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Fundamentals of Productand Service Costing

Cost Management Systems

Cost System

Cost Allocation and Product Costing

Keys to a good cost system:

  • The objective of the cost management system

is to provide information about costs relevant

for decision making.

  • Oriented to the needs of the decision makers
  • Designed so that benefits exceed costs

Fundamental Themes Underlyingthe Design of Cost Systems

  • Cost systems should have a decision focus.
  • Different cost information is used for different purposes.
  • Cost information for managerial purposes must meet the cost-benefit test.
  • The cost system accumulates and reports costs about processes, products, and services.

Reasons to Calculate Productor Service Costs

  • For decision making
  • For deciding what to sell
  • For setting prices
  • For knowing the cost of goods sold
  • For knowing the cost of inventory

Costing with No Work-in-Process Inventories

Basic Cost Flow Model

Costing with No Work-in-Process Inventories

Costing with No Work-in-Process

Inventories

Costing with No Work-in-Process Inventories

  • Baxter Paint begins production on April 1.

How costs and units move through inventories:

Costing with No Work-in-Process Inventories

  • It starts and completes production of 100,000 gallons of paint in April and has no ending work-in-process inventory.

What are the costs at the end of the period?

$1,000,000 was added to work-in-process and then transferred out to finished goods.

Since Baxter produced 100,000 gallons of paint, then the cost per gallon of paint is $10.

This is true for the following accounts:

– Raw Materials (RM)

– Work-in-Process (WIP)

– Finished Goods (FG)

FG

Costing with Work-in-Process Inventories

Costing with Work-in-Process

Inventories

How do we cost Baxter’s 20,000 gallons of paint that are only half finished?

20,000 gallons half finished is equivalent to 10,000 gallons finished.

$990,000/100,000 gallons = $9.90 per gallon

90,000 gallons transferred out plus 10,000 equivalent gallons of finished paint equals 100,000 equivalent gallons of paint.

90,000 gallons × $9.90/gallon = $891,000

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