Modul ke:
Fakultas
Program Studi
Akuntansi Biaya Cost Systems and Cost Accumulation
Suryadharma Sim, SE, M. Ak
03 Ekonomi dan
Bisnis
S1 Manajemen
Cost Systems and Cost Accumulation
Flow of Costs in a manufacturing enterprise
Cost accounting’s functions include recording and measuring cost elements as
the related resources flow through the production process. All manufacturing
costs, regardless of their fixed or variable behavior, flow through the work in
process and finished goods inventory accounts.
The production process, the physical arrangement of the facility, and the
decision-making need of managers determine how costs will be accumulated.
Typically the general ledger accounts for manufacturing costs are Materials,
Payroll, Factory Overhead Control, Work in Process, Finished Goods, and Cost
of Goods Sold. These accounts are used to recognize and measure the flow of
costs, from the acquisition of materials, through factory operations, to the cost of
product sold.
Cost Systems and Cost Accumulation
Cost Flows and Classifications in a Manufacturing Company
Notice from the exhibit that as goods are completed, their costs are transferred from Work in Process to
Finished Goods. Here the goods await sale to customers. As goods are sold, their costs are transferred
from Finished Goods to Cost of Goods Sold. At this point the various costs required to make the product
are finally recorded as an expense. Until that point, these costs are in inventory accounts on the balance
sheet.
Cost Systems and Cost Accumulation
An Example of Cost Flows
To provide an example of cost flows in a manufacturing company, assume that a
company’s annual insurance cost is $2,000. Three-fourths of this amount ($1,500)
applies to factory operations, and one-fourth ($500) applies to selling and
administrative activities. Therefore, $1,500 of the $2,000 insurance cost would be
a product (inventoriable) cost and would be added to the cost of the goods
produced during the year. This concept is illustrated in Exhibit 1-8, where $1,500
of insurance cost is added to Work in Process. As shown in the exhibit, this
portion of the year’s insurance cost will not become an expense until the goods
that are produced during the year are sold—which may not happen until the
following year or even later. Until the goods are sold, the $1,500 will be part of
inventories—Work in Process or Finished Goods—along with the other costs of
producing the goods.
Cost Systems and Cost Accumulation
EXHIBIT 1-8
An Example of Cost Flows in a Manufacturing Company
By contrast, the $500 of insurance cost that applies to the company’s selling and
administrative activities will be expensed immediately.
Cost Systems and Cost Accumulation
Reporting the Result of Operation
The results of operations of a manufacturing enterprise are reported
in the conventional financial statements just as they are for any other
form of business. These statements summarize the period’s
operations and show financial position at the end of the period:
Income Statement
Balance Sheet
Statement of Cash Flows
Cost Systems and Cost Accumulation
Cost Systems
Costs that are allocated to units of production may be actual costs or
standard costs. In an actual cost system or historical cost system, cost
information is accumulated as cost is incurred, but the presentation of
results is delayed until all operations of the accounting period have been
performed or, in a service business, until the period’s services have
been rendered. In a standard cost system, products, operations, and
processes are costed based on predetermined quantities of resources
to be used and predetermined prices of those resources. Actual costs
are also accumulated separately, and variances or differences between
actual costs and standard costs are collected in separate accounts.
Cost Systems and Cost Accumulation
The objective of a cost system or costing system is accumulate the
costs of goods or services. The information on the cost of a product
or service is used by managers to set the prices of the product,
control operations, and develop financial statements. Also, the cost
system improves control by providing information on the costs
incurred by each department or manufacturing process.
“COST SYSTEMS DEPENDING ON HOW COSTS OF
PRODUCTION ARE ACCUMULATED”
Cost Systems and Cost Accumulation
Cost Accumulation
Any of the previously mentioned cost system can be used
with job order costing, with process costing, or with other cost
accumulation methods. In job order costing, cost is traced to
an individual batch, lot, or contract. In process costing, cost is
traced to a department, operation, or some other subdivision
within the production facility. A third method, back flush
costing, differs markedly from job order and process costing
Cost Systems and Cost Accumulation
Job Order Costing
A job order cost system provides a separate record for the cost of each quantity of
product passing through the factory. A quantity of each particular product is called
order. A job order cost system fits better in the industries that develop products with
that have different specifications most of the time or that have a wide variety of
products in stock. Many service companies use this type of system for costing
orders by accumulating the costs associated with providing services to their
customers. Some characteristics of the job order cost systems are listed below:
- They accumulate in batches
- Production under specific orders
- Normally does not produces the same article
- Examples: Accounting firm, Construction Company, law practice, apparel
manufacturing, movie studio.
Cost Systems and Cost Accumulation
7 STEPS TO MAKE A JOB ORDER COSTING
1.- Identify the chosen cost-object
2.- Identify the direct costs the job
3.- Select the cost allocation bases
4.- Identify the indirect costs
5.- Calculate the rate per unit
6.- Calculate the indirect costs 7.- Calculate the total cost of the job
Cost Systems and Cost Accumulation
Process Costing
In a process cost system, costs are accumulated for each department or
process in the factory. A process cost system fits more in companies
manufacturing products which are not distinguishable with each other during a
process of continuous production. Some characteristics of process cost
systems are listed below:
- They accumulate costs by department
- Production continuous and homogeneous
- Examples: Oil Refinery, food processing, paper processing, soft drinks,
medicines, buckets, toys, pants.
"When" should the cost of production be determined?
- Before we begin the process - Default costs (estimated or standard)
- After or at the same time of the process - Actual costs (current or historical).
Cost Systems and Cost Accumulation
5 STEPS TO ACHIEVE A PROCESS COSTING
1.- Summarize the physical flow of the units to produce
2.- Calculate production in terms of equivalent units
3.- Calculate equivalent unit costs
4.- Summarize total costs to account for
5.- Assign total costs to the units already completed and to
units in ending work in process inventory (WIP).
Cost Systems and Cost Accumulation
Blended Methods
In some manufacturing, different units have significantly
different direct material costs, but all units undergo identical
conversion in large quantities. In these cases, direct
materials costs are accumulated using job order costing,
and conversion costs are accumulated using process
costing.
Cost Systems and Cost Accumulation
Backflush Costing
Backflush costing is a workable way to accumulate manufacturing costs in a
factory or part of a factory in which processing speeds are extremely fast, such
as in a mature Just In Time system. Backflush costing is workable because it
bypasses the routine cost accounting entries that are required in subsidiary
records for job order and process cost accumulation, thus saving considerable
data processing time. Where there is insufficient time and insufficient incentive
to track the detailed costs of work in process, backflushing provides a method
of cost accumulation by working backward through the available accounting
information after production is completed; that is, at the end of each accounting
period.