Professional Documents
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Advanced Managerial
Accounting
CHAPTER
4
Accumulating and Assigning
Costs to Products
Learning Objectives
Manufacturing Organizations
Classify costs into three groups
1.direct materials, (from raw materials inventory),
2.direct labor, and
3.manufacturing overhead (machine time, factory
supplies).
These costs accumulate in work in process
inventory and are transferred to finished goods
when completed and to cost of goods sold when
the product is sold.
Retail Organizations
Retail organizations enter the cost of purchases into an
account that accumulates the cost of merchandise
inventory (approx. 80% of total cost).
Also important is the subsequent allocation of overhead
costs; (labor, depreciation, lighting, heating, etc.).
Costing attention focuses on how to allocate various
overhead costs to determine the cost of purchasing and
selling products, or department costs.
Service Organizations
Service organizations have employee pay as their
major cost item (approx. 80%). The focus here is to
determine the cost of a project.
Cost Classification
Cost Classification
Indirect costs Most capacity-related
costs are indirect costs; (depreciation
on production equipment, rent of
warehouse).
Indirect costs are accumulated in an
indirect cost pool.
An appropriate portion of the indirect
cost is allocated from the cost pool to
the cost object.
In summary, the costs of consumable
resources are variable costs and almost
all variable costs are direct costs.
The costs of capacity resources are
fixed costs and almost all fixed costs
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are indirect costs.
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$14,000,000.
Consider the labor hours as the cost driver.
The factory's practical capacity expressed in labor hours
is 250,000hrs.
The predetermined indirect cost rate = $56
(14,000,000/250,000) per direct labor hour.
Therefore for every labor hour used in the factory to
produce the product, $56 of indirect cost will be
applied to the product.
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Exercise 4-29
Mackenzie Consulting computes the cost of
each consulting engagement by adding a
portion of firm wide overhead costs to the
labor cost of the consultants on the
engagement. The overhead costs are
assigned to each consulting engagement
using a cost driver rate based on consultant
labor costs. Mackenzie Consulting overhead
costs are $7,500,000 per year, and total
consultants labor cost is estimated at
$250,000 per month.
Required
(a) What is Mackenzie Consulting cost driver
rate?
(b) If the consultant labor cost on an
engagement is $100,000, what cost will 2727
Exercise 4-30
The Brinker Company uses a job order costing system at its local
plant. The plant has a machining department and a finishing
department. The company uses machine hours to allocate
machining department overhead costs to jobs and uses direct
labor cost to allocate finishing department overhead costs to jobs.
Cost and practical capacity estimates for the current year are as
follows:
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Process Costing
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-EXERCISES-
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Exercise 4-31
Eastern Wood Products has two production departments:
cutting and assembly. The company has been using a
plantwide cost driver rate computed by dividing plantwide
overhead costs by total plantwide direct labor hours. The
estimates for overhead costs and practical capacity
quantities of cost drivers for the current year follow:
Cuttin
g
Manufacturing
overhead
Assem
bly
$40,00 $60,000
0
Total
$100,0
00
2,000
6,000
8,000
Machine hours
4,000
3,000
7,000
Required
(a) Compute the plantwide cost driver rate.
(b)Determine departmental cost driver rates based on
direct labor hours for assembly and machine hours for
cutting.
(c) Provide reasons why Eastern Wood might use the
method in part a or the one in part b.
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