative
Expenses
Selling andAdministrative
Raw Materials
PeriodCosts
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V. Cost Classifications for
Decision Making Every decision involves a choice between at least
two alternatives.
The goal of making decisions is to identify thosecosts that are either relevant or irrelevant to thedecision.
Costs and benefits that differ between alternatives
are relevant in a decision. All other costs andbenefits are irrelevant and can and should beignored.
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Differential costs and Revenues Differential costs (or incremental costs) is a difference in
cost between any two alternatives. Differential costs can beeither fixed or variable.
A difference in revenue between two alternatives is called
differential revenue. For example, assume you have a job paying $1,500 per
month in your hometown. You have a job offer in aneighboring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.- Differential revenue is : $2,000 $1,500 = $500- Differential cost: $ 300
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RetailerDistribution
(present)
Direct SaleDistribution(proposed)
DifferentialCosts andRevenue
Revenue (variable) $ 700,000 $ 800,000 $ 100,000
Cost of goods sold (variable) 350,000 400,000 50,000
Advertising (fixed) 80,000 45,000 (35,000)
Commissions (variable) 0 40,000 40,000
Warehouse depreciation (fixed) 50,000 80,000 30,000
Other expenses (fixed) 60,000 60,000 0Total 540,000 625,000 85,000
Net operating income $ 160,000 $ 175,000 $ 15,000
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Differential costs and Revenues
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Opportunity cost Opportunity cost is the potential benefit that is
given up when one alternative is selected overanother.
These costs are not usually entered into theaccounting records of an organization, but mustbe explicitly considered in all decisions.
Example: If you were not attending college, you
could be earning $ 15,000 per year. Youropportunity cost of attending collage for one yearis $ 15,000.
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Sunk costs Sunk cost have already been incurred and that
cannot be changed by any decision made now or inthe future.
Since sunk costs cannot be changed and therefore
cannot be differential costs, they should beignored in decision making.
Example: If you bought an automobile that cost$10,000 two year a go. The $10,000 cost is sunkbecause whether you drive it, park it, trade it, orsell it, you cant change the $10,000 cost.
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Idle Time
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The labor costs incurred during idletime are ordinarily treated as
manufacturing overhead
Machinebreakdowns
Powerfailures
Materialshortages
Direct labour ($12 per hour x 37 hours) .............$ 444Manufacturing overhead (idle time: $12 per hour x 3 hours). 36Total cost for the week $ 480
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Overtime The overtime premiums for all factory workers are
usually considered to be part of manufacturingoverhead.
This is done to avoid penalizing particular products orcustomer orders simply because they happen to fall onthe tail end of the daily production schedule.
Lecturer YIN SOKHENG, Master in Finance 37
Direct labour($12 per hour x 45 hours)...$ 540
Manufacturing overhead(overtime premium : $6 per hour x 5 hours).. 30
Total cost for the week ...$ 570
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Job Order Costing System
Chapter Three
E-mail: [email protected]
Prepared and Taught by Lecturer: YIN SOKHENG,
Master in Finance
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I. Types of Product Costing System
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There are several methods that can be used toaccumulate manufacturing costs and determine
unit product cost. One of these methods is
known as a job- order cost system.
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A process cost system
A companies that produce many units of a singleproduct
One unit of product is indistinguishable from any
other unit of product.The identical nature of each unit of product
enables assigning the same average cost per unit.
Example:
- Weyerhaeuser (paper manufacturing)
- Coca-Cola
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A job order costing system Many different products are produced each period.
The products are usually manufactured to customers'order
The unique nature of each order requires tracing orallocating costs to each job, and maintaining costrecords for each job.
Example companies:
- Boeing (aircraft manufacturing)
- Bechtel International (large scale construction)
- Walt Disney Studios (movies production)
Also used in the service industry- Hospitals- Law firms.
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ComparingProcess and Job-Order Costing System
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Job-Order ProcessNumber of jobs worked Many Single product
Cost accumulated by Job Department
Average cost computed by Job Department
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II. Measuring the Job-Order costing
system
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Direct Manufacturing Costs
Direct Materials
Direct Labour
ManufacturingOverhead
Charge directmaterials anddirect labour
costs to eachjob as work is
performed
Job NO. 1
Job NO. 2
Job NO. 3
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Lecturer YIN SOKHENG, Master in Finance 7
Indirect Manufacturing Costs
Direct Materials
Direct Labour
Manufacturing
Overhead
Manufacturingoverhead,includingindirect
materials andindirect labour,
are allocated to
jobs ratherthan directlytraced to each
job.
Job NO. 1
Job NO. 2
Job NO. 3
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Materials Requisition Form
The materials requisition form is a detailed sourcedocument that (1) specifies the type and quantity ofmaterials to be drawn from the storeroom, and (2)identifies the job to which the costs of the materials
are to be charged. The form is used to control the flow of materials
into production and also for making entries in theaccounting records.
Production managers use materials requisitionforms to request materials for manufacturing.
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Materials Requisition Form
Materials Requisition Number 0017 Job Number to Be charge d 2B77Department Milling
Date March 2, 20x2
Description Quantity Unit Cost Total Cost
M46 Housing 150 $ 1.64 $ 246G7 Connector 300 1.38 414
$ 660
Authorized
Signature Bill White
Lecturer YIN SOKHENG, Master in Finance 9
Total cost is transferred to job cost sheet for job 2B77
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Employee Time Ticket
A worker uses a time ticket to record the time
spent on each job (or overhead activity).
A completed time ticket is an hour-by-hour
summary of the employees activities throughoutthe day.
This source document determines the amount of
direct labour that is charged to a job (or the amount
of indirect labour that is charged to overhead).
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Employee Time Ticket
Time Ticket No 016 Date March 3, 20x2Employee Marry Holden Station 2
Started EndedTime
Completed Rate Amount Job Number
7:00 12:00 5.0 $9 $ 45 2B77
12:00 2:30 2.0 9 18 2B88
2:30 3:30 1.0 9 9 Maintenance
Total 8.0 $ 72
Supervisor McMalen
Lecturer YIN SOKHENG, Master in Finance 11
Information is transferred to job cost sheet for job 2B77
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Application of Manufacturing Overhead
It is usually easy to assign materials and labourcosts to products and services. Why?
It is difficult, however, to assign overhead costs to
products and services. Why? There are threereasons for this:
1. Manufacturing overhead is an indirect cost.
2. Manufacturing overhead consists of many
different items.3. Output may fluctuate due to seasonal or
other factors.
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Application of Manufacturing Overhead
The only way to assign overhead costs to productsis use an allocation (allocation base) process.
An allocation base is a measure such as direct
labour-hours (DLH) or machine-hours (MH) that isused to assign overhead costs to products andservices.
The allocation base is used to compute the
predetermined overhead rate. So, a predeterminedoverhead rate is used to assign overhead costs toproducts and services.
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Application of Manufacturing Overhead Apredetermined overhead rateis used to assign overhead
costs to products and services. It is:
Based on estimated data.
Established before the period begins.
Why Use Estimated Data?
1. Waiting until the year is over to determineactual overhead costs would be too late.Managers need to cost jobs immediately.
2. Overhead rates, if based on actual costs andactivity, would vary substantially from month tomonth. Much of this variation would be due torandom changes in activity.
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Application of Manufacturing Overhead
Predetermined overhead rate =
The process of assigning overhead cost to job ( job cost sheet) is calledoverhead application (overhead applied).
Lecturer YIN SOKHENG, Master in Finance 15
Estimated total manufacturing overhead cost
Estimated total units in the allocation base(DLH, MH, etc.)
Overhead applied
to a particular job
Predetermined
overhead rate
Amount of allocation
base incurred by the job(actual DLH, MH, etc.)X=
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Application of Manufacturing OverheadExample: Assume that company allocates overhead costs to
job (and therefore to products) on the basis of direct labour
hours. For the coming year the company estimates that it
will incur $600,000 in manufacturing overhead costs and
work 75,000 direct labour hours. The companys predeter-
mined overhead rate would be:
Predetermined overhead rate =
Lecturer YIN SOKHENG, Master in Finance 16
$ 600,00075,000 DLH
= $ 8/ DHL
Overhead applied $ 8 per DLH 27 DLHsX=
= $216 0f overhead applied to job (job cost sheet) 2B77
Ticket NO 016 = 5 DLHsTicket NO 072 = 8 DLHsTicket NO 088 = 4 DLH sTicket NO 099 = 10 DLHsTotal = 27 DLHs
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Job Cost Sheet
After being notified that the production order has
been issued, the Accounting Department prepares
ajob cost sheet. A job cost sheet is a form prepared for each
separate job that records the direct materials, direct
labour, and overhead (overhead applied) costs
charged to the job.
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JOB COST SHEET
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Job Number 2B77 Date Initiated March 2
Date Completed March 8
Department Milling
Item Special order coupling Units Completed 2For Stock
Direct Materials Direct Labor Manufacturing Overhead
Req. NO. Amount Ticket Hours Amount Hours Rate Amount
0017 $ 660 016 5 $ 45 27 $8/DLH $ 216
0025 506 072 8 60
0036 238 088 4 21
099 10 54
27 $ 180
Cost Summary Units ShippedDirect Materials $ 1,404 Date Number Balance
Direct Labor $ 180 March 8 - 2
Manufacturing Overhead $ 216
Total Cost $ 1,800
Unit Product Cost $ 900 18
LecturerYINSOK
HENG,MasterinFinance
THE FLOW OF DOCUMENTS IN A JOB ORDER
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THE FLOW OF DOCUMENTS IN A JOB-ORDER
COSTING SYSTEM
Lecturer YIN SOKHENG, Master in Finance 19
Sales Order
Product Order
Direct Labor Time TicketMaterials Requisition
Job Cost Sheet
Predetermined OH Rates
The various costs of production are accumulated on a form,prepared by the accounting department, known as a
The job costs sheet forms the basis for computing unit coststhat are used to cost ending inventories and cost of goods sold.
A sales order is prepared as basis for issuing a
A product order initiates work on a job,whereby costs are charged through
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III. Entry to record the Cost Flows in a Job-OrderCosting System
Under perpetual system.
The Steps of Accounting Processing Cycle.
Entry to record cost flows of : materials
labour
application of overhead
transfer to finished goods
sales of goods to customer
operating
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Job-Order Costing Flow of Materials Costs
Lecturer YIN SOKHENG, Master in Finance 21
Indirect
Materials
MaterialsRequisition
Record on each JobOrder Cost Sheetand add to Work
in Process Account
DirectMaterials
Record inManufacturing
Overhead Account
Materials usedmay be either
direct orindirect.
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Job-Order Costing Flow of Labour Costs
Lecturer YIN SOKHENG, Master in Finance 22
Indirect
Labour
EmployeeTime Ticket
Record on each JobOrder Cost Sheetand add to Work
in Process Account
DirectLabour
Record inManufacturing
Overhead Account
An employeestime may be eitherdirect or indirect.
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Entry to record the Cost Flows Materials Purchases
Raw materials purchased are recorded in aninventory account.
Lecturer YIN SOKHENG, Master in Finance 24
General Journal Page 3
Date Account Titles P.R Debit Credit
Raw Materials XX,XXX
Account Payable XX,XXX
Raw Materials Account Payable
XX,XXX XX,XXX
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Entry to record the Cost Flows Use of Materials Direct materials issued to a job increase the work in process
account and decrease raw materials account. Indirect materials that are used in the factory increase the
manufacturing overhead account and decrease raw
materials account.
Lecturer YIN SOKHENG, Master in Finance 25
General Journal Page 3
Date Account Titles P.R Debit Credit
Work in Process XX,XXX
Manufacturing Overhead XX,XXX
Raw Materials XX,XXX
Raw Materials Work in Process Manuf. OH
XX,XXX XX,XXX XX,XXX
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Entry to record the Cost Flows Labour The cost of direct labour incurred increases the work in process
account and increases the salaries and wage payable account.
The cost of indirect labour incurred increases the manufacturing
overhead account and increses the salaries and wage payable
account.
Lecturer YIN SOKHENG, Master in Finance 26
General Journal Page 3
Date Account Titles P.R Debit CreditWork in Process XX,XXX
Manufacturing Overhead XX,XXX
Salaries and Wage Payable XX,XXX
Salariesand Wage Payable Work in Process Manuf. OH
XX,XXX XX,XXX XX,XXX
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Entry to record the Cost Flows Actual Overhead In addition to indirect materials and indirect labour, other
manufacturing overhead costs are charged (or added) to the
manufacturing overhead account as they are incurred.
Lecturer YIN SOKHENG, Master in Finance 27
General Journal Page 3
Date Account Titles P.R Debit Credit
Manufacturing Overhead XX,XXX
Account Payable XX,XXX
Property Taxes Payable XX,XXX
Prepaid Insurance XX,XXX
Accumulated Dep., factory XX,XXX
AccountPayable
Property TaxesPayable
PrepaidInsurance
AccumulatedDep., factory Manuf. OH
XX,XXX XX,XXX XX,XXX XX,XXX XX,XXX
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Entry to record the Cost Flows Application of Overhead The work in process account is increased the and the
manufacturing overhead account is decreased when overhead is
applied (or allocated) to jobs.
Lecturer YIN SOKHENG, Master in Finance 28
General Journal Page 3
Date Account Titles P.R Debit Credit
Work in Process XX,XXX Manufacturing Overhead XX,XXX
Manuf. OH Work in Process
XX,XXX XX,XXX
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Entry to record the Cost Flows Transfer to Finished Goods
As a job is completed, the cost of goods that were
completed for that job is transferred from the work inprocess account to finished goods account.
Lecturer YIN SOKHENG, Master in Finance 29
General Journal Page 3
Date Account Titles P.R Debit Credit
Finished Goods XX,XXX
Work in Process XX,XXX
Work in Process Finished Goods
XX,XXX XX,XXX
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Entry to record the Cost Flows Sales of Job to Customer
When a job is sold to a customer on account:
1. The sale is recorded; and2. The cost of the job is transferred from the finished goods account
to the cost of goods sold account.
Lecturer YIN SOKHENG, Master in Finance 30
General Journal Page 3
Date Account Titles P.R Debit CreditAccount Receivable XX,XXX
Sales XX,XXX
Cost of Goods Sold XX,XXX
Finished Goods XX,XXX
Finished GoodsCost of
Goods SoldAccount
Receivable Sales
XX,XXX XX,XXX XX,XXX XX,XXX
Summary of Cost Flows in a Job-Order Costing System
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Raw Materials
Debit for thecost ofmaterials
purchased
Credit for directmaterials added towork in process
Work in ProcessCredit for indirectmaterials addedto MOH
Debit for directmaterials, directlabor, and MOHapplied
Credit for thecost of goodsmanufactured
Salaries and Wages Payable
Credit for directlabor added to WIP
Credit for indirectlabor added toMOH
MOH/ FOH Finished Goods
Debit for actualOH costsincurred
Credit for OH costapplied to WIP Debit for thecost of goodsmanufactured
Credit for thecost of goods sold
UnderappliedOH cost
Overapplied OHcost
Cost of Goods SoldDebit for the costof goods sold
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HENG,MasterinFinanc
e
31
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Disposition of the Amount ofOverapplied and Underapplied OH
Lecturer YIN SOKHENG, Master in Finance 32
If balance is materials
The amount isallocated to these
accounts:
Work inProcess
FinishedGoods
Cost ofGoods Sold
If balance is not materials
The amount maybe closed directlyto cost of goods
sold.
Cost ofGoods Sold
OR
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Closed Out to Cost of Goods Sold
Lecturer YIN SOKHENG, Master in Finance 33
Assuming balance is not material
General Journal Page 4
Date Account Titles P.R Debit Credit
Manufacturing Overhead 3,000
Cost of Goods Sold 3,000
MOH/ FOH Cost of Goods SoldActual OH costs
$ 497,000OH applied to job
$ 500,000Unadjusted balance $ 3,000
$ 3,000 $ 3,000Overapplied
Adjustedbalance
$ 0 Income Statement
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Allocated between accounts
Lecturer YIN SOKHENG, Master in Finance 34
Allocation of under- or overapplied overhead betweenWork in Process, Finished Goods, and Cost of GoodsSold is more accurate than closing the entries balanceinto Cost of Goods Sold.
Assume that:- Total overhead applied $ 90,000
- MOH account has a debit balance $ 5,000
- Overhead applied in WIP inventory, ending $ 30,000- Overhead applied in FG inventory, ending 15,000
- Overhead applied in COGS inventory, ending 45,000
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Allocated between accounts
Lecturer YIN SOKHENG, Master in Finance 35
Overhead applied in WIP inventory, ending $ 30,000 33.33%
Overhead applied in FG inventory, ending 15,000 16.67%
Overhead applied in COGS inventory, ending 45,000 50.00%
Total overhead applied $ 90,000 100.00%
Based on the above percentages, the underappliedoverhead would be allocated as shown in the following
journal entry:
WIP (33.33% X $ 5,000) 1,666.50
FG (16.67% X $5,000) 833.50COGS (50.00% X $ 5,000) 2,500.00
Manufacturing Overhead 5,000.00
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Summary Overapplied and Underapplied OH
Lecturer YIN SOKHENG, Master in Finance 36
If overhead is: Assuming not material:
UNDERAPPLIED(Applied OH is less than
actual OH)
INCREASECost of Goods Sold
OVERAPPLIED(Applied OH is greater than
actual OH)
DECREASECost of Goods Sold
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Summary of Overhead Concepts
Lecturer YIN SOKHENG, Master in Finance 37
At the beginning of the period:Estimated total
manufacturing overheadcost
Estimatedtotal units in theallocation base
=Predeterminedoverhead rate
During the period:
Predeterminedoverhead rate X
Actual total units of theallocation base incurred
during the year=
Totalmanufacturing
overhead applied
At the of the period:
Actual totalmanufacturingoverhead cost
Total manufacturing
overhead applied =Underapplied(oveerapplied)
overhead
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Lecturer YIN SOKHENG, Master in Finance 38
GeneralJournal
GeneralLedger
After-closingtrial balance
UnadjustedTrial balance
Adjusted trialbalance
Financial
statementanddisclosure
1. Record businesstransactions
4. Make end of periodadjustments
7. Make closingentries
2. Post(alltypesof
entries)
8. Prepare
5. Prepare3. Prepare
6. Prepare
The Steps of Accounting Processing Cycle
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The Steps of Accounting Processing Cycle
Lecturer YIN SOKHENG, Master in Finance 39
1. Joumnalize (record) transactions
2. Post to ledger accounts
3. Prepare a trial balance ( unadjusted trial balance)
4. Make end of period adjustments in the general journaland post to ledger accounts
5. Prepare an adjusted trial balance
6. Prepare financial statement and and appropriate disclosures
7. Journalize and post the closing entries to ledger accounts
8. Prepare an after-closing trial balance
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Process Costing System
Chapter Four
E-mail: [email protected]
Prepared and Taught by Lecturer: YIN SOKHENG,
Master in Finance
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Product Costing System
Lecturer YIN SOKHENG, Master in Finance 2
In this chapter we look at an alternative known asprocess costing .
A process costing is most commonly used in
industries that produce essentially homogenous(uniform) products on a continuous basis, such as
bricks, cornflakes, or paper.
A form of process costing may also be used in
utilities that produce gas, water, and electricity.
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I. Comparison of Job-Order and Process Costing
1. Similarities Between Job-Order and Process
Costing
Both system assign material, labor, and overhead
costs to products and they provide a mechanism forcomputing unit product cost.
Both system use the same manufacturing accounts,including Manufacturing Overhead, Raw
Materials, Work in Process, and Finished Goods. The flow of costs through the manufacturing
accounts is basically the same in both system.
Lecturer YIN SOKHENG, Master in Finance 3
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2. Difference Between Job-Order and Process
Costing Process costing is used when a single product is
produced on the continuing basis or for a longperiod of time. Job-order costing is used when many
different jobs are worked on each period. Process costing systems accumulate costs by
department. Job-order costing systems accumulatedcosts by individual jobs.
Process costing systems use department productionreports to accumulate costs. Job-order costingsystems use job cost sheets to accumulate costs.
Lecturer YIN SOKHENG, Master in Finance 4
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II. Perspective of Process Cost Flows
1. Processing Department
What is a processing department?
Any location in an organization where materials,
labour or overhead are added to product.
The activities performed in a processing
department are performed uniformly on all units or
production. Furthermore, the output of a processingdepartment must be homogeneous.
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2. Comparing Job-Order and Process Costing
Lecturer YIN SOKHENG, Master in Finance 6
DirectMaterials
Direct Labour
Manufacturing
Overhead
Work inProcess
FinishedGoods
Cost ofGoods Sold
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Job-Order Costing System
Lecturer YIN SOKHENG, Master in Finance 7
DirectMaterials
Direct Labour
ManufacturingOverhead
JobsFinishedGoods
Cost ofGoods Sold
Costs are traced andapplied to individualjobs in a job-order
costing system.
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Proces Costing System
Lecturer YIN SOKHENG, Master in Finance 8
DirectMaterials
Direct Labour
ManufacturingOverhead
ProcessingDepartment
FinishedGoods
Cost ofGoods Sold
Costs are traced andapplied to departments
in a process costingsystem.
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III. Entry to Record Cost Flows in a Process Costing
System
Lecturer YIN SOKHENG, Master in Finance 9
For purposes of this example,
assume there are two processing
department Department A and B.
We will use journal entries andT.accounts.
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Process Cost Flows (in journal entry form)
The requisition of direct materials for use in processdepartment.
Lecturer YIN SOKHENG, Master in Finance 10
General Journal Page 4
Date Account Titles P.R Debit Credit
Work in Process A XX,XXX
Work in Process B XX,XXX
Raw Materials XX,XXX
To record the use of direct materials
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Process Cost Flows (in journal entry form)
Direct Labour Cost
Lecturer YIN SOKHENG, Master in Finance 12
General Journal Page 4
Date Account Titles P.R Debit Credit
Work in Process A XX,XXX
Work in Process B XX,XXX
Salaries and Wages Payable XX,XXX
To record direct labour cost
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Process Cost Flows (in journal entry form)
Applied Overhead to Work in Process
Lecturer YIN SOKHENG, Master in Finance 14
General Journal Page 4
Date Account Titles P.R Debit Credit
Work in Process A XX,XXX
Work in Process B XX,XXX
Manufacturing Overhead XX,XXX
To apply overhead to department.
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Work in ProcessDepartment A
. Directmaterials
ManufacturingOverhead
. DirectLabour
. ActualOverhead
. OverheadApplied to
Work inProcess
. AppliedOverhead
Work in ProcessDepartment B
. Directmaterials
. DirectLabour
. AppliedOverhead
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15
Process Cost Flows
(in T-account form)
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Process Cost Flows (in journal entry form)
Transfer the Cost ( Partially Completed)
Lecturer YIN SOKHENG, Master in Finance 16
General Journal Page 4
Date Account Titles P.R Debit Credit
Work in Process Department B XX,XXX
Work in Process Department A XX,XXX
To record the transfer of goods fromDepartment A to Department B.
P C Fl
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Work in ProcessDepartment A
Work in ProcessDepartment B
. Directmaterials
. Transferredto Dept. B
. Directmaterials
. DirectLabour
. DirectLabour
. AppliedOverhead
. AppliedOverhead
. Transferredfrom Dept. A
Lecturer YIN SOKHENG, Master in Finance
17
Process Cost Flows
(in T-account form)
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Process Cost Flows (in journal entry form)
Finished Goods ( Fully Completed)
Lecturer YIN SOKHENG, Master in Finance 18
General Journal Page 4
Date Account Titles P.R Debit Credit
Finished Goods XX,XXX
Work in Process Department B XX,XXX To record the completion of goods andtheir transfer from Department B to
finished inventory.
P C Fl
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Work in ProcessDepartment B Finished Goods
. Directmaterials
. Cost ofGoods
Manufactured
. Cost ofGoods
Manufactured
. DirectLabour
. AppliedOverhead
. Transferred
from Dept. A
Lecturer YIN SOKHENG, Master in Finance
19
Process Cost Flows
(in T-account form)
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P C Fl
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Work in ProcessDepartment B Finished Goods
. Directmaterials
. Cost ofGoods
Manufactured
. Cost ofGoods
Manufactured
. Cost ofGoodsSold
. DirectLabour
. AppliedOverhead
. Transferredfrom Dept. A
Cost of Goods Sold. Cost of Goods
Sold
Lecturer YIN SOKHENG, Master in Finance
21
Process Cost Flows
(in T-account form)
III Computing Cost / Accumulation of Cost
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III. Computing Cost / Accumulation of Cost
Equivalent Units of Production Equivalent units are the product of the number of
partially completed units and percentage
completion of those units.
Two half completed product are equivalent to one
completed product. So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
We need to calculate equivalent units because adepartment usually has some partially completed
units in its beginning and ending inventory.
Lecturer YIN SOKHENG, Master in Finance 22
Calculating Equivalent Units
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g q Equivalent units can be calculated two ways:
1. The Weighted Average Method2. The First-In, First-Out (FIFO) Method
The production report is divided into three parts:
Lecturer YIN SOKHENG, Master in Finance 23
1: A quantity schedule showing
the flow of units and the
computation of equivalent units.
2: A computation of cost per
equivalent unit.3: Cost Reconciliation section
show the reconciliation of all cost
flow into and out of the department
during the period.
Production Report
Section
Section
Section
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Process Costing and Direct Labour
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Process Costing and Direct Labour
Lecturer YIN SOKHENG, Master in Finance 25
Direct labour costsmay be small incomparison to other
product costs in
process costsystems.
DirectMaterials
DirectLabour
MOH
DollarAm
ount
Type of Product Cost
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The Weighted Average Example
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The Weighted Average Example
Smith Company reported the following activity inDepartment A for the month of June:
Lecturer YIN SOKHENG, Master in Finance 27
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out of
Department A during June
5,400
Work in process, June 30 900 60% 30%
E i l t it f d ti l l
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Equivalent units of production always equal=
Units completed and transferred
+ Equivalent units remaining in work in process
Lecturer YIN SOKHENG, Master in Finance 28
Materials Conversion
Units completed and transferred out ofDepartment A during June
5,400 5,400
Work in process, June 30:
900 units x 60% 540
900 units x 30% 270
Equivalent units of production inDepartment A during June 5,940 5,670
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Materials
Lecturer YIN SOKHENG, Master in Finance 29
Beginning work inprocess 300 units
40% complete
5,100 units started andcompleted
Ending work inprocess 900 units
60% complete
5,400 Units Completed540 Equivalent Units
5,940 Equivalent UnitsOf Production
6,000 Units Started
900 x 60%
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Conversion
Lecturer YIN SOKHENG, Master in Finance 30
Beginning work inprocess 300 units
20% complete
5,100 units started andcompleted
Ending work inprocess 900 units
30% complete
5,400 Units Completed270 Equivalent Units
5,670 Equivalent UnitsOf Production
6,000 Units Started
900 x 30%
Example: Assume that Double Diamond Skis use theProduction Report Example
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Example: Assume that Double Diamond Skis use the
weighted-average method of process costing to determine
unit costs in it Shaping and Milling Department.
Lecturer YIN SOKHENG, Master in Finance 31
Work in process, May 1 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete $ 5,575
Production started during May 5,000 units
Production completed during May 4,800 units
Costs added to production in May:
Materials cost $ 368,600
Conversion cost $ 350,900Work in process, 31 400 units
Materials: 40% complete
Conversion: 25% complete
Production ReportStep 1: Prepare Quantity Schedule with Equivalent Units
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Lecturer YIN SOKHENG, Master in Finance 32
QUANTITY
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160Conversion 25% compl. 100
Total units 5,200 4,960 4,900
Step 1: Prepare Quantity Schedule with Equivalent Units
Step 2: Cost per Equivalent Unit
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To calculate the cost per equivalent unit forthe period:
Cost per equivalent
unit
Lecturer YIN SOKHENG, Master in Finance 33
Step 2: Cost per Equivalent Unit
=Cost for the period
Equivalent unit of production
of the period
Step 2: Cost per Equivalent Unit
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Lecturer YIN SOKHENG, Master in Finance 34
COT TO BE ACCOUNTED FOR
Total cost Materials Conversion
Units to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shippingand Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900
Equivalent units 4,960 4,900
Cost per equivalent unit $ 76.25 $ 72.75Total cost per equivalent unit($ 76.25 + 72.75) $ 149
Step 2: Cost per Equivalent Unit
S 3 C R ili i
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Lecturer YIN SOKHENG, Master in Finance 35
COT ACCOUNTED FOR
Total cost Equivalent Units
Materials Conversion
Cost accounted for as follows:
Transferred during the period $ 715, 200 4,800 4,800Work in process, May 31:
Materials (160 x $76.25) 12,200 160
Conversion (100 x $ 72.75) 7,275 100
Total work in process, May 31 $ 19,475Total cost accounted for $ 734,675 4,960 4,900
Step 3: Cost Reconciliation
2. The First-In, First-Out Method
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2. The First In, First Out Method
The FIFO method (generally considered moreaccurate that the weighted-average method) differs
from the weighted average method in two ways:
1. The computation of equivalent units.
2.The way in which the costs of beginning
inventory are treated in the cost reconciliation
report.
Lecturer YIN SOKHENG, Master in Finance 36
Equivalent units FIFO Method
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Equivalent units FIFO Method
Smith Company reported the following activity inDepartment A for the month of June:
Lecturer YIN SOKHENG, Master in Finance 37
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out of
Department A during June
5,400
Work in process, June 30 900 60% 30%
M i l C i
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Lecturer YIN SOKHENG, Master in Finance 38
Materials Conversion
Units completed and transferred out of
Department A during June
5,400 5,400
Work in process, June 30:
900 units x 60% 540
900 units x 30% 270
Equivalent units in Department A duringJune 5,940 5,670
Equivalent units in beginning inventory
300 units x 40% 120
300 units x 20% 60Units completed and transferred out ofDepartment A during June 5,820 5,610
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Materials
Lecturer YIN SOKHENG, Master in Finance 39
Beginning work inprocess 300 units
40% complete
5,100 units started andcompleted
Ending work inprocess 900 units
60% complete
Units completed & transferred out 5,400Equivalent units in ending WIP invent. 540Equivalent units in beg. WIP invent. (120)
Equivalent Units of Production 5,820
6,000 Units Started
900x60%
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Example: Assume that Double Diamond Skis use the
i h d h d f i d i
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weighted-average method of process costing to determine
unit costs in it Shaping and Milling Department.
Lecturer YIN SOKHENG, Master in Finance 41
Work in process, May 1 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete $ 5,575
$ 15,175
Production started during May 5,000 units
Production completed during May 4,800 units
Costs added to production in May:
Materials cost $ 368,600
Conversion cost $ 350,900Work in process, 31 400 units
Materials: 40% complete
Conversion: 25% complete
Production ReportStep 1: Prepare Quantity Schedule with Equivalent Units
QUANTITY
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LecturerYINSOKHENG,MasterinFinance
42
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Beginning inventory 200
Materials 200 units x 45% 90
Conversion 200 units x 70% 140
Units started & completed 4,600 4,600 4,600
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% compl. 100
Total units 5,200 4,960 4,900
Step 2: Cost per Equivalent Unit
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Lecturer YIN SOKHENG, Master in Finance 43
COT TO BE ACCOUNTED FOR
Total cost Materials Conversion
Units to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900
Equivalent units 4,850 4,840
Cost per equivalent unit $ 76.00 $ 72.50
Total cost per equivalent unit($ 76.00 + 72.50) $ 148.50
p p q
COT ACCOUNTED FOR
Step 3: Cost Reconciliation
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Lecturer YIN SOKHENG, Master in Finance 44
Total cost Equivalent Units
Materials Conversion
Work in process, May 1 $ 15,175
Materials (90 x $76.00) 6,840 90
Conversion (140 x $ 72.50) 10,150 140
Total $ 32,165
Started and completed in May 683,100 4,600 4,600
Total transferred during the period $ 715, 265
Work in process, May 31:
Materials (160 x $76.00) 12,160 160
Conversion (100 x $ 72.50) 7,250 100Total $ 19,410
Total cost accounted for $ 734,675 4,850 4,840
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Cost Behavior Analysis
Chapter Five
E-mail: [email protected]
Prepared and Taught by Lecturer: YIN SOKHENG,
Master in Finance
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Types of Cost Behavior PatternsVariable Cost
Fixed Cost
Mixed Cost
Lecturer YIN SOKHENG, Master in Finance 2
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The Variable Cost Total variable cost is proportional to the activity level
within the relevant range.
As activity increases total variable cost increases, and
as activity decreases total variable cost decreases.
Lecturer YIN SOKHENG, Master in Finance 3
The Activity Base
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Unitsproduced
A measure of what
causes theincurrence of avariable cost
Labour
hours
Miles
driven
Machinehours
The Activity Base
Lecturer YIN SOKHENG, Master in Finance 4
Total Variable Cost
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Your telephone bill is based on how many minutesyou talk.
Lecturer YIN SOKHENG, Master in Finance 5
A variable cost is one that change in total in
proportion to change in the volume of activity
TotalTe
lephoneBill
Minutes Talked
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Extent of Variable Costs The proportion of variable costs differs across
organizations.
1. Merchandising companies cost of goods sold.
2. Manufacturing companies direct materials, directlabour, and variable overhead.
3. Merchandising companies and Manufacturingcompanies commission, shipping costs, and clerical
costs such as invoicing.
4. Service companies supplies, travel, and clerical.
Lecturer YIN SOKHENG, Master in Finance 7
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True Variable Cost The variable costs vary in direct proportion to the level
of production activity during a period.
Example: direct material
Lecturer YIN SOKHENG, Master in Finance 8
Cost
Volume
Step Variable Cost
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Step-Variable Cost
Lecturer YIN SOKHENG, Master in Finance 9
C
ost
Activity
Total cost increases to anew higher cost for thenext higher range of
activity.
Total cost remainsconstant within a arrow
range of activity.
Step-Variable Cost
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Step Variable Cost
Lecturer YIN SOKHENG, Master in Finance 10
C
ost
Volume
Small changes in the level of production are not likelyto have any effect on the number of maintenance
workers employed.
Only fairly wide changesin the activity level willcause a change in the
number of maintenanceworkers employed.
Fixed Cost
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Fixed Cost
- Total fixed costs remain unchanged when thelevel of activity changes.
- The fixed cost per unit goes down as activity levelgoes up.
Example: depreciation, supervisory salaries, andrent
Lecturer YIN SOKHENG, Master in Finance 11
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Fixed Cost Per Unit
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Fixed Cost Per Unit
The average cost per local call decreases as morelocal calls are made.
Lecturer YIN SOKHENG, Master in Finance 13
On a per unit basis, a fixed cost changesas the volume of activity changes
Mon
thlybasic
Teleph
oneCharge
perLocalCall
Number of Local Calls
Types of Fixed Costs
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Lecturer YIN SOKHENG, Master in Finance 14
CommittedLong term cannot be
significantly reduced inthe short term.
DiscretionaryMay be altered in the short-term by current managerial
decisions.
ExamplesAdvertising and
research and
development
ExamplesDepreciation on
equipment and real
estate taxes
Fixed Cost and Relevant Range
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Lecturer YIN SOKHENG, Master in Finance 15
Relevant
Range
Cost
Rented Area (Square Feet)
0
30
60
90
1,000 2,000 3,000
Total cost doesnt
change for a widerange of activity,
and then jumps to anew higher cost for
the next higherrange of activity.
The companysnormal operating range
Example: Office space is available at rental rate of
$30,000 per year in increments of 1,000 square feet.
Variable and Fixed Cost Behavior
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Avariable costchanges in direct
proportion to changes
in the cost-driver level.
Afixed costisnot immediately
affected by changes
in the cost-driver.
Think of variable
costs on a per-unit basis.
The per-unit variable
cost remains unchanged
regardless of changes in
the cost-driver.
Think of fixed costs
on a total-cost basis.
Total fixed costs remainunchanged regardless of
changes in the cost-driver.
16Lecturer YIN SOKHENG, Master in Finance
Mixed CostsA mixed cost has both fixed and variable components
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The total mixed cost line can expressed as anequation: Y = a + bx
Where: Y = the total mixed costa = the total fixed cost
b = the variable cost per unitX = the level of activity
Lecturer YIN SOKHENG, Master in Finance 17
A mixed cost has both fixed and variable components.Consider the example of utility cost.
TotalU
tilityCost
Activity (Kilowatt Hours)
Fixed MonthlyUtility Charge
Variable Costper KW
Y
X
Analysis of Mixed Costs
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Analysis of Mixed Costs
Each account and classifying the cost as variable, fixedor mixed based on the cost behavior over time.
Cost estimates are based on an evaluation of
production method, and material, labour, andoverhead requirements.
Lecturer YIN SOKHENG, Master in Finance 18
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Lecturer YIN SOKHENG, Master in Finance 19
Understanding relationships between costsand their cost drivers allows managers to...
evaluate strategic plans andoperational improvement programs.
make short- and long-run decisions.
plan or budget the effects of future activities.
Cost Drivers and Cost Behavior
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Traditional View of Cost Behavior Activity-Based View of Cost Behavior
Resource ACost Driver =Units ofResourceOutput
Resource BCost Driver =Units ofResourceOutput
Activity ACost Driver =Units ofActivity Output
Activity BCost Driver =Units ofActivity Output
Resource BCost Driver =Units ofResourceOutput
Resource ACost Driver =Units ofResourceOutput
Product or Service
Cost Driver = Units of Final
Product or Service
Product or Service
Cost Driver = Output of Final
Product or Service
20Lecturer YIN SOKHENG, Master in Finance
Cost Drivers and Cost Behavior
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Cost behavior is how the activities
of an organization affect its costs.
Any output measure that causes
the use of costly resources
is a cost driver.
21Lecturer YIN SOKHENG, Master in Finance
Value Chain Functions, Costs, and Cost Drivers
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Value Chain Function and Example Costs Example Cost DriversResearch and developmentSalaries marketing research personnel Number of new product proposals
costs of market surveysSalaries of product and process engineers Complexity of proposed productsDesign of products, services, and processesSalaries of product and process engineers Number of engineering hoursCost of computer-aided design equipment Number of parts per productCost to develop prototype of product
for testing
22Lecturer YIN SOKHENG, Master in Finance
Value Chain Functions, Costs, and Cost Drivers
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Value Chain Function and Example Costs Example Cost DriversProductionLabor wages Labor hoursSupervisory salaries Number of people supervisedMaintenance wages Number of mechanic hoursDepreciation of plant and machinery Number of machine hourssuppliesEnergy cost Kilowatt hoursMarketingCost of advertisements Number of advertisementsSalaries of marketing personnel, Sales dollars
travel costs, entertainment costs23Lecturer YIN SOKHENG, Master in Finance
Value Chain Functions, Costs, and Cost Drivers
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C , C , d C
Value chain function and Example costs Example Cost Drivers
DistributionWages of shipping personnel Labor hoursTransportation costs including Weight of items delivered
depreciation of vehicles and fuelCustomer serviceSalaries of service personnel Hours spent servicingproductsCosts of supplies, travel Number of service calls
24Lecturer YIN SOKHENG, Master in Finance
Methods of Measuring
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g
Mixed Costs
Lecturer YIN SOKHENG, Master in Finance 25
1. The Scattergraph Method 2. The High-low Method
3. Least-squares regression Method
The Scattergraph Method
Use one data point to estimate the total level of activity
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Lecturer YIN SOKHENG, Master in Finance 26
Use one data point to estimate the total level of activityand the total cost.
M
aintenancecos
t
1,000sofdollars
Patient-days in 1,000s
Total maintenance cost = $11,000Y
X
Intercept = Fixed cost = $10,000
4321
Patient-days = 800
0
10
20
The Scattergraph MethodM k i k ti t f i bl t it
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Total maintenance at 800 patients $ 11,000
Less: Fixed cost 10,000
Estimated total variable cost for 800 patient $ 1,000
Lecturer YIN SOKHENG, Master in Finance 27
Make a quick estimate of variable cost per unit
and determine the cost equation.
Variable cost per unit =$ 1,000
800= $ 1.25 /patient-day
Y = $10,000 + $1.25X
Total maintenance cost Number of patient days
High Low Method
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High-Low Method
Lecturer YIN SOKHENG, Master in Finance 28
The focus of this method is normally onthe highest- and lowest-activity points.
The first step if to plot the historicaldata points on a graph.
High-Low Method Example
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Lecturer YIN SOKHENG, Master in Finance 29
High month: AprilMaintenance cost: $47,000
Number of patient-days: 4,900
Low month: SeptemberMaintenance cost: $17,000
Number of patient-days: 1,200
What is the variable cost (per unit)?
High-Low Method Example
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Lecturer YIN SOKHENG, Master in Finance 30
($47,000 $17,000) (4,900 1,200)
= $30,000 3,700 = $8.1081
What is the fixed cost?
Unit variable cost = Change in costChange in unit
High Low Method Example
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High-Low Method Example
Lecturer YIN SOKHENG, Master in Finance 31
$47,000 = Fixed cost + ($8.1081 4,900)$47,000 $39,730 = $7,270
$17,000 = Fixed cost + ($8.1081 1,200)$17,000 $9,730 = $7,270
Least-Squares Regression Method
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Lecturer YIN SOKHENG, Master in Finance 32
This method use all of the data pointsto estimate the fixed and variable costcomponents of a mixed cost.
Regression analysis measurescost behavior more reliably than
other cost measurement methods.
The cost analysis objective is the same:Y = a + bX
Coefficient of Determination
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Coefficient of Determination
Lecturer YIN SOKHENG, Master in Finance 33
One measure of reliability,or goodness of fit, is the
coefficient of determination,
R (or R-squared).
The coefficient of determination
measures how much of thefluctuation of a cost is explainedby changes in the cost driver.
Least-Squares Regression Method
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Lecturer YIN SOKHENG, Master in Finance 34
Totalcost
Activity
R2 is the percentage of the variation in totalcost explained by the activity.
Y
X
R2varies from 0% to 100%, and thehigher the percentage the better.
43210
10
20
q g
The Contribution Format
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Lecturer YIN SOKHENG, Master in Finance 35
Racing Bicycle Company
Contribution Income StatementFor the month of June
Sales (500 bicycles) $ 250,000
Less: Variable expenses 150,000
Contribution margin $ 100,000Less: Fixed expenses 80,000
Net income $ 20,000
The contribution Margin (CM) emphasizes cost behavior.Contribution margin covers fixed costs and provides for income.
The Contribution Format
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Comparison of the Contribution Income Statement
With the Traditional Income Statement
Traditional Approach(costs organized by function)
Contribution Approach(costs organized by behavior)
Sales (500 bicycles) $ 250,000 Sales (500 bicycles) $ 250,000
Less: Cost of goods sold 150,000 Less: Variable expenses 150,000
Gross margin $ 100,000 Contribution margin $ 100,000
Less: Operating expenses 80,000 Less: Fixed expenses 80,000
Net income $ 20,000 Net income $ 20,000
Lecturer YIN SOKHENG, Master in Finance 36
Used primarily bymanagement
Used primarily forexternal reporting
The End
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End of Chapter 5
The End
37Lecturer YIN SOKHENG, Master in Finance
Thank You
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thank you all for yourattention.