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 / FMOHACTUAL / 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 CostDirect Materials
Direct Labor
Variable Overhead
Variable Costing
Fixed Overhead
Full Absorption
NORMAL COSTING
Type of Cost / Calculation / Unit Cost / Total CostDirect Materials
Direct Labor
Variable Overhead
Variable Costing
Fixed Overhead
Full Absorption
STANDARD COSTING
Type of Cost / Calculation / Unit Cost / Total CostDirect 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
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