a&mis 2121w. f. bentz a&mis 212 – session 2 william f. bentz january 10, 2002 fisher...
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A&MIS 212 1W. F. Bentz
A&MIS 212 – Session 2
William F. BentzJanuary 10, 2002
Fisher College of Business
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Thursday’ Agenda
Chapter 2, Exercise 3Chapter 2, Problem 13Introduce Job-Order Costing Systems
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Key Issues in Product Costing
TerminologyPoints of potential confusion Accounts
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Concept of “Cost”
Cost is a sacrifice; a measurable cost is the relinquishment of a measurable asset or the creation of a measurable liability.
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GAAP Product Cost
For Work-in-Process and Finished Goods inventory purposes (GAAP), only manufacturing costs are included in “product” costs. Product costs remain in inventory until the associated product are sold or decline in value. When the associated products are sold, the “product cost” is added to Cost of Goods Sold.
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Meanings of Product Cost
R&D DesignProduc-
tionConsumer
ServiceDistri-bution
Market-ing
Inventoriable product costs
Reimbursable government
contract costs
Decision-relevant costs
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GAAP Expenses (Period Costs)
Costs are incurred for activities that do not directly create products, but support the creation of products. These costs are charged to expense accounts during the accounting period incurred and thus are called period expenses.
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GAAP Expenses--Examples
Administrative Expenses◈Corporate officers◈Corporate buildings◈Corporate costs like the annual audit fees◈Corporate costs like
Selling (Marketing) ExpensesDistribution Expenses
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Accounting-Speak
Costs Incurred
Period Expenses
Product Costs
(Inventory)
Expensed During a Period
Assets (Prepaids)
(PP&E)
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Concept—Service Potential
In accounting, service potential can be thought of as the present value of the cash flows from an activity, at some level of risk, or adjusted for risk.
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Concept—Cost
Actions that decrease the present value of cash outflows, at a given level of risk, are actions that decrease cost. Actions that increase the present value of future cash outflows, at a given level of risk, are actions that increase cost.
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Concept—Cost
Actions that increase the risk of future cash flows are actions that increase cost. Actions that decrease the risk of future cash flows are actions that decrease cost. and so on.
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Terminology—Costing
Costing is the process of estimating the cost (sacrifice) of taking action. Costs are the result of undertaking and maintaining activities. Thus, costing is largely a matter of assigning costs (sacrifices) with the activities which caused those sacrifices.
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Terminology—Cost Object
A cost object is any activity for which a separate measurement of cost is desired. An activity involves doing something
Cost objects are derived from the purposes for which the cost information is to be used (different costs for different purposes).
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Terminology—Costing Systems
Costing systems are the information systems used to accumulate cost data either regularly or intermittently. Usually cost systems are flexible enough to collect information for a variety of purposes.
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Terminology—Costing Systems
A variety of costing systems may exist in any one organization (engineering, accounting, production, distribution).
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Terminology—Cost Analysis
Cost analysis is the process of assessing the expected impact of managerial decisions on the financial performance of an entity. Decision analysis includes cost analysis.
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Terminology—Cost Incurred
Cost incurred is the cost that an entity has experienced as a result of the execution of some activity for a specified period of time. Although it is in the past, cost incurred may have to be estimated. Accurate, valid measures of cost incurred require information about separable activities.
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“Product Costs (GAAP)
Product (inventoriable) costs include all manufacturing costs regardless of traceability or behavior. • Direct materials• Direct labor• Indirect labor, materials, depreciation,
services, etc.
Conversion
Prime cost
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The Flow of Costs
Inventory System
Work in Process
Finished Goods
Inventory
Cost of Goods Sold
Payroll System
Indirect Costs
Assigned
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Costing Objects
Next, let us consider how one associates the costs incurred to a set of cost objects in the costing process.
Costs
Incurred
Object 1
Object 2
Object 3
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Cost Assignment
Tracing – direct costs can be traced to cost objects
1. Ability to trace with acceptable accuracy, validity, and cost• Technology is improving our ability to trace• The more complex the production process, the
more difficult and costly the tracing process
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Cost Assignment
Tracing (continued)2. Cost-effective to trace costs
• The greater the cost, the greater the value of tracing
• Technology is reducing the cost of tracing• The value of tracing increases with competition• More complex mfg. systems increase the need
to trace
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Cost Assignment
Cost allocation is the process of assigning costs to cost objects when those costs cannot be traced cost-effectively. Cost allocation ranges from relatively unambiguous,
with high face validity, to relatively arbitrary. Most distortions in product and service costing are
related to cost allocation, not cost tracing.
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Job-Costing
One costing system is called job-costing or job-order costing. Job-costing systems are designed to cost a single unit or project, or one or more batches of very similar units.
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Job-Costing Applications
Job-costing is suited to: Ship building Construction projects Printing shops with diverse jobs Medical procedures Repair shops Consulting projects
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Costing Jobs--Materials
When materials and component parts are taken out of inventory and put into process, the cost of those materials are traced to the job for which they were used. The total cost of all materials used in a period is debited to Work-in-Process. That debit amount must equal the total of the material costs charged to individual jobs.
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Costing Jobs--Labor
When the total cost of labor is determined each period, that cost is either traced to specific jobs or charged to indirect cost. Workers and their supervisors must have a system for keeping tract of who worked on what jobs.
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Costing Jobs—Indirect Costs
Indirect costs are allocated to jobs based on predetermined (budgeted) overhead (indirect manufacturing cost rates (PORs). In the least complex systems, there will be one POR. In more complex processes, there may be a number of cost drivers involved, and a corresponding POR for each cost driver.
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To cost a specific job
Trace the direct costs to each job For each job record the amount of the
driver activity for each BICR Multiply the BICR times the amount of
activity for each cost driver Add the cost components to compute the
total cost (inventory value) of each job
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The Flow of Costs
Adjustment
Indirect Costs
Allocated
Indirect Costs
Incurred
Cost of Goods Sold
Finished Goods
Inventory
Work in Process
Payroll System
Inventory System
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Inventory values
The cost of any job is the cumulative amount of the costs charged to that job in the current and previous periods. The cost accumulates until the job is completed. The costs incurred for long-term construction contracts, as discussed in A&MIS 521, would be accumulated using a job-cost system.
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Updating the costs of jobs
Direct materials would likely be accounted for using a perpetual inventory system
Direct labor costs would be updated every time a payroll is computed and at the end of every accounting period.
Indirect costs are charged to jobs at the end of every accounting period prior to completion and when they are finished.
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Refinements
One can keep track of categories of cost within a job. For example, a large construction company I once worked for kept track of the cost of; (1) concrete floors, (2) walls & piers, (3) electrical systems, (4) roofing, and (5) mechanical systems. The company used this information to price bids and to select subcontractors on the basis of costs.
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Problem Areas
A major consideration in the quality of the direct cost information lies in the tracing of costs to jobs. A potential problem occurs when workers are involved in several jobs each morning or afternoon and do not keep accurate time records.
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