Lesson 13
Managerial Accounting,
Concepts and Principles
Task Team of
FUNDAMENTAL ACCOUNTING
School of Business,Sun Yat-sen University
2
Outline
?What is managerial accounting?
?Comparison between managerial
accounting and financial accounting
?Cost classifications in different ways
?Flow of manufacturing activities
?Job order cost accounting systems and
process cost accounting systems
?Cost allocation
3
Introduction
?The previous 12 chapters focus on the financial
accounting topics
?Please summarize the basic points of financial accounting
→ Users/ Time focus/ Emphasis/ Importance/ Subject focus/
Requirements
?Thinking
→ Is the information provided by financial accounting enough for an
enterprise to conduct its operation and management?
→ If not,how to satisfy this demand for the internal used information?
→ Have you ever heard ―managerial accounting‖?
4
What is Managerial Accounting?
?An activity that provides financial and
nonfinancial information to managers and
other internal decision makers
?Is quite important to planning,control,and
decision making activities
5
The Environment of
Managerial Accounting
Complexity and
size of organizations
Development of
technology
Regulatory
environment
Competition
Emphasis
on quality
Environment of
Managerial Accounting
6
Managerial Accounting and
Financial Accounting
F i n a n c i a l M a n a g e r i a l
A c c o u n t i n g A c c o u n t i n g
1, U s e r s I nv e s t ors,c r e di t ors,a nd M a na ge r s,e m pl oy e e s,a nd
ot he r e x t e r na l us e r s ot he r i nt e r na l us e r s
2, Ti m e f oc us H i s t ori c a l pe r s pe c t i v e Fu t ure e m ph a s i s
3, E m ph a s i s O bj e c t i v i t y a nd R e l e v a nc e
V e r i f i a bi l i t y f or pl a nn i ng a nd c on t r ol
4, I m po r t a nc e P r e c i s i on of i nf orm a t i on Ti m e l i ne s s of i nf orm a t i on
5, S ub j e c t f oc us S um m a r i z e d da t a f or D e t a i l e d s e gm e nt r e po r t s
t he w ho l e orga ni z a t i on of a n orga ni z a t i on
6, R e qu i r e m e nt s S t r uc t ure d a nd of t e n R e l a t i v e l y f l e x i bl e
c on t r ol l e d by G A A P ( no G A A P )
7
Cost Classifications
?Costs can be classified by:
?Relevance
?Behaviour
?Controllability
?Traceability
?Function
8
Costs Classification by
Relevance
? Relevant
?If costs influence a decision
→ Costs that are applicable to a particular decision.
→ Costs that should have a bearing on which
alternative a manager selects.
→ Costs that are avoidable.
→ Future costs that differ between alternatives.
? Irrelevant
?If costs do not influence a decision
9
Costs Classification by
Relevance
?Sunk Costs
?All costs incurred in the past that cannot be changed by
any decision made now or in the future.
?should not be considered in decisions.
?Irrelevant
?Example,You bought an automobile that cost $30,000
two years ago,The $30,000 cost is sunk because whether
you drive it,park it,trade it,or sell it,you cannot change
the $30,000 cost.
10
Costs Classification by
Relevance
? Out-of-pocket costs
?require future outlays of cash
?associated with a particular decision
?relevant for future decisions
?Example,Considering the decision to take a
vacation or stay at home,if you choose a
vacation,you will only have travel costs (out-of-
pocket costs),
11
Costs Classification by
Relevance
?Opportunity Costs
?The potential benefit that is given up when one
alternative is selected over another.
?Example,If you were not attending college or
university,you could be earning $25,000 per
year,Your opportunity cost of attending college
or university for one year is $25,000.
12
Costs Classification by Behavior
?Cost behavior refers to
?how a cost will react to changes in the level of
business activity.
?Fixed costs
?do not change when activity changes.
?Variable costs
?change in proportion to changes in the volume
of activity
13
?Total fixed costs remain unchanged
when activity changes within a relevant range.
?Fixed costs per unit decline as activity increases.
Costs Classification by
Behavior
Volume of Activity
Fix
ed
co
sts
pe
r u
nit
Volume of Activity
To
tal
fix
ed
co
sts
14
?Total variable costs change when activity changes.
?Variable costs per unit do not change as activity
increases,
Costs Classification by
Behaviour
Volume of activity
To
tal
va
ria
ble
co
sts
Volume of activityV
ari
ab
le c
os
ts
pe
r u
nit
15
Costs Classification by
Behavior
?Mixed costs
?contain a combination of fixed and variable costs.
Variable
Sales Commissions
Sales
To
ta
l Co
mp
en
sa
tio
n
Fixed
Monthly salary
16
Costs Classification by
Behaviour
?Step-Wise Costs
?remain fixed over limited ranges of volumes but increase
by a lump sum when volume increases beyond maximum
amounts.
?Example,additional production supervisors must be
added when another shift is added.
Superv
isory
Salaries
Production Volume
17
Costs Classification by
Controllability
?Controllable vs,not controllable
?depends upon the employee’s responsibilities.
?Example,A lower level manager may have
control over overtime costs but not over the
purchase of high-cost machinery.
18
Costs Classification by
Traceability
?Management often traces costs to cost
objects
?To obtain a better measure of their total cost
?Cost objects include
→ Products
→ Services
→ Departments
→ Divisions
→ Customer groups
19
Costs Classification by
Traceability
?Traceable costs are classified as
?Direct costs
→ can be conveniently traced to a unit of product or
other cost objective.
→ Examples,salaries of production workers,salary of
maintenance department employees.
?Indirect costs
→ must be allocated to a unit of product or other cost
objective.
→ Examples,factory rent,factory light and heat,
factory accounting costs.
20
Costs Classification by Function
?Manufacturing Costs
?are necessary and integral to the production of
finished goods.
?Examples,direct labour,direct materials,and
manufacturing overhead.
?Non-Manufacturing Costs
?are not integral to the manufacture of finished
goods.
?Examples,selling and administrative expenses.
21
Manufacturing
Costs
Direct
Material
Direct
Labour
Manufacturing
Overhead
Costs Classification by Function
22
Costs Classification by Function
?Direct materials
?Materials that are clearly and easily identified with a
particular product.
?Example,Steel used to manufacture an automobile
?Direct labour
?Labour costs that are clearly traceable to,or readily
identifiable with,the finished product.
?Example,Wages paid to an automobile assembly
worker.
23
Costs Classification by Function
?Manufacturing overhead
?All manufacturing costs except direct material
and direct labour.
?Manufacturing costs that cannot be traced
directly to specific units produced.
?Examples,
→ Indirect labour – maintenance
→ Indirect material – cleaning supplies
→ Factory utility costs
→ Supervisory costs
24
Manufacturing costs are often
combined as follows:
Costs Classification by
Function
Direct
Material
Direct
Labour
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
25
Costs Classification by
Function
?Non-Manufacturing costs (period costs) are
expenses not charged to the product.
?Selling Costs
→ Costs incurred to obtain customer orders and to
deliver finished goods to customers —advertising
and shipping.
?Administrative Costs
→ Non-manufacturing costs of staff support and
administrative functions —accounting,data
processing,personnel,research and development.
26
Discussions
? ABC company manufactures a portable radio
designed for mounting on the wall of the
bathroom,The following list represents some of
the different types of costs incurred in the
manufacture of these radios:
1,The plant manager's salary.
2,The cost of heating the plant.
3,The cost of heating executive offices.
4,The cost of printed circuit boards used in the radios.
5,Salaries and commissions of company salespersons.
27
Discussions
6,Depreciation on office equipment used in the executive
offices.
7,Depreciation on production equipment used in plant.
8,Wages of janitorial personnel who clean the plant.
9,The cost of insurance on the plant building.
10,The cost of electricity to light the plant.
11,The cost of electricity to power plant equipment.
12,The cost of maintaining and repairing equipment in the
plant.
13,The cost of printing promotional materials for trade
shows.
14,The cost of solder used in assembling the radios.
15,The cost of telephone service for the executive offices.
28
Discussions
?Required:
?Classify each of the items above as
product cost or period costs.
29
Discussions,the answer
1 Product 6 Period 11 Product
2 Product 7 Product 12 Product
3 Period 8 Product 13 Period
4 Product 9 Product 14 Product
5 Period 10 Product 15 Period
30
Flow of Manufacturing
Activities
Raw Materials
Beginning Inventory
Raw Materials
Purchases
Goods in Process
Beginning Inventory Finished Goods
Beginning Inventory
Raw Materials Used
Direct Labour Used
Materials Activity
(raw materials)
Financial Reports Raw Materials
Ending Inv.
(balance sheet)
Production Activity
(goods in process)
Goods in Process
Ending Inv.
(balance sheet)
Finished Goods
Ending Inv.
(balance sheet)
Cost of Goods
Sold (income
statement)
Marketing Activity
(finished goods)
Goods
Manufactured
Factory Overhead
Used
31
Job Order Cost
Accounting Systems
?Job Order Cost Accounting Systems
?The production of products in response to
special orders,
?quite flexible in the number of products they
can produce.
→ Jobs involving the production of more than one unit
of product are called job lots.
32
Job Order Cost Accounting
Systems
Goods in
Process
Cost of
Goods
Sold
Labour
Materials
Ind
ire
ct
Ind
ire
ct
Finished
Goods
Factory
Overhead
Direct
Direct
Allocate Completed
Delivered
33
Direct
Materials
Cost per unit
for Job No,1
Direct
Labour
Factory
Overhead
Job No,1 Finished Goods
Job No,2 Finished Goods Cost per unit for Job No,2
Job Order Cost Accounting
Systems
34
Process Cost Accounting
Systems
?Process Cost Accounting Systems
?Used for production of small,identical,low-
cost items.
?Mass produced in automated continuous
production process.
?Costs cannot be directly traced to each unit of
product.
35
Direct
Materials
Finished
Goods
Direct
Labour
Factory
Overhead
Process 1 Process 2
Cost per
equivalent
unit for
Process 1
Cost per
equivalent
unit for
Process 2
Total cost
per
equivalent
unit
Process Cost Accounting
Systems
36
?Unit cost
?To determine the cost of goods transferred from
department to department and to finished
goods,we need to calculate unit cost.
?Unit cost is computed by dividing the
accumulated costs by the number of equivalent
units produced in the period,
Process Cost Accounting
Systems
Cost per
equivalent
unit
= Product costs for the periodEquivalent units for the period
37
?Costs are accumulated for a period of time
by process or department,
?Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
?Example,Three one-third full pitchers are
equivalent to one full pitcher.
?Equivalent units may be different for material
and labour and overhead at different stages of a
process.
Process Cost Accounting
Systems
38
Comparing Job Order and
Process Production
?Similarities
?Same objective
→ to determine the cost of products
?Same inventory accounts
→ raw materials,goods in process,and finished goods
?Same overhead assignment method
→ predetermined rate times actual activity
39
Comparing Job Order and
Process Production
?Job Order Systems
?Custom orders
?Heterogeneous
products
?Low output volume
?High flexibility
?Low to medium
standardization
?Process Systems
?Repetitive production
?Homogeneous offerings
?High output volume
?Low product flexibility
?High standardization
Differences
40
Cost Allocation
?Plant-wide Overhead Rate
?Two-stage Cost Allocation
?Activity-based Costing
?Methods of Overhead Cost Allocation
Low
High
Co
mp
lex
ity
41
Cost Allocation
?Plant-wide Overhead Rate
?A single plant-wide overhead rate is relatively
easy to use
?but may result in inaccurate product costs
42
Cost Allocation
?Two-stage Cost Allocation
?more accurate method than plant-wide
?Stage 1,Allocate service department costs to
production departments,Service department
costs are assigned to operating (or production)
departments.
?Stage 2,Allocate production department costs to
cost objects,Costs accumulated within operating
(or production) departments are assigned to cost
objects.
43
Cost Allocation
Maintenance Factory
Accounting
Janitorial
Machining
Department
Assembly
Department
Stage 1
Service Departments
Stage 2
Job 236 Job 237 Job 238
44
Cost Allocation
?Activity-based Costing
?Attempts to better allocate costs to the desired
cost objects by focusing on activities consumed
by the cost objects.
?Many activities within a department drive
overhead costs.
→ Products require activities.
→ Activities consume resources.
45
Cost Allocation
Overhead Actual
Rate Activity×
Rate = Estimated overhead costs in activity cost poolEstimated number of activity units
? Allocate overhead cost:
? Activity-based Costing,Procedures
?Identify activities that consume resources.
?Assign costs to a cost pool for each activity.
?Identify cost drivers associated with each activity.
?Compute overhead rate for each cost pool.
46
Cost Allocation
?Activity-based Costing,Identifying Cost
Drivers
?Most cost drivers are related to either volume
or complexity of production.
?Examples,purchasing,invoicing,quality
inspection,product design.
?Three factors in choosing a cost driver:
→ Causal relationship
→ Benefits received
→ Reasonableness.
47
Cost Allocation
Cost Cost Driver
Materials purchasing Number of purchase orders
Materials handling Number of materials
requisitions
Personnel Number of employees
Equipment amortization Number of products
produced or hours of use
Quality inspection Number of units inspected
Indirect labour in setting up
equipment
Number of setups required
?Activity-based Costing,Cost and Cost Driver
48
Cost Allocation
?Activity-based Costing,Benefits
?More detailed measures of costs
?Better understanding of activities
?More accurate product costs for,,,
→ Pricing decisions
→ Product elimination decisions
→ Managing activities that cause costs
?Benefits should always be compared with costs
of implementation
49
Summary
? Managerial accounting is quite important to planning,
control,and decision making activities.
? Managerial accounting and financial accounting are
different in users,time focus,requirements,etc,
?Costs can be classified by relevance,behaviour,
controllability,traceability,and function.
? Flow of manufacturing activities.
? Similarities and differences between job order and
process cost accounting systems
? The methods of cost allocation,plant-wide overhead
rate,two stage cost allocation,activity-based costing
50
Case Study
? ABC Company acquired its factory building about 25 years
ago,For a number of years,the company has rented out a
small,unused part of the building,The renter's lease will
expire soon,Rather than renewing the lease,ABC Company
is considering using the space itself to manufacture a new
product,Under this option,the unused space will continue to
be depreciated on a straight-line basis,as in past years.
51
Case Study
? Direct materials and direct labour cost for the new product
is $45 per unit,In order to store finished units of the new
product,the company will rent a small warehouse nearby,
The rental cost is $1,800 per month,It will cost the company
an additional $3,500 each month to advertise the new
product,A new production supervisor,hired to oversee
production of the new product,will be paid $2,500 per
month,The company will pay a sales commission of $12 for
each unit of product that is sold.
52
Case Study
?Required:
?Complete the chart below (in the next page) by placing an
"?" under each column heading that helps to identify the
costs listed to the left,You can place an "?" under more
than one heading for a single cost,for example,a cost
may be a product cost,an opportunity cost,and a sunk
cost; you would place an "?" under each of these
headings on the answer sheet opposite the cost,
53
Case Study
Opportunity
cost
Sunk cost Variable
cost
Fixed cost Product
cost
Selling and
administration
cost
Rent on unused
factory space
depreciation
Direct material +
direct labour
Rental cost of
warehouse
Advertising cost
Supervisor’s salary
Sales commissions
The End of Lesson 13
Managerial Accounting,
Concepts and Principles
Task Team of
FUNDAMENTAL ACCOUNTING
School of Business,Sun Yat-sen University
2
Outline
?What is managerial accounting?
?Comparison between managerial
accounting and financial accounting
?Cost classifications in different ways
?Flow of manufacturing activities
?Job order cost accounting systems and
process cost accounting systems
?Cost allocation
3
Introduction
?The previous 12 chapters focus on the financial
accounting topics
?Please summarize the basic points of financial accounting
→ Users/ Time focus/ Emphasis/ Importance/ Subject focus/
Requirements
?Thinking
→ Is the information provided by financial accounting enough for an
enterprise to conduct its operation and management?
→ If not,how to satisfy this demand for the internal used information?
→ Have you ever heard ―managerial accounting‖?
4
What is Managerial Accounting?
?An activity that provides financial and
nonfinancial information to managers and
other internal decision makers
?Is quite important to planning,control,and
decision making activities
5
The Environment of
Managerial Accounting
Complexity and
size of organizations
Development of
technology
Regulatory
environment
Competition
Emphasis
on quality
Environment of
Managerial Accounting
6
Managerial Accounting and
Financial Accounting
F i n a n c i a l M a n a g e r i a l
A c c o u n t i n g A c c o u n t i n g
1, U s e r s I nv e s t ors,c r e di t ors,a nd M a na ge r s,e m pl oy e e s,a nd
ot he r e x t e r na l us e r s ot he r i nt e r na l us e r s
2, Ti m e f oc us H i s t ori c a l pe r s pe c t i v e Fu t ure e m ph a s i s
3, E m ph a s i s O bj e c t i v i t y a nd R e l e v a nc e
V e r i f i a bi l i t y f or pl a nn i ng a nd c on t r ol
4, I m po r t a nc e P r e c i s i on of i nf orm a t i on Ti m e l i ne s s of i nf orm a t i on
5, S ub j e c t f oc us S um m a r i z e d da t a f or D e t a i l e d s e gm e nt r e po r t s
t he w ho l e orga ni z a t i on of a n orga ni z a t i on
6, R e qu i r e m e nt s S t r uc t ure d a nd of t e n R e l a t i v e l y f l e x i bl e
c on t r ol l e d by G A A P ( no G A A P )
7
Cost Classifications
?Costs can be classified by:
?Relevance
?Behaviour
?Controllability
?Traceability
?Function
8
Costs Classification by
Relevance
? Relevant
?If costs influence a decision
→ Costs that are applicable to a particular decision.
→ Costs that should have a bearing on which
alternative a manager selects.
→ Costs that are avoidable.
→ Future costs that differ between alternatives.
? Irrelevant
?If costs do not influence a decision
9
Costs Classification by
Relevance
?Sunk Costs
?All costs incurred in the past that cannot be changed by
any decision made now or in the future.
?should not be considered in decisions.
?Irrelevant
?Example,You bought an automobile that cost $30,000
two years ago,The $30,000 cost is sunk because whether
you drive it,park it,trade it,or sell it,you cannot change
the $30,000 cost.
10
Costs Classification by
Relevance
? Out-of-pocket costs
?require future outlays of cash
?associated with a particular decision
?relevant for future decisions
?Example,Considering the decision to take a
vacation or stay at home,if you choose a
vacation,you will only have travel costs (out-of-
pocket costs),
11
Costs Classification by
Relevance
?Opportunity Costs
?The potential benefit that is given up when one
alternative is selected over another.
?Example,If you were not attending college or
university,you could be earning $25,000 per
year,Your opportunity cost of attending college
or university for one year is $25,000.
12
Costs Classification by Behavior
?Cost behavior refers to
?how a cost will react to changes in the level of
business activity.
?Fixed costs
?do not change when activity changes.
?Variable costs
?change in proportion to changes in the volume
of activity
13
?Total fixed costs remain unchanged
when activity changes within a relevant range.
?Fixed costs per unit decline as activity increases.
Costs Classification by
Behavior
Volume of Activity
Fix
ed
co
sts
pe
r u
nit
Volume of Activity
To
tal
fix
ed
co
sts
14
?Total variable costs change when activity changes.
?Variable costs per unit do not change as activity
increases,
Costs Classification by
Behaviour
Volume of activity
To
tal
va
ria
ble
co
sts
Volume of activityV
ari
ab
le c
os
ts
pe
r u
nit
15
Costs Classification by
Behavior
?Mixed costs
?contain a combination of fixed and variable costs.
Variable
Sales Commissions
Sales
To
ta
l Co
mp
en
sa
tio
n
Fixed
Monthly salary
16
Costs Classification by
Behaviour
?Step-Wise Costs
?remain fixed over limited ranges of volumes but increase
by a lump sum when volume increases beyond maximum
amounts.
?Example,additional production supervisors must be
added when another shift is added.
Superv
isory
Salaries
Production Volume
17
Costs Classification by
Controllability
?Controllable vs,not controllable
?depends upon the employee’s responsibilities.
?Example,A lower level manager may have
control over overtime costs but not over the
purchase of high-cost machinery.
18
Costs Classification by
Traceability
?Management often traces costs to cost
objects
?To obtain a better measure of their total cost
?Cost objects include
→ Products
→ Services
→ Departments
→ Divisions
→ Customer groups
19
Costs Classification by
Traceability
?Traceable costs are classified as
?Direct costs
→ can be conveniently traced to a unit of product or
other cost objective.
→ Examples,salaries of production workers,salary of
maintenance department employees.
?Indirect costs
→ must be allocated to a unit of product or other cost
objective.
→ Examples,factory rent,factory light and heat,
factory accounting costs.
20
Costs Classification by Function
?Manufacturing Costs
?are necessary and integral to the production of
finished goods.
?Examples,direct labour,direct materials,and
manufacturing overhead.
?Non-Manufacturing Costs
?are not integral to the manufacture of finished
goods.
?Examples,selling and administrative expenses.
21
Manufacturing
Costs
Direct
Material
Direct
Labour
Manufacturing
Overhead
Costs Classification by Function
22
Costs Classification by Function
?Direct materials
?Materials that are clearly and easily identified with a
particular product.
?Example,Steel used to manufacture an automobile
?Direct labour
?Labour costs that are clearly traceable to,or readily
identifiable with,the finished product.
?Example,Wages paid to an automobile assembly
worker.
23
Costs Classification by Function
?Manufacturing overhead
?All manufacturing costs except direct material
and direct labour.
?Manufacturing costs that cannot be traced
directly to specific units produced.
?Examples,
→ Indirect labour – maintenance
→ Indirect material – cleaning supplies
→ Factory utility costs
→ Supervisory costs
24
Manufacturing costs are often
combined as follows:
Costs Classification by
Function
Direct
Material
Direct
Labour
Manufacturing
Overhead
Prime
Cost
Conversion
Cost
25
Costs Classification by
Function
?Non-Manufacturing costs (period costs) are
expenses not charged to the product.
?Selling Costs
→ Costs incurred to obtain customer orders and to
deliver finished goods to customers —advertising
and shipping.
?Administrative Costs
→ Non-manufacturing costs of staff support and
administrative functions —accounting,data
processing,personnel,research and development.
26
Discussions
? ABC company manufactures a portable radio
designed for mounting on the wall of the
bathroom,The following list represents some of
the different types of costs incurred in the
manufacture of these radios:
1,The plant manager's salary.
2,The cost of heating the plant.
3,The cost of heating executive offices.
4,The cost of printed circuit boards used in the radios.
5,Salaries and commissions of company salespersons.
27
Discussions
6,Depreciation on office equipment used in the executive
offices.
7,Depreciation on production equipment used in plant.
8,Wages of janitorial personnel who clean the plant.
9,The cost of insurance on the plant building.
10,The cost of electricity to light the plant.
11,The cost of electricity to power plant equipment.
12,The cost of maintaining and repairing equipment in the
plant.
13,The cost of printing promotional materials for trade
shows.
14,The cost of solder used in assembling the radios.
15,The cost of telephone service for the executive offices.
28
Discussions
?Required:
?Classify each of the items above as
product cost or period costs.
29
Discussions,the answer
1 Product 6 Period 11 Product
2 Product 7 Product 12 Product
3 Period 8 Product 13 Period
4 Product 9 Product 14 Product
5 Period 10 Product 15 Period
30
Flow of Manufacturing
Activities
Raw Materials
Beginning Inventory
Raw Materials
Purchases
Goods in Process
Beginning Inventory Finished Goods
Beginning Inventory
Raw Materials Used
Direct Labour Used
Materials Activity
(raw materials)
Financial Reports Raw Materials
Ending Inv.
(balance sheet)
Production Activity
(goods in process)
Goods in Process
Ending Inv.
(balance sheet)
Finished Goods
Ending Inv.
(balance sheet)
Cost of Goods
Sold (income
statement)
Marketing Activity
(finished goods)
Goods
Manufactured
Factory Overhead
Used
31
Job Order Cost
Accounting Systems
?Job Order Cost Accounting Systems
?The production of products in response to
special orders,
?quite flexible in the number of products they
can produce.
→ Jobs involving the production of more than one unit
of product are called job lots.
32
Job Order Cost Accounting
Systems
Goods in
Process
Cost of
Goods
Sold
Labour
Materials
Ind
ire
ct
Ind
ire
ct
Finished
Goods
Factory
Overhead
Direct
Direct
Allocate Completed
Delivered
33
Direct
Materials
Cost per unit
for Job No,1
Direct
Labour
Factory
Overhead
Job No,1 Finished Goods
Job No,2 Finished Goods Cost per unit for Job No,2
Job Order Cost Accounting
Systems
34
Process Cost Accounting
Systems
?Process Cost Accounting Systems
?Used for production of small,identical,low-
cost items.
?Mass produced in automated continuous
production process.
?Costs cannot be directly traced to each unit of
product.
35
Direct
Materials
Finished
Goods
Direct
Labour
Factory
Overhead
Process 1 Process 2
Cost per
equivalent
unit for
Process 1
Cost per
equivalent
unit for
Process 2
Total cost
per
equivalent
unit
Process Cost Accounting
Systems
36
?Unit cost
?To determine the cost of goods transferred from
department to department and to finished
goods,we need to calculate unit cost.
?Unit cost is computed by dividing the
accumulated costs by the number of equivalent
units produced in the period,
Process Cost Accounting
Systems
Cost per
equivalent
unit
= Product costs for the periodEquivalent units for the period
37
?Costs are accumulated for a period of time
by process or department,
?Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
?Example,Three one-third full pitchers are
equivalent to one full pitcher.
?Equivalent units may be different for material
and labour and overhead at different stages of a
process.
Process Cost Accounting
Systems
38
Comparing Job Order and
Process Production
?Similarities
?Same objective
→ to determine the cost of products
?Same inventory accounts
→ raw materials,goods in process,and finished goods
?Same overhead assignment method
→ predetermined rate times actual activity
39
Comparing Job Order and
Process Production
?Job Order Systems
?Custom orders
?Heterogeneous
products
?Low output volume
?High flexibility
?Low to medium
standardization
?Process Systems
?Repetitive production
?Homogeneous offerings
?High output volume
?Low product flexibility
?High standardization
Differences
40
Cost Allocation
?Plant-wide Overhead Rate
?Two-stage Cost Allocation
?Activity-based Costing
?Methods of Overhead Cost Allocation
Low
High
Co
mp
lex
ity
41
Cost Allocation
?Plant-wide Overhead Rate
?A single plant-wide overhead rate is relatively
easy to use
?but may result in inaccurate product costs
42
Cost Allocation
?Two-stage Cost Allocation
?more accurate method than plant-wide
?Stage 1,Allocate service department costs to
production departments,Service department
costs are assigned to operating (or production)
departments.
?Stage 2,Allocate production department costs to
cost objects,Costs accumulated within operating
(or production) departments are assigned to cost
objects.
43
Cost Allocation
Maintenance Factory
Accounting
Janitorial
Machining
Department
Assembly
Department
Stage 1
Service Departments
Stage 2
Job 236 Job 237 Job 238
44
Cost Allocation
?Activity-based Costing
?Attempts to better allocate costs to the desired
cost objects by focusing on activities consumed
by the cost objects.
?Many activities within a department drive
overhead costs.
→ Products require activities.
→ Activities consume resources.
45
Cost Allocation
Overhead Actual
Rate Activity×
Rate = Estimated overhead costs in activity cost poolEstimated number of activity units
? Allocate overhead cost:
? Activity-based Costing,Procedures
?Identify activities that consume resources.
?Assign costs to a cost pool for each activity.
?Identify cost drivers associated with each activity.
?Compute overhead rate for each cost pool.
46
Cost Allocation
?Activity-based Costing,Identifying Cost
Drivers
?Most cost drivers are related to either volume
or complexity of production.
?Examples,purchasing,invoicing,quality
inspection,product design.
?Three factors in choosing a cost driver:
→ Causal relationship
→ Benefits received
→ Reasonableness.
47
Cost Allocation
Cost Cost Driver
Materials purchasing Number of purchase orders
Materials handling Number of materials
requisitions
Personnel Number of employees
Equipment amortization Number of products
produced or hours of use
Quality inspection Number of units inspected
Indirect labour in setting up
equipment
Number of setups required
?Activity-based Costing,Cost and Cost Driver
48
Cost Allocation
?Activity-based Costing,Benefits
?More detailed measures of costs
?Better understanding of activities
?More accurate product costs for,,,
→ Pricing decisions
→ Product elimination decisions
→ Managing activities that cause costs
?Benefits should always be compared with costs
of implementation
49
Summary
? Managerial accounting is quite important to planning,
control,and decision making activities.
? Managerial accounting and financial accounting are
different in users,time focus,requirements,etc,
?Costs can be classified by relevance,behaviour,
controllability,traceability,and function.
? Flow of manufacturing activities.
? Similarities and differences between job order and
process cost accounting systems
? The methods of cost allocation,plant-wide overhead
rate,two stage cost allocation,activity-based costing
50
Case Study
? ABC Company acquired its factory building about 25 years
ago,For a number of years,the company has rented out a
small,unused part of the building,The renter's lease will
expire soon,Rather than renewing the lease,ABC Company
is considering using the space itself to manufacture a new
product,Under this option,the unused space will continue to
be depreciated on a straight-line basis,as in past years.
51
Case Study
? Direct materials and direct labour cost for the new product
is $45 per unit,In order to store finished units of the new
product,the company will rent a small warehouse nearby,
The rental cost is $1,800 per month,It will cost the company
an additional $3,500 each month to advertise the new
product,A new production supervisor,hired to oversee
production of the new product,will be paid $2,500 per
month,The company will pay a sales commission of $12 for
each unit of product that is sold.
52
Case Study
?Required:
?Complete the chart below (in the next page) by placing an
"?" under each column heading that helps to identify the
costs listed to the left,You can place an "?" under more
than one heading for a single cost,for example,a cost
may be a product cost,an opportunity cost,and a sunk
cost; you would place an "?" under each of these
headings on the answer sheet opposite the cost,
53
Case Study
Opportunity
cost
Sunk cost Variable
cost
Fixed cost Product
cost
Selling and
administration
cost
Rent on unused
factory space
depreciation
Direct material +
direct labour
Rental cost of
warehouse
Advertising cost
Supervisor’s salary
Sales commissions
The End of Lesson 13
