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Topic 4: Full Costing

Cost Accounting I

Department of Economics and Business Universitat Pompeu Fabra

Topic 4:Full Costing - Outline

— Partial Costing versus Full Costing.

— Full Costing by Departments.

— Cost-Allocation Base – Definition and Examples.

— Assignment of Support Department Costs to Operating

Departments.

— Direct-allocation method. — Step-down allocation method. — Reciprocal allocation method.

— Problems of Cost Calculation.

— Costs of Sub-Activity and Benefits of Over-Activity. — Waste, Scrap and By-Products – Definition. — Valuation of Work-In-Process.

— Income Effects of Alternative Inventory Costing Methods.

Costing Method: Full Costing

q Direct costs and indirect (manufacturing) costs are assigned to the cost object

(= product costs).

q Indirect non-manufacturing costs are usually considered as period costs.

Total Costs

Direct Costs Product Costs Period Costs Indirect Costs manufacturing non-manufacturing optional

Full Costing by Departments

— Indirect costs are allocated to products in two stages. — Stage 1: Indirect Costs assigned to cost centers or departments. — Stage 2: Costs accumulated in cost centers or departments are allocated to products.

Total Costs

Product Costs Direct Costs Indirect Costs Departments Departmental indirect cost rates

Operating Departments and Support

Departments

— Operating Department — Adds value to a product or service that is observable by a customer. — Examples: Production, Marketing. — Support Department — Provides services that maintain other internal departments. — Examples: Legal Department, Human Resources Department.

Cost Centers and Cost Pools

— Cost Center — Is a responsibility center in which a manager is accountable for costs only. — It may be based on

— a function

— a department or a section,

— an individual, or

— any group of these.

— Cost Pool — Is a grouping of individual cost items. — Examples:

— Company-wide total-cost pool for telephones,

— Cost pool for a particular car used by a salesperson.

Cost-Allocation Base - Examples

— Units produced — If a single product or quite homogeneous products are produced. — Machine-hours — If relatively homogeneous machinery is intensively used. — Direct labor-hours — High proportion of relatively homogeneous labor. — Direct labor-costs — High proportion of heterogeneous labor (significant differences in the wages) — Direct materials-costs — High proportion of different direct materials (significant differences in materials’ costs)

Full Costing by Departments – Example (1)

— Statement of Costs Cost Items Production Painting Packaging Mainten. Administr. Managem. Total Materials Labor Rents Depreciat. Energy Others Total 20,200 16,100 38,100 8,900 41,100 16,000 140, Departments

— Calculation of departmental indirect cost rates Production Painting Packaging Costs of operating departm. 30,200 47,100 63, Allocation base 1,000 10,000 500 machine h. kg units Indirect Cost Rate 30.20 4.71 126. Operating Departments

Full Costing by Departments – Example (3)

— Calculation of Unit Product Costs Direct Costs Raw materials 424. Indirect Costs Cost of production 20 hours * 30.2 604. Cost of painting 200 kg * 4.7 940. Cost of packaging 1 unit * 126.2 126. Unit Product Costs 2,094.

Full Costing by Departments – Example (4)

Support Department Cost-Allocation

Methods (2)

— Step-down allocation method — Services rendered by support departments to other support departments are partially recognized. — Procedure:

— Support departments must be ranked.

— Costs in the first ranked support department are allocated to the other

support departments and to the operating departments.

— Costs in the second ranked support department are allocated to those

support departments not yet allocated and to the operating departments.

Support Department Cost-Allocation

Methods (3)

— Step-down allocation method - continued Support Dep. 1 Support Dep. 2 Operating Dep. 1 Operating Dep. 2 600, (600,000) Example: 50, 350, 200,

Total 1,500, 0 1,500,

Support Department Cost-Allocation

Methods (4)

— Reciprocal allocation method – continued Example: Support department 1 (§1) Support department 2 (§2) € 18,600 total costs € 10, 40 total working 100 units Renders 8 units to 2. Mutual Renders 10 units to 1. services §1 = 18,600 + 10% * § §2 = 10,000 + 20% * § à §1 = 20,000 and §2 = 14, à §1 renders 4,000 to §2, and §2 renders 1,400 to §

Support Department Cost-Allocation

Methods (5)

— Reciprocal allocation method - continued Support dep. 1 Support dep. 2 Operating Dep. 1 Operating Dep. 2 18, 1, (20,000) 0 Example: 10, (14,000) 4, 0

Total 108, 108,