Principles of Mgmt Accounting Class 4 & 5 PDF

Principles of MANAGEMENT ACCOUNTING Prof. Dr. Xavier Gabriëls ([email protected]) 1  Classes 4 & 5 Cost calculation problems in a manufacturing environment principles - Service department cost allocation - By-product and joint prod...

Principles of MANAGEMENT ACCOUNTING Prof. Dr. Xavier Gabriëls ([email protected]) 1  Classes 4 & 5 Cost calculation problems in a manufacturing environment principles - Service department cost allocation - By-product and joint product costing - BOM and factory ledger - Job order costing - Process costing 2  Service Department Cost Allocation First Stage Allocations Service Service department costs are allocated to production departments. Department (Cafeteria) Production Department Service (Machining) The Department Product (Accounting) Production Department Service (Assembly) Department (Personnel) 3  Service Department Cost Allocation (2) Service Department (Cafeteria) Production Department Service (Machining) The Department Product (Accounting) Production Department Service (Assembly) Second Stage Allocations Departmentdepartment overhead costs, plus allocated service Production (Personnel) department costs, are applied to products using departmental predetermined overhead rates. 4  Selecting Allocation Bases Personnel: Typical Custodial: Number of Allocation Square employees footage Bases Receiving: Cafeteria: Units Number of handled employees Security: Accounting: Power: Square Staff Kilowatt footage hours hours 5  Interdepartmental Services Service Department Production (Cafeteria) Department (Machining) POWER DEPARTMENT Production Service Department Department (Assembly) (Custodial) 6  Interdepartmental Services (2) Problem Allocating costs when service departments provide services to each other Solutions Direct Method Stepwise Method 7  Direct Method Service Production Cost of services Department Department between service (Cafeteria) (Machining) departments are ignored and all costs are allocated directly to production Service Production departments. Department Department (Custodial) (Assembly) 8  Direct Method: Example Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Number of employees 15 10 20 30 Square feet occupied 5.000 2.000 25.000 50.000 Service Department Allocation Base Cafeteria Number of employees Custodial Square feet occupied 9  Direct Method: Example (2) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 144.000 ? Custodial allocation ? ? ? Total after allocation $ 0 20 $360.000 × = $144.000 20 + 30 Allocation base: Number of employees 10  Direct Method: Example (3) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 144.000 216.000 Custodial allocation ? ? ? Total after allocation $ 0 30 $360.000 × = $216.000 20 + 30 Allocation base: Number of employees 11  Direct Method: Example (4) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 144.000 216.000 Custodial allocation (90.000) 30.000 ? Total after allocation $ 0 $ 0 $ 574.000 25.000 $90.000 × = $30.000 25.000 + 50.000 Allocation base: Square feet occupied 12  Direct Method: Example (5) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 144.000 216.000 Custodial allocation (90.000) 30.000 60.000 Total after allocation $ 0 $ 0 $ 574.000 $ 976.000 50.000 $90.000 × = $60.000 25.000 + 50.000 Allocation base: Square feet occupied 13  Stepwise Method Service department costs are allocated Service Production to other service Department Department departments and (Cafeteria) (Machining) to production departments, usually starting with the service department that serves the Service Production largest number of Department Department other service (Custodial) (Assembly) departments. 14  Stepwise Method (2) Service Production Department Department Once a service (Cafeteria) (Machining) department’s costs are allocated, other service departments’ costs are not allocated back to it. Service Production Department Department (Custodial) (Assembly) 15  Stepwise Method (3) Service Production Department Department Custodial will (Cafeteria) (Machining) have a new total to allocate to production departments: its own costs plus those costs Service Production allocated from Department Department the cafeteria. (Custodial) (Assembly) 16  Stepwise Method: Example We will use the same data used in the direct method example. Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Number of employees 15 10 20 30 Square feet occupied 5.000 2.000 25.000 50.000 Service Dpt. Relative share Highest relative Cafeteria => Custodial 10/60 = 1/6 share => Custodial => Cafeteria 5.000/80.000 = 1/16 allocate first 17  Stepwise Method: Example (2) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 60.000 ? ? Custodial allocation ? ? ? Total after allocation $ 0 10 $360.000 × = $60.000 10 + 20 + 30 Allocation base: Number of employees 18  Stepwise Method: Example (3) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 60.000 120.000 ? Custodial allocation ? ? ? Total after allocation $ 0 20 $360.000 × = $120.000 10 + 20 + 30 Allocation base: Number of employees 19  Stepwise Method: Example (4) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 60.000 120.000 180.000 Custodial allocation ? ? ? Total after allocation $ 0 30 $360.000 × = $180.000 10 + 20 + 30 Allocation base: Number of employees 20  Stepwise Method: Example (5) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 60.000 120.000 180.000 Custodial allocation (150.000) ? ? Total after allocation $ 0 $ 0 New total = $90.000 original custodial cost plus $60.000 allocated from the cafeteria. 21  Stepwise Method: Example (6) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 60.000 120.000 180.000 Custodial allocation (150.000) 50.000 ? Total after allocation $ 0 $ 0 $ 570.000 25.000 $150.000 × = $50.000 25.000 + 50.000 Allocation base: Square feet occupied 22  Stepwise Method: Example (7) Service Departments Production Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Cafeteria allocation (360.000) 60.000 120.000 180.000 Custodial allocation (150.000) 50.000 100.000 Total after allocation $ 0 $ 0 $ 570.000 $ 980.000 50.000 $150.000 × = $100.000 25.000 + 50.000 Allocation base: Square feet occupied 23  Comparison of Methods Totals after allocation Machining Assembly Method Department Department Direct $ 574.000 $ 976.000 Stepwise 570.000 980.000 24  Reciprocal Method Production- Service dept. Costs of service department departments are (Machining) (Cafeteria) allocated to both the other service departments and production departments. Service Production- Department dept. (Custodial) (Assembly) 25  Reciprocal Method: Example Service Dpt. Production Dept. Cafeteria Custodial Machining Assembly Dept. Costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 # employees 15 10 20 30 # square feet 5.000 2.000 25.000 50.000 Service Dpt. Relative share Cafeteria => Custodial 10/60 = 1/6 Custodial => Cafeteria 5.000/80.000 = 1/16 26 Reciprocal Method: Example (2) System of equations : Cafeteria (A) = 1/16 B + 360.000 Custodial (B) = 1/6 A + 90.000 ⇔ Cafeteria (A) = 369.473,70 Custodial (B) = 151.579 27  Reciprocal Method: Example (3) Cafeteria Custodial Machining Assembly Dept. Costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Allocation Cafeteria (369.474) 61.579 123.158 184.737 Allocation Custodial 9.474 ? ? ? Total after allocation ? ? ? ? 30 $369.474 = $184.737 × 20 + 30 + 10 Allocation base: Number of employees 28  Reciprocal Method: Example (4) Service Dpt. Production Dpt. Cafeteria Custodial Machining Assembly Dept. Costs before allocation $ 360.000 $ 90.000 $ 400.000 $ 700.000 Allocation Cafeteria (369.474) 61.579 123.158 184.737 Allocation Custodial 9.474 (151.579) 47.368 94.737 Totaal na verdeling $ 0 $ 0 $ 570.526 $ 979.474 50.000 $151.579 × = $94.737 5.000 + 25.000 + 50.000 Allocation base : # square feet 29 Comparison of Methods Totals after allocation Method Machining Assembly Direct $ 574.000 $ 976.000 Step 570.000 980.000 Reciprocal 570.526 979.474 30  Joint Product Processes A number of products are produced from a single raw material input. Product 1 Single Input Product 2 Product 3 31  Joint Product Processes (2) Concept: in some industries, a number of products are produced from a single raw material input. Key terms: Joint products – products resulting from a process with a common input. Split-off point – the stage of processing where joint products are separated. Joint cost – costs of processing joint products prior to the split- off point. Final product – ready for sale without further processing. Intermediate product – requires further processing before sale. 32 Joint Product Cost Allocation Consider the following example of an oil refinery. We will assume only two products, gasoline and oil. 33  Joint Product Cost Allocation (2) Joint Product Separate Final Costs Oil Processing Sale Joint Separate Joint Production Input Processing Costs Process Gasoline Separate Final Processing Sale Split-Off Separate Point Processing Costs 34  Joint Cost Allocation Methods Physical Monetary measure method measure method Joint costs are Joint costs are allocated based on a allocated based on proportional measure the relative values (weight, volume, etc.) of of the products at the the joint products at the split-off point. split-off point. 35 Joint Cost Allocation Methods (2) Let’s look at an example illustrating the joint cost allocation methods. 36  Physical Measure Method The physical measure method may be used when Output product prices are highly volatile. Many additional processes occur between the split-off point and the first point of marketability. Market prices are unavailable for products such as on cost- plus contracts. 37  Physical Measure Method (2) Joint Costs Oil 240.000 gallons Common Joint Production Input Process Gasoline 360.000 gallons Split-Off Point 38  Physical Measure Method (3) Joint conversion cost = $225.000 Oil 240.000 gallons Common Joint material Production cost = $275.000 Process Gasoline 360.000 gallons Split-Off Point 39  Physical Measure Method (4) Product Oil Gasoline Total Output quantities in gallons 240.000 360.000 600.000 Proportionate share: ? ? Allocated joint costs: ? ? 40  Physical Measure Method (5) Product Oil Gasoline Total Output quantities in gallons 240.000 360.000 600.000 Proportionate share: 240.000 ÷ 600.000 40% 360.000 ÷ 600.000 60% Allocated joint costs: ? ? 41  Physical Measure Method (6) Product Oil Gasoline Total Output quantities in gallons 240.000 360.000 600.000 Proportionate share: 240.000 ÷ 600.000 40% 360.000 ÷ 600.000 60% Allocated joint costs: $500.000 × 40% $ 200.000 $500.000 × 60% $ 300.000 $275.000 joint material cost plus $225.000 joint conversion cost 42  Monetary Measure Method Net Realizable Value If products require further processing beyond the split-off point before they are marketable, it may be necessary to estimate the net realizable value (NRV) at the split-off point. Final Added NRV = Sales – Processing Value Costs 43  Monetary Measure Method Net Realizable Value (2) Intermediate Final Joint products products Costs Oil Separate Final Processing Sale Common Separate Joint Production Processing Costs Input Process Separate Final Gasoline Processing Sale Split-Off Separate Point Processing Costs 44  Monetary Measure Method Net Realizable Value (3) Joint conversion Sales cost = $225.000 Separate Value Oil Processing $500.000 Common Separate Joint material Processing Costs Production cost = $275.000 Process $200,000 Sales Separate Value Gasoline Processing $1.200.000 Split-Off Separate Point Processing Costs $500.000 45  Monetary Measure Method Net Realizable Value (4) Product Oil Gasoline Total Sales value $ 500.000 $ 1.200.000 $ 1.700.000 Less additional processing costs ? ? ? Estimated NRV at split-off point ? ? ? Proportionate share: ? ? Allocated joint costs: ? ? 46  Monetary Measure Method Net Realizable Value (5) Product Oil Gasoline Total Sales value $ 500.000 $ 1.200.000 $ 1.700.000 Less additional processing costs 200.000 500.000 700.000 Estimated NRV at split-off point $ 300.000 $ 700.000 $ 1.000.000 Proportionate share: ? ? Allocated joint costs: ? ? 47  Monetary Measure Method Net Realizable Value (6) Product Oil Gasoline Total Sales value $ 500.000 $ 1.200.000 $ 1.700.000 Less additional processing costs 200.000 500.000 700.000 Estimated NRV at split-off point $ 300.000 $ 700.000 $ 1.000.000 Proportionate share: $300.000 ÷ $1.000.000 30% $700.000 ÷ $1.000.000 70% Allocated joint costs: ? ? 48  Monetary Measure Method Net Realizable Value (7) Product Oil Gasoline Total Sales value $ 500.000 $ 1.200.000 $ 1.700.000 Less additional processing costs 200.000 500.000 700.000 Estimated NRV at split-off point $ 300.000 $ 700.000 $ 1.000.000 Proportionate share: $300.000 ÷ $1.000.000 30% $700.000 ÷ $1.000.000 70% Allocated joint costs: $500.000 × 30% $ 150.000 $500.000 × 70% $350.000 49  Choosing Among Joint Cost Allocation Methods The mere fact that joint costs are common between different Impossible to use products means... cause-effect basis Therefore, any attempt at allocating those... Can be “joint” costs, by arbitrary definition,... 50  By-Products Joint Costs Major Product Joint Joint Production Major Input Process Product Relatively low value or quantity By-products when compared to major products Split-Off Point 51  Distinguishing between Main and By-Products MAIN PRODUCT a joint output that generates a significant portion of of the net realizable value BY-PRODUCTS outputs from a joint process that are minor Do not allocate joint costs in quantity and/or NRV to by-products when compared to the main products 52  Accounting for By-Products Two commonly used methods of accounting for by-products are... Net Realizable Value Approach By-product NRV is deducted from joint production costs before allocation. Realized Value Approach By-product NRV is treated as other revenue. 53  Basics of Accounting for By-Products Example: Main Product 100.000 litres @ €35,00 - year 1: 60.000 litre - year 2: 40.000 litre Common Costs € 1.500.000 4.000 litres @ €15,60 By-product - year 1: 3.000 litre - year 2: 1.000 litre 54  Basics of Accounting for By-Products (2) Method 1-A: Deduct net realizable value (NRV) related to the sale of the by-products from the cost of the main product Common cost: 1.500.000 - NRV By-products: - 62.400 = 1.437.600 => 1.437.600/100.000 = 14,376 => Year 1: 14,376 x 60.000 = 862.560 Year 1 Year 2 Turnover 2.100.000 1.400.000 Cost of Goods Sold (COGS) 862.560 575.040 Result 1.237.440 824.960 55  Basics of Accounting for By-Products (3) Method 1-B: Deduct net realizable value (NRV) related to the sale of the by-products from the cost of the sold main products Common cost: 1.500.000/100.000 = 15 => COGS Main Product year 1 = 15 x 60.000 = 900.000 Year 1 Year 2 Turnover 2.100.000 1.400.000 Cost of Goods Sold (COGS) 853.200 584.400 Main Product 900.000 600.000 - By-product 46.800 15.600 Result 1.246.800 815.600 56  Basics of Accounting for By-Products (4) Method 2: The NRV of the by-product treated as other revenue Used because Year 1 Year 2 by-product Turnover main product 2.100.000 1.400.000 NRVs are Turnover by-product 46.800 15.600 small and effects on Total turnover 2.146.800 1.415.600 income Costs of Goods Sold (COGS) 900.000 600.000 are Result 1.246.800 815.600 immaterial 57  Disposal of Scrap And Waste By-Product Scrap and Waste Sales value Cost of further exceeds cost of processing further exceeds sales processing value Sold as by-product Dispose of Look for new legally at or products minimum cost 58  BOM and factory ledger A Bill of Materials (BOM) defines the complete set of physical elements required to manufacture a product. A factory ledger is a group of accounts used to record factory-related transactions and to keep track of various manufacturing costs such as direct materials, direct labour, and factory overhead costs. 59 Materials Requisition Form RoseCo Materials Requisition Form Requisition No. X7 - 6890 Date 3-4-X2 Job No. A - 143 Department B3 Description Quantity Unit Cost Total Cost 2 x 4, 12 feet 12 $ 3.00 $ 36.00 1 x 6, 12 feet 20 4.00 80.00 $ 116.00 Authorized Signature Will E. Delite 60  BOM The bill of materials lists all parts (items) with their (technical) specifications. 61 Job-Order Cost Accounting RoseCo Job-Cost Record Job Number A - 143 Date Initiated 3-4-X2 Date Completed Department B3 Item Wooden cargo crate A materials requisition Units Completed Direct Materials Direct Laborform Manufacturing is used toOverhead Req. No. Amount Ticket authorize the Rate Hours Amount Hours use of Amount materials on a job. Cost Summary Units Shipped Product Costs Amount Date Number Balance Direct Materials Let’s see one Direct Labor Manufacturing Overhead Total Cost Unit Cost 62  Materials Requisition Form RoseCo Materials Requisition Form Requisition No. X7 - 6890 Date 3-4-X2 Cost of material Job No. A - 143 is charged to job Department B3 A-143. Description Quantity Unit Cost Total Cost 2 x 4, 12 feet 12 $ 3.00 $ 36.00 1 x 6, 12 feet 20 4.00 80.00 $ 116.00 Type, quantity, and total cost of material charged to job A-143. Authorized The materials requisition form is the Will E. Signature source document for Delite recording material usage in the accounting records. 63 Job-Order Cost Accounting RoseCo Job-Cost Record Job Number A - 143 Date Initiated 3-4-X2 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 X7-6890 $ 116 Cost Summary Units Shipped Product Costs Amount Date Number Balance Direct Materials $ 116 Direct Labor Manufacturing Overhead Total Cost Unit Cost 64 Production vs. non-production costs Production or manufacturing costs are costs that are made in order to produce a product or deliver a service: raw material, labour, indirect Non-production costs relate to general administrative expenses as well as pre- (R&D) and post-production (distribution, …) costs => are treated as period costs and are not included in inventory valuation 65  Types of Product-Costing Systems 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. 66  Types of Product-Costing Systems (2) 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. 67  Types of Product-Costing Systems (3) Process Job-Order Costing Costing  Job-shop operations  Products manufactured in very low volumes or one at a time.  Batch-production operations  Multiple products in batches of relatively small quantity. 68  Types of Product-Costing Systems (4) Process Job-Order Costing Costing  Typical job-order cost applications:  Special-order printing  Building construction  Also used in service industry  Hospitals  Law firms 69  Accumulating Costs in a Job-Order Costing System Charge direct material and direct labour to each job as incurred. Direct Materials Job No. 1 Special documents Direct Labour Job No. 2 are used to track costs for each job. Manufacturing Job No. 3 Overhead Apply overhead to each job using a predetermined rate. 70  Manufacturing Overhead Costs Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accountin period. Budgeted manufacturing overhead cost POHR = Budgeted amount of cost driver (or activity base) Overhead applied = POHR × Actual activity Based on estimates, and Actual amount of the allocation determined before the base, such as direct labour hours, period begins incurred during the period 71  Overhead Application Example RoseCo applies overhead based on direct- labour hours. Total estimated overhead for the year is $640.000. Total estimated labour cost is $1.400.000 and total estimated labour hours are 160.000. What is RoseCo’s predetermined overhead rate? 72  Overhead Application Example (2) Budgeted manufacturing overhead cost POHR = Budgeted amount of cost driver (or activity base) $640.000 POHR = 160.000 direct-labour hours (DLH) POHR = $4,00 per DLH For each direct labour hour worked on a job, $4,00 of factory overhead will be applied to the job. 73  Overapplied and Underapplied Manufacturing Overhead Alternative 1 Alternative 2 If Manufacturing Close to Cost Overhead is... Allocation of Goods Sold UNDERAPPLIED INCREASE INCREASE Work in Process Cost of Goods Sold (Applied OH is less Finished Goods than actual OH) Cost of Goods Sold OVERAPPLIED DECREASE DECREASE Work in Process Cost of Goods Sold (Applied OH is greater Finished Goods than actual OH) Cost of Goods Sold 74 Process- Costing Systems 75  Comparison of Job-Order Costing and Process Costing 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. 76 Comparison of Job-Order Costing and Process Costing (2) Process Job-order Costing Costing Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill 77  Comparison of Job-Order Costing and Process Costing (3) Job-order costing Process costing Costs accumulated by the Costs accumulated by department or process. job. Work in process has a Work in process has a job- production report for each batch cost sheet for each job. of products. Many unique, high cost A few identical, low cost products. jobs. Units continuously produced for Jobs built to customer inventory in automated process. order. 78  Process Costing Direct Materials Direct labour costs Dollar Amount are usually small Manufacturing in comparison to Overhead other product costs in process Direct cost systems. Labour (high level of automation) Type of Product Cost 79  Process Costing (2) Direct Materials Direct labour costs Dollar Amount Conversion are usually small in comparison to other product costs in process cost systems. (high level of automation) Type of Product Cost So, direct labour and manufacturing overhead are often combined into one product cost called conversion. 80  Process Costing: The Basics Costs will be accumulated by process. They will not be traced to individual units of product. Direct Materials Conversion Costs Raw material directly Labour and overhead traceable to the process. directly traceable to the process. 81 Schematic approach Inventory Production Work in progress INPUTS Stadium 1 Transfer semi-finished products Inventory Work in progress Production INPUTS Finished product Stadium 2 Sale of finished product 82  Comparing Job Costing and Process Costing Work in process Direct contains individual jobs Materials in a job cost system. Finished Direct Labour Jobs Goods Manufacturing Cost of Overhead Goods Sold 83  Comparing Job Costing and Process Costing (2) Work in process contains homogenous Direct products in a process Materials cost system. Direct Labour Finished & Overhead Products Goods (Conversion) Cost of Goods Sold 84  Equivalent Units: A Key Concept Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. 85 Equivalent Units Example Two one-half completed products are equivalent to one completed product. + = l So, 10.000 units 70 percent complete are equivalent to 7.000 complete units. 86  Equivalent Units: Question 1 For the current period, Jones 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 Jones have for the period? a. 10.000 b. 11.500 c. 13.500 d. 15.000 87  Equivalent Units: Question 1 For the current period, Jones 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 Jones have for the period? a. 10.000 10.000 units + (5.000 units × b. 11.500 0,30) c. 13.500 = 11.500 equivalent units d. 15.000 88  Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per Costs for the period equivalent = Equivalent units for the period unit 89  Equivalent Units: Question 2 If Jones incurred $27.600 in production costs for the 11.500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1,84 b. $2,40 c. $2,76 d. $2,90 90  Equivalent Units: Question 2 If Jones incurred $27.600 in production costs for the 11.500 equivalent units. What was Jones’s 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 91  Assigning Costs to Products – The Five-step Process  Summarize the flow of physical units (number of units completed and number of units remaining in process).  Compute the number of equivalent units produced.  Summarize the total costs to be accounted for (costs in beginning work in process inventory and the costs incurred in the current period).  Compute costs per equivalent unit.  Assign unit costs from  to units completed and to units in ending work-in-process inventory. 92 Equivalent Units of Production – Weighted-Average Method The weighted-average method... Makes no distinction between work done in the pr period and work done in the current period. Blends together units and costs from the prior period and the current period. The FIFO method is a more complex method and is rarely used in practice. 93  Start inventory: Weighted-Average method Calculation # equivalent units (Eq. un.) Finished Product (FP): Starting Inventory (SI) + started – Ending Inventory (EI) = # finished (1) Total cost FP Eq. Work In Total Eq. Cost/Eq. un. un. Progress (WIP) un. EI Eq. un. Transfer cost Completion ∑ Material cost SI + current percentage x # ∑ (1) (look when Total cost/ period Total Eq. un. material is added) Conversion ∑ cost = ∑ (2) Cost finished product = (1) x (2) Cost EI = # Eq. un. EI x cost/Eq. un. 94  Start inventory: FIFO FIFO Total cost FP Eq. un. (5) WIP EI Eq. un. Total Eq. Cost/Eq. un. un. Transfer cost Completion ∑ # Finished - percentage* Material cost ONLY cost (Completion # ∑ Total cost/ current percentage (look when Total Eq. un. period !!! SI * material is Conversion cost ∑ # SI) added) Cost finished product = ∑ cost SI (transfer/mat/conv) + respective # Eq. un. (5) * respective cost/Eq. un. Cost EI = # Eq. un. EI x respective cost/Eq. un. 95  Example The NV Playback produces DVD-players. The starting inventory is about 10 items which are finished for 40 % (material cost €139 & conversion cost €273). During March, the production of 100 DVD-players was started, of which 80 items are finished. There are 20 items of work in progress which are finished for 60%. The material is inserted at the start of the production stadium. The cost of materials in March is around €1.500, the conversion costs are €1.104. 96 Example (2) STADIUM 1 Material SI EI 10 20 START items items TRANSFER 100 items 0% 40% 60% 100% 97 Example (3) Weighted-Average method: Add cost of the SI (material and conversion) to the material cost and the conversion cost of the period. 98  Example (4) FP Weighted- Equivalent EI WIP Total Cost price Cost average units (Eq. Eq. un. Eq. un. / Eq. un. un.) 1.500 + 10 + 100 20 110 14,9 Material 139 = – 20 = 1.639 90 1.104 + 90 12 102 13,5 Conversion 273 = 1.377 Σ Weighted-Average 28,4 99  Example (5) Cost price finished goods = 90 items x €28,4 = €2.556 Cost price end inventory (EI; work in progress) = 20 items x €14,9 + 12 items x €13,5 = €298 + €162 = €460 100 Example (6) FIFO: Cost SI only taken in the finished goods Add cost SI (material and conversion) separately to the cost of the finished products 101  Example (7) FP EI WIP Total Cost price FIFO Cost Eq. un. Eq. un. Eq. un. / Eq. un. 1.500 90 – 10 = 20 100 15 Material 80 1.104 90 – (40% x 12 98 11,26 Conversion 10) = 86 FIFO 102  Example (8) Cost price finished products = Σ cost SI + 80 items x €15 + 86 items x €11,26 = €139 + €273 + 1.200 + 968,36 = €2.580,36 Cost price end inventory (EI; WIP) = 20 items x €15 + 12 items x €11,26 = €300 + €135,12 = €435,12 103 Rejected products Quality inspection: (Semi) finished products During the production process Cost price of rejected products: Cost of production? At the account of finished products? At the account of goods in process/partly finished goods? Period cost? 104 Definitions and implications for cost calculation Normal rejected products: % of rejected goods that can be considered as normal for the production process. PCP at the account of approved products Abnormal rejected products: Amount of rejected goods above the normal % PCP at the account of P/L Point of inspection Position in the production process (degree of finalization) at which the quality control occurs. Is EI WIP / SI WIP before or after the point of inspection? 105 Example (1) Louisa Vuittoni is a producer of leather handbags. This luxurious product offers top quality towards the client. The production process develops in two stages. In the first stage the leather is dyed. In the second stage the dyed leather is transformed into a handbag. The quality control occurs at the end of the second stage, before the product exits the factory. Normally, 5% of the finished goods are rejected. These products are destroyed. 106 Example (2) Data of October 2006 stage 2: Value of production in stage 1: €50.000,00 Production started in stage 2: 1.000 pieces Cost of material stage 2: €20.000,00 Processing costs stage 2: €10.000,00 Materials are added to the production process at 20% completion. No stock of goods in process Point of inspection is located at the end of the production process 60 products are rejected because of errors The accepted products are being sold at €200,00 per handbag. 107  Example (3) STAGE 2 Point of inspection Material START 1.000 pieces 20 % 100 % Rejected: 60 pieces Accepted: 940 pieces 108  Example (4) Approved Normal Abnormal EI Total Costs € CP/Eq. un. FP rejection rejection WIP Eq. un. Transfer 940 50 10 0 1.000 50,00 50.000 Material 940 50 10 0 1.000 20,00 20.000 Conversion 940 50 10 0 1.000 10,00 10.000 Σ 80.000 Σ 80,00 109 Example (5) Valuation: Normally rejected products 50 x 80,00 = 4.000,00 Abnormally rejected products 10 x 80,00 = 800,00 Finished product (accepted) 940 x 80,00 = 75.200,00 Cost division of rejected products: Normal rejected goods => to FP: 75.200,00 + 4.000,00 = 79.200,00 Abnormally rejected products => as a periodical cost to P/L 110 Partly finished goods in stock (1) The EI WIP is before the point of inspection: EI WIP Point of inspection The cost of normal rejected production is being allocated towards finished products. The EI WIP is after the point of inspection: Point of inspection EI WIP The cost of normal rejected production is divided over finished products and WIP. 111 Partly finished goods in stock (2) The SI WIP is before the point of inspection SI WIP Point of inspection SI finished goods in this period can be rejected Assign cost of rejected goods to this period The SI WIP is after the point of inspection Point of inspection SI WIP The SI finished goods has already been inspected in the previous period No costs assigned to the current period 112 Partly finished goods in stock (3) Weighted-Average The costs of the SI are being assimilated in the finished goods and EI WIP on the basis of the Weighted- Average. Cost of rejected goods are distributed over finished products and EI WIP (if EI is after inspection). FIFO De costs of SI are assimilated in de cost price of finished goods. Cost of rejected products are distributed over: Started + finished SI (and EI WIP) if SI is before inspection Started (and EI WIP) if SI is after inspection 113 Extensive example A (1) Data October stage 2: Materials are added to the production process at 20% completion. 1000 pieces are started A SI WIP of 200, 40% completed Value SI = 9.500 (transfer) + 5.000 (material) + 700 (conversion) = €15.200 An EI WIP of 300, 60% completed 40 pieces are rejected (normal) Point of inspection is at 50% of the production process. 114 Extensive example A (2) 40 pieces rejected Materials Point of inspection START Finished 1.000 ? products pieces 20% SI 50% EI 200 pieces 300 pieces 40% 60% 115  Extensive example A (3) FP Rejected EI WIP Total CP/Eq.un. Costs € Eq. un. Eq. un. Eq. un. Eq. un. € T 50.000 860 40 300 1.200 49,58 + 9.500 M 20.000 860 40 300 1.200 20,83 + 5.000 C 10.000 860 20 180 1.060 10,09 + 700 Σ 95.200 Weighted-average Σ 80,50 116 Extensive example A (4) Valuation: Rejected products (40 x 49,58) + (40 x 20,83) + (20 x 10,09) = 3.018,55 Finished product (approved) 860 x 80,50 = 69.239,47 EI WIP (approved) (300 x 49,58) + (300 x 20,83) + (180 x 10,09) = 22.941,98 117 Extensive example A (5) Distributing costs over rejected products (860/1.160) x 3.018,55 = 2.237,89 to FP (300/1.160) x 3.018,55 = 780,66 to EI WIP Total cost price (incl. rejected products) FP 69.239,47 + 2.237,89 = 71.477,36 EI WIP 22.941,98 + 780,66 = 23.722,64 118  Extensive example A (6) FP Rejected EI WIP Total CP/Eq.un. Costs € Eq. un. Eq. un. Eq. un. Eq. un. € 860 T 50.000 40 300 1.000 50,00 -200 860 M 20.000 40 300 1.000 20,00 -200 860 C 10.000 20 180 980 10,20 -80 Σ 80.000 FIFO Σ 80,20 119 Extensive example A (7) Valuation: Rejected products (40 x 50,00) + (40 x 20,00) + (20 x 10,20) = 3.004,08 Finished product (approved) (660 x 50,00) + (660 x 20,00) + (780 x 10,20) = 54.159,18 EI WIP (approved) (300 x 50,00) + (300 x 20,00) + (180 x 10,20) = 22.836,73 120 Extensive example A (8) Distribution of cost over rejected products (860/1.160) x 3.004,08 = 2.227,16 to FP (300/1.160) x 3.004,08 = 776,92 to EI WIP Total cost price (incl. rejected products) FP 54.159,18 + 2.227,16 + 15.200 (SI) = 71.586,34 EI WIP 22.836,73 + 776,92 = 23.613,65 121 Extensive example B (1) Data October stage 2: Materials are added to the production process at 20% completion. 1000 pieces are started A SI WIP of 200, 60% completed Value SI = 9.500 (transfer) + 5.000 (material) + 700 (conversion) = €15.200 A EI WIP of 300, 80% completion 40 pieces are rejected (normal) Point of inspection is at 50% of the production process. 122 Extensive example B (2) 40 pieces rejected Materials Point of inspection START Finished 1.000 ? pieces pieces 20% 50% SI EI 200 pieces 300 pieces 60% 80% 123  Extensive example B (3) FP Rejected EI WIP Total CP/Eq.un. Costs € Eq. un. Eq. un. Eq. un. Eq. un. € 860 T 50.000 40 300 1.000 50,00 -200 860 M 20.000 40 300 1.000 20,00 -200 860 C 10.000 20 240 1.000 10,00 -120 Σ 80.000 FIFO Σ 80,00 124 Extensive example B (4) Valuation: Rejected products (40 x 50,00) + (40 x 20,00) + (20 x 10,0) = 3.000,00 Finished products (approved) (660 x 50,00) + (660 x 20,00) + (740 x 10,00) = 53.600,00 EI WIP (approved) (300 x 50,00) + (300 x 20,00) + (240 x 10,00) = 23.400,00 125 Extensive example B (5) Distribution costs over rejected products [(860-200)/(860-200+300)] x 3.000,00 = 2.062,50 to FP [(300)/(860-200+300)] x 3.000,00 = 937,50 to EI WIP Total cost price (incl. rejected products) FP 53.600,00 + 2.062,50 + 15.200 (SI) = 70.862,50 EI WIP 23.400,00 + 937,50 = 24.337,50 126 Management decisions and control tools - Direct costing vs. Full costing - Variance analysis - Relevant costs and special decisions - Limited resources - Pricing decisions 127 Full Costing A system of accounting for costs in which both fixed and variable production costs are considered product costs. Fixed Costs Product Variable Costs 128 Full Costing (2) Absorption costing Full cost: The total amount of resources, measured in monetary terms, sacrificed to achieve a particular objective. Applications: Stock valuation Long-term pricing Budgeting 129 Direct Costing A system of cost accounting that only assigns the variable cost of production to products. Fixed Costs Product Variable Costs 130 Direct Costing (2) Choice of the allocation key for indirect costs is often easier because of the variable nature Choice of the cost calculation method influences the reported result via the inventory changes 131  Full and Direct Costing Direct Full Costing Costing Direct materials Direct labor Product costs Product costs Variable mfg. overhead Fixed mfg. overhead Period costs Period costs Selling & Admin. exp. 132  Full and Direct Costing (2) Direct Full Costing Costing Direct materials Direct labor Product costs Product costs Variable mfg. overhead Fixed mfg. overhead Period costs Period costs Selling & Admin. exp. The difference between Full and Direct costing is the treatment of fixed manufacturing overhead. 133 Example (1) Material Depreciation Meal white bread 1.000 Bakery 500 Meal whole meal br. 900 Baking oven 300 Shop 700 Secondary prod. 500 Delivery van 500 Direct labour Various White bread 1.000 Energy oven 400 Whole meal br. 1.000 Others 300 Indirect labour Production data Shop assistant 800 White bread 5.000 Driver 800 Whole meal br. 4.000 Selling price White bread 1,00 Whole meal br. 1,20134  Example (2) TOTAL COST White bread Whole meal bread Direct material cost 1.000,00 900,00 Direct labour cost 1.000,00 1.000,00 Indirect costs (4.800/9.000)x5.000 (4.800/9.000)x4.000 = 2.666,67 = 2.133,33 Total cost series 4.666,67 4.033,33 Total cost per bread 0,93 1,03 Turnover 5.000,00 4.800,00 Result per series 333,33 766,67 Result period 1.100,00 135  Example (3) FULL PRODUCTION COST White bread Whole meal bread Direct material cost 1.000,00 900,00 Direct labour cost 1.000,00 1.000,00 Indirect production cost (1.700/9.000)x5.000 (1.700/9.000)x4.000 = 944,44 = 755,55 Full production cost series 2.944,44 2.655,55 Full PC per bread 0,59 0,66 Turnover 5.000,00 4.800,00 Gross result per series 2.055,56 2.144,45 136  Example (4) Total gross result 4.200,00 Period cost 3.100,00 Result period 1.100,00 Only the production costs are taken into account when calculating the cost and thus only these costs are taken into account in the calculation of the cost of the sold products and the value of the inventory. 137  Example (5) DIRECT White bread Whole meal bread PRODUCTION COST Direct material cost 1.000,00 900,00 Direct labour cost 1.000,00 1.000,00 Variable indirect (900/9.000)x5.000 (900/9.000)x4.000 production cost = 500,00 = 400,00 Direct production cost 2.500,00 2.300,00 series Direct PC per bread 0,50 0,58 Turnover 5.000,00 4.800,00 Gross result per series 2.500,00 2.500,00 138  Example (6) Total gross result 5.000,00 Period cost - fixed mfg overhead 800,00 - non-production cost 3.100,00 Result period 1.100,00 Only the variable production cost are taken into account when calculating the cost and thus only these costs are taken into account in the calculation of the cost of the sold products and the value of the inventory. 139