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Chapter One
2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. G.A.A.P 7. Requirement
Controlling
Planning
Identify alternatives Select a best alternative Develop budgets
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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.
Implementing plans
(Directing and Motivating)
Organization Structure
Purchasing
Personnel
Treasurer Manager
Lecturer YIN SOKHENG, Master in Finance
Manager
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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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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.
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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.
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Flexible workforce
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Classifying Costs
By Behavior
- Variable Costs - Fixed Costs By Traceability/ Cost Objects - Direct Costs - Indirect Costs By Function - Product Costs - Period Costs
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Minutes Talked
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The cost per minute talked is constant. For example, 10 cents per minute.
Per Minute Telephone Charge Minutes Talked
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- 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
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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The average cost per local call decreases as more local calls are made.
Monthly basic Telephone Charge per Local Call Number of Local Calls
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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 cant easily and conveniently traced to a unit of product or other cost objective. Example: Manufacturing overhead
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Prime Cost
Conversion Cost
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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
Manufacturing Overhead
Manufacturing costs that cant be traced to directly to
Materials used support the production process. Example: lubricants and cleaning supplies used in the automobile assembly plant.
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Period costs include all marketing or selling costs and administrative costs. Expense
Sales
Balance Sheet
Income Statement
Income Statement
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Manufacturing
LUCKY GOODS
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Cash Receivable Materials waiting to be processed. Prepaid expense Inventories - Raw Materials - Work in Process - Finished Goods
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)
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Inventory Flows
Basic Equation for Inventory Accounts Beginning Additions Ending Withdrawals balance + to inventory = balance + from inventory
Or
Additions
Withdrawals =
Merchandising Company
Cost of Goods Sold
Beginning merchandise inventory
+ Purchased = or
+ Purchased -
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Manufacturing Company
Cost of Goods Sold
Beginning finished goods inventory
or
Cost of Beginning Cost of goods Ending finished goods sold = finished goods + manufactured - goods inventory inventory
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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
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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
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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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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.
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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.
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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
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Opportunity cost
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 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 cant change the $10,000 cost.
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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
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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
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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
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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.
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Process
Single product Department Department
Charge direct materials and direct labour costs to each job as work is performed
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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.
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Authorized Signature
Bill White
spent on each job (or overhead activity). A completed time ticket is an hour-by-hour summary of the employees 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).
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Rate $9 9 9
Amount
Job Number
McMalen
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.
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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.
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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.
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The process of assigning overhead cost to job ( job cost sheet) is called overhead application (overhead applied). Overhead applied to a particular job
Amount of allocation base incurred by the job (actual DLH, MH, etc.)
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Total
= $ 8 per DLH X 27 DLHs = $216 0f overhead applied to job (job cost sheet) 2B77
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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.
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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
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2B77 Milling
Units Completed
Amount $ 45 60 21 54 $ 180
Hours 27
Rate $8/DLH
Amount $ 216
Lecturer YIN SOKHENG, Master in Finance
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
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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Direct Labour
Record on each Job Order Cost Sheet and add to Work in Process Account
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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
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Materials Requisition
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
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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
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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
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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
Manuf. OH XX,XXX
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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
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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
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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
Credit
Work in Process
Debit for direct materials, direct labor, and MOH applied Credit for the cost of goods manufactured
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
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MOH/ FOH
Actual OH costs
$ 497,000
OH applied to job
$ 500,000
$ 3,000
$ 3,000
$ 3,000
Overapplied
$0
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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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At the of the period: Actual total manufacturing overhead cost Total manufacturing overhead applied = Underapplied (oveerapplied) overhead
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Journal
types of entries)
3. Prepare
5. Prepare
6. Prepare
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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 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.
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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 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.
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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 processing department must be homogeneous.
Manufacturing Overhead
Finished Goods
Manufacturing Overhead
Processing Department
Finished Goods
Manufacturing Overhead
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.
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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Work in Process Department A Debit for direct materials Work in Process Department B Debit for direct materials
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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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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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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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. Transferred to Dept. B
. Direct Labour
. Applied Overhead
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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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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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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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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.
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Dollar Amount
Direct Labour
Direct labour costs may be small in comparison to other product costs in process cost systems.
Direct labour costs may be small in comparison to other product costs in process cost systems.
Direct labour and manufacturing overhead may be combined into product cost called conversion.
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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
40%
20%
60%
30%
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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
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Materials
900 x 60%
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Conversion
900 x 30%
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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.
Work in process, May 1 Materials: 55% complete Conversion: 30% complete
Production started during May
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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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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$ 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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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
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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
40%
20%
60%
30%
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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
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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Materials
Units completed & transferred out 5,400 Equivalent units in ending WIP invent. 540 Equivalent units in beg. WIP invent. (120)
900 x 60%
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Conversion
Units completed & transferred out 5,400 Equivalent units in ending WIP invent. 270 Equivalent units in beg. WIP invent. (60)
900 x 30%
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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.
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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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
Lecturer YIN SOKHENG, Master in Finance
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
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$ 15,175 719,500
$ 734,675
368,600
$ 368,600
350,900
$ 350,900
4,840 $ 72.50
Cost per equivalent unit Total cost per equivalent unit ($ 76.00 + 72.50)
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Equivalent Units
Materials Conversion
$ 15,175
6,840 90
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
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within the relevant range. As activity increases total variable cost increases, and as activity decreases total variable cost decreases.
Labour hours
Minutes Talked
Lecturer YIN SOKHENG, Master in Finance 5
The cost per minute talked is constant. For example, 10 cents per minute.
Per Minute Telephone Charge Minutes Talked
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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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Cost
Volume
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Step-Variable Cost
Total cost increases to a new higher cost for the next higher range of activity.
Activity
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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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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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The average cost per local call decreases as more local calls are made.
Monthly basic Telephone Charge per Local Call Number of Local Calls
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90 60
Cost Relevant Range
30 0 1,000 2,000
Total cost doesnt change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.
3,000
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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
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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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.
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Example Cost Drivers Number of new product proposals Complexity of proposed products
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Use one data point to estimate the total level of activity and the total cost.
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Maintenance cost 1,000s of dollars
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1 2 3 Patient-days in 1,000s
Patient-days = 800
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$ 1,000 800
= $ 1.25 /patient-day
Y = $10,000 + $1.25X
Total maintenance cost
Lecturer YIN SOKHENG, Master in Finance
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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Coefficient of Determination
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 the fluctuation of a cost is explained by changes in the cost driver.
Lecturer YIN SOKHENG, Master in Finance 33
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Total cost
10
R2 varies from 0% to 100%, and the higher the percentage the better.
2 Activity
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The contribution Margin (CM) emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.
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The End
End of Chapter 5
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Thank You
thank you all for your attention.
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