Cost Assignment Part 2

• This section focuses on cost assignment, specifically part 2 of 2. The learning objectives include:

Learning Objectives

• Determine the purchasing cost of materials consumed as well as the production cost of completed goods that are sold.
• Determine the total cost and profit of finished goods once sold.
• Explain possible misleading information from traditional costing systems to make decisions.

Session 4 Topics

• Calculate the cost of cost objects.
• Purchasing cost of materials bought.
• Inventory valuation: purchasing cost of materials consumed
• Production cost of finished goods made
• Inventory valuation: production cost of finished goods sold
• Full cost
• Profit and Loss
• Comparison between blanket rate and traditional method

Recap of Session 1

• Direct vs Indirect costs (overheads)
• Cost assignment method
• Full cost
• Allocation Costing System
• Cost driver and cost driver rate

Blanket Rate

• An overhead rate for the organization.

Department Traditional Costing System

• Involves considering the value chain and inventories.
• Department Definition
• Overhead allocation to cost objects
• Department cost driver rate
• Whole process has a specific target: defining the cost of a cost object.
• It answers: Why does it matter, and Who does it help?

Purchasing Cost

• Purchasing costs include the costs of unprocessed wood and glass purchases.
• Cost of objects equals direct costs plus overheads
• Overheads = Number of cost Driver X cost driver rate.
• Sum up the value chain and inventories which encompasses Purchasing, the Materials inventory, Production, Finished Goods inventory and Sales.
• The D&W have relevant data per department, split into relevant information for purchasing departments, production departments and distribution departments.

Inventory Valuation

• January's ending inventory included 3000kgs of wood valued at 4.22€ per kg.
• February saw the purchase of 2000kgs of wood at 5.12€ per kg and 4000kgs were consumed.
• Weighted Average cost= (12,660 +10,240) / (3,000+ 2,000)= 4.58
• In February, there was no opening stock and 5000kgs of glass were purchased at 13.26€ per kg with 4000kgs consumed.
• The weighted average cost is calculated as (0+66,300) / (0+5,000)= 13.26
• The production costs made are separated into the direct materials in wood being 15kg, The direct materials in glass standing at 0 and Production (cutting, aggregating, splitting, melting, moulding and Assembly.)

D&W Production Process

• Direct cost per door: 88.2
• Direct costs per window: 142.14

Overheads (€)

• Purchasing totalled 6,3000, cutting totalled 6470, aggregating totalled 3810, the splitting came to 1780 and the distribution totalled 6420.
• Cutting: 0.25,
• Aggregating: 0.25, and
• Splitting: 0.25

Total production overheads

• The cost of objects includes direct costs in addition to overhead as calculated using the cost driver rate.
• Direct costs for doors: 88.2
• Direct cost for windows: 142.14
• Overheads: doors: 17.3. Windows: 17.2
• The production cost of goods for Doors totals 105.5€ and for windows, 159.34€

Inventory valuation:

• January had an inventory of 500 Doors valued at 99.8€ per door.
• In February, 200 doors were produced at 105,5€ per door and 100 doors were sold.
• Windows had: beginning inventory of 500 windows valued at 150.5 € per window.
• In February, 500 windows were produced at 159.34€ per window and 900 windows were sold.
• The equation for Full cost is the production cost of finished goods sold plus distribution overheads, while profit is sales minus full cost.

Cost Drivers

• Purchasing Cost Drivers: Kgs of Materials
• Cutting /Aggregating/ Splitting = Labour Hours
• The equation for full cost is Production costs multiplied by finished goods sold.

Blanket Rate

• Total overheads totalled 24 780 €
• A number of products sold amounted to 100 products. The blanket overhead rate calculates as follows: 24 780 / 1 000= 24.78 € per product.
• Allocation of overheads to doors =100 X €24.78 resulting in a total of €2478
• Allocation of overheads to windows = 900 x €24.78 resulting in a total of €22 302
• Traditional costing systems rely on a few volume-based cost drivers

Weaknesses of Traditional Costing Systems

• Volume-based cost drivers: overhead is allocated to products heavily correlated with the number of units produced.
• Subsidy effect: Products produced in large volumes subsidize complex products produced in smaller volumes.
• Traditional systems merge support and production department costs.

Department & Traditional Method

• Build the value chain
• Construct overhead analysis sheet
• Calculate the cost of cost objects: from purchasing costs to total costs.
• Conclude by considering strengths and weaknesses of the method.