Management Accounting
BA213
Michael Dimond
Costing Methods
• Process Costing
• Job Costing
• Activity-based Costing (in the text, but not covered in this
class)
Michael Dimond
School of Business Administration
Understanding costs is key to cost management
• A cost object is anything for which a separate measurement of
costs is desired. Examples include a product, a service, a project,
a customer, a brand category, an activity, and a department
• Direct costs of a cost object are related to the particular cost object
and can be traced to that cost object in an economically feasible
(cost-effective) way. Direct costs are traced to a cost object.
• Indirect costs of a cost object are related to the particular cost
object but cannot be traced to that cost object in an economically
feasible (cost-effective) way. Indirect costs are allocated to a cost
object.
• A cost driver is a factor which causes total costs to change in a
given period (e.g. sales volume). A change in the cost driver results
in a change in the level of total costs.
• A cost pool is a group of indirect cost items which are separate, but
related.
• A cost allocation base is used to distribute the indirect costs in a
cost pool to cost objects.
Michael Dimond
School of Business Administration
Example of assigning costs to cost object
Michael Dimond
School of Business Administration
Process Costing
• Process costing divides the total costs by the total number of
units produced. All units (of goods or services) are identical
and indistinguishable. This results in an average production
cost per unit, which may be classified in as few as two
categories: direct materials and conversion costs
• Process-costing systems separate costs into cost categories
according to when costs are introduced into the process.
• Direct materials are usually added at the beginning of the production process,
or at the start of work in a subsequent department down the assembly line.
• Conversion costs are generally added equally along the production process.
• Process costing is very high-level and assumes all costs are
spread evenly over the production of the identical units.
• There will be complications when the process creates WIP inventory
• FIFO and Average cost inventory methods will be treated differently
Michael Dimond
School of Business Administration
Steps in Process Costing
1.
2.
3.
4.
5.
Summarize the flow of physical units of output.
Compute output in terms of equivalent units.
Summarize total costs to account for.
Compute cost per equivalent unit.
Assign total costs to units completed and to units in ending
work in process.
Michael Dimond
School of Business Administration
Process Costing Details
Assume the company has no beginning WIP inventory
Michael Dimond
School of Business Administration
Process Costing Details, cont’d
Michael Dimond
School of Business Administration
Process Costing Details, cont’d
Michael Dimond
School of Business Administration
Inventory Methods in Process Costing
1. Weighted-average process-costing method calculates the equivalentunit cost of all the work done to date (regardless of the accounting period
in which it was done), assigns this cost to equivalent units completed
and transferred out of the process, and to equivalent units in ending
work-in-process inventory.
2. FIFO computations assign the cost of the previous accounting period’s
equivalent units in beginning work-in-process inventory to the first units
completed and transferred out of the process and assign the cost of
equivalent units worked on during the current period first to complete
beginning inventory, next to start and complete new units, and finally to
units in ending work-in-process inventory.
3. Standard-cost procedures attribute costs based on the budgeted
standard for the cost item in question. This avoids the intricacies
involved in detailed tracking with weighted-average or FIFO methods
when there are frequent price variations over time.
Michael Dimond
School of Business Administration
Job Costing
• Job costing assigns direct costs to the production of a unique
unit of work based on consumption, then allocates the
indirect costs using one of two basic approaches:
• Actual costing: Indirect costs based on the actual indirect-cost rates
times the actual activity consumption.
• Normal Costing: Indirect costs based on the budgeted indirect-cost rates
times the actual activity consumption.
Michael Dimond
School of Business Administration
Steps in Job Costing
1. Identify the job that is the chosen cost object
2. Identify the direct costs of the job
3. Select the cost-allocation bases to use for allocating indirect
costs to the job
4. Identify the indirect costs associated with each costallocation base
5. Compute the rate per unit of each cost-allocation base used
to allocate indirect costs to the job
6. Compute the indirect costs allocated to the job
7. Compute the total cost of the job by adding all direct and
indirect costs assigned to the job.
Michael Dimond
School of Business Administration
Job Costing Details
• Journal entries are made at each step of the production
process.
• The purpose is to have the accounting system closely reflect
the actual state of the business, its inventories, and its
production processes.
• All product costs are accumulated in the work-in-process
control account.
• Direct materials used
• Direct labor incurred
• Factory overhead allocated or applied
• Actual indirect costs (overhead) are accumulated in the
manufacturing overhead control account.
Michael Dimond
School of Business Administration
Job Costing Details, cont’d
Michael Dimond
School of Business Administration
Job Costing Details, cont’d
Michael Dimond
School of Business Administration
Job Costing Requires Subsidiary Ledgers
• Subsidiary ledgers keep track of details of a specific job so
management can better control costs
Michael Dimond
School of Business Administration