Direct materials would be entered into the materials account; direct labor would be entered into the direct labor account. Then, these costs are assigned to units of product. A cost object is something for which you want to know the cost. For example, a cost object may be the human resources department of a company. The costs related to that cost object might include salaries of employees of that department, telephone costs for that department, and depreciation on office equipment.
Another example is a customer group of a company. Atlantic City and Las Vegas casinos routinely treat heavy gamblers to free rooms, food, and drink.
The casino owners know the benefits yielded by these high rollers and need to know the costs of keeping them happy, such as the opportunity cost of lost revenue from the rooms, the cost of the food, and so on. A direct cost is one that can be traced to the cost object, typically by physical observation. An indirect cost cannot be traced easily and accurately to the cost object.
The same cost can be direct for one purpose and indirect for another. For example, the salaries paid to purchasing department employees in a factory are a direct cost to the purchasing department but an indirect cost overhead to units of product. Allocation means that an indirect cost is assigned to a cost object using a reasonable and convenient method.
Since no causal relationship exists, allocating indirect costs is based on convenience or some assumed linkage. A product is tangible in that you can see, feel, and take it with you. Examples of products include a tube of toothpaste, a car, or an orange. A service is a task or an activity performed for a customer. For example, the dental hygienist who cleans your teeth provides a service. Manufacturing overhead includes all product costs other than direct materials and direct labor.
Direct materials purchases are first entered into the materials inventory. They may or may not be used during the month. Prime cost is the sum of direct materials and direct labor. Conversion cost is the sum of direct labor and overhead. Total product cost consists of direct materials, direct labor, and overhead. This is not equal to the sum of prime cost and conversion cost because then direct labor would be double counted.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A period cost is one that is expensed immediately, rather than being inventoried like a product cost Selling cost is the cost of selling and delivering products and services. Examples include free samples, advertising, sponsorship of sporting events, commissions on sales, and the depreciation on delivery trucks such as Coca-Cola or Pepsi trucks.
The cost of goods manufactured is the sum of direct materials, direct labor, and overhead used in producing the units completed during the current period and transferred to finished goods inventory. The cost of goods manufactured is the cost of direct materials, direct labor, and overhead for the units produced completed during a time period. The cost of goods sold is the cost of direct materials, direct labor, and overhead for the units sold during a time period.
The number of units produced is not necessarily equal to the number of units sold during a period. For example, a company may produce 1, pairs of jeans in a month but sell only pairs. The income statement for a manufacturing firm includes the cost of goods sold, which is the sum of direct materials, direct labor, and manufacturing overhead. The income statement for a service firm contains no cost of goods sold because there is no product to purchase or to manufacture and, thus, there is no inventory account to expense as cost of goods sold.
In addition, because there is no cost of goods sold on the income statement of a service firm, there is no gross margin, unlike a manufacturing firm. The percentage column on the income statement gives some insight into the relative spending on the various expense categories. Less: Operating expenses Selling expenses The decision to add plastic cups was made assuming that the fixed cost pool would remain unchanged. However, management failed to realize that additional demands on activities would be made by the new product line.
Their failure to recognize this was due to the fact that they did not understand that costs can be driven by factors that are unrelated to the number of units produced. For example, materials handling costs are apparently driven by the number of moves, inspection costs by the number of batches, purchasing costs by the number of orders, and accounting costs by the number of transactions.
Demand for these activities increased and so supply of the activities had to be increased; each activity evidently did not have enough idle capacity to handle the increased demands. An activity-based cost management system provides information about both unit-based and non-unit-based drivers and is concerned with tracing these costs to the individual product lines.
Using this system, the need for additional resources would have been revealed, leading to a better decision. Because previously, the factory had made only one type of product, it surely did not have an ABC system, and did not need one.
Now, it is unlikely that the significant cost of installing such a system would be worth it. This way, the heads of production, the materials storeroom, purchasing, inspection, and accounting could have suggested the need for additional resources.
These resource costs could then have been incorporated into the planning for the additional product, leading to a better decision. Traditional Cost System: a. Interrelated parts: Cost accounting staff, computer, printer b. Processes: Cost assignment: Direct tracing: Materials, labor Driver tracing: None Allocation using direct labor hours for assignment : Setup costs, purchasing costs, materials handling costs, plant depreciation c. Objectives: Costing out of products d. Inputs: Direct materials cost, direct labor cost, setup cost, purchasing cost, materials handling cost, plant depreciation e.
Outputs: Product cost report f. User actions: Submission of a bid, make-or-buy decision Note: A traditional system would not use non-unit-drivers such as number of setups, moves, and orders to assign overhead costs to products. This leaves direct labor hours, a unit-based driver, as the only possibility. Since direct labor hours is not a good driver for the overhead activities listed, then allocation is the principal means of cost assignment.
Furthermore, a traditional cost system would not assign sales or service costs to products, so these two items cannot be inputs for the system. Activity-Based Cost System: a.
Processes: Cost assignment: Direct tracing: materials, labor Driver tracing: Setup costs number of setups , purchasing costs number of orders , materials handling costs number of moves , commissions units sold , service costs number of complaints Allocation: Plant depreciation direct labor hours c. Inputs: Direct materials cost, direct labor cost, setup cost, purchasing cost, materials handling cost, commissions, customer service cost, plant depreciation e.
User actions: Submission of a bid, make-or-buy decision. The differences between the two systems are found in the processes. The ABC system is driver-intensive; non-unit drivers are used to trace costs to products, whereas this is not part of the traditional system which is allocation-intensive. The ABC system also assigns marketing and customer service costs to products, giving a more comprehensive view of product costs. Thus, although both systems provide product cost reports, the content of the reports will differ.
The increased accuracy of cost assignments because of driver tracing and the additional marketing and customer service cost information provided by the ABC system should increase the quality of the bidding and make-or-buy decisions i.
Problem 2. The operational models reveal that the ABC cost system is more complex, requires more inputs, and uses more complicated processes to transform the inputs. Thus, we would expect this system to be more costly to operate. On the other hand, the increased complexity provides increased accuracy and a richer set of possible product cost definitions.
The ABC system can provide both traditional and operating product cost information. Both these factors should provide an advantage when it comes to managerial decision making. The cost of making bad decisions is reduced. Choosing the ABC system depends on whether the benefits of improved decision making outweigh the increased measurement costs. Traditional Control System: Actions Justification a Performance, organizational subunit; managing costs b Rewards manager for subunit performance d Emphasizes performance of organizational subunit g Emphasis on controlling costs j Reward based on controlling costs subunit performance l Emphasis on controlling costs o Emphasis on subunit performance; controlling costs Activity-Based Control System: Actions Justification c Activity-based cost used as input for activity control e Emphasis on activity analysis f Emphasis on managing activities activity analysis h Managing activities i Driver analysis k Driver analysis; activity management m Nonfinancial measure of performance n Driver analysis; activity performance.
Manufacturing overhead: Indirect labor Cost of goods sold: Cost of goods manufactured Add: Beg. Goods available for sale Less: End. Less: Salary, sales supervisor Commissions, salespersons Mythic, Inc. Total current manufacturing costs WIP — 0. Total service costs added In this type of firm, direct materials probably includes supplies such as paper, toner, file folders, envelopes, etc. The dominant cost is direct labor for the 15 professionals. Although labor is the major cost of providing many services, it is not always the case.
For example, the dominant cost for some medical services may be overhead e. In some services, the dominant cost may be materials e. Services have three attributes that are not possessed by tangible products: 1 intangibility, 2 perishability, and 3 inseparability.
Intangibility means that the buyers of services cannot see, feel, hear, or taste a service before it is bought. Therefore, there will never be any finished goods inventories, making the cost of services produced equal to cost of services sold.
Inseparability means that providers and buyers of services must be in direct contact for an exchange to take place. However, it will be difficult for MDW to use this figure in budgeting.
Some of its accountants are no doubt more experienced than others, capable of completing a return in less time and with less research. The returns themselves differ in complexity. Manufacturing overhead: Plant depreciation Unit prime cost would increase by 10 percent since both direct materials and direct labor are strictly variable, and 10 percent more units would require 10 percent more variable cost. However, unit conversion cost would increase by less than 10 percent because of the presence of fixed costs.
Pietro Frozen Foods, Inc. No other line items would be affected. Cornerstone Exercise 2. Pietro Manufacturing, Inc. If the cost of goods sold has been 65 percent of sales for the past few years, managers would probably be concerned. Managers should investigate to see why the increase occurred, and take steps to decrease product costs or increase price, if possible, in the coming year.
Since office rent is a fixed cost, no variable cost would be affected, and prime cost and total variable cost stay the same. Since conversion cost includes the new higher fixed overhead, it would increase. Similarly, total unit service cost would increase as shown below.
Happy Home Helpers, Inc. They are shown here to reinforce the concept that for this firm, with no work in process, total services production cost equals cost of services produced. They are shown here to reinforce the concept that for this firm, with no finished goods inventory, total cost of services produced equals the cost of services sold.
Unlike a service firm, we would expect a manufacturing firm to have begin- ning and ending finished goods inventory. The objective of the dishwashing system is to provide clean, germ-free dish- es, glasses, and silverware. Processes include: scraping uneaten food off dishes into disposal, loading the racks, washing the dishes, and unloading the racks. The items are classified as follows: a. Automatic dishwasher—interrelated part b. Racks to hold the dirty glasses, silverware, and dishes—interrelated part c.
Electricity—input d. Water—input e. Waste disposal—interrelated part f. Sinks and sprayers—interrelated parts g. Dish detergent—input h. Gas heater to heat water to degrees Fahrenheit—interrelated part i. Conveyor belt—interrelated part j. Persons 1, 2, 3, and 4—interrelated parts k. Clean, germ-free dishes—outputs l. Dirty dishes—inputs m.
Half-eaten dinner—inputs n. Aprons—interrelated parts 3. The cost management information system is similar in that it has interrelated parts: processes, objectives, inputs, and outputs. The differences are: inputs are economic events and there are users of information. The output of the cost management system produces user actions. Output can act as the basis for action or can confirm that actions already taken had the intended effects. Interrelated parts: Cost accounting personnel, computer, printer b.
Processes: Cost assignment: materials, labor, and overhead c. Objectives: Costing out of products d. Inputs: Direct materials, direct labor, depreciation, power and materials handling e. Outputs: Product cost report f. User actions: Submission of a bid, make-or-buy decision 2. The inputs consist of only production costs suggesting a traditional product cost definition.
Exercise 2. Direct tracing b. Allocation c. Direct tracing d. Direct tracing e. Driver tracing; potential driver—machine hours or maintenance hours f.
Direct tracing g. Direct tracing h. Rand Al-akam. Sushant Karnik. Sergio Hoffman. Shoniqua Johnson. Rahul Kadam. Naren Reddy. Anna Antonio. More From Nurul Meutia Salsabila. Nurul Meutia Salsabila. Violenta Mega. Popular in Economy. Daniel Obasi. Rohith Thatchan. Martoni Saliendra. Muthusamy Senthilkumaar. Anyone Someone.
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