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Cost Managment Chapter.3,4,5

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22 views2 pages

Cost Managment Chapter.3,4,5

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Fedhasaa Bonjaa
Copyright
© © All Rights Reserved
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Chapter 3: Costing Methods Creating Cost Centers and Pools

Absorption Costing  Cost Centers: Departments/functions incurring costs without


generating revenue.
Definition: Allocates all manufacturing costs (both fixed and
variable) to products.
 Cost Pools: Grouped similar costs for allocation based on
Example: If producing 1,000 chairs with total monthly fixed homogeneous activities or responsibilities.
overhead at $30,000:
Support Department Cost Allocation
 Direct Material = $20, Direct Labor = $15, Variable
Overhead = $5, Fixed Overhead = $30.  Methods:
 Total Cost per Chair = $70.
 Direct Method: Allocates costs directly to operating
Variable Costing departments.
 Step-Down Method: Allocates costs sequentially,
Definition: Includes only variable costs in product costs; fixed considering some inter-department services.
overhead treated as a period expense.  Reciprocal Method: Fully considers interactions between
support departments for precise allocation.
Example: Total variable cost per chair = Direct Materials ($20) +
Direct Labor ($15) + Variable Overhead ($5) = $40. Joint and By-Products

Activity-Based Costing (ABC)  Joint Products: Produced from a single raw material, costs
allocated based on measures like sales value.
Definition: Allocates costs based on activities that drive costs;  By-Products: Secondary products with lower economic
useful for accurate product costing. value; revenue can offset main product’s costs.

Example: Overhead allocation based on machine hours, e.g., Common Cost Allocation
Product A uses 2,000 machine hours, Product B uses 3,000;
overhead rate is $20 per machine hour. Methods:

Job Order, Batch, and Contract Costing  Activity-Based Costing (ABC): Allocates based on activities,
enhancing precision.
 Job Order Costing: Tracks costs for each custom job  Standard Costing: Uses predetermined rates, but may lack
individually; used in custom manufacturing and construction. accuracy.
 Batch Costing: Costs are accumulated for a batch and
averaged per unit (e.g., food production).
 Contract Costing: Suitable for long-term projects like Chapter 5: Activity-Based Costing and Management
construction, with costs recognized by milestones.
Activity-Based Costing (ABC)
Accounting for Direct and Indirect Costs
Definition: Assigns costs based on resource consumption of
 Direct Costs: Directly attributable to a specific job or contract activities.
(e.g., direct materials, direct labor).
 Indirect Costs: Cannot be directly traced; shared among Cost Drivers: Factors causing cost changes (e.g., machine hours,
products or projects (e.g., indirect materials, indirect labor). setups, customer orders).

Treatment of Waste, Scrap, Spoilage, and Rework  Types of Activities:

 Waste: Written off as a loss and included in overhead.  Unit-level: Performed for each unit (e.g., direct labor).
 Scrap: Can be sold, often credited to the overhead account.  Batch-level: Performed for batches (e.g., machine setups).
 Spoilage: Normal spoilage included in cost of goods sold;  Product-level: Specific to product lines (e.g., product
abnormal spoilage charged to income statement. designs).
 Rework: Costs to fix defective products, either charged to the  Facility-level: Necessary for operation (e.g., factory
specific job or part of overhead if related to quality control. maintenance).

ABC for Customer Profitability


Chapter 4: Cost Allocation
Definition: Evaluates individual customer profitability by
Key Cost Concepts analyzing service costs.

 Overhead Costs: Indirect costs supporting production but not Steps:


tied to specific units.
 Direct Costs: Attributable to a specific product or project  Identify all activities in serving customers.
(e.g., raw materials).  Assign costs to these activities.
 Traceable Costs: Indirect costs that can be linked to a  Calculate profitability by comparing revenue with costs for
particular segment, department, or product. each customer.
 Allocated Costs: Distributed based on a predetermined
method, such as hours used or machine hours.
Activity-Based Management (ABM)

Definition: Uses ABC information for cost control and operational


improvements.

Components:

 Cost Control: Eliminating non-value-adding activities.


 Process Improvement: Streamlining activities for efficiency.

 Decision-Making: Informs on pricing, product development,


and resource allocation.

Practical Application of ABM

Example in Consulting:

 Activities like client meetings and project management are


analyzed.
 Cost control through reducing unproductive time.
 Decision-making adjustments in billing rates based on activity
profitability.

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