Management Accounting
Chapter 4
Traditional Cost
Management Systems
Department of Accounting
Management Accounting
Chapter 4 objectives:
1.
2.
3.
4.
5.
6.
7.
8.
To be able to understand job order costing systems
To be able to understand how using job bid sheets is effective for estimating
product costs in a job order costing system
To be able to use cost driver rates to apply support activity costs to products
To be able to discuss why cost systems with multiple cost driver rates give
different cost estimates than cost systems with a single rate
To be able to evaluate a cost system to understand whether it is likely to distort
product costs, explain the importance of recording actual costs, and compare
them with estimated costs
To be able to appreciate the importance of conversion costs and the
measurement of costs in multistage continuous-processing industries
To be able to understand the significance of differences between job order
costing and multistage-process costing systems
To be able to understand the two-stage allocation process and service
department allocation methods
Department of Accounting
Management Accounting
Cost Management Systems
Traditional tools:
Job order costing systems:
A process that estimates the costs of manufacturing
products for different jobs required for specific customers
Process costing systems:
A costing method that computes and allocates an equal
amount of cost to each product
Recently developed tool:
Activity-Based-Costing (ABC): A system based on activites that links organizational
spending on resources to the products and services
produced and delivered to customers
Department of Accounting
Management Accounting
Job Order Costing and Cost Flow Model
Inventories in a manufacturing company
• Raw materials inventory
• Work-in-process
• Finished goods inventory
Department of Accounting
Management Accounting
Job Order Costing and Terminology
Job bid sheet:
Format for estimating job costs
Job cost sheet:
Same as a job bid sheet except that the direct materials and direct
labor costs on the job cost sheet represent actual costs incurred on
the job
Cost driver rate:
activity expense_______________
total quantity of activity cost driver
Job costs:
Expenses involved with the direct material, direct labor and support
costs for a job
Margin:
An additional amount added to job costs in order to make a profit
Bid price:
Equals the total job costs plus the markup (margin)
Markup rate:
The percent by which job costs are marked up
Rate of return:
Ration of net income to investment
Full absorption costing:
A costing method in which alle production costs become product costs
Variable costing:
A costing method in which only flexible costs are included product
costs
Department of Accounting
Management Accounting
Job Order Costing, monitoring and follow-up
Melissa’s Auto Service Company
Introduction, page 113
Exhibit 4-3, page 120
Exhibit 4-4, page 121
Exhibit 4-5, page 122
Exhibit 4-6, page 123
Exhibit 4-7, page 123
Famous Flange Company
Exhibit 4-1, page 115
Exhibit 4-2, page 119
Exhibit 4-9, page 126
Exhibit 4-10, page 126
Exhibit 4-11, page 127
Department of Accounting
Management Accounting
Job Order Costing and Markup
Markup, among other things, depends of:
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•
•
•
•
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The amount of costs excluded from the cost driver rate
Target ”rate of return”
Competitive intensity
Past bidding strategies adopted by key competitors
Demand conditions
Overall product-market strategies
Depending upon conditions, markup rates may differ for different product groups and/or
for different market segments.
Department of Accounting
Management Accounting
Job Order Costing and Cost Drivers
Cost driver rate:
activity expense_______________
total quantity of activity cost driver
Cost pool:
Each subset of total support costs that can be associated with a
distinct cost driver
• Discussing fluctuating cost driver rates (exhibit 4-2)
• Discussing how many cost driver rates
• Discussing how many cost pools (exhibit 4-8)
Department of Accounting
Management Accounting
Job Order Costing and Actual Job Costs
• Registrations
• Implications
• Monitoring
• Action
Department of Accounting
Management Accounting
Multistage Process Costing Systems
•
Homogeneous manufacturing of products.
•
Cost are measured only for process stages, and cost variances are determined
only at the level of the process stages instead of at the level of individual jobs.
•
Using conversion costs = costs to convert the materials or product at each
stage.
Department of Accounting
Management Accounting
Multistage Process Costing Systems
Calcut Chemical Company
•Exhibit 4-13
•Exhibit 4-14
•Exhibit 4-15
Department of Accounting
Management Accounting
Two-Stage Cost Allocations
Direct Allocation Method
Stage 1
Assignment of costs accumulated in the service department directly
to the production departments or activities.
Stage 2
Assignment of costs accumulated in production departments and activities to
individual products.
Department of Accounting
Management Accounting
Two-Stage Cost Allocations
Direct Allocation Method - Distortions
Risk of distortions in two-stage allocations typically are:
 Allocations based on unit-related measures
 Differences in relative consumption ratios
Department of Accounting
Management Accounting
Two-Stage Cost Allocations
Sequential Allocation Method
Allocates service departments costs to production departments and other service
departments in a sequential order.
Department of Accounting
Management Accounting
Two-Stage Cost Allocations
Reciprocal Allocation Method
Allocates service departments costs to production departments and other service
departments in a reciprocal order.
Needs to be resolved by developing two or more equations.
Department of Accounting