What type of business uses process costing
Mass production companies such as Jelly beans
Managers need to understand product costs so they can:
-Control costs
-set prices
-identify their most profitable products
Process Costing
Helps Mass manufactures determine the unit costs of their products and determine the cost of each manufacturing cost
-Used to track costs of similar products through the manufacturing process (Jelly Beans, toilet paper, potato chips)
-Track cost by proces
Job Ordering Costing
Track cost of unique jobs or customer orders
****Job costs sheet to track direct materials, direct labor, and manufacturing overhead
-Calculate a uit cost per job
-used band T-Shirt example
Difference between job order costing and process costing
Job Order
1. Many different jobs are worked during different periods
2. Costs are accumulated by individual jobs
3. Job cost sheet is the key document controlling the accumulation of costs by a job
4. Unit costs are computed by the job on the job cost she
Managers would use the total per unit cost to help them determine a
selling price for the product
-Total unit cost will be used to value finished goods inventory (Total # of units inventory X Per Unit Cost)
-Total unit cost will also be used to compute costs of goods sold (Total # of Units sold X Per Unit Cost)
Trace the flow of materials, labor and overhead costs
-Materials(Raw materials) and conversion cost (Direct labor. manufacturing overhead)
-Manufacturing Cost assigned to the product should follow the physical flow of the product
-Calculate number of units transferred out
-Calculate number of units in ending
Journal Entries in process costing
Debit Credit
-Material Cost
*WIP(Formulating) XXX
Raw Materials XXX
*WIP (Bottling) XXX
Raw Materials XXX
-Labor Cost
*WIP (formulating) XXX
Salaries and Wages Payable XXX
-Overhead Cost
*WIP( formulating) XXX
Manufacturing overhead XXX
(predetermined ove
Equivalent Units=
Number of partially completed units X Percentage completion
Process Costing Fifo-Method (First In- First Out)
Units transferred to the department will come first from beginning WIP then new items started
-allows managers to evaluate current performance on costs of the current period (separate calculation made for each cost category in each processing department)
Fifo Calculations
*compute equivalent units of production= Equivalent Units to complete beginning WIP inventory+ Units started and completed during the period+ Equivalent Units in ending WIP
*alternate method to compute equivalent units of production= Equivalent Units tran
Service Department allocations
**Definition- Cost of service departments that support production are included in overhead and allocated to product costs
(Service departments do not directly engage in operating activities)-ex(Cafeteria, accounting division, human resources)
**Direct Met
Operating Departments
Carries out the central purpose of the organization (production department of manufacturer)
-In process costing, all processing departments are operating departments
****Contribution margin format income statement
Sales
-Variable expenses
=Contribution MArgin
-Fixed Expenses
=Net Operating Income
CVP Graph
-Linear Relationship between sales and expenses in the relevant range
-all cost can be classified or broken down into fixed and variable
-one product or a constant product mix
-inventories do not change significantly from period to period
-volume is the o
Incremental analysis
Focus only on the cost and revenues that change as a result of a decision (EX. putting more money into advertising to increase sales)
-compare the change in expected revenue to the change in expected expenses to determine if there is a positive or negativ
Break-even point
Level of Sales at which the profit is 0
-CM must = Fixed Expenses
-Net Operating Income=0
***Profit=(Unit cm) X (quantity) - (Fixed Expenses)
**** Set the profit = 0 and solve for quantity. Then take the quantity X unit sales price to find the total sales
Target Profit analysis
Target Profit= (Unit CM) X (quantity) - (fixed expenses)
Operating Leverage
At a given level of sales
**** Degree of operating leverage = ( Contribution Margin) / (net operating Income)
Measure of how sensitive net operating income is to a given percentage change
-related to the relative amount of fixed and variable costs that ma
High Operating Leverage companies
-higher levels of fixed costs, lower levels of variable costs
-High contribution margin ratios
-higher risk and higher potential reward
Examples( golf courses, theme parks, airlines, cruise ships, hotels)
-lots of fixed assets in common
Low Operating Leverage Companies
Fewer fixed cost, more variable cost
-lower contribution margins
-less risk of incurring a loss and lower potential reward
Examples (Merchandising Companies and fast-food restaurants)
Margin of Safety
Margin of Safety in dollars = (actual sales) - (Break-even Sales)
Margin of Safety % = (margin of safety in dollars) / (or actual sales)
***** When expressed as a % the higher the percentage the less risk of loss
-the amount by which sales can drop before
Cost Structure
The relative proportion of fixed and variable cost in an organization
-As sales increase
Variable cost increase
Fixed Cost stay the same
***** if sales increase you would rather have a larger percentage of fixed costs
-As sales Decrease
Variable cost decr
Sales Mix
is the relative proportion in which a company's products are sold
***Company earns more profit by selling high-contribution margin products than by selling an equal number of low-contribution margin incomes
-Different products have different selling price
Sales Mix Example
Lets assume racing bicycles company sells bikes and carts and that the sales mix between the two products remains the same
***Sales mix and the break-even point
-To calculate prepare CM income statement for each product and then the total of each product
profit formula and its equivalents
profit=(Sales)-(Variable Cost)-(Fixed Cost)
profit=[Unit Sales Price (P) X quantity (Q)] - [Unit variable cost (V) X quantity (Q)] - (fixed expenses)
profit=(P x Q) - (V x Q) - (Fixed expenses)
Compute contribution margin
CM= CM ratio x Sales
CM ratio = CM/ Sales
Variable expense Ratio = Variable expenses / Sales
Compute unit contribution margin
CM / number of units sold
for each additional unit that company sells then more will be added in contribution margin will be available to break-even
Activity Bases Costing (ABC)
Cost objects generate Activities which consumer resources at cost
-Used for internal decision making and for managing activities
- direct materials and direct labor are not affected
***WHY USE ABC COSTING
-Generates a more accurate product cost
-helps man
Activity Based Costing VS. Traditional Costing
- Only assigns manufacturing overhead consumed by the product
- Uses non-volume related allocation resources
-Directly traces shipping costs to the product. other non manufacturing costs caused by the product are assigned to the product
Five Levels of Activity
-Unit level activities= activity performed each time a unit is produced
* (cost of packaging each unit is dependent on the number of units produced)
-Batch level activities= Activity performed each time a batch is handled of processed no matter how many u
Activity Measures
Transaction Drivers-simple count of the number of times an activity occurs ( number of customer orders)
Duration Drivers-measures the amount of time required to perform an activity ( number of machine hours used)
Steps for Implementing ABC
1. Define activities, activity cost pools and activity measures
-Interview employees and mangers who work in overhead areas (OH, Selling and Administration) and have them describe their major activities
-Combine similar activities and group them in the sa
ABC and External Reporting
Most companies do not use ABC for external reporting because
-External reports are less detailed than internal reports
-It many be difficult to make changes to the company's accounting system
-**ABC does not conform to GAAP
-auditors may be suspect of the
ABC limitations
-Substantial resources required to implement and maintain
-Desire to fully allocate all costs to products
-Resistance to unfamiliar numbers and reports
-Potential misinterpretation of unfamiliar numbers
-Does not conform to GAAP. Two costing systems may b
Compare product margins using traditional cost methods to ABC
a