Chapter Summary

Cost accounting systems provide information useful for managing the activities that consume resources. Managers use the information to evaluate and reward employee performance. In addition, the cost information is reported on external financial statements as, for example, inventories, cost of goods sold, and period expenses.

Job order costing methods are appropriate for businesses and companies producing customized jobs that require differing amounts and types of direct labor, direct materials, and overhead. Process costing is used for production processes that produce mass quantities of identical units that use the same amounts and types of direct labor, direct materials, and overhead. Activity-based costing is used to track resources that are not directly traceable to the product or service produced. Overhead items are typically the focus of ABC methods. It is not uncommon to find all of these costing methods being used by the same company for different purposes and costs.

The purpose of a job cost sheet is to keep track of all manufacturing costs relating to a particular job. Each job cost sheet shows the cost of all the materials, direct labor, and factory overhead charged to the job. The job cost sheets of all jobs in process serve as a subsidiary ledger supporting the balance of the Work in Process Inventory controlling account.

Costs flow from the Direct Labor account, the Direct Materials Inventory account, and the Manufacturing Overhead account into the Work in Process Inventory account. As jobs are completed, the accumulated costs are transferred to the Finished Goods Inventory account. As units are sold, their costs flow from the Finished Goods Inventory account to the Cost of Goods Sold account.

Costs in process costing flow in basically the same manner as costs in a job order cost system. Throughout the period, the costs of direct labor, direct materials, and manufacturing overhead are charged to the appropriate Work in Process accounts. At the end of each period, costs in each Work in Process account are transferred to the next Work in Process (or Finished Goods) account, representing the cost of units on which processing has been completed.

Equivalent units are measures of productive activity that include work performed on partially completed units. The basic idea is that performing, say, 50% of the processing on 500 units is equivalent to performing all of the processing on 250 units.

Costs associated with beginning work in process from the previous period and costs added to work in process for the current period are pooled for each significant input. Dividing total costs by total equivalent units provides cost per equivalent unit for each input. The equivalent units associated with the units transferred out are multiplied by the cost per equivalent unit to determine the amount of cost to transfer out.

Activity cost pools are the costs of resources consumed by an activity that is necessary to produce a good or service. Types of overhead activity cost pools include building maintenance, utilities, purchasing activities, and machinery repairs, among others.

Activity bases are the measures of the activity that consumes the associated resource cost pool. Thus, for the purchasing activities cost pool, the activity base is the number of purchase orders processed. Dividing the activity cost pool by the activity base provides the cost per unit of activity. Activity costs are assigned to the product by tracking the activity base associated with the product and multiplying it by the appropriate cost per unit of activity.

In this chapter we have emphasized the measurement of unit costs. In upcoming chapters, we will see how managers control these costs and utilize cost information in planning and decision making.