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
