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Managerial Accounting 1 (Cost Accounting)

Managerial Accounting 1 (Cost Accounting)

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Managerial Accounting 1 (Cost Accounting), prepared by Lecturer YIN SOKHENG, Master in Finance.

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Managerial Accounting 1 (Cost Accounting), prepared by Lecturer YIN SOKHENG, Master in Finance.

www.accviw.blogspot.com

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Introduction to Managerial Accounting

Chapter One

Prepared and Taught by Lecturer: YIN SOKHENG, Master in Finance
E-mail: yin_sokheng@yahoo.com

I. Definition of Managerial Accounting
Managerial accounting provides information for managers of an organization who direct and control its operations. Financial accounting provides information for stockholders, creditors and others who are outside the organization.

Lecturer YIN SOKHENG, Master in Finance

2

Differences Between Financial and Managerial Accounting
Financial Accounting 1. Users External persons who make financial decisions Historical perspective Emphasis on verifiability Emphasis on precision Primary focus is on the whole organization Must follow GAAP and prescribed formats Mandatory for external reports Managerial Accounting Managers who plans for and control an organization Future emphasis Emphasis on relevance for planning and control Emphasis on timeliness Focuses on segments of an organization Need not follow GAAP or any prescribed format Not mandatory
3

2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. G.A.A.P 7. Requirement

Lecturer YIN SOKHENG, Master in Finance

II. Work of Management
Planning
Directing and Motivating

Controlling

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Planning
Identify alternatives Select a best alternative Develop budgets
Lecturer YIN SOKHENG, Master in Finance 5

Directing and Motivating
Directing and motivating involves managing day-to-day activities to keep the organization running smoothly.  Employee work assignments.  Routine problem solving.  Conflict resolution.  Effective communications.

Lecturer YIN SOKHENG, Master in Finance

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Controlling
The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual result with the budgets are an essential part of the control function.

Lecturer YIN SOKHENG, Master in Finance

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Planning and Control Cycle
Formulating long and short –term plans (Planning)
Being

Comparing actual to planed performance (Controlling)

Implementing plans
(Directing and Motivating)

Measuring performance (Controlling)
Lecturer YIN SOKHENG, Master in Finance 8

Organization Structure

Decentralization is the delegation of decision-making authority throughout an organization

Corporate Organization Chart
Board of Directors President/CEO
Vice president operations Chief Financial Officer (CFO) Controller

Purchasing

Personnel

Treasurer Manager
Lecturer YIN SOKHENG, Master in Finance

Manager
9

Line and Staff Relationships
Line position are directly related to achievement of the basic objectives of an organization. Example: Production supervisors . Staff positions support and assist line positions. Example: Cost accountants.

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The Chief Financial Officer (CFO)
for: A member of the top manager team (CFO) responsible
 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.
Lecturer YIN SOKHENG, Master in Finance 1-11

The Controller
Controller
Tax Manager
Financial Accounting

Cost Accounting

Data Processing

The controller handles the accounting function, which includes taxes, cost and financial accounting, and information systems.

Lecturer YIN SOKHENG, Master in Finance

1-12

III. Just-in-Time (JIT) System
 A just-in-time manufacturer produces goods to

ship to customers rather than producing goods for inventory. Production is initiated by a customer order, a system referred to as "demand pull," rather than a desire to build inventory for potential orders.  When applied in a manufacturing company, JIT systems minimize raw materials, work in process, and finished goods inventories.
Lecturer YIN SOKHENG, Master in Finance 13

The Steps in JIT System processing
Receive customer orders. Schedule production. Receive materials just-in-time for production. Complete parts just-in-time for assembly into products. Complete products just-in-time to ship customers.

Lecturer YIN SOKHENG, Master in Finance

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Key Elements for a Successful JIT System
Improved plant layout Reduced setup time
Zero production Defects

Flexible workforce

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Benefits of a JIT System
Reduced inventory costs Higher quality products Less warehouse space needed More repaid response to customer orders. Greater customer satisfaction

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Cost Terms, Concepts, and Classifications
Chapter Two

Prepared and Taught by Lecturer: YIN SOKHENG, Master in Finance
E-mail: yin_sokheng@yahoo.com

Classifying Costs
 By Behavior

- Variable Costs - Fixed Costs  By Traceability/ Cost Objects - Direct Costs - Indirect Costs  By Function - Product Costs - Period Costs
Lecturer YIN SOKHENG, Master in Finance 2

I. Cost Classifications by Behavior
Cost Behavior: How a cost will react to changes in the level of business activity.  Variable Costs: - Total variable costs change when the level of activity 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…
Lecturer YIN SOKHENG, Master in Finance 3

Total Variable Cost
A variable cost is one that change in total in proportion to change in the volume of activity

Your telephone bill is based on how many minutes you talk.
Total Telephone Bill

Minutes Talked
4

Lecturer YIN SOKHENG, Master in Finance

Variable Cost Per Unit
On a per unit basis, a variable cost remain constant over a wide range of activity

The cost per minute talked is constant. For example, 10 cents per minute.
Per Minute Telephone Charge Minutes Talked
Lecturer YIN SOKHENG, Master in Finance 5

Cost Classifications by Behavior
 Fixed Costs:

- Total fixed costs remain unchanged when the level of activity changes. - The fixed cost per unit goes down as activity level goes up.  Example: depreciation, supervisory salaries, and rent…

Lecturer YIN SOKHENG, Master in Finance

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Total Fixed Cost
A fixed cost is one that remain constant in total even when the volume of activity changes

Your monthly basic telephone bill probably does not change when you make local calls.
Monthly basic Telephone Charge Number of Local Calls
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Fixed Cost Per Unit
On a per unit basis, a fixed cost changes as the volume of activity changes

The average cost per local call decreases as more local calls are made.
Monthly basic Telephone Charge per Local Call Number of Local Calls
Lecturer YIN SOKHENG, Master in Finance 8

II. Cost Classifications by Traceability
 Direct Costs:

Costs that can easily and conveniently traced to a unit of product or other cost objective. Examples: Direct materials cost, Direct labour cost.  Indirect labour Costs: Costs that can’t 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:
Manufacturing Costs/ Product Costs  Direct Material Direct labour  Overhead Nonmanufacturing Costs/ Period Costs  Selling & marketing expenses  General and administrative expenses

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Classification of Manufacturing Costs/ Product Costs
Manufacturing costs are often classified as follows:
Manufacturing Costs Direct Material Direct Labor Manufacturing Overhead

Prime Cost

Conversion Cost
11

Lecturer YIN SOKHENG, Master in Finance

Manufacturing Costs
Direct Material Direct Labour
Manufacturing Overhead

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 be physically and conveniently traced directly to it.

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Direct Labour
 Those labour costs that can be easily

traced to individual units of product.

Example: Wages paid to assembly workers.
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Manufacturing Overhead
 Manufacturing costs that can’t be traced to directly to

specific units produced.

Example: Indirect labour and indirect materials
Wages paid to employee who are not directly involved in production work. Example: maintenance worker, janitors, and security guards.

Materials used support the production process. Example: lubricants and cleaning supplies used in the automobile assembly plant.

Lecturer YIN SOKHENG, Master in Finance

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Non-manufacturing Costs/ Period Costs
Marketing or Selling Costs Administrative Costs

Costs necessary to get the order and deliver product.

All executive , organizational, and clerical costs.

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Product Costs Versus Period Costs
Product costs include direct materials, direct labour, and manufacturing overhead.
Inventory Cos of Goods Sold

Period costs include all marketing or selling costs and administrative costs. Expense

Sales

Balance Sheet

Income Statement

Income Statement
17

Lecturer YIN SOKHENG, Master in Finance

Comparing Merchandising and Manufacturing Activities
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
Merchandiser Current assets:
Cash Receivable Prepaid expense Merchandise Inventory

Manufacturer Current assets:

Partially complete products-some material, labour, or overhead has been added.
Lecturer YIN SOKHENG, Master in Finance

Cash Receivable Materials waiting to be processed. Prepaid expense Inventories - Raw Materials - Work in Process - Finished Goods

Fully completed products awaiting sale.
20

Income Statement
Merchandiser Company
Cost of goods sold: Beg. merchandise inventory +Purchase Goods available for sale -Ending merchandise inventory $14,200 234,150 $248,350 (12,100)

Manufacturing Company
Cost of goods sold: Beg. Finished goods invent. +Cost of goods manufactured Goods available for sale -Ending finished goods inventory $ 14,200 234,150 $248,350 (12,100)

=Cost of goods sold $236,250

=Cost of goods sold $236,250

Lecturer YIN SOKHENG, Master in Finance

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Inventory Flows
Basic Equation for Inventory Accounts Beginning Additions Ending Withdrawals balance + to inventory = balance + from inventory
Or

Beginning balance Available

+

Additions

=

Available Ending balance
22

-

Withdrawals =

Lecturer YIN SOKHENG, Master in Finance

Merchandising Company
Cost of Goods Sold
Beginning merchandise inventory

+ Purchased = or

Ending merchandise inventory

Cost of goods + sold

Cost of Goods Sold Cost of goods = sold
Beginning merchandise inventory

+ Purchased -

Ending merchandise inventory

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Manufacturing Company
Cost of Goods Sold
Beginning finished goods inventory

+

Cost of goods manufactured

Cost of = goods inventory + goods sold
Ending finished

or
Cost of Beginning Cost of goods Ending finished goods sold = finished goods + manufactured - goods inventory inventory

Cost of Goods Sold

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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
Raw Materials

Manufacturing Costs

Work in Process
Total manufacturing costs + Beginning work in process inventory = Total work in process -Ending work in process inventory = Cost of goods manufactured

Direct materials Beginning raw + Direct labour material inventory + Manufacturing OH + Raw materials = Total manufacturing purchased costs = Raw materials available for use - Ending raw materials inventory = Direct materials use in product

Lecturer YIN SOKHENG, Master in Finance

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Product Costs
Work in Process Finished Goods
Beginning finished goods inventory +Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory = Cost of goods sold Total manufacturing costs + Beginning work in process inventory = Total work in process - Ending work in process inventory = Cost of goods manufactured

Lecturer YIN SOKHENG, Master in Finance

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The Schedule of Costs of Goods Manufactured
Raw Materials Beginning 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
Lecturer YIN SOKHENG, Master in Finance

Finished Goods
Beginning finished goods inventory +Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory = Cost of goods sold

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 Beginning raw materials inventory is the inventory 

carried over from the prior period. As items are removed from raw materials inventory and placed in to the production process, thy are celled direct materials. Conversion costs ( direct labour + MOH/ FOH) are costs incurred the convert the direct material in to a finished product. Total manufacturing costs are all manufacturing costs incurred 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 are transferred to finished goods inventory.
29

Lecturer YIN SOKHENG, Master in Finance

Manufacturing Cost Flows
Costs Materials Purchases Direct Labour Manufacturing Overhead Balance Sheet Inventories Raw Materials Work in Process Finished Goods Period Costs Cost of Goods Sold Selling and Administrative Expenses
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Income Statement Expenses

Selling and Administrative
Lecturer YIN SOKHENG, Master in Finance

 Every decision involves a choice between at least

V. Cost Classifications for Decision Making

two alternatives.  The goal of making decisions is to identify those costs that are either relevant or irrelevant to the decision.  Costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits are irrelevant and can and should be ignored.
Lecturer YIN SOKHENG, Master in Finance 31

Differential costs and Revenues
 Differential costs (or incremental costs) is a difference in

cost between any two alternatives. Differential costs can be either 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 a neighboring 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

Lecturer YIN SOKHENG, Master in Finance

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Differential costs and Revenues
Retailer Distribution (present) Revenue (variable) Cost of goods sold (variable) Advertising (fixed) Commissions (variable) Warehouse depreciation (fixed) Other expenses (fixed) Total Net operating income $ 700,000 350,000 80,000 0 50,000 60,000 540,000 $ 160,000 Direct Sale Distribution (proposed) $ 800,000 400,000 45,000 40,000 80,000 60,000 625,000 $ 175,000 Differential Costs and Revenue $ 100,000 50,000 (35,000) 40,000 30,000 0 85,000 $ 15,000

Lecturer YIN SOKHENG, Master in Finance

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Opportunity cost

 Opportunity cost is the potential benefit that is

given up when one alternative is selected over another.  These costs are not usually entered into the accounting records of an organization, but must be explicitly considered in all decisions.  Example: If you were not attending college, you could be earning $ 15,000 per year. Your opportunity cost of attending collage for one year is $ 15,000.
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 Sunk cost have already been incurred and that

Sunk costs

cannot be changed by any decision made now or in the future.  Since sunk costs cannot be changed and therefore cannot be differential costs, they should be ignored in decision making.  Example: If you bought an automobile that cost $10,000 two year a go. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you can’t change the $10,000 cost.
Lecturer YIN SOKHENG, Master in Finance 35

Machine breakdowns

Idle Time
Power failures

Material shortages

The labor costs incurred during idle time are ordinarily treated as manufacturing overhead
Direct labour ($12 per hour x 37 hours) …………….............…$ 444 Manufacturing overhead (idle time: $12 per hour x 3 hours)……. 36 Total cost for the week ……………………………………………………$ 480
Lecturer YIN SOKHENG, Master in Finance 36

 The overtime premiums for all factory workers are

Overtime

usually considered to be part of manufacturing overhead.  This is done to avoid penalizing particular products or customer orders simply because they happen to fall on the tail end of the daily production schedule.
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
Lecturer YIN SOKHENG, Master in Finance 37

Job – Order Costing System
Chapter Three Prepared and Taught by Lecturer: YIN SOKHENG, Master in Finance
E-mail: yin_sokheng@yahoo.com

I. Types of Product Costing System
There are several methods that can be used to accumulate manufacturing costs and determine unit product cost. One of these methods is known as a job- order cost system.

Lecturer YIN SOKHENG, Master in Finance

2

A process cost system
A companies that produce many units of a single

product 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
Lecturer YIN SOKHENG, Master in Finance 3

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 or allocating costs to each job, and maintaining cost records 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….
Lecturer YIN SOKHENG, Master in Finance 4

Comparing Process and Job-Order Costing System
Job-Order
Number of jobs worked Cost accumulated by Average cost computed by Many Job Job

Process
Single product Department Department

Lecturer YIN SOKHENG, Master in Finance

5

II. Measuring the Job-Order costing system Direct Manufacturing Costs
Direct Materials Direct Labour Manufacturing Overhead
Lecturer YIN SOKHENG, Master in Finance

Job NO. 1 Job NO. 2 Job NO. 3

Charge direct materials and direct labour costs to each job as work is performed
6

Indirect Manufacturing Costs
Manufacturing overhead, including indirect materials and indirect labour, are allocated to jobs rather than directly traced to each job.
7

Direct Materials Direct Labour Manufacturing Overhead
Job NO. 1 Job NO. 2 Job NO. 3

Lecturer YIN SOKHENG, Master in Finance

Materials Requisition Form
 The materials requisition form is a detailed source

document that (1) specifies the type and quantity of materials 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 the accounting records.  Production managers use materials requisition forms to request materials for manufacturing.
Lecturer YIN SOKHENG, Master in Finance 8

Materials Requisition Form
Materials Requisition Number 0017 Job Number to Be charge d 2B77 Department Milling Description M46 Housing G7 Connector Quantity 150 300 Date March 2, 20x2

Unit Cost $ 1.64 1.38

Total Cost $ 246 414 $ 660

Authorized Signature

Bill White

Total cost is transferred to job cost sheet for job 2B77

Lecturer YIN SOKHENG, Master in Finance

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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 employee’s activities throughout the 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).

Lecturer YIN SOKHENG, Master in Finance

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Employee Time Ticket
Time Ticket No Employee 016 Date Station Time Completed 5.0 2.0 1.0 8.0 March 3, 20x2 2 Marry Holden

Started 7:00 12:00 2:30 Total Supervisor

Ended 12:00 2:30 3:30

Rate $9 9 9

Amount

Job Number

$ 45 2B77 18 2B88 9 Maintenance $ 72

McMalen

Information is transferred to job cost sheet for job 2B77
Lecturer YIN SOKHENG, Master in Finance 11

Application of Manufacturing Overhead
 It is usually easy to assign materials and labour

costs to products and services. Why?  It is difficult, however, to assign overhead costs to products and services. Why? There are three reasons 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.
Lecturer YIN SOKHENG, Master in Finance

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Application of Manufacturing Overhead
 The only way to assign overhead costs to products

is use an allocation (allocation base) process.  An allocation base is a measure such as direct labour-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services.  The allocation base is used to compute the predetermined overhead rate. So, a predetermined overhead rate is used to assign overhead costs to products and services.
Lecturer YIN SOKHENG, Master in Finance 13

Application of Manufacturing Overhead
 A predetermined overhead rate is 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 determine actual overhead costs would be too late. Managers need to cost jobs immediately. 2. Overhead rates, if based on actual costs and activity, would vary substantially from month to month. Much of this variation would be due to random changes in activity.
Lecturer YIN SOKHENG, Master in Finance 14

Application of Manufacturing Overhead
Predetermined overhead rate =
Estimated total manufacturing overhead cost Estimated total units in the allocation base (DLH, MH, etc.)

The process of assigning overhead cost to job ( job cost sheet) is called overhead application (overhead applied). Overhead applied to a particular job

=

Predetermined overhead rate

X

Amount of allocation base incurred by the job (actual DLH, MH, etc.)

Lecturer YIN SOKHENG, Master in Finance

15

Application of Manufacturing Overhead
Example: 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 company’s predetermined overhead rate would be: Ticket NO 016 = 5 DLHs Predetermined overhead rate = =
Overhead applied

$ 600,000 75,000 DLH $ 8/ DHL

Ticket NO 072 = 8 DLHs Ticket NO 088 = 4 DLH s Ticket NO 099 = 10 DLHs
= 27 DLHs

Total

= $ 8 per DLH X 27 DLHs = $216 0f overhead applied to job (job cost sheet) 2B77
16

Lecturer YIN SOKHENG, Master in Finance

Job Cost Sheet
 After being notified that the production order has

been issued, the Accounting Department prepares a job 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.

Lecturer YIN SOKHENG, Master in Finance

17

JOB COST SHEET Job Number Department For Stock Direct Materials Req. NO. 0017 0025 0036 Amount $ 660 506 238 Ticket 016 072 088 099 Direct Labor Hours 5 8 4 10 27 Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost $ 1,404 $ 180 $ 216 $ 1,800 $ 900
18

2B77 Milling

Date Initiated Date Completed

March 2 March 8 2 Manufacturing Overhead

Item Special order coupling

Units Completed

Amount $ 45 60 21 54 $ 180

Hours 27

Rate $8/DLH

Amount $ 216
Lecturer YIN SOKHENG, Master in Finance

Units Shipped Date March 8 Number Balance 2

THE FLOW OF DOCUMENTS IN A JOB-ORDER COSTING SYSTEM Sales Order
A sales order is prepared as basis for issuing a …

Product Order
A product order initiates work on a job, whereby costs are charged through… Materials Requisition Direct Labor Time Ticket
Predetermined OH Rates

The various costs of production are accumulated on a form, prepared by the accounting department, known as a …

Job Cost Sheet
The job costs sheet forms the basis for computing unit costs that are used to cost ending inventories and cost of goods sold.
Lecturer YIN SOKHENG, Master in Finance 19

III. Entry to record the Cost Flows in a Job-Order Costing 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
Lecturer YIN SOKHENG, Master in Finance 20

Job-Order Costing – Flow of Materials Costs
Materials used may be either direct or indirect.

Direct Materials

Record on each Job Order Cost Sheet and add to Work in Process Account

Materials Requisition
Indirect Materials
Record in Manufacturing Overhead Account

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21

Job-Order Costing – Flow of Labour Costs
An employee’s time may be either direct or indirect.

Direct Labour

Record on each Job Order Cost Sheet and add to Work in Process Account

Employee Time Ticket
Indirect Labour
Record in Manufacturing Overhead Account

Lecturer YIN SOKHENG, Master in Finance

22

Job-Order Costing Document Flow Summary

Employee Time Ticket
Other Actual Overhead Charges

Indirect Labour Record on each Job Applied Record in Order Cost (or allocated) Manufacturing Sheet and Overhead Overhead add to Work Account in Process Account Indirect materials
23

Materials Requisition

Lecturer YIN SOKHENG, Master in Finance

Entry to record the Cost Flows – Materials Purchases Raw materials purchased are recorded in an inventory account.
General Journal Date Account Titles Raw Materials Account Payable P.R Page 3 Debit XX,XXX XX,XXX Credit

Raw Materials XX,XXX

Account Payable XX,XXX

Lecturer YIN SOKHENG, Master in Finance

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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.
General Journal Date Account Titles Work in Process Manufacturing Overhead Raw Materials Raw Materials XX,XXX Work in Process XX,XXX P.R Page 3 Debit XX,XXX XX,XXX XX,XXX Manuf. OH XX,XXX Credit

Lecturer YIN SOKHENG, Master in Finance

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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.
General Journal Date Account Titles Work in Process Manufacturing Overhead Salaries and Wage Payable Salaries and Wage Payable XX,XXX Work in Process XX,XXX P.R Page 3 Debit XX,XXX XX,XXX XX,XXX Manuf. OH XX,XXX Credit

Lecturer YIN SOKHENG, Master in Finance

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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.
General Journal Date Account Titles Manufacturing Overhead Account Payable Property Taxes Payable Prepaid Insurance Accumulated Dep., factory
Account Payable XX,XXX Property Taxes Payable XX,XXX Prepaid Insurance XX,XXX Accumulated Dep., factory XX,XXX

Page 3 P.R Debit XX,XXX XX,XXX XX,XXX XX,XXX XX,XXX Credit

Manuf. OH XX,XXX

Lecturer YIN SOKHENG, Master in Finance

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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.
General Journal Date Account Titles Work in Process Manufacturing Overhead P.R Page 3 Debit XX,XXX XX,XXX Credit

Manuf. OH XX,XXX

Work in Process 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 in process account to finished goods account.
General Journal Date Account Titles Finished Goods Work in Process P.R Page 3 Debit XX,XXX XX,XXX Credit

Work in Process XX,XXX

Finished Goods XX,XXX

Lecturer YIN SOKHENG, Master in Finance

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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:

The sale is recorded; and 2. The cost of the job is transferred from the finished goods account to the cost of goods sold account.
1.
General Journal Date Account Titles Account Receivable Sales Cost of Goods Sold Finished Goods
Finished Goods XX,XXX Cost of Goods Sold XX,XXX Account Receivable XX,XXX

Page 3 P.R Debit XX,XXX XX,XXX XX,XXX XX,XXX
Sales XX,XXX
30

Credit

Lecturer YIN SOKHENG, Master in Finance

Summary of Cost Flows in a Job-Order Costing System
Raw Materials
Debit for the cost of materials purchased Credit for direct materials added to work in process

Work in Process
Debit for direct materials, direct labor, and MOH applied Credit for the cost of goods manufactured

Credit for indirect materials added to MOH

Salaries and Wages Payable
Credit for direct labor added to WIP Credit for indirect labor added to MOH

MOH/ FOH
Debit for actual OH costs incurred Underapplied OH cost Credit for OH cost applied to WIP Overapplied OH cost

Finished Goods
Debit for the cost of goods manufactured Credit for the cost of goods sold

Cost of Goods Sold
Debit for the cost of goods sold

Lecturer YIN SOKHENG, Master in Finance 31

Disposition of the Amount of Overapplied and Underapplied OH
If balance is materials If balance is not materials The amount may be closed directly to cost of goods sold. OR Work in Process Cost of Goods Sold Finished Goods Cost of Goods Sold

The amount is allocated to these accounts:

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32

Closed Out to Cost of Goods Sold
General Journal Date Account Titles Manufacturing Overhead Cost of Goods Sold P.R Page 4 Debit 3,000 3,000 Credit

MOH/ FOH
Actual OH costs

Cost of Goods Sold
Unadjuste d balance Adjusted balance
Income Statement Assuming balance is not material

$ 497,000

OH applied to job

$ 500,000

$ 3,000

$ 3,000

$ 3,000

Overapplied

$0

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33

Allocated between accounts
Allocation of under- or overapplied overhead between Work in Process, Finished Goods, and Cost of Goods Sold is more accurate than closing the entries balance into 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 - Overhead applied in FG inventory, ending - Overhead applied in COGS inventory, ending
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$ 30,000 15,000 45,000
34

Allocated between accounts
Overhead applied in WIP inventory, ending Overhead applied in FG inventory, ending Overhead applied in COGS inventory, ending Total overhead applied $ 30,000 15,000 45,000 $ 90,000 33.33% 16.67% 50.00% 100.00%

Based on the above percentages, the underapplied overhead 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) COGS (50.00% X $ 5,000) Manufacturing Overhead
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833.50 2,500.00 5,000.00
35

Summary – Overapplied and Underapplied OH
If overhead is: UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) Assuming not material: INCREASE Cost of Goods Sold

DECREASE Cost of Goods Sold

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36

Summary of Overhead Concepts
At the beginning of the period: Estimated total manufacturing overhead cost During the period: Predetermined overhead rate X Actual total units of the allocation base incurred during the year = Total manufacturing overhead applied Estimated total units in the allocation base Predetermined overhead rate

÷

=

At the of the period: Actual total manufacturing overhead cost – Total manufacturing overhead applied = Underapplied (oveerapplied) overhead

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37

The Steps of Accounting Processing Cycle
1. Record business transactions 4. Make end of period 2. Post General (all adjustments 7. Make closing entries General Ledger
8. Prepare

Journal

types of entries)

After-closing trial balance

3. Prepare

5. Prepare

Unadjusted Trial balance

Adjusted trial balance

6. Prepare

Financial statement and disclosure

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38

The Steps of Accounting Processing Cycle
1. 2. 3. 4. 5. 6. 7. 8. Joumnalize (record) transactions Post to ledger accounts Prepare a trial balance ( unadjusted trial balance) Make end – of – period adjustments in the general journal and post to ledger accounts Prepare an adjusted trial balance Prepare financial statement and and appropriate disclosures Journalize and post the closing entries to ledger accounts Prepare an after-closing trial balance

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39

Process Costing System
Chapter Four

Prepared and Taught by Lecturer: YIN SOKHENG, Master in Finance
E-mail: yin_sokheng@yahoo.com

Product Costing System
In this chapter we look at an alternative known as process 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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2

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 for computing 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

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 long period 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 accumulated costs by individual jobs.  Process costing systems use department production reports to accumulate costs. Job-order costing systems use job cost sheets to accumulate costs.
Lecturer YIN SOKHENG, Master in Finance 4

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 processing department must be homogeneous.

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5

2. Comparing Job-Order and Process Costing
Direct Materials Direct Labour Work in Process Finished Goods

Manufacturing Overhead

Cost of Goods Sold

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6

Job-Order Costing System
Costs are traced and applied to individual jobs in a job-order costing system.

Direct Materials Direct Labour Jobs

Finished Goods

Manufacturing Overhead

Cost of Goods Sold
7

Lecturer YIN SOKHENG, Master in Finance

Proces Costing System
Costs are traced and applied to departments in a process costing system.

Direct Materials Direct Labour

Processing Department

Finished Goods

Manufacturing Overhead

Cost of Goods Sold
8

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III. Entry to Record Cost Flows in a Process Costing System For purposes of this example, assume there are two processing department – Department A and B. We will use journal entries and T.accounts.

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9

Process Cost Flows (in journal entry form) The requisition of direct materials for use in process department.
General Journal Date Account Titles Work in Process A Work in Process B Raw Materials To record the use of direct materials P.R Page 4 Debit XX,XXX XX,XXX XX,XXX Credit

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10

Process Cost Flows (in T-account form)
Raw Materials
Debit for the cost of materials purchased

Work in Process Department A Debit for direct materials Work in Process Department B Debit for direct materials

Credit for direct materials

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11

Process Cost Flows (in journal entry form) Direct Labour Cost
General Journal Date Account Titles Work in Process A Work in Process B Salaries and Wages Payable To record direct labour cost P.R Page 4 Debit XX,XXX XX,XXX XX,XXX Credit

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12

Process Cost Flows (in T-account form)
Work in Process Department A Salaries and Wages Payable . Direct Labour . Direct materials . Direct Labour Work in Process Department B . Direct materials . Direct Labour
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Process Cost Flows (in journal entry form) Applied Overhead to Work in Process
General Journal Date Account Titles Work in Process A Work in Process B Manufacturing Overhead To apply overhead to department. P.R Page 4 Debit XX,XXX XX,XXX XX,XXX Credit

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14

Process Cost Flows (in T-account form)
Manufacturing Overhead
. Actual Overhead . Overhead Applied to Work in Process

Work in Process Department A . Direct materials . Direct Labour . Applied Overhead

Work in Process Department B . Direct materials . Direct Labour . Applied Overhead
Lecturer YIN SOKHENG, Master in Finance 15

Process Cost Flows (in journal entry form) Transfer the Cost ( Partially Completed)
General Journal Date Account Titles Work in Process – Department B Work in Process – Department A To record the transfer of goods from Department A to Department B. P.R Page 4 Debit XX,XXX XX,XXX Credit

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16

Process Cost Flows (in T-account form)
Work in Process Department A . Direct materials . Direct Labour . Applied Overhead Work in Process Department B . Direct materials

. Transferred to Dept. B

. Direct Labour
. Applied Overhead

. Transferred from Dept. A

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17

Process Cost Flows (in journal entry form) Finished Goods ( Fully Completed)
General Journal Date Account Titles Finished Goods Work in Process – Department B To record the completion of goods and their transfer from Department B to finished inventory. P.R Page 4 Debit XX,XXX XX,XXX Credit

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18

Process Cost Flows (in T-account form)
Work in Process Department B . Direct materials . Direct Labour . Applied Overhead . Transferred from Dept. A

Finished Goods . Cost of Goods Manufactured

. Cost of Goods Manufactured

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19

Process Cost Flows (in journal entry form) Cost of Goods Sold
General Journal Date Sales To record sales on account Finished Goods Work in Process – Department B To record cost of goods sold XX,XXX XX,XXX Account Titles Account Receivable P.R Page 4 Debit XX,XXX XX,XXX Credit

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20

Process Cost Flows (in T-account form)
Work in Process Department B . Direct materials . Direct Labour . Applied Overhead . Transferred from Dept. A

Finished Goods . Cost of Goods Manufactured . Cost of Goods Sold

. Cost of Goods Manufactured

Cost of Goods Sold
. Cost of Goods Sold

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21

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 a department usually has some partially completed units in its beginning and ending inventory.
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Calculating Equivalent Units
 Equivalent units can be calculated two ways: 1. The Weighted –Average Method 2. The First-In, First-Out (FIFO) Method  The production report is divided into three parts:
Production Report

Section Section Section
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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.
23

1. The Weighted –Average Method
The weighted average method… • Makes no distinction between work done in prior or current periods. • Blends together units and costs from prior and current periods.
Cost per = equivalent unit Equivalent units of production for the period Costs for the period

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24

Process Costing and Direct Labour
Direct Materials MOH

Dollar Amount

Direct Labour

Direct labour costs may be small in comparison to other product costs in process cost systems.

Type of Product Cost
Lecturer YIN SOKHENG, Master in Finance 25

Process Costing and Direct Labour
Dollar Amount Direct Materials MOH

Direct labour costs may be small in comparison to other product costs in process cost systems.

Type of Product Cost

Direct labour and manufacturing overhead may be combined into product cost called conversion.
Lecturer YIN SOKHENG, Master in Finance 26

The Weighted Average Example
Smith Company reported the following activity in Department A for the month of June:
Percent Completed Units Materials Conversion

Work in process, June 1 Units started into production in June Units completed and transferred out of Department A during June Work in process, June 30

300 6,000 5,400 900

40%

20%

60%

30%

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27

Equivalent units of production always equal= Units completed and transferred + Equivalent units remaining in work in process
Materials Conversion

Units completed and transferred out of Department A during June Work in process, June 30:
900 units x 60%

5,400

5,400

540 270 5,940 5,670

900 units x 30% Equivalent units of production in Department A during June

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28

Materials

6,000 Units Started
5,100 units started and completed Ending work in process 900 units 60% complete

Beginning work in process 300 units 40% complete

5,400 Units Completed 540 Equivalent Units

900 x 60%

5,940 Equivalent Units Of Production

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29

Conversion

6,000 Units Started
5,100 units started and completed Ending work in process 900 units 30% complete

Beginning work in process 300 units 20% complete

5,400 Units Completed 270 Equivalent Units

900 x 30%

5,670 Equivalent Units Of Production

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30

Example: Assume that Double Diamond Skis use the weighted-average method of process costing to determine unit costs in it Shaping and Milling Department.
Work in process, May 1 Materials: 55% complete Conversion: 30% complete
Production started during May

Production Report Example

200 units $ 9,600 $ 5,575 5,000 units 4,800 units $ 368,600 $ 350,900 400 units

Production completed during May Costs added to production in May: Materials cost Conversion cost Work in process, 31 Materials: 40% complete Conversion: 25% complete
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31

Production Report
Step 1: Prepare Quantity Schedule with Equivalent Units
QUANTITY

Units to be accounted for: Work in process, May 1 Started into production Total units 200

5,000
5,200 Equivalent units Materials
Conversion

Units accounted for as follows: Completed and transferred Work in process, May 31 Materials 40% complete Conversion 25% compl. Total units 5,200 4,960 4,800 400 160 100 4,900 4,800 4,800

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32

Step 2: Cost per Equivalent Unit
To calculate the cost per equivalent unit for the period:
Cost for the period Cost per equivalent = unit Equivalent unit of production of the period

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33

Step 2: Cost per Equivalent Unit
COT TO BE ACCOUNTED FOR Total cost Materials Conversion

Units to be accounted for: Work in process, May 1
Costs added in the Shipping and Milling Department Total cost Equivalent units

$ 15,175 719,500
$ 734,675

$ 9,600 368,600
$ 368,600

$ 5,575 350,900
$ 350,900

4,960
$ 76.25 $ 149

4,900
$ 72.75

Cost per equivalent unit Total cost per equivalent unit ($ 76.25 + 72.75)

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34

Step 3: Cost Reconciliation
COT ACCOUNTED FOR

Total cost
Cost accounted for as follows: Transferred during the period Work in process, May 31: Materials (160 x $76.25) Conversion (100 x $ 72.75)
Total work in process, May 31

Equivalent Units
Materials Conversion

$ 715, 200

4,800 160

4,800

12,200 7,275
$ 19,475 $ 734,675

100
4,960 4,900

Total cost accounted for

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35

2. The First-In, First-Out Method
The FIFO method (generally considered more accurate 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.

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36

Equivalent units – FIFO Method
Smith Company reported the following activity in Department A for the month of June:
Percent Completed Units Materials Conversion

Work in process, June 1 Units started into production in June Units completed and transferred out of Department A during June Work in process, June 30

300 6,000 5,400 900

40%

20%

60%

30%

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37

Materials

Conversion

Units completed and transferred out of Department A during June Work in process, June 30:
900 units x 60%

5,400

5,400

540 270 5,940 120 60 5,820 5,610 5,670

900 units x 30% Equivalent units in Department A during June Equivalent units in beginning inventory 300 units x 40% 300 units x 20% Units completed and transferred out of Department A during June

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38

Materials

6,000 Units Started
5,100 units started and completed Ending work in process 900 units 60% complete

Beginning work in process 300 units 40% complete

Units completed & transferred out 5,400 Equivalent units in ending WIP invent. 540 Equivalent units in beg. WIP invent. (120)

Equivalent Units of Production 5,820

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900 x 60%

39

Conversion

6,000 Units Started
5,100 units started and completed Ending work in process 900 units 30% complete

Beginning work in process 300 units 20% complete

Units completed & transferred out 5,400 Equivalent units in ending WIP invent. 270 Equivalent units in beg. WIP invent. (60)

Equivalent Units of Production 5,610

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900 x 30%

40

Example: Assume that Double Diamond Skis use the weighted-average method of process costing to determine unit costs in it Shaping and Milling Department.
Work in process, May 1 Materials: 55% complete Conversion: 30% complete
Production started during May

200 units $ 9,600 $ 5,575 $ 15,175 5,000 units 4,800 units $ 368,600 $ 350,900 400 units

Production completed during May Costs added to production in May: Materials cost Conversion cost Work in process, 31 Materials: 40% complete Conversion: 25% complete
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41

Production Report
Step 1: Prepare Quantity Schedule with Equivalent Units
QUANTITY

Units to be accounted for: Work in process, May 1 Started into production Total units
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200

5,000
5,200
Equivalent units Materials
Conversion

Units accounted for as follows: Beginning inventory Materials 200 units x 45% Conversion 200 units x 70% Units started & completed Work in process, May 31 Materials 40% complete Conversion 25% compl. Total units 5,200 4,960 4,600 400 160 100 4,900
42

200 90 140 4,600 4,600

Step 2: Cost per Equivalent Unit
COT TO BE ACCOUNTED FOR Total cost Materials Conversion

Units to be accounted for: Work in process, May 1
Costs added in the Shipping and Milling Department Total cost Equivalent units

$ 15,175 719,500
$ 734,675

368,600
$ 368,600

350,900
$ 350,900

4,850 $ 76.00 $ 148.50

4,840 $ 72.50

Cost per equivalent unit Total cost per equivalent unit ($ 76.00 + 72.50)

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43

Step 3: Cost Reconciliation
Total cost
Work in process, May 1 Materials (90 x $76.00) Conversion (140 x $ 72.50)
Total

COT ACCOUNTED FOR

Equivalent Units
Materials Conversion

$ 15,175
6,840 90

10,150 $ 32,165 683,100 $ 715, 265 4,600

140 4,600

Started and completed in May Total transferred during the period Work in process, May 31: Materials (160 x $76.00) Conversion (100 x $ 72.50)
Total

12,160 7,250
$ 19,410 $ 734,675

160

100
4,850 4,840
44

Total cost accounted for
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Cost Behavior Analysis
Chapter Five

Prepared and Taught by Lecturer: YIN SOKHENG, Master in Finance
E-mail: yin_sokheng@yahoo.com

Types of Cost Behavior Patterns
 Variable Cost  Fixed Cost  Mixed Cost

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2

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.

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3

The Activity Base
Units produced A measure of what causes the incurrence of a variable cost Miles driven Machine hours

Labour hours

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4

Total Variable Cost
A variable cost is one that change in total in proportion to change in the volume of activity

Your telephone bill is based on how many minutes you talk.
Total Telephone Bill

Minutes Talked
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Variable Cost Per Unit
On a per unit basis, a variable cost remain constant over a wide range of activity

The cost per minute talked is constant. For example, 10 cents per minute.
Per Minute Telephone Charge Minutes Talked
Lecturer YIN SOKHENG, Master in Finance 6

Extent of Variable Costs
 The proportion of variable costs differs across

organizations. 1. Merchandising companies – cost of goods sold. 2. Manufacturing companies – direct materials, direct labour, and variable overhead. 3. Merchandising companies and Manufacturing companies – commission, shipping costs, and clerical costs such as invoicing. 4. Service companies – supplies, travel, and clerical.
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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

Cost

Volume
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Step-Variable Cost
Total cost increases to a new higher cost for the next higher range of activity.

Total cost remains constant within a arrow range of activity.
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Activity
9

Cost

Step-Variable Cost
Small changes in the level of production are not likely to have any effect on the number of maintenance workers employed.

Only fairly wide changes in the activity level will cause a change in the number of maintenance workers employed.
Volume
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Cost

Fixed Cost
- Total fixed costs remain unchanged when the level of activity changes. - The fixed cost per unit goes down as activity level goes up. Example: depreciation, supervisory salaries, and rent…

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11

Total Fixed Cost
A fixed cost is one that remain constant in total even when the volume of activity changes

Your monthly basic telephone bill probably does not change when you make local calls.
Monthly basic Telephone Charge Number of Local Calls
Lecturer YIN SOKHENG, Master in Finance 12

Fixed Cost Per Unit
On a per unit basis, a fixed cost changes as the volume of activity changes

The average cost per local call decreases as more local calls are made.
Monthly basic Telephone Charge per Local Call Number of Local Calls
Lecturer YIN SOKHENG, Master in Finance 13

Types of Fixed Costs
Committed Long term cannot be significantly reduced in the short term.
Examples Depreciation on equipment and real estate taxes Discretionary May be altered in the shortterm by current managerial decisions.

Examples Advertising and research and development

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14

Fixed Cost and Relevant Range
 Example: Office space is available at rental rate of
The company’s normal operating range

$30,000 per year in increments of 1,000 square feet.

90 60
Cost Relevant Range

30 0 1,000 2,000

Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.

Rented Area (Square Feet)

3,000
15

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Variable and Fixed Cost Behavior
A variable cost changes in direct proportion to changes in the cost-driver level. Think of variable costs on a per-unit basis. The per-unit variable cost remains unchanged regardless of changes in the cost-driver. A fixed cost is not immediately affected by changes in the cost-driver. Think of fixed costs on a total-cost basis. Total fixed costs remain unchanged regardless of changes in the cost-driver.
16

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Mixed Costs

A mixed cost has both fixed and variable components. Consider the example of utility cost.
The total mixed cost line can expressed as an equation: Y = a + bx Where: Y = the total mixed cost a = the total fixed cost b = the variable cost per unit X = the level of activity

Y

Total Utility Cost

Variable Cost per KW Fixed Monthly Utility Charge
17

Activity (Kilowatt Hours)

X

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Analysis of Mixed Costs
 Each account and classifying the cost as variable, fixed

or mixed based on the cost behavior over time.  Cost estimates are based on an evaluation of production method, and material, labour, and overhead requirements.

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18

Understanding relationships between costs and their cost drivers allows managers to...

evaluate strategic plans and operational improvement programs. make short- and long-run decisions.
plan or budget the effects of future activities.
Lecturer YIN SOKHENG, Master in Finance 19

Cost Drivers and Cost Behavior
Traditional View of Cost Behavior
Resource A Cost Driver = Units of Resource Output Resource B Cost Driver = Units of Resource Output

Activity-Based View of Cost Behavior
Resource A Cost Driver = Units of Resource Output Resource B Cost Driver = Units of Resource Output

Activity A Cost Driver = Units of Activity Output

Activity B Cost Driver = Units of Activity Output

Product or Service Cost Driver = Units of Final Product or Service

Product or Service Cost Driver = Output of Final Product or Service
20

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Cost Drivers and Cost Behavior
Any output measure that causes the use of costly resources is a cost driver. Cost behavior is how the activities of an organization affect its costs.

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21

Value Chain Functions, Costs, and Cost Drivers
Value Chain Function and Example Costs Research and development •Salaries marketing research personnel costs of market surveys •Salaries of product and process engineers Design of products, services, and processes •Salaries of product and process engineers •Cost of computer-aided design equipment •Cost to develop prototype of product for testing
Lecturer YIN SOKHENG, Master in Finance 22

Example Cost Drivers Number of new product proposals Complexity of proposed products

Number of engineering hours Number of parts per product

Value Chain Functions, Costs, and Cost Drivers
Value Chain Function and Example Costs Production •Labor wages •Supervisory salaries •Maintenance wages •Depreciation of plant and machinery supplies Energy cost Marketing •Cost of advertisements •Salaries of marketing personnel, travel costs, entertainment costs Example Cost Drivers Labor hours Number of people supervised Number of mechanic hours Number of machine hours Kilowatt hours

Number of advertisements Sales dollars

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23

Value Chain Functions, Costs, and Cost Drivers
Value chain function and Example costs Distribution •Wages of shipping personnel •Transportation costs including depreciation of vehicles and fuel Customer service •Salaries of service personnel products •Costs of supplies, travel Example Cost Drivers Labor hours Weight of items delivered

Hours spent servicing Number of service calls

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24

Methods of Measuring Mixed Costs
1. The Scattergraph Method  2. The High-low Method  3. Least-squares regression Method

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25

The Scattergraph Method
Y Total maintenance cost = $11,000

Use one data point to estimate the total level of activity and the total cost.

20
Maintenance cost 1,000’s of dollars

10

∗ ∗ ∗ ∗

∗ ∗

∗ ∗ ∗

Intercept = Fixed cost = $10,000

0

1 2 3 Patient-days in 1,000’s

4

X

Patient-days = 800

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26

The Scattergraph Method
Make a quick estimate of variable cost per unit and determine the cost equation.
Total maintenance at 800 patients Less: Fixed cost Estimated total variable cost for 800 patient $ 11,000 10,000 $ 1,000

Variable cost per unit =

$ 1,000 800

= $ 1.25 /patient-day

Y = $10,000 + $1.25X
Total maintenance cost
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Number of patient days
27

High-Low Method
The first step if to plot the historical data points on a graph.

The focus of this method is normally on the highest- and lowest-activity points.

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28

High-Low Method Example
High month: April Maintenance cost: $47,000 Number of patient-days: 4,900 Low month: September Maintenance cost: $17,000 Number of patient-days: 1,200 What is the variable cost (per unit)?

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29

High-Low Method Example
Unit variable cost = Change in cost Change in unit

($47,000 – $17,000) ÷ (4,900 – 1,200) = $30,000 ÷ 3,700 = $8.1081

What is the fixed cost?

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30

High-Low Method Example
$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

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31

Least-Squares Regression Method
This method use all of the data points to estimate the fixed and variable cost components of a mixed cost. Regression analysis measures cost behavior more reliably than other cost measurement methods. The cost analysis objective is the same: Y = a + bX
Lecturer YIN SOKHENG, Master in Finance 32

Coefficient of Determination
One measure of reliability, or goodness of fit, is the coefficient of determination, R² (or R-squared). The coefficient of determination measures how much of the fluctuation of a cost is explained by changes in the cost driver.
Lecturer YIN SOKHENG, Master in Finance 33

Least-Squares Regression Method
Y R2 is the percentage of the variation in total cost explained by the activity.

20

Total cost

10

∗ ∗ ∗ ∗

∗ ∗ ∗ ∗ ∗ ∗

R2 varies from 0% to 100%, and the higher the percentage the better.

0

1

2 Activity

3

4

X

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34

The Contribution Format
Racing Bicycle Company Contribution Income Statement For the month of June Sales (500 bicycles) Less: Variable expenses Contribution margin Less: Fixed expenses Net income $ 250,000 150,000 $ 100,000 80,000 $ 20,000

The contribution Margin (CM) emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.
Lecturer YIN SOKHENG, Master in Finance 35

The Contribution Format
Comparison of the Contribution Income Statement With the Traditional Income Statement Traditional Approach (costs organized by function)
Sales (500 bicycles) Less: Cost of goods sold Gross margin Less: Operating expenses Net income $ 250,000 150,000 $ 100,000 80,000 $ 20,000

Contribution Approach (costs organized by behavior)
Sales (500 bicycles) Less: Variable expenses Contribution margin Less: Fixed expenses Net income $ 250,000 150,000 $ 100,000 80,000 $ 20,000

Used primarily for external reporting
Lecturer YIN SOKHENG, Master in Finance

Used primarily by management
36

The End
End of Chapter 5

Lecturer YIN SOKHENG, Master in Finance

37

Thank You
thank you all for your attention.

Lecturer YIN SOKHENG, Master in Finance

38

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