Bài giảng môn Kế toán, kiểm toán - Chapter nine: Absorption cost systems

Absorption Cost SystemsChapter NineCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinOutline of Chapter 9Absorption Cost SystemsJob Order Costing Cost Flows through the T-Accounts Allocating Overhead to JobsPermanent versus Temporary Volume ChangesPlantwide versus Multiple Overhead RatesProcess Costing: The Extent of AveragingAppendix A: Process CostingAppendix B: Demand Shifts, Fixed Costs, and Pricing9-2Connection to Other ChaptersChapter 9 describes how manufacturing firms use absorption costing to apply costs to products manufactured.Previously, chapters 7 and 8 introduced the topic of cost allocations and discussed various reasons why firms allocate costs, including decision management, decision control, cost-plus pricing contracts, financial reporting, and taxes.After chapter 9, chapters 10 and 11 will describe criticisms of absorption cost systems. Chapter 10 shows how variable costing can mitigate absorption costing’s incentives to overproduce. Chapter 11 shows how activity-based costing can mitigate absorption costing’s tendency to give inaccurate product costs.9-3Manufacturing versus Nonmanufacturing SettingsManufacturing settingsProduct costs: costs of manufacturing goodsPeriod costs: nonmanufacturing costsCosts must be allocated between cost of goods sold (expense or expired costs) and ending inventories (assets or unexpired costs) Note: Because allocation involves management’s judgment, it offers discretion in product costing and income determination.Nonmanufacturing settings (merchandising and service firms)Product costs: costs of inventory held for resalePeriod costs: all other costsMost product costs for physical goods are directly traced to external contacts and do not require cost allocation9-4Two Types of Absorption SystemsAbsorption cost systems ensure that all manufacturing costs are assigned to products either by direct tracing or by cost allocation.Job order costing is used in departments that produce output in distinct jobs (job order production) or batches (batch manufacturing).Process costing is used in departments that produce output that is not in distinct batches or produce continuous flows, such as beverages and oil refineries.In practice, many plants use hybrids of job order and process costing.9-5Job Order CostingCost object: Distinct job or batch records are maintained for each job (see Table 9-1).Direct traceable costs: Raw materials and direct labor costs are directly assigned to each job.Cost allocation: Manufacturing overhead costs (fixed and variable) that cannot be directly traced are allocated to jobsAllocation base: An input measure such as machine hours or labor hoursOverhead rate: Overhead rate is set at beginning of year based on estimated total overhead costs and estimated volume.9-6Cost Flow SequenceSee Figure 9-1 for cost flows in job order cost system.1. Costs are accumulated in three major categories: materials, labor, and overhead.2. Direct materials, direct labor, and overhead are assigned to the work-in-process (WIP) inventory account for each job.3. When manufacturing is completed, the cost of units completed is transferred from WIP to the finished goods inventory.4. When goods are sold, the costs are transferred from the finished goods inventory account to the cost of goods sold expense account.5. If any amount remains in the overhead account at the end of the period, it must be allocated to some inventory or expense account.Review Self Study Problem 1.9-7Inventory Cost Flow Accounting AssumptionsInventory cost flow assumptions change the amounts transferred out of an inventory account when input prices change over time.External importance: financial statements, taxes, cost-based contracts.Internal importance: decision making and decision control.1. First In, First Out (FIFO): Oldest items are transferred out first. When prices are rising, FIFO reports higher net income than LIFO.2. Last In, Last Out (LIFO): Newest items are transferred out first. When prices are rising, LIFO reports lower net income than FIFO.3. Specific Identification: Each inventory item is individually priced.9-8Overhead RateProspective overhead rates are set at the beginning of the year (also known as predetermined overhead rates).Numerator: Estimated annual budgeted overhead dollarsDenominator: Estimated annual factory volume (input measure)Possible input measures: machine hours, direct labor hours (DLH), direct material dollars, or direct labor dollarsIncentive effect: Managers reduce whichever input used to allocate overhead. (Recall Chapter 7).9-9Over/Underabsorbed Overhead Actual overhead incurred for a year is the amount of indirect manufacturing costs incurred during the year.Absorbed overhead (also known as applied overhead) is the amount of overhead applied to work-in-process during they year using the predetermined overhead rate and the actual amount of inputs used.Underabsorbed overhead exists when actual > absorbed overhead.Overabsorbed overhead exists when actual < absorbed overhead.9-10Disposing of Over/Underabsorbed OverheadOverhead accounts must be cleared of over/underabsorbed overhead at the end of the year.1. Write off all to cost of goods sold expense account.Simplest bookkeeping procedure2. Allocate among WIP and finished goods inventory, and cost of goods sold expense account.Better if ending inventory levels are significant3. Recalculate job costs with actual overhead rates.Most complex data processing9-11Flexible Budgets to Estimate OverheadRecall from Chapter 6:Static budget estimates do not change with volume.Flexible budget estimates do change with volume.Forecast annual budgeted overhead dollars with a flexible budget: Budget = Fixed + Variable = FOH + (VOH X BV) where, FOH = Fixed overhead estimate VOH = Variable overhead rate estimate BV = Budgeted volume estimate9-12Budgeted Volume: Expected versus NormalExpected volume: Volume expected for the coming year.Decision control: enhanced because transfer prices are adjusted for changing volumeDecision management: impaired because lower volume raises overhead rate, and encourages profit centers to raise prices Normal volume: Long-run average volume over economic cycle.Decision control: impaired because managers are not held responsible for short-run volume fluctuationsDecision management: better long-run opportunity cost estimates result in better pricing decisionsOpportunity to manage earnings: setting normal volume is more subjective than expected volume9-13Permanent versus Temporary Volume ChangesHow should overhead rate estimates respond to volume changes?Permanent volume changes:Write off assets or change estimated useful lives of assets.Managers may be reluctant to admit that their prior projections need to be adjusted.Temporary volume changes:Assumed to average out over economic cyclesNo accounting changes should be made.9-14Plantwide versus Multiple Overhead Rates Choices of overhead cost allocation disaggregation:1. Single overhead cost pool for entire plant:Easiest to apply, but accounting costs may be very inaccurate representations of opportunity costs.2. Many cost pools each with its own cost driver:More data processing, but more accurate costing3. Two-stage allocation of departmental overhead ratesAllocate to departments, and then to products.Review Self Study Problem 2.9-15Plantwide versus Multiple Overhead RatesIf the overhead rates contain large amounts of fixed historical costs, such as depreciation, then neither plantwide rates nor individual department rates accurately reflect the opportunity cost of capacity.9-16Process Costing Overview Production process is a continuous flow without discrete batches or jobs.Each process is treated as a separate cost center.Costs are averaged over large number of production units that are assumed to be essentially identical.Decision making usefulness is reduced because costs for individual batches are not available.See Appendix A for process costing details.9-17Appendix A: Process Costing DetailsSee Table 9-6.Step 1: Account for physical flow of units.Step 2: Compute number of equivalent physical units and average cost per equivalent unit.Step 3: Total all the costs to be assigned.Step 4: Allocate total costs to WIP inventory and transfers to Finished Goods inventory by the number of equivalent physical units in each category.Refinements: inventory cost flow assumptions9-18Appendix B: Demand Shifts, Fixed Costs, and PricingPrice should be lowered when demand falls See Figures 9-5 and 9-6Pricing decisionShutdown decision See Table 9-10 9-19