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Module 10ModuleModuleModule 101010 Allocating Costs to Jobs and ProcessesProcesses Omar ElKheshen – kheshen@gmail.com 1
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Learning Objectives By the end of this module you should understand: 1. The sources for costs of direct material, direct labor and overhead in the cost gathering process 2. The use of cost centers to gather overhead costs 3. The application of activity bases to spread overhead to products 4. The distinction between plant wide and departmental predetermined overhead rates 5. The costing issues involved in joint products and by-products 6. Process costing, its use of equivalent units and its two principal methods 7. The need to question the appropriateness of traditional cost drivers and the basic mechanisms of activity-based costing Omar ElKheshen – kheshen@gmail.com 2
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Agenda 10.1 Introduction 10.2 Cost Gathering 10.3 Where Do these Costs Come from? 10.4 Plantwide versus Departmental Rates 10.5 Joint Products and By-Products 10.6 Process Costing 1010..77 Process Costing and the Equivalent UnitProcess Costing and the Equivalent Unit 10.8 Cost per Equivalent Unit 10.9 Activity-Based Costing 10.10 Traditional Costing versus ABC Review Questions Case Studies Omar ElKheshen – kheshen@gmail.com 3
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In module 9 we’ve covered different mutually exclusive cost categories Cost Categories: Variable & Fixed Direct & Indirect Traceable & Common Controllable & Non-Controllable Standard & Actual Product & Period Engineered & discretionary These categories are broad as they deal with total blocks of costs An early understanding of their characteristics allows the reader to gain a broad overview of costing and its potential impact on managerial behavior Omar ElKheshen – kheshen@gmail.com 4
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No two businesses have identical costing systems because no two companies have identical accounting systems Part I Part II Financial Accounting Management Accounting No two companies select identical: No two businesses have identical: PrinciplesPrinciples Costing SystemsCosting Systems Conventions Production Characteristics Presentation Product Mix & Modes Technology This module outlines the basic principles on which all costing systems are based Omar ElKheshen – kheshen@gmail.com 5
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As discussed in the previous module, costing systems have 4 roles: two of them are forward looking and two are backward looking Why is Cost Information so Important? Controlling Actual performance against planned performance Planning Next year’s costs carefully BACKWARD LOOKING TrackingTracking The consumption of resourcesThe consumption of resources FOREWARD LOOKINGLOOKING Choosing Among alternative courses of action This module will concentrate on the tracking and controlling functions of cost systems When managers are satisfied with those two functions, they’ll be able to assess their informational needs for planning and choosing Omar ElKheshen – kheshen@gmail.com 6
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Agenda 10.1 Introduction 10.2 Cost Gathering 10.3 Where Do these Costs Come from? 10.4 Plantwide versus Departmental Rates 10.5 Joint Products and By-Products 10.6 Process Costing 1010..77 Process Costing and the Equivalent UnitProcess Costing and the Equivalent Unit 10.8 Cost per Equivalent Unit 10.9 Activity-Based Costing 10.10 Traditional Costing versus ABC Review Questions Case Studies Omar ElKheshen – kheshen@gmail.com 7
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To focus our discussion on cost gathering (also known as cost accumulation), we’ll use the same example of a timber-shelved DVD unit used in Module 8 Omar ElKheshen – kheshen@gmail.com 8
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Agenda 10.1 Introduction 10.2 Cost Gathering 10.3 Where Do these Costs Come from? 10.4 Plantwide versus Departmental Rates 10.5 Joint Products and By-Products 10.6 Process Costing 1010..77 Process Costing and the Equivalent UnitProcess Costing and the Equivalent Unit 10.8 Cost per Equivalent Unit 10.9 Activity-Based Costing 10.10 Traditional Costing versus ABC Review Questions Case Studies Omar ElKheshen – kheshen@gmail.com 9
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Three items we have to consider when tracing costs Where do costs come from? Materials Labor Overheads Omar ElKheshen – kheshen@gmail.com 10
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Three items we have to consider when tracing costs Where do costs come from? Materials Labor Overheads Omar ElKheshen – kheshen@gmail.com 11
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Materials are the easiest cost to trace to a cost item because of their visible, physical nature; where its percentage from total costs varies from item to item Heavy overhead component in thecomponent in the software package reflects the massive investment in R&D required by a software house to design and test a commercial package Materials are drawn from inventory where a requisition slip is used to record the quantity of materials drawn, their quality materials, the date drawn and the initials of the storekeeper and the requisitioner Omar ElKheshen – kheshen@gmail.com 12
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Determining the price of material is not an easy task; let’s see why in this example Example The metal trim required in the construction of the DVD units was purchased in five meter lengths from a local steel stockholder. Varying quantities were purchased during the month of May at various prices. Assume that the metal storekeeper issued 7 meters of metal to production each working day of the month. What price should be charged? Omar ElKheshen – kheshen@gmail.com 13
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