Module 19 - Module 19 Additional Topics in Product Costing...

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Unformatted text preview: Module 19 Additional Topics in Product Costing ©Cambridge Business Publishers, 2009 Production and Service Department Costs Production Departments Service Departments Departments that actually perform the work on a product Departments which provide support services to production and/or other support departments ©Cambridge Business Publishers, 2009 Department Costs Direct Department Costs A cost assigned directly to a department when it is incurred For production departments, Includes both direct product costs and indirect product costs incurred directly in the department ©Cambridge Business Publishers, 2009 Indirect Department Costs A cost assigned to a department as a result of an indirect allocation, or reassignment from another department Service Department Costs Considered essential elements in the overall manufacturing process Provide support for Various production departments Other service departments Services provided by one service department to other service departments are called interdepartment services ©Cambridge Business Publishers, 2009 Allocating Service Department Costs Three common methods for allocating service department costs ©Cambridge Business Publishers, 2009 • • • Allocates all service department costs based only on the amount of services provided to the producing departments No cost allocations are made to other service departments Advantage – Direct Method • Disadvantage – Easy and convenient to use Does not recognize the interdepartmental costs to provide services of one department to another service department ©Cambridge Business Publishers, 2009 Flow of Costs ­ Direct Method No costs are allocated from one service department to another service department. Tech Support Payroll Service Service Departments Departments House­ keeping Producing Producing Departments Departments Roasting Packaging Product ©Cambridge Business Publishers, 2009 Product Product Jaguars Coffee has 2 producing departments­ roasting Jaguars Coffee has 2 producing departments­ roasting and packaging. Data concerning its 3 service departments follows: Department Tech support Payroll Housekeeping Service Functions Network and workstation control Timesheet verification and paychecks Cleaning Allocation Base Number of workstations Number of employees Number of square feet occupied Service Department Cost Allocation Example Management should select an equitable allocation base to allocate service department costs. ©Cambridge Business Publishers, 2009 Continued Jaguars Coffee cost and allocation base data: Service Department Cost Allocation Example Because costs will be allocated only to producing departments, only the allocation base data of those departments will be used. ©Cambridge Business Publishers, 2009 Continued Direct Method Example Allocation of tech support services Allocation = Service Department Cost × Number of workstations in dept. / Total workstations To Roasting = $19,000 × 12/20 = $11,400 To Packaging = $19,000 × 8/20 = $7,600 Tech support services are allocated based on the total workstations in the roasting and packaging departments, 12 and 8, respectively. ©Cambridge Business Publishers, 2009 Continued Direct Method Allocation Example continued Allocation of payroll services Allocation = Service Department Cost × Number of employees in dept. / Total employees To Roasting = $22,000 × 40/100 = $8,800 To Packaging = $22,000 × 60/100 = $13,200 Payroll services are allocated based on the total employees in the roasting and packaging departments, 40 and 60, respectively. ©Cambridge Business Publishers, 2009 Continued Direct Method Example cont. Allocation of housekeeping services Allocation = Service Department Cost × Number of square feet in dept. / total square feet To Roasting = $16,000 × 3,500/10,000 = $5,600 To Packaging = $16,000 × 6,500/10,000 = $10,400 Housekeeping services are allocated based on the total square footage in the roasting and packaging departments, 3,500 and 6,500, respectively. ©Cambridge Business Publishers, 2009 Continued Direct Method Example continued Technology Support Payroll Housekeeping Roasting Packaging Total Department costs before allocations Cost allocations: From tech support From payroll From housekeeping Department costs $ after allocations $19,000 $22,000 $16,000 $65,000 $44,000 $166,000 (19,000) (22,000) 0$ 0 $ 11,400 8,800 (16,000) 5,600 0 $90,800 7,600 13,200 10,400 $75,200 $166,000 All costs of service departments are allocated to the producing departments. ©Cambridge Business Publishers, 2009 Step Method Gives partial recognition of interdepartmental services by using a methodology that allocates the service department costs sequentially both to the remaining service departments and the producing departments All service department costs are ultimately assigned or reassigned to production departments Improves accuracy of service department cost allocations, when compared to the direct method ©Cambridge Business Publishers, 2009 Step Method Product ©Cambridge Business Publishers, 2009 Product Product Step Method First, determine which service department provides the largest proportion of interdepartmental services: Housekeeping provides the largest percentage of services to llocation Basis A other service departments. Allocation % of Departmental Services Provided 8.7% 4.3% 13.0% Tech support to payroll Number workstations 2/23 Tech support to housekeeping Number of workstations 1/23 Tech support to interdepartments Payroll to tech support Payroll to housekeeping Number of employees Number of employees Payroll to interdepartments 4/108 4/108 3.7% 3.7% 7.4% Housekeeping to tech support Housekeeping to payroll ©Cambridge Business Publishers, 2009 1,000/11,600 Number of square feet 600/11,600 Number of square feet Housekeeping to interdepartments Continued 8.6% 5.2% 13.8% Step Method Example Allocation of housekeeping Service Department × services Allocation = Cost Number of square feet / Total square feet To Payroll = $16,000 × 600/11,600 = $828 To Tech support = $16,000 × 1,000/11,600 = $1,379 To Roasting = $16,000 × 3,500/11,600 = $4,828 To Packaging = $16,000 × 6,500/11,600 = $8,965 Housekeeping services are allocated based on the total square feet in tech support, payroll, roasting, and packaging departments, 1,000, 600, 3,500, and 6,500, respectively. ©Cambridge Business Publishers, 2009 Continued Step Method Example Allocation = Allocation of tech support Service Department Number of work services × Cost stations in dept. / Total workstations Tech support cost to allocate: $19,000 + $1,379 = $20,379 To Payroll = $20,379 × 2/22= $1,853 To Roasting = $20,379 × 12/22 = $11,116 To Packaging = $20,379 × 8/22 = $7,410 Tech support services are allocated based on the total workstations in payroll, roasting, and packaging departments, 2, 12 and 8, respectively. ©Cambridge Business Publishers, 2009 Continued Step Method Example Allocation of payroll services Allocation = Service Department × Cost Payroll costs to allocate: $22,000 + $828 + $1,853 = $24,681 To Roasting = $24,681 × 40/100 = $9,872 To Packaging = $24,681 × 60/100 = $14,809 Number of employees in dept. / Total employees Payroll services are allocated based on the total number of employees in the roasting and packaging departments, 40 and 60, respectively. ©Cambridge Business Publishers, 2009 Continued Step Method Example Technology Support Payroll Housekeeping Roasting Packaging Total Department costs before allocations Cost allocations: From housekeeping From tech support From payroll $19,000. $ 22,000. $ 16,000. $65,000 $ 44,000 $166,000 1,379. (20,379) $ 0 828. 1,853. (24,681) $ 0 (16,000) 4,828 11,116 8,965 7,410 $ 0 9,872 14,809 $90,816 $75,184 $166,000 All costs of service departments are allocated to the producing departments. ©Cambridge Business Publishers, 2009 Linear Algebra Method Uses a series of linear algebraic equations, which are solved simultaneously, to allocate service cost interdepartmentally and to the producing departments Also known as the reciprocal method Recognized as the most mathematically accurate service department cost allocation ©Cambridge Business Publishers, 2009 Linear Algebra Method Exhibit 19.5 ©Cambridge Business Publishers, 2009 Dual Rate Methods Separate pools are used for fixed costs and variable costs Produces cost allocations that more accurately reflect factors that drive costs Involves establishing separate bases for allocating fixed and variable costs May be used in conjunction with direct, step, or linear algebra methods With activity driving variable costs, and With capacity driving fixed costs ©Cambridge Business Publishers, 2009 Just­in­Time (JIT) A comprehensive inventory management philosophy Spawned in part by computerized manufacturing and product handling systems Stresses policies, procedures, and attitudes by managers and other workers that result in the efficient production of high quality goods while maintaining the minimum level of inventories ©Cambridge Business Publishers, 2009 Just­in­Time (JIT) Philosophy Known as the lean production philosophy Includes Increased coordination through the value chain Reduced inventory Reduced production times Increased product quality Increased employee involvement and empowerment ©Cambridge Business Publishers, 2009 Elements of reducing incoming materials 1. Developing long­term relationships with a limited number of vendors 2. Selecting vendors on the basis of service and material quality, as well as price 3. Establishing procedures for employees to order materials for current needs directly from approved vendors 4. Accepting vendor deliveries directly to the shop floor or only as needed ©Cambridge Business Publishers, 2009 JIT/Lean Approach to Reducing Incoming Materials JIT/Lean Approach to Reducing Work­in­Process Inventory Key element is reducing cycle time Cycle time consists of Setup Time Total time required to complete a process Waiting Time Processing Time Movement Time ©Cambridge Business Publishers, 2009 Inspection Time Setup Time Setup time is the time required to prepare equipment to produce a specific product, or to change from producing one product to another product Can be reduced by Reducing cycle time for batch production Rearranging the shop floor to eliminate unnecessary movements of materials ©Cambridge Business Publishers, 2009 Processing Time The time spent working on units The only element of cycle time that adds value to the product ©Cambridge Business Publishers, 2009 Movement Time The time units spend moving between work and inspection stations ©Cambridge Business Publishers, 2009 Waiting Time Waiting time is Can be reduced by moving from a materials push to a materials pull approach to production The time units spend in temporary storage waiting to be processed, moved, or inspected ©Cambridge Business Publishers, 2009 Materials Push and Pull Systems Materials Push System Employees work to reduce the pile of inventory building up at their workstations Employees ‘push’ the work to the next workstation after completing their operation ©Cambridge Business Publishers, 2009 Materials Pull System • Employees at each station work to provide inventory for the next workstation as needed • Work stops when inventory units reach a specified limit until that station catches up • Known as a Kanban system Inspection Time The amount of time it takes units to be inspected ©Cambridge Business Publishers, 2009 JIT/Lean Approach to Reducing Finished Goods Inventory Can be reduced by Reducing cycle time Reduces the need for speculative inventories Better predicting customer demand for finished units To improve, adopt a value chain approach to inventory management by which the manufacturer or supplier is working as a partner with its customers to meet inventory needs ©Cambridge Business Publishers, 2009 Dysfunctional Effects of Traditional Performance Measures Traditional Performance Measures Dysfunctional Effects Achieve quantity discounts and favorable prices Obtain a low price Purchasing agent may order excessive inventory, which increases storage, handling, and obsolescence Purchasing agent may order from a supplier not certified as meeting quality specifications ©Cambridge Business Publishers, 2009 Dysfunctional Effects of Traditional Performance Measures Traditional Performance Measures Avoiding idle employees and equipment Supervisor may refuse to halt production to determine the quality problem, which increases inspection, rework, and spoiled costs Supervisor may overproduce causing increase in storage, obsolescence, and handling costs Dysfunctional Effects Obtaining low unit fixed costs under absorption costing ©Cambridge Business Publishers, 2009 Goal is to eliminate inventory and reduce cycle time to processing time Performance emphasis on Inventory turnover Cycle time Cycle efficiency Ratio of value­added to non­value­added manufacturing activities Performance Measures under Lean Production and JIT ©Cambridge Business Publishers, 2009 Inventory Turnover As applied to a specific item of raw materials or finished goods Annual demand in units Inventory turnover = Average inventory in units Higher turnover is better ©Cambridge Business Publishers, 2009 Inventory Turnover When stated in dollars Can be used as a measure of the organizations’ overall success in reducing inventory or in increasing sales in relation to inventories Cost of goods sold Inventory turnover = Average inventory in dollars Higher turnover is better ©Cambridge Business Publishers, 2009 Measures the effectiveness of inventory levels GMROI = Gross margin Average inventory Gross Margin Return on Inventory Investment (GMROI) ©Cambridge Business Publishers, 2009 Cycle Time Measures the total time required to produce one unit of a product Cycle Time = Setup Setup Time Time Processing Processing Time Time Movement Movement Time Time Waiting Waiting Time Time nspection + IInspection Time Time + + + ©Cambridge Business Publishers, 2009 Cycle Efficiency Measures the degree to which non­value added activities are eliminated Cycle Efficiency = Processing time Cycle time If all non­value added activities are eliminated, cycle efficiency equals 1. ©Cambridge Business Publishers, 2009 Simplified Recordkeeping Lean production and JIT enable significant reductions in the number of accounting transactions required for purchasing and production Purchasing Standing purchase orders allow production Product costing personnel to requisition materials directly from vendors Limited quantities are delivered Ending inventories are close to nonexistent so costs are insignificant ©Cambridge Business Publishers, 2009 Backflush Product Costing All costs of direct materials, direct labor, and manufacturing overhead are assigned as incurred to Cost of Goods Sold If inventories remain at year end, costs are backed out of Cost of Goods Sold and assigned to inventories ©Cambridge Business Publishers, 2009 ...
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This note was uploaded on 11/08/2010 for the course ACC 5056 taught by Professor J.goslinga during the Spring '10 term at University of Florida.

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