Costing Systems
EMBA 5403
Fall 2010
Available costing systems
 Absorption costing
 Actual Costing
 Normal Costing
 Standard Costing
 Variable costing
 Actual Costing
 Normal Costing
 Standard Costing
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Costing systems
Cost
component
Actual
Normal
Standard
material
Actual
Actual
Standard
labor cost
Actual
Actual
Standard
Manufacturing
OverheadVariable
Actual
Applied
Standard
Manufacturing
Overhead-Fixed
Actual
Applied
Standard
Applied
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Variance
 Differences between the costs
according to the costing system used
and actual amounts
 Actual amounts are reflected in the
financial statements
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Absorption Costing
Cost of Goods
Manufactured
Absorption costing allocates
variable and fixed
overhead costs to products.
Cost of Goods
Sold
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Finished Goods
Inventory
Valuation 5/37
Product Costing Procedures
in Organizations
Process
Costing
Job-order
Costing
 Distinct jobs or batches of units.
• Costs accumulated separately by job.
•Typical job order cost applications:
• Special-order printing
• Building construction
• Also used in service industry
• Hospitals
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• Law firms
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Product Costing Procedures
in Organizations
Process
Costing
Job-order
Costing
Typical process cost applications:
Fall 2010

Petrochemical refinery

Paint manufacturer

Paper mill
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Job-Order Costing
Manufacturing
overhead (MOVH)
Applied (added) to
each
job using a
predetermined
rate
Direct
materials
The
Job
Direct
labor
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Job-Order Costing
Direct
material
s
and
labor
Raw materials
could be used as
direct or indirect
product cost.
Part of the
job cost
Materials
Requisition and
Time tickets
An employee’s
time may be either
direct or indirect.
Fall 2010
Indirect
materials
and labor
Mugan
Manufacturing
Overhead
Control
Account
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Job-Order Costing
wages
Other
Actual OH
Charges
Material
usage
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Indirect
Labor
Manufacturing
Applied
Overhead
Overhead
Control
Account
Job-Order
Cost
Sheets
Indirect
Materials
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Job-Order Cost Sheet
XYZ Job-Order Cost Sheet
Job Number A - 143
Department A4
Item Steel water tank
Date Initiated 17 September 2008
Date Completed
17-Nov-08
Units Completed
2
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
MR 1041 TL 1200
20
8
TL 160
8 TL 6
TL 48
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
Fall 2010
Units Shipped
Date Number Balance
TL 1200
TL 160
TL 48
1408
Mugan 704 11/17/08
1
1
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Job-Order System Cost Flows
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Indirect
Work in Mugan
Fall 2010
Labor
Process
Work-in-Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
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Job-Order System Cost Flows
Work-in-Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

Cost of
Goods
Mfd.

Finished Goods
Cost of
Goods
Mfd.

Cost of
Goods
Sold

Cost of Goods Sold
Cost of
Goods
Sold Mugan

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Allocation Process
Define the cost objects.
Accumulate indirect costs in cost pools.
Choose an allocation base.
Estimate an application rate.
Allocate indirect costs based on use of
the allocation base
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Over- and Underabsorbed
Overhead
Overabsorbed overhead
Applied
Overhead
Costs
>
Actual
Overhead
Costs
Underabsorbed overhead
Applied
Overhead
Costs
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<
Mugan
Actual
Overhead
Costs
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Over- and Underabsorbed
Overhead
XYZ’s actual overhead for the year was TL650,000
and a total of 100,000 direct labor hours were
worked.
Using XYZ’s predetermined overhead rate of
TL 6.00 per direct labor hour, how much overhead
was applied to XYZ’s jobs during the year?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = TL 6.00 per DLH × 100,000 DLH = TL 600,000
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Accounting for Over- and
Underabsorbed Overhead
Three basic approaches
 Prorate among work-in-process,
finished goods, and cost of goods
sold.
 Adjust cost of goods sold.
 Recalculate the application rate and
apply to all the jobs during the
period.
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Accounting for Over- and
Underabsorbed Overhead
If Manufacturing
Overhead is . . .
UNDERABSORBED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work-in-Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work-in-Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERABSORBED
(Applied OH is greater
than actual OH)
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Allocation
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Allocation Base
If overhead
costs are
accumulated in
a single cost
pool and
allocated using
a single
allocation base.
Single Overhead
Cost Pool
Application
Rate
Products
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Multiple Allocation Bases
Many companies use Activity Based Costing where multiple cost
pools and a different allocation base for each cost pool.
Overhead
Cost Pool
A
Application
Rate A
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Overhead
Cost Pool
B
Overhead
Cost Pool
C
Application
Rate B
Products
Mugan
Application
Rate C
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ABC and Multiple Allocation
Bases
 Improves planning and control.
 Activity Based Costing (ABC) is one
method of using multiple allocation
bases.
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Multistage Allocation Processes
Overhead
Cost Pool 1
Overhead
Cost Pool 2
Overhead
Cost Pool 3
Overhead
Cost Pool 4
Separate
Application Rates
Department A
Department B
Dept. Application
Rates
Fall 2010
Department C
Dept. Application
Rates
Products
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Process Costing
Identical units of product are
produced
in a continuous flow through a series
of manufacturing steps or processes.
Costs are assigned to completed units
transferred out of the process and to
incomplete units remaining in the
process.
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Process Costing
Costs are accumulated for a period of
time for products in work-in-process
inventory.
Equivalent units is a concept
expressing these partially completed
products as a smaller number of
fully completed products.
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Equivalent Units
Two one-half completed products are
equivalent to one completed product.
=
+
So, 8,000 units 70 percent complete
are equivalent to 5,600 complete units.
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Equivalent Units Question
For the current period, Ames 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
Ames have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
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Equivalent Units Question
For the current period, Ames 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
Ames have for the period?
a. 10,000
10,000 units + (5,000 units × .30)
b. 11,500
= 11,500 equivalent units
c. 13,500
d. 15,000
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Calculating and Using
Equivalent Units of Production
To calculate the cost per
equivalent unit for the period:
Cost per
equivalent
unit
Fall 2010
=
Costs for the period
Equivalent units for the period
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Equivalent Units Question
Now assume that Ames incurred $27,600 in
production costs for the 11,500 equivalent
units. What was Ames’ average cost per
equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
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Equivalent Units Question
Now assume that Ames incurred $27,600 in
production costs for the 11,500 equivalent
units. What was Ames’ average cost per
equivalent unit for the period?
a. $1.84
$27,600 ÷ 11,500 equivalent units
b. $2.40
= $2.40 per equivalent unit
c. $2.76
d. $2.90
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Equivalent Units Question
What portion of the $27,600 in production
costs was assigned to work-in-process
inventory and what amount was assigned
to completed units for the period?
a. $0 and $27,600
b. $7,600 and $20,000
c. $3,600 and $24,000
d. $12,000 and $15,600
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Equivalent Units Question
Work-in-process:
What portion
of the $27,600 in production
1,500 equivalent units @ $2.40 = $3,600
costs was assigned to work-in-process
inventory and
what amount
was assigned
Completed
units:
10,000 equivalent
$2.40 = $24,000
to completed
units forunits
the @
period?
a. $0 and $27,600
b. $7,600 and $20,000
c. $3,600 and $24,000
d. $12,000 and $15,600
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Equivalent Units
When there are partially completed units
in beginning inventory, work efforts
during the period can be categorized as
follows:
 Work to complete beginning work-in-process
 Work on units started and completed during
the period
 Work on units in ending work-in-process
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Equivalent Units - Example
ACE started June with 250 partially completed
units in work-in-process (30% complete).
During June, ACE completed the units in workin-process and started an additional 1,200
units.
There were 300 units in ending work-in-process
on June 30. They were 40% complete.
How many total equivalent units
did ACE produce during June?
Continue
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Equivalent Units - Example
units
% of work
done this
period
Equivalent
units
Work to complete
250
70%
beginning work-in-process
Work on units started and
900
100%
completed
Work on ending
work-inSince 30%
of the work
300 was done
40% on
processthese units in May, the remaining 70% of
Total equivalent units
the work is done in June.
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175
900
120
1,195
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Equivalent Units - Example
units
% of work
done this
period
Equivalent
units
Work to complete
250
70%
175
beginning work-in-process
Work on units started and
900
100%
900
completed
Work on ending work-in300
40%
120
process
Since 1,200 units were started during June, and 300 of
Total
equivalent
units
1,195
those
units are
still in work-in-process on June 30,
900 units were started and completed during June.
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Equivalent Units - Example
Work to complete
beginning work-in-process
Work on units started and
completed
Work on ending work-inprocess
Total equivalent units
units
% of work
done this
period
250
70%
175
900
100%
900
300
40%
120
Equivalent
units
1,195
40% of the work was done
on these units in June.
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Fall 2010