WHBM17

Chapter
17 Accounting Systems For

Measuring Costs
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Cost Accounting Systems
Determining unit Planning and
manufacturing control
costs. functions.
Cost accounting systems provide information

supporting decisions making the business successful.
Assessing the Providing

efficiency and products or
effectiveness services to
of operations. customers.
Cost Accounting Systems
Evaluate and Disclose
reward inventories
employee and cost of
performance. goods sold.
Cost accounting systems are the procedures

and techniques used by management.
Track resources
Manage activities
consumed by
that consume
products and
resources.
services.
Basic Cost Accounting Procedures
Process Job Order
Costing Costing
Used for production of large,

unique, high-cost items.
Built to order rather than mass
produced.
Many costs can be directly traced
to each job.
Process Job Order
Costing Costing
Typical job order cost applications:

Special-order printing
Building construction
Also used in service industry
Hospitals
Law firms
Process Job Order
Costing Costing
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.
Process Job Order
Costing Costing
Typical process cost applications:

Petrochemical refinery
Paint manufacturer
Paper mill

Job Order Costing
Manufacturing
overhead (OH)
Applied to each
Direct job using a
materials predetermined
rate (POHR)
THE JOB
Direct
labor
Job Order Costing
The primary
document for
tracking the costs
associated with a
given job is the job
cost sheet.
Lets investigate

The Job Cost Sheet
RoseCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-X9
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost

The Job Cost Sheet
Date Completed
X7-6890 $ 116

Direct Materials $ 116 Date Number Balance
Direct Labor
Total Cost
Unit Cost

The Job Cost Sheet
Date Completed Accumulate
direct labor
Direct Materials Direct Labor
costs by
Req. No. Amount Ticket Hours Amount Hours means
Rate of a
Amount
X7-6890 $ 116 36 8 $ 88 work record,
such as a time
Cost Summary
ticket, for each
Units Shipped
Direct Materials $ 116 Date Numberemployee.
Balance
Direct Labor $ 88
Total Cost
Unit Cost

The Job Cost Sheet
Apply manufacturing overhead
Job Number A - 143
to jobs using a
Date Initiated 3-4-X9
predetermined overheadDate rate (POHR)3-5-X9
Completed based on
Department B3 direct labor hours (DLH). 2
Units Completed
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Cost $ 118

Job Order Costing
Document Flow Summary
Lets summarize
the document
flow we have
been discussing
in a job order
costing system.

Job Order Costing
The materials Direct JobCost
Cost
materials Job
requisition Job Cost
Sheets
Job Cost
Sheets
indicates the Sheets
Sheets
cost of direct Materials
Materials
Ledger Cards
material Materials
Ledger Cards
Materials
Ledger Cards
to charge to Requisition
jobs
and the cost of Manufacturing
indirect material Overhead
Indirect
to charge to Account
materials
overhead.
Job Order Costing
Employee time Direct JobCost

Cost
Labor Job
tickets indicate Job Cost
Sheets
Job Cost
Sheets
Sheets
the cost of direct Sheets
labor Employee Time
Employee Time
Ticket
Employee
to charge to Employee Time
Ticket
Time
Ticket
jobs Ticket
and the cost
Manufacturing
of indirect labor Overhead
to charge to Indirect Account
overhead. Labor

Job Order Costing
Employee Indirect
Time Ticket Labor
Overhead
Other Manufacturing Applied Job Cost
Actual OH Overhead with Sheets
Charges Account
POHR
Materials Indirect
Requisition Material

Flow of Costs in Job Costing
Lets examine the

cost flows in a
job order costing
system. We will
use T-accounts
and start with
materials.

Work in Process
Materials Inventory (Job Cost Sheet)
Material Direct Direct
Purchases Material Material
Indirect
Material
Mfg. Overhead
Indirect
Material

Next lets add

labor costs and
applied
manufacturing
overhead to the
job order cost
flows. Are you
with me?
Work in Process
Labor (Job Cost Sheet)
Direct Direct
Labor Material
Indirect Direct
Labor Labor
Overhead
Applied
Mfg. Overhead
When
Indirect Overhead Actual Applied
Material Applied to
overhead
/
factory = factory
overhead
Indirect Work in
the difference is closed
Labor Process to cost of goods sold.
Closing Under- or Overapplied
If Manufacturing Effect of Closing to

Overhead is . . . Cost of Goods Sold
UNDERAPPLIED INCREASE
(Applied OH is less Cost of Goods Sold
than actual OH)
OVERAPPLIED DECREASE
(Applied OH is greater Cost of Goods Sold
than actual OH)

Now lets
complete the
goods and sell
them. Still with
me?

Work in Process
(Job Cost Sheet) Finished Goods
Direct
Material Cost of Cost of Cost of
Goods Goods Goods
Direct
Mfd. Mfd. Sold
Labor
Overhead
Applied
Cost of Goods Sold
Cost of
Goods
Sold
Process Costing
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.

Comparing Job and Process Costing
Job Costing Process Costing
Custom orders Repetitive production

Heterogeneous products Homogeneous products
Low production volume High production volume
High product flexibility Low product flexibility
Low to medium High standardization
standardization

Job and Process Costing
The Work in Process
Direct account consists of
Materials individual jobs in
job costing.
Direct Finished
Jobs
Labor Goods
Factory Cost per

Overhead unit for
each job
Job and Process Costing
The Work in Process
Direct account consists of
Materials specific processes in
process costing.
Direct Finished
Processes
Labor Goods
Factory Cost per

Overhead unit
processed
Job and Process
Costing Similarities
Same objective: to determine
the cost of products
Same inventory accounts: raw materials,

work in process, and finished goods
Same overhead assignment method:

predetermined rate times actual activity

Work in Process Accounts
The Key to Process Costing
Direct
Materials
Indirect
Work in
Process
Assembly
Work in
Factory Finished
Applied Process
Overhead Overhead Goods
Packaging
Indirect
Delivered
to
Direct
Labor Customers
Computing Unit Cost
Costs are accumulated for a period of time
by process or department.
Unit cost is computed by dividing the

accumulated costs by the number of
units produced in the period.

Computing Unit Cost
Costs are accumulated for a period of time
by process or department.
Unit cost is computed by dividing the

accumulated costs by the number of
units produced in the period.
If partially complete units remain in

process, we must use equivalent units
as the divisor to obtain unit costs.
Computing and Using Equivalent
Units of Production
Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.
Two one-half full pitchers are

equivalent to one full pitcher.
+ = 1

Question
For the current period, PencilCo started
15,000 units and completed 10,000 units,
leaving 5,000 units in process 30 percent
complete. How many equivalent units of
production did PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000

Question
For the current period, PencilCo started
15,000 units and completed 10,000 units,
leaving 5,000 units in process 30 percent
complete. How many equivalent units of
production did PencilCo have for the period?
a. 10,000
10,000 units + (5,000 units .30)
b. 11,500 = 11,500 equivalent units
c. 1,500
d. 15,000

Cost Per Equivalent Unit
Cost per Product costs for the period

equivalent =
Equivalent units for the period
unit

Question
Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCos cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

Question
Now assume that PencilCo incurred
$27,600 in production costs. What was
PencilCos cost per unit for the period?
a. $1.84
b. $2.40 $27,600 11,500 equivalent units
c. $2.76 = $2.40 per equivalent unit
d. $2.90

Equivalent Units
40% of
Material
Equivalent units may be
different for material and labor
Stage 1
and overhead at different
stages of a process.
25% of
Labor and
Overhead
At completion of Stage 1 of the process, material

is 40% complete, but labor and overhead are only
25% complete.

Equivalent Units
40% of 60% of
Material + Material = 100%
Stage 1 Stage 2
25% of 25% of
Labor and + Labor and = 50%
Overhead Overhead

Equivalent Units
40% of 60% of
Material Material
Stage 1 Stage 2 Stage 3
25% of 25% of 50% of

Labor and Labor and Labor and
Overhead Overhead Overhead
The process is now complete.

Process Costing and
Equivalent Units
Owl Inc uses FIFO

process costing
in its Fabrication
Department
where a product
called Strata is
made.
Process Costing and
Equivalent Units
Owl Inc Fabrication Department Data For April 2002
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - direct labor 40%
Percentage of completion - overhead 40%
Units started in April 90,000
Units transferred from grinding to mixing 100,000
Ending Inventory:
Process Costing and
Equivalent Units
Material is added at the
beginning of the process so
Ending Inventory:
it is always 100% complete.
Process Costing and
Equivalent Units
Overhead is applied on the basis
of labor, so both are at the
Ending Inventory:
same percentage of completion.
Physical Flow of Units
April Fabrication Department Physical Flow
Units to account for:

Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000
Units accounted for as:

Units transferred from Fabrication to Mixing 100,000
Ending inventory 20,000
Total number of units 120,000

Computing Equivalent
Units of Production
Fabrication Department
Direct Material Equivalent Units of Production - April 2002
Units of Percent Added Equivalent

Product This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000

Units of Production
Since materials are added at the
beginning of the process, no additional
materials are necessary to complete the
beginning inventory.

Total units 120,000 90,000

Units of Production
100,000 units completed
and transferred.

Goods started and completed 70,000
} 100,000
100% 70,000
Total units 120,000 90,000

Units of Production
Fabrication Department Direct Labor and Factory

Overhead Equivalent Units of Production - April 2002

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000

Units of Production
Since labor and overhead were 40
percent complete in the beginning
inventory, 60 percent of the work must
be Direct
Fabrication Department completed
Laborinand
April.
Factory

Beginning goods in process 30,000 60% 18,000
Total units 120,000 93,000

Units of Production
Fabrication Department Direct Labor and Factory


Beginning goods in process 30,000 100,000
60% 18,000
Goods started and completed 70,000
} Transferred
100% 70,000
Total units 120,000 93,000

Units of Production
Summary of Fabrication Department
Equivalent Units of Production - April 2002
Direct Direct Factory

Activities during April 2002 Material Labor Overhead
Units from beginning inventory
processed in current period 0 18,000 18,000
Units started and completed
in current period 70,000 70,000 70,000
Units in ending inventory at
end of current period 20,000 5,000 5,000
Equivalent units of production

for period 90,000 93,000 93,000

Process Costing and
Equivalent Units
April Work in Process Costs
Beginning work in process $ 22,380
Costs added in April:
Direct material 45,000
Direct labor 11,160
Overhead 44,640
Total costs to account for $ 123,180

Cost per Equivalent Unit
Cost Per Equivalent Unit - April 2002
Direct Direct Factory

Materials Labor Overhead
Total cost of resource for
April $ 45,000 $ 11,160 $ 44,640
Equivalent units of production

in April 90,000 93,000 93,000
Cost per equivalent unit for

April = $ 0.50 = $ 0.12 = $ 0.48

Cost Reconciliation
We will account for all costs incurred

by assigning unit costs to the:
A. 100,000 units completed and
transferred.
B. 20,000 units remaining in ending
work in process inventory.

Fabrication Department Work in Process
Cost Summary for April 2002
Cost of completed units
From beginning work in process
April 1 balance $ 22,380
Costs to complete April 1 inventory
Direct material
Direct labor
Overhead
Started and completed
Total completed and transferred
Cost of ending work in process
Direct material
Direct labor
Overhead
Total cost accounted for
Direct material $ 0
Direct labor (18,000 $0.12) 2,160
Overhead (18,000 $0.48) 8,640 10,800
Started and completed
Total completed and transferred
Direct material
Direct labor
Overhead
Direct material $ 0
Direct labor (18,000 $0.12) 2,160
Overhead (18,000 $0.48) 8,640 10,800
Started and completed (70,000 $1.10) 77,000
Total completed and transferred (100,000 units) $ 110,180
Direct material
$0.12 + $0.48 + $0.50 = $1.10
Direct labor
Overhead
Direct material $ 0
Direct labor (18,000 $0.12) 2,160
Overhead (18,000 $0.48) 8,640 10,800
Started and completed (70,000 $1.10) 77,000
Total completed and transferred (100,000 units) $ 110,180
Direct material (20,000 $0.50) $ 10,000
Direct labor (5,000 $0.12) 600
Overhead (5,000 $0.48) 2,400 13,000
Total cost accounted for $ 123,180
Activity-Based Costing (ABC)
A
B C
One of the most

difficult tasks in Assigning
overhead is
computing accurate difficult. I agree!
unit costs lies in
determining the
proper amount of
overhead cost to
assign to each job.

Activity-Based
Costing
Departmental
Overhead
Rates
Plantwide
Overhead
Rate
Overhead Allocation
In the ABC method,

we recognize that many
activities within a
department drive
A overhead costs.
B C
Identify activities and assign indirect costs to
those activities.
Central idea . . .
Products require activities.
Activities consume resources.
A
B C
The Benefits of ABC
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 to

costs of implementation.

Identifying Cost Drivers
Most cost drivers are related to either volume
or complexity of production.
Examples: machine time, machine setups,
purchase orders, production orders.
Three factors are considered in choosing a

cost driver:
Causal relationship.
Benefits received.
Reasonableness.
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:
Estimated overhead costs in activity cost pool
Rate =
Estimated number of activity units
Assign costs to products:
Overhead Actual

Rate Activity

Lets look at an
example comparing
traditional costing
with ABC.
We will start with
traditional costing.

Traditional Costing vs. ABC
Example
Pear Company manufactures a product in regular and
deluxe models. Overhead is assigned on the basis of
direct labor hours. Budgeted overhead for the current
year is $2,000,000. Other information:
Deluxe Regular
Model Model
Direct Material $ 150 $ 112
Direct Labor Cost 16 8
Direct Labor Time 1.6 hours 0.8 hours
Expected Volume (units) 5,000 40,000
First, determine the unit cost of each model using

traditional costing methods.
Traditional Costing
Direct
Labor Hours
Deluxe Model 5,000 units @ 1.6 hours 8,000
Regular Model 40,000 units @ 0.8 hours 32,000
Total Direct Labor Hours (DLH) 40,000
Overhead = Estimated overhead costs

Rate Estimated activity
Overhead = $2,000,000 = $50 per DLH

Rate 40,000 DLH
Traditional Costing
ABC will have different

overhead per unit.
Deluxe Regular
Model Model
Direct Material $ 150 $ 112
Direct Labor 16 8
$50 per hour 1.6 hours 80
$50 per hour 0.8 hours 40
Total Unit Cost $ 246 $ 160

Pear Company plans to adopt activity-based
costing. Using the following activity center data,
determine the unit cost of the two products using
activity-based costing.
Overhead
Activity Cost Cost for Units of Activity
Center Driver Activity Deluxe Regular
Purchasing Orders $ 84,000 400 800
Scrap Rework Orders 216,000 300 600
Testing Tests 450,000 4,000 11,000
Machine Related Hours 1,250,000 20,000 30,000
Total Overhead $ 2,000,000

Overhead Units
Activity Cost Cost for of
Center Driver Activity Activity Rate
Purchasing Orders $ 84,000 1,200
Scrap Rework Orders 216,000 900
Testing Tests 450,000 15,000
Machine Related Hours 1,250,000 50,000
400 deluxe + 800 regular = 1,200 total

Overhead Units
Activity Cost Cost for of
Center Driver Activity Activity Rate
Purchasing Orders $ 84,000 1,200 $ 70 per order
Scrap Rework Orders 216,000 900 $240 per order
Testing Tests 450,000 15,000 $ 30 per test
Machine Related Hours 1,250,000 50,000 $ 25 per hour
Rate = Overhead Cost for Activity Units of Activity

Deluxe Model Regular Model

Actual Cost Actual Cost
Units of Allocated Units of Allocated
Activity Rate Activity to Product Activity to Product
Purchasing $ 70/order 400 ? 800 ?
Scrap Rework $240/order 300 ? 600 ?
Testing $ 30/test 4,000 ? 11,000 ?
Machine Related $ 25/hour 20,000 ? 30,000 ?
Total Overhead ? ?


Purchasing $ 70/order 400 $ 28,000 800 $ 56,000
Scrap Rework $240/order 300 ? 600 ?
Testing $ 30/test 4,000 ? 11,000 ?
Machine Related $ 25/hour 20,000 ? 30,000 ?
Total Overhead ? ?
Cost Allocated to Product = Actual Units of Activity Rate
Lets complete
the table. The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin

Purchasing $ 70/order 400 $ 28,000 800 $ 56,000
Scrap Rework $240/order 300 72,000 600 144,000
Testing $ 30/test 4,000 120,000 11,000 330,000
Machine Related $ 25/hour 20,000 500,000 30,000 750,000
Total Overhead $ 720,000 $ 1,280,000


Total overhead = $720,000 Actual + $1,280,000
Cost Actual
= $2,000,000 Cost
Recall
Activity
that $2,000,000
Rate
was the original
Activity to Product
amount
Activity
of
to Product
overhead assigned
Purchasing $ 70/order to the400 products
$ 28,000using traditional
800 $ 56,000
Scrap Rework $240/orderoverhead 300costing.
72,000 600 144,000
Testing $ 30/test 4,000 120,000 11,000 330,000
Machine Related $ 25/hour 20,000 500,000 30,000 750,000
Total Overhead $ 720,000 $ 1,280,000

Overhead Costs Assigned to Products:

Deluxe Model $720,000 5,000 units = $144 per unit
Regular Model $1,280,000 40,000 units = $32 per unit
Deluxe Regular
Model Model
Direct Materials $ 150 $ 112
Direct Labor 16 8
Manufacturing Overhead 144 32
Total Unit Cost $ 310 $ 152

Traditional Costing ABC
Deluxe Regular Deluxe Regular
Model Model Model Model
Direct materials $ 150 $ 112 $ 150 $ 112
Direct labor 16 8 16 8
Overhead 80 40 144 32
Total cost $ 246 $ 160 $ 310 $ 152
This result is not uncommon when activity-based

costing is used. Many companies have found that low-
volume, specialized products have greater overhead
costs than previously realized.
Costs and Cost Drivers in
Cost Cost Driver
Materials purchasing Number of purchase orders
Materials handling Number of materials
requisitions
Personnel processing Number of employees hired
or laid off
Equipment depreciation Number of products
produced or hours of use
Quality inspection Number of units inspected
Indirect labor for Number of setups required
equipment setups
Engineering costs for Number of modifications
product modifications
End of Chapter 17

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Chapter

17 Accounting Systems For

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Cost accounting systems provide information

Assessing the Providing

Cost accounting systems are the procedures

Used for production of large,

Typical job order cost applications:

Used for production of small,

Typical process cost applications:

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Cost Summary Units Shipped

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Cost Summary Units Shipped

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Cost Summary Units Shipped

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Employee time Direct JobCost

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Lets examine the

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Next lets add

If Manufacturing Effect of Closing to

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Used for production of small,

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Custom orders Repetitive production

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Factory Cost per

Factory Cost per

Same inventory accounts: raw materials,

Same overhead assignment method:

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Unit cost is computed by dividing the

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Unit cost is computed by dividing the

If partially complete units remain in

Two one-half full pitchers are

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Cost per Product costs for the period

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

At completion of Stage 1 of the process, material

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Stage 1 Stage 2 Stage 3

25% of 25% of 50% of

The process is now complete.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Owl Inc uses FIFO

April Fabrication Department Physical Flow

Units to account for:

Units accounted for as:

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002