10 cost management 4e product costing system

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10 Blocher,Stout,Cokins,Chen, Cost Management 4e Product Costing System Methodology Cost measurement – Standard Costing Standard costing system uses standard (“normative”) costs for all cost elements, direct and indirect: Standard costs are costs a firm should attain under normal operating conditions Standard costing systems provide a basis for cost control, performance evaluation, and process improvement
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Blocher,Stout,Cokins,Chen, Cost Management 4e 11 Product Costing System Methodology Cost measurement – Summary Costing System Direct Materials Direct Labor Factory Overhead Actual Costing Actual Cost Actual Cost Actual Cost Normal Costing Actual Cost Actual Cost Applied 1 Overhead Cost Standard Costing Standard Cost Standard Cost Standard Cost Type of Cost Used For:
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Blocher,Stout,Cokins,Chen, Cost Management 4e 12 Product Costing System Methodology Overhead Assignment (Normal Costing) Volume-based costing systems allocate overhead using a volume-based cost driver, such as direct labor-hours, direct labor costs, or machine-hours This approach assumes that overhead cost incurrence is related to output volume Activity-based costing (ABC) systems allocate factory overhead to products using a cause-and- effect criterion with multiple cost drivers, both volume-based and non-volume-based This system allocates factory overhead more accurately based on “resource consumption”
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13 Blocher,Stout,Cokins,Chen, Cost Management 4e Product Costing System Methodology Overhead Assignment Overhead applied = POHR × Actual activity Based on estimates , and determined before the period begins Actual amount of the allocation base, such as direct labor-hours, incurred during the period Estimated factory overhead amount for the year Estimated level of cost driver for the year POHR =
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14 Blocher,Stout,Cokins,Chen, Cost Management 4e The factory overhead applied to jobs during a period is almost never equal to actual factory overhead costs incurred during that period The factory overhead account is a temporary account and must be closed out to zero at the end of the year Two accounting treatments: Adjust the Cost of Goods Sold (CGS) account Adjust the production costs of the period (i.e., prorate the discrepancy to the ending balances of WIP inventory, Finished Goods Inventory, and the CGS account) Product Costing System Methodology Overhead Assignment
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15 Blocher,Stout,Cokins,Chen, Cost Management 4e Product Costing System Methodology Spoilage, Rework and Scrap Spoilage refers to the unacceptable units that are discarded or sold for disposal value Rework units are units produced that must be reworked into good units that can be sold in regular channels Scrap is the material left over from the manufacture of the product; it has little or no value
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16 Blocher,Stout,Cokins,Chen, Cost Management 4e Spoilage, Rework and Scrap in Job Costing (continued) Rework units are units produced that must be reworked into good units that can be sold in regular channels
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