COST MEASUREMENT

·  ACTUAL COSTING

·  USES ACTUAL COSTS FOR DM, DL, VMOH, & FMOH

·  NORMAL COSTING

·  USES ACTUAL COSTS FOR DM & DL; USES ESTIMATED COSTS FOR VMOH & FMOH

·  STANDARD COSTING

·  USES ESTIMATED COSTS FOR DM, DL, VMOH, & FMOH

METHOD / DM / DL / VMOH / FMOH
ACTUAL / AC / AC / AC / AC
NORMAL / AC / AC / EC / EC
STANDARD / EC / EC / EC / EC

Where:

AC = ACTUAL COSTS

EC = ESTIMATED COSTS

COST MEASUREMENT

ACTUAL COSTING

·  ADVANTAGES

·  MORE ACCURATE

·  DISADVANTAGES

·  TIME DELAY

·  SEASONAL COST FLUCTUATION

·  FLUCTUATION IN PRODUCTION – FMOH/UNIT FLUCTUATES

NORMAL COSTING

·  ADVANTAGES

·  LESS TIME DELAY

·  EARLY DECISIONS

·  DISADVANTAGES

·  ADDITIONAL RECORDKEEPING

·  WRONG COST-DRIVER CAN CAUSE MAJOR LOSSES

STANDARD COSTING

·  ADVANTAGES

·  MOST TIMELY

·  USED FOR BUDGETING, CONTROL, AND EVALUATIONS

·  DISADVANTAGES

·  EVEN MORE RECORDKEEPING

COST MEASUREMENT

DTE CORPORATION

DOWN-TO-EARTH CORP. HAS SUPPLIED YOU WITH THE FOLLOWING NUMBERS.

·  EST. PRODUCTION=100,000 UNITS

·  EST. VMOH = $120,000

(COST DRIVER = DLH)

·  EST. FMOH = $560,000

(COST DRIVER = DM$)

·  EST. DLH = 120,000 HRS.

·  EST. DM$ = $280,000

·  ACT. PRODUCTION = 110,000 UNITS

·  ACT. DLH = 90,000 HRS

·  ACT. DM$ = $300,000

ESTIMATION OF MOH RATES

VMOH RATE = ( EST. VMOH )

(EST. COST DRIVER)

FMOH RATE = ( EST. FMOH )

(EST. COST DRIVER)

CHOICES OF COST DRIVERS

·  UNITS OF OUTPUT

·  DLH (DIRECT LABOR HOURS)

·  DL$ (DIRECT LABOR COST)

·  MH (MACHINE HOURS)

·  DM$ (DIRECT MATERIAL COST)

·  DMlbs (DIRECT MATERIAL WEIGHT)

·  ETC.

EXAMPLES:

·  VMOH RATE = $120,000 .

120,000 DLH

= $1.00 PER DLH

·  FMOH RATE = $560,000 .

$280,000 DM$

= $2.00 PER DM$

APPLICATION OF MOH IN NORMAL COSTING

·  APPLIED VMOH =

(VMOH RATE) x (ACTUAL QUANTITY OF COST DRIVER USED FOR THE TOTAL PRODUCTION)

·  APPLIED FMOH =

(FMOH RATE) x (ACTUAL QUANTITY OF COST DRIVER USED FOR THE TOTAL PRODUCTION)

EXAMPLE:

APPLIED VMOH = $1 x 90,000

= $90,000

APPLIED FMOH = $2 x 300,000

= $600,000

APPLICATION OF MOH IN STANDARD COSTING

·  APPLIED VMOH =

(VMOH RATE) x (ESTIMATED COST DRIVER PER UNIT) x (ACTUAL NO. OF UNITS PRODUCED)

·  APPLIED FMOH =

(FMOH RATE) x (ESTIMATED COST DRIVER PER UNIT) x (ACTUAL NO. OF UNITS PRODUCED)

EXAMPLE:

EST. DLH / UNIT = 120,000/100,000

= 1.2 DLH/UNIT

EST. DL$ / UNIT = $280,000/100,000

= $2.8 / UNIT

APPLIED VMOH = $1 x 1.2 x 110,000

= $132,000

APPLIED FMOH = $2 x 2.8 x 110,000

= $616,000


GOOFUS INC.

1.  Direct Materials

a. Actual total amount of direct material used – 417,900 1bs

b. Actual total cost of direct material - $794,010

c. Standard (est.) amount of direct material – 4 1bs/unit d. Standard (est.) cost of direct material - $2.00/1b

2.  Direct Labor

a. Actual total amount of direct labor used – 44,775 DLH

b. Actual total cost of direct labor - $456,705

c. Standard amount (est.) of direct labor – 0.50 DLH/unit

d. Standard cost (est.) of direct labor - $10.00/DLH

3.  Variable Overhead

a. Total actual variable overhead - $210,000

b. Estimated (budgeted) variable overhead - $200,000

c. Variable overhead is applied to the product on the basis

of direct labor hours (DLH)

4.  Fixed Overhead

a. Total actual fixed overhead - $480,000

b. Estimated (budgeted) fixed overhead - $500,000

c. Fixed overhead is applied to the product on the basis

of direct material cost (DM$)

5.  Other Information

a. Estimated (budgeted) production – 100,000 units

b. Actual units produced – 99,500 units

DO VARIABLE AND FULL ABSORPTION COSTING USING ACTUAL, NORMAL, AND STANDARD COSTING METHODS.

ACTUAL COSTING

Type of Cost / Calculation / Unit Cost / Total Cost
Direct Materials
Direct Labor
Variable Overhead
Variable Costing
Fixed Overhead
Full Absorption

NORMAL COSTING

Type of Cost / Calculation / Unit Cost / Total Cost
Direct Materials
Direct Labor
Variable Overhead
Variable Costing
Fixed Overhead
Full Absorption

STANDARD COSTING

Type of Cost / Calculation / Unit Cost / Total Cost
Direct Materials
Direct Labor
Variable Overhead
Variable Costing
Fixed Overhead
Full Absorption

8

ACTUAL COSTING

COST / UNIT COST (2) / CALCULATION / TOTAL COST (4)
DM / 7.98 / 794,010/99,500 / 794,010 (1b)
DL / 4.59 / 456,705 (2b)
VMOH / 2.11 / 210,000 (3a)
VAR COST / 14.68 / 1,460,715
FMOH / 4.82 / 480,000 (4a)
FAC COST / 19.50 / 1,940,715

UNIT COST (2) = TOTAL COST (4) / ACTUAL UNITS (99,500)

NORMAL COSTING

COST / UNIT COST (2) / CALCULATION / TOTAL COST (4)

DM

/ 7.98 / 794,010 (1b)
DL / 4.59 / 456,705 (2b)
VMOH / 1.8 / VMOH RATE x 2a / 179,100
VAR COST / 14.37 / 1,429,815
FMOH / 4.99 / FMOH RATE x 1b / 496,256
FAC COST / 19.36 / 1,926,071

UNIT COST (2) = TOTAL COST (4) / ACTUAL UNITS (99,500)

VMOH RATE = {200,000(3b)} / {0.5(2c) x 100,000(5a)}

= $4/DLH

FMOH RATE = {500,000(4b)} / {4(1c) x 2(1d) x 100,000(5a)}

= $0.625/DM$


STANDARD COSTING

COST / UNIT COST (2) / CALCULATION / TOTAL COST (4)
DM / 8.00 / 2(1D) x 4(1C) x 99,500(5B) / 796,000
DL / 5.00 / 10(2D) x 0.5(2C) x 99,500(5B) / 497,500
VMOH / 2.00 / VMOH RATE x 0.5(2C) x 99,500 / 199,000
VAR COST / 15.00 / 1,492,500
FMOH / 5.00 / FMOH RATE x {4(1C) x 2(1D)} x 99,500 / 497,500
FAC COST / 20.00 / 1,990,000

UNIT COST (2) = TOTAL COST (4) / ACTUAL UNITS (99,500)

VMOH RATE = {200,000(3b)} / {0.5(2c) x 100,000(5a)}

= $4/DLH

FMOH RATE = {500,000(4b)} / {4(1c) x 2(1d) x 100,000(5a)}

= $0.625/DM$


INCOME STATEMENTS

(FULL ABSORPTION COST

or GROSS MARGIN FORMAT) è REQUIRED BY FASB/GAAP/SEC

SALES

LESS COGS (DM + DL+ VMOH + FMOH)

GROSS MARGIN

LESS NMOH (VMKT + FMKT+ VADM + FADM)

OPERATING PROFIT (OPFAC)

************************************************

(VARIABLE COST or

CONTRIBUTION MARGIN FORMAT)

SALES

LESS COGS (DM + DL + VMOH) (1)

LESS VNMOH (VMKT+VADM) (2)

CONTRIBUTION MARGIN

LESS FMOH

LESS FNMOH (FMKT + FADM)

OPERATING PROFIT (OPVC)

NOTE: (1) = VMC

(1) + (2) = UVC

***********************************************

IF PRODUCTION = SALES THEN OPFAC = OPVC

IF PRODUCTION > SALES THEN OPFAC > OPVC

IF PRODUCTION < SALES THEN OPFAC < OPVC

VARIABLE COST OR CONTRIBUTION MARGIN FORMAT OF THE INCOME STATEMENT

·  SALES ={UNIT PRICE X UNITS SOLD}

·  LESS COST OF GOOD SOLD (COGS)

= {DM + DL + VMOH}

·  LESS VNMOH = {VMKT + VADM}

·  CONTRIBUTION MARGIN

·  LESS FMOH

·  LESS FNMOH = {FMKT + FADM}

·  OPERATING PROFIT (OP)


CALCULATION OF “COGS”

·  VARIABLE COSTING

{VC/UNIT} = {DM/UNIT} + {DL/UNIT} + {VMOH/UNIT}*

* {VMOH/UNIT} = TOTAL VMOH

UNITS PROD.

COGS (VC) = (UNITS SOLD) X {VC/UNIT}

·  FULL ABSORPTION COSTING

{FAC/UNIT} = {DM/UNIT} + {DL/UNIT} + {VMOH/UNIT}

+ {FMOH/UNIT}*

* {FMOH/UNIT} = TOTAL FMOH

UNITS PROD.

COGS (FAC) = (UNITS SOLD) X {FAC/UNIT}

·  NOTE: UNITS FROM DIFFERENT PERIODS HAVE DIFFERENT PRODUCT COSTS


LOW-LIFE CORPORATION (LLC)

LLC PRODUCES A SINGLE PRODUCT WITH THE FOLLOWING COSTS:

1999 1998

UNITS PRODUCED 1000 1000

UNITS SOLD 1150 850

OPENING BALANCE 150 0

ENDING BALANCE 0 150

SELLING PRICE/UNIT $20.00 $15.00

DM/UNIT $2.10 $1.50

DL/UNIT $2.50 $2.00

FMOH $4000 $3000

VMOH $1200 $1100

FMKT $1500 $1000

VMKT $1300 $1250

FADM $3000 $2500

VADM $600 $500

USE THE VARIABLE & FULL ABSORPTION COSTING FORMAT TO CALCULATE THE OPERATING PROFIT FOR THE TWO YEARS.


LLC’S OPERATING PROFIT (1998)

SALES = 850 x 15 = $12,750

COGS = 850 x (1.50 + 2.00 + 1100/1000)

= $3,910

^^^^^^^^^^^^^^^^^^^^^^^^^^^^

SALES 12750

(COGS) (3910)

(VMKT) (1250)

(VADM) (500)

CM 7090

(FMOH) (3000)

(FMKT) (1000)

(FADM) (2500)

OP $590


LLC’S OPERATING PROFIT (1999)

SALES = 1150 x 20 = $23,000

COGS = 150 x (1.50 + 2.00 + 1100/1000)

+ 1000 x (2.10 + 2.50 + 1200/1000)

= $6,490

^^^^^^^^^^^^^^^^^^^^^^^^^^^^

SALES 23000

(COGS) (6490)

(VMKT) (1300)

(VADM) (600)

CM 14610

(FMOH) (4000)

(FMKT) (1500)

(FADM) (3000)

OP $6110


LLC’S OPERATING PROFIT (1999)

(USING FULL ABSORPTION COSTING)

SALES = 1150 x 20 = $23,000

COGS=150x(1.50+2.00+1100/1000+3000/1000)

+1000x(2.10+2.50+1200/1000+4000/1000)

= $10,940

^^^^^^^^^^^^^^^^^^^^^^^^^^^^

SALES 23000

(COGS) (10940)

GROSS MARGIN 12060

(VMKT) (1300)

(VADM) (600)

(FMKT) (1500)

(FADM) (3000)

OP $5660

17