chapter 4 traditional cost management systems

Management AccountingManagement Accounting

Department of Accounting

Chapter 4

Traditional Cost Management Systems



Chapter 4 objectives:1. To be able to understand job order costing systems2. To be able to understand how using job bid sheets is effective for estimating

product costs in a job order costing system3. To be able to use cost driver rates to apply support activity costs to products4. To be able to discuss why cost systems with multiple cost driver rates give

different cost estimates than cost systems with a single rate5. To be able to evaluate a cost system to understand whether it is likely to distort

product costs, explain the importance of recording actual costs, and compare them with estimated costs

6. To be able to appreciate the importance of conversion costs and the measurement of costs in multistage continuous-processing industries

7. To be able to understand the significance of differences between job order costing and multistage-process costing systems

8. To be able to understand the two-stage allocation process and service department allocation methods



Cost Management Systems

Traditional tools:

Job order costing systems: A process that estimates the costs of manufacturing products for different jobs required for specific customers

Process costing systems: A costing method that computes and allocates an equal amount of cost to each product

Recently developed tool:

Activity-Based-Costing (ABC): A system based on activites that links organizational spending on resources to the products and services produced and delivered to customers



Job Order Costing and Cost Flow Model

Inventories in a manufacturing company

• Raw materials inventory• Work-in-process• Finished goods inventory



Job Order Costing and TerminologyJob bid sheet: Format for estimating job costs

Job cost sheet: Same as a job bid sheet except that the direct materials and direct labor costs on the job cost sheet represent actual costs incurred on the job

Cost driver rate: activity expense_______________ total quantity of activity cost driver

Job costs: Expenses involved with the direct material, direct labor and support costs for a job

Margin: An additional amount added to job costs in order to make a profit

Bid price: Equals the total job costs plus the markup (margin)

Markup rate: The percent by which job costs are marked up

Rate of return: Ration of net income to investment

Full absorption costing: A costing method in which alle production costs become product costs

Variable costing: A costing method in which only flexible costs are included product costs



Job Order Costing, monitoring and follow-upMelissa’s Auto Service CompanyIntroduction, page 113Exhibit 4-3, page 120Exhibit 4-4, page 121Exhibit 4-5, page 122Exhibit 4-6, page 123Exhibit 4-7, page 123

Famous Flange CompanyExhibit 4-1, page 115Exhibit 4-2, page 119Exhibit 4-9, page 126Exhibit 4-10, page 126Exhibit 4-11, page 127



Job Order Costing and Markup

Markup, among other things, depends of:

• The amount of costs excluded from the cost driver rate• Target ”rate of return”• Competitive intensity• Past bidding strategies adopted by key competitors• Demand conditions• Overall product-market strategies

Depending upon conditions, markup rates may differ for different product groups and/or for different market segments.



Job Order Costing and Cost Drivers

Cost driver rate: activity expense_______________ total quantity of activity cost driver

Cost pool: Each subset of total support costs that can be associated with a distinct cost driver

• Discussing fluctuating cost driver rates (exhibit 4-2)

• Discussing how many cost driver rates • Discussing how many cost pools (exhibit 4-8)



Job Order Costing and Actual Job Costs

• Registrations

• Implications

• Monitoring

• Action



Multistage Process Costing Systems

• Homogeneous manufacturing of products.

• Cost are measured only for process stages, and cost variances are determined only at the level of the process stages instead of at the level of individual jobs.

• Using conversion costs = costs to convert the materials or product at each stage.



Multistage Process Costing Systems

Calcut Chemical Company •Exhibit 4-13•Exhibit 4-14•Exhibit 4-15



Two-Stage Cost Allocations

Direct Allocation Method

Stage 1 Assignment of costs accumulated in the service department directlyto the production departments or activities.

Stage 2 Assignment of costs accumulated in production departments and activities to individual products.




Direct Allocation Method - Distortions

Risk of distortions in two-stage allocations typically are:

Allocations based on unit-related measures Differences in relative consumption ratios




Sequential Allocation Method

Allocates service departments costs to production departments and other service departments in a sequential order.




Reciprocal Allocation Method

Allocates service departments costs to production departments and other service departments in a reciprocal order.

Needs to be resolved by developing two or more equations.

chapter 4 traditional cost management systems

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