...------------------------------------------------- Management accounting Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. In contrast to financial accountancy information, management accounting information is: * primarily forward-looking, instead of historical * model based with a degree of abstraction to support decision making generically, instead of case based; * designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators; * usually confidential and used by management, instead of publicly reported; * computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards. Management Accounting Processes * Managerial accounting processes are tools and procedures that a company relies on to rein in waste and run efficient operations. Without adequate mechanisms, the firm may be unable to shoulder the financial burdens inherent in business activities. Operating expenses include interest, salaries, taxes and materials costs. Accountants use the terms "management accounting," "cost accounting" and "managerial accounting" identically...
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...Manufacturing Overhead Costs Allocation The report provided will assist you with selecting an allocation base to assign your budgeted manufacturing overhead costs of producing the two camera boxes the company manufactures. The report also addresses the questions and concerns you had regarding the allocation bases. First, the predetermined overhead rate is computed. The predetermined overhead rate is used to charge overhead costs to products or jobs. This rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period. Based on the information you provided, your estimated manufacturing overhead costs will be $171,400. The most common allocation bases are machine hours, direct labor hours and direct labor costs. The predetermined overhead rates for each allocation base are as follows: Predetermined overhead based on L&L’s machine hours used 171,400/6,000 = 28.5667 Predetermined overhead based on L&L‘s direct labor hours used 171,400/5,000 = 34.28 Predetermined overhead based on L&L’s direct labor costs 171,400/100,000 = 1.714 Selecting an allocation base is arbitrary. The decision is based on your own judgment or preference. My advice is to use direct labor hours as the allocation base. The direct labor hours indicates the amount of time and effort utilized in manufacturing each product. For each hour used to make an individual product the appropriate amount...
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...produced | 1,000 | 1,000 | 1,000 | 1,000 | | Material | $15.00 | $ 5.00 | $10.00 | $ 5.00 | | + Labor | 30.00 | 5.00 | 15.00 | 10.00 | | +Variable OH | 15.00 | 7.50 | 5.00 | 7.50 | | = Total var. cost | $60.00 | $17.50 | $30.00 | $22.50 | | + Fixed overhead | $10,000 | $10,000 | $12,500 | $12,500 | | = Unit cost | $70.00 | $27.50 | $42.50 | $35.00 | | Selling price | $98.00 | $38.50 | $59.50 | $49.00 | | Unit Profit | $28.00 | $11.00 | $17.00 | $14.00 | | Mark-on | 40% | 40% | 40% | 40% | | Total Profit | $28,000 | $11,000 | $17,000 | $14,000 | $70,000 | The overhead rate for the year is determined by adding together the budgeted variable and fixed overhead costs and dividing this sum by the number of budgeted labor hours. The standard cost of a product is found by multiplying the number of direct labor hours required to manufacture that product by the overhead rate and adding this quantity to the direct labor and material costs. Under this allocation method the allocation rate is: Budgeted variable overhead | $35,000 | Budgeted fixed overhead | 45,000 | Budgeted total overhead costs | $80,000 | Budgeted labor hours | 12,000 | Allocation rate per hour | $6.67 | Arnold then calculated the mark-on for the four products using the standard cost for each product based on allocating the overhead costs using direct labor hours. PRODUCT | A | B | C | D | Selling price | $98.00 | $38.50 | $59.50 | $49.00 | Unit cost...
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...of products for each product with the selling price. We now have total revenues per product which we can use later for performing the profitability analysis of the firm. Under a traditional absorption cost system the costs are allocated to the products by determining direct costs and an allocation base for determining how to allocate overhead costs for each product. In the case of Salewa there are two direct costs, direct labor and direct materials. The allocation base for allocating the overhead will be machine hours and direct labor hours. Cost per product = Cost of direct Materials + Cost of direct Labor + Allocated Overhead Direct materials To calculate the cost of direct materials we multiplied the total production per product with all the costs of direct materials per product and summed them up. Eventually we had for each of the four products the total amount of direct material cost. Direct Labor To calculate the total direct labor costs we first started with calculating the cost for high and low skilled employees per hour. We did this by dividing the quarterly salary per employee with the amount of labor hours per quarter per employee. For calculating total direct hours per product we used fractions because there is a difference in speed between high- and low skilled employees. Because...
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...unable to explain the apparent high cost of producing some of the products. Harrison agreed with his production manager and is convinced that the cost accounting system is at fault. He has hired Tom Arnold, a management consultant, to analyze the firm's costing system. Arnold has documented the existing costing system. It is a very simple system that uses a single allocation rate for all overhead costs. The overhead rate for the year is determined by adding together the budgeted variable and fixed overhead costs and dividing this sum by the number of budgeted labor hours. The standard cost of a product is found by multiplying the number of direct labor hours required to manufacture that product by the overhead rate and adding this quantity to the direct labor and material costs. Arnold is convinced that the company's costing system is partially to blame for some of the firm's problems. He has assembled data for four of Premier's products. He has put together the actual costs required for each of these products in Table A. These costs will serve as the benchmark against which the results of different allocation schemes can be evaluated. Of course, in real life we could never start out with accurate actual costs - accurate actual costs would be the end result that we would attempt to determine. But we provide this information as a learning aid to help you to clearly...
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...4-14. Traditional vs. ABC The following cost information is available for Senkowski, Ltd.: Activity | Allocation Base | Volume of Activity | Overhead Cost | Purchasing | Purchase orders | 30,000 | $150,000 | Receiving | Shipments received | 15,000 | 60,000 | Machine setups | Setups | 2,500 | 200,000 | Quality control | Inspections | 18,000 | 90,000 | Direct materials are $15 per unit for luxury handbags and $11 per unit for deluxe handbags. There were 12,500 direct labor hours, each of which was charged to inventory at $18 per hour. Required A. Management is trying to decide between using the traditional allocation method based on direct labor hours and using activity-based costing. Calculate the overhead rates for each method. B. One particular batch of 40 luxury handbags had the following specifications: Direct labor hours | 8 | Purchase orders | 4 | Shipments received | 3 | Setups | 2 | Inspections | 12 | Calculate the overhead to be allocated to the bags under the traditional and activity-based costing techniques. C. Which costing method do you think is better for the company? Why? 4-14 (LO2, 3, and 4—Traditional versus ABC) A. Traditional allocation: The overhead rate based on direct labor hours is $40.00 per direct labor hour ($500,000 total overhead ÷ 12,500 direct labor hours). ABC allocation: The overhead rate for each activity is as follows: Purchasing: | $150,000 ÷ 30,000 = $5.00 per purchase order | ...
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...Budgeted cost per package – Original costing system Using the original costing system that used total direct labor hours as the indirect cost allocation base, the total projected indirect costs will be allocated by first determining the allocation rate. Since we will be producing 10,000 packages of headless shrimps at 0.01 labor hours per package, the total number of hours worked would be 10,000 x 0.01 = 100 hours. Similarly, for the 50,000 packages of peeled and deveined shrimp, 50,000 x 0.05 = 2,500 hours would be worked. Therefore a total of 100 + 2,500 = 2,600 hours would be worked to complete the production. The indirect cost allocation rate will be $ 40,125 / 2,600 or $ 15.43 per hour worked. Indirect costs are then allocated as below: | Headless Shrimp | Peeled and Deveined Shrimp | Production estimates | 10,000 packages | 50,000 packages | Labor hours | 0.01 hour/package x 10,000 = 100 hours | 0.05 hour/package x 50,000 = 2,500 hours | Indirect cost allocated | $ 15.43 x 100 = $ 1,543 | $ 15.43 x 2,500 = $ 38,582 | Indirect cost per package | $ 0.154 | $ 0.772 | Next, we calculate the direct costs as follows: | Headless Shrimp | Peeled and Deveined Shrimp | Shrimp | $ 3.5 | $ 4.5 | Foam trays | $ 0.05 | $ 0.05 | Shrink wrap | $ 0.05 | $ 0.02 | Direct labor hours | 0.01 hour | 0.05 hour | Direct labor cost | 0.01 hour x $ 20 = $ 0.2 | 0.05 hour x $ 20 = $ 1 | Direct cost per package | $ 3.8 | $ 5.57 | Lastly, to calculate the total cost per package...
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...are all costs that are not directly related to the production of the good to be sold. These include administrative salaries, the costs of the building or machinery, commissions to salespeople, and many other items. EX>>>An overall overhead rate can be calculated by dividing overhead (indirect) costs -- for example, rent and utilities -- by direct costs -- for example, labor. If your overhead costs are $30,000 and direct costs are $60,000, your overhead rate is .50. If the typical overhead rate for companies in your industry is 1.3, and your rate is .50, you have a competitive advantage with your lower overhead (30000/60000 = .5 = 50%). EX>>>>if annual overhead costs are $600,000 and you operate the plant 300 days a year, your average overhead costs are $2,000 a day ($600,000/300= 200% ). The overhead rate is the total of indirect costs (known as overhead) for a specific reporting period, divided by an allocation measure. The cost of overhead can be comprised of either actual costs or budgeted costs. There are a wide range of possible allocation measures, such as direct labor hours, machine time, or square footage used. A company uses the overhead rate to allocate its indirect costs to products or projects, so that it can price them appropriately to cover all of its costs and thereby generate a long-term profit. If the overhead rate is not included in the cost of a product, then there is a risk that the company will significantly underprice its products...
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...ch05.qxd 9/27/04 4:19 PM Page 174 CHAPTER Q1 Q2 Q3 Q4 Q5 Q6 Job Costing In Brief Custom products and services, which are produced singly or in small batches, need to be valued for financial statements, tax reporting, and management monitoring. Job costing is an accounting method used to assign product costs to custom products or services. In job costing, direct costs are traced and overhead costs are allocated to individual jobs. Sometimes defects occur in custom products. Defective units can sometimes be reworked. The costs for both spoilage and rework need to be accounted for, as does the cost of scrap that arises from production. This Chapter Addresses the Following Questions: How are costs assigned to customized goods and services? How is overhead allocated to individual jobs? What is the difference between actual costing and normal costing? What are the uses and limitations of job cost information? How are spoilage, rework, and scrap handled in job costing? What are the quality and behavioral implications of spoilage? ch05.qxd 9/27/04 4:19 PM Page 175 BOMBARDIER: CUSTOM MANUFACTURING n 1942, the Canadian company L’AutoNeige Bombardier Limitée began manufacturing tracked vehicles for snow-covered terrain. These vehicles were early models of what later became snowmobiles. In English, L’Auto-Neige means snow car. Over time, the company developed expertise in building engines and expanded into other markets such as personal watercraft, aircraft, subway cars, buses...
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... | QUESTIONS 4-1 The cost of the raw materials entered into production is moved from the raw materials account to the work-in-process inventory account. The cost of manufacturing labor and overhead items are assigned to production by adding them to the work-in-process inventory account. Overhead costs are assigned (or allocated or apportioned) as determined by the cost system. When manufacturing is completed, work is transferred to finished goods inventory, and costs are moved from the work-in-process inventory account to the finished goods inventory account. Finally, when goods are sold their costs are moved from the finished goods inventory account to cost of goods sold. 4-2 Manufacturing organizations face greater challenges in product costing, especially the assignment of overhead costs, than retail or service organizations do. The basic idea behind all manufacturing costing systems is to determine the costs that products accumulate as they consume organization resources during manufacturing, as described above in 4-1. In retail organizations, goods are purchased rather than manufactured; the cost of the goods purchased is entered into an account that accumulates the cost of merchandise inventory in the store. Stores incur various overhead costs such as labor, depreciation on the store, lighting, and heating. The primary focus in retail operations is the profitability of product lines or departments. Therefore, retail organizations, like manufacturing...
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...Manufacturing Case Study Holly Manufacturing Company produces two cello models. One is a standard acoustic cello that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified cello with pearl inlays and a body constructed from special woods. The custom cello sells for $900. Both cellos require 10 hours of direct labor to produce, but the custom cello is manufactured by more experienced workers who are paid at a higher rate. Most of Holly’s sales come from the standard cello, but sales of the custom model have been growing. Following is the company’s sales, production, and cost information for last year: Cello Standard Custom Sales and production volume in units 900 100 Unit Selling Price $600.00 $900.00 Unit costs: Direct materials $150.00 $375.00 Direct labor $180.00 $240.00 Manufacturing overhead* $135.00 $135.00 Total unit costs $465.00 $750.00 Unit Gross Profit $135.00 $150.00 Direct Labor Hours 10.00 10.00 Direct Labor Rate Per Hour $18.00 $24.00 * Manufacturing overhead costs: Building depreciation $ 40,000 Maintenance 15,000 Purchasing 20,000 Inspection 12,000 Indirect materials 15,000 Supervision 30,000 Supplies 3,000 Total manufacturing overhead costs $135,000 Selling and Administrative...
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...workstation, we only need to allocate the rent and other indirect costs to the five workstations. In stage two, we have to assign the overhead cost of each workstation to each job base on the labor hours that each job consumed. Table 1: Stage One: The total overhead allocation to different workstations Job Preparation Scanning Assembly Output Quality Control Idle Total Wages $ 8,000 $ 32,000 $ 64,000 $ 10,000 $ 11,000 $ 125,000 Depreciate 500 25,000 $ 10,000 14,000 500 50,000 Rent 2,000 2,000 8,000 4,000 1,000 13,000 30,000 Others 1,311.5 5,246 10,492 1,639 1,311.5 20,000 Total Overhead 11,811.5 64,246 92,492 29,639 13,811.5 13,000 225,000 Allocation rate $ 73.82 $ 100.38 $ 72.26 $ 148.20 $ 86.32 In table 1, we allocate the total overhead costs to different workstations. Because the labor hours of each workstation are available in this case, we can use the labor hours as the cost drive to assign the overhead of each workstation to each job. The overhead cost per labor hour is the rate that we use to allocate the indirect cost. Table 2: Stage two: Overhead costs assignment to Job 61001 Job 61001 Job Preparation Scanning Assembly Output Quality Control Total Labor hours 4 32 42 8 7 93 Overhead costs $ 295 $ 3,212 $ 3,035 $ 1,186 $ 604 $ 8,332 In the table 2, we use the labor hours consumed in Job 61001 to compute the overhead cost that assigned to this cost object. The...
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...CHAPTER 4 JOB COSTING TRUE/FALSE 1. Direct costs are allocated to the cost object using a cost-allocation method. Answer: False Difficulty: 1 Objective: 1 Terms to Learn: cost-allocation base Indirect costs are allocated to the cost object using a cost-allocation method. 2. Quality control costs may be a direct cost of the Manufacturing Department, but an indirect cost of an individual job. Answer: True Difficulty: 2 Objective: 1 Terms to Learn: job 3. Cost objects may be jobs, products, or customers. Answer: True Difficulty: 1 Objective: 1 Terms to Learn: job 4. The cost driver of an indirect cost is often used as the cost-allocation base. Answer: True Difficulty: 1 Objective: 1 Terms to Learn: cost-allocation base 5. A company may use job costing to assign costs to different product lines and then use process costing to calculate unit costs within each product line. Answer: True Difficulty: 2 Objective: 2 Terms to Learn: job-costing system, process-costing system 6. Job costing is commonly used to estimate costs in beverage production. Answer: False Difficulty: 1 Objective: 2 Terms to Learn: job-costing system, process-costing system Process costing is commonly used to estimate costs in beverage production. 7. In a job-costing system the cost object is an individual unit, batch, or lot of a distinct product or service. Answer: True Difficulty: 1 Objective:...
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...PROBLEMS P 7-5: Massey Electronics a. The following table presents the allocation of the $9.5 million of shared manufacturing overhead using the four proposed schemes. Direct labor hours Direct labor dollars Direct material dollars Square footage Allocated overhead based on: Direct labor hours Direct labor dollars Direct material dollars Square footage of plant b. Texas 3,000,000 $60,000,000 $180,000,000 200,000 Mexico 4,000,000 $40,000,000 $200,000,000 300,000 Total 7,000,000 $100,000,000 $380,000,000 500,000 $4,085,000 5,700,000 4,465,000 3,800,000 $5,415,000 3,800,000 5,035,000 5,700,000 % Texas 43.0% 60.0% 47.0% 40.0% $9,500,000 9,500,000 9,500,000 9,500,000 Questions involving how to allocate costs involve what input base to tax, and hence how the choice of the taxing scheme affects the firm’s cash flows. Since Massey has tax loss carry forwards, the allocation of the $9.5 million manufacturing overhead does not affect taxes, which is usually an important cash flow stream to consider. The four allocation methods create significant differences in the dollars allocated to the two plants. In fact, the Texas and Mexico plants allocations vary by up to $1.9 million, depending on which method is used. Since the lines of business end up paying for these allocated costs through higher full cost-based transfer prices, the choice of allocation method could prove economically important if the lines of business change...
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...CHAPTER 4 JOB COSTING 4-1 Cost pool––a grouping of individual cost items. Cost tracing––the assigning of direct costs to the chosen cost object. Cost allocation––the assigning of indirect costs to the chosen cost object. Cost-allocation base––a factor that links in a systematic way an indirect cost or group of indirect costs to a cost object. 4-2 In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units. 4-3 An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account withdrawals is similar for many customers. Here, process costing can be used to compute the cost of each checking account withdrawal. 4-4 The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned...
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