Unit 2 Flashcards
(34 cards)
Costing Methods
MA Chapt 6
What is Process Costing
Uniform, homogenous production process
For production of stock
Process costing - steps
- Compute units to be accounted for
- Compute output in terms of EU
- Compute cost to account for
- Compute cost per EU
- Assign total cost to unit completed and in ending WIP (steps 2 &4)
Formula for EU produced
Units transferred out
+
Units completed
+
EU in ending WIP
Formula forDM cost per EU
Total DM cost
:/:
( units finished + EU of DM in WIP)
Formula for conversion cost per EU
Total Conversion cost (CC)
:/:
( units finished + EU of CC in WIP)
What is job costing
- Intermittent production
- Heterogenous / customized production
- Production on demand
How is normal spoilage treated in job Vs process costing
Job
- Charged to OH unless it is job related then add to job cost
- Remove from WIP inventory and add to relevant M. ohd
Process
- Included in costs transferred out
- It increases the cost of good units units
How is abnormal spoilage treated in job Vs process costing
Job
- Expense as period cost. If job related, add to job cost
- Spoliage cost is removed from WIP inventory and added to loss account
Process
- Expense as period cost
- Spoliage cost is removed from WIP inventory and added to loss account related to the process
Difference between Variable Costing and Absorption Costing
- Variable costing uses only the variable elements:
- Absorption costing includes fixed OH per unit to the variable costs above
What are the steps in Activity Based Costing
- Identify the cost objectives ( prdt, service, customer)
- Identify the cost driver ( machine hrs, lab hrs, units produced)
- Assign indirect costs to cost pools
- Calculate activity rate
- Assign indirect costs to cost objectives
Traditional Vs ABC
Traditional Cost Allocation
- Allocates cost to products using predetermined rate based on a single cost driver
- Simple to calculate and apply
- Not accurate when more costs are included in the overhead that are not related to the cost driver
- Uses budgeted ohd to determine allocation rate. When the actual activity level changes it distorts the cost
- Allocates only manufacturing cost
Traditional Vs ABC
Activity Based Costing
Allocates costs to products by defining different cost pools and assigning driving to each based on how the pool is created
- Gives more accurate representation of costs
- Easy to identify and eliminate non value added services
- Aids performance evaluation
What are joint products
Products that share one or more production processesand incur costs that cannot be traced to a single product or process
Methods of allocating joint costs of products
- Physical Output - Based on physical measures such as weight,count, length
- Sales value at split-off - Relative value at split-off point
- Net Realizable Value - Based on relative total NRV. NRV for each product is calculated as final SP less separate related cost
- Constant gross margin% of NRV - Gross margin % of all products are the same
Methods of allocating joint costs of services
- Direct - Allocated to operating depts based on an allocation base (eg lab hrs) without considering allocation from service depts
- Step down - Allocation to both service and operating depts starting with the service dept that provides the most service
- Reciprocal - Allocated simulteanously to all depts from both service and operating depts
Transfer Pricing
MA Chapt 17-18
What are relevant factors in short term TP
- Opportunity cost
- Incremental costs
- Decision maker’s bias
Pros & Cons of common domestic TP - Cost Based TP
Pros
- Simple
- Easily calculated using available accounting data
Cons
- May encourage decisions that do not benefit the org as a whole
- Distribution of the profit may be unfair to the buyer or seller
- May encourage inefficiencies
Pros & Cons of common domestic TP - Market based TP
- Simple if external markets are readily available
- If selling div is operating at full capacity, it will encourage a price that is beneficial to the organizartion as a whole
Cons - External markets may not be readily available
- Sub optimal decsions may be made by seller and or buyer if seller has excess capacity
Pros & Cons of common domestic TP - Negotiated TP
Pros
- Divs have independence and control
- Foster relationships btw divs
- TP usually benefits whole org
Con
- Price determined by each div’s negotiating skills
- Time consuming
What are the International TP methods
- Cost plus
- Marking up the fixed and variable costs - Profit split
- It is calculated so that profit is split between the buying & selling divs - Comparable uncontrolled price
- It is sales between manufacturing div and external customer. It is uncontrolled because they are not related parties
Governance Structure
Chapt 3-4
For Profit - Roles of main parties in governance
- Shareholders
- Electing BODs . By voting.
