Value Chain
Cost Behaviour Pattern
High-Low method is used to estimate cost functions by considering data at the highest and lowest levels of
activity (cost driver) within a certain range.
 Cost Function: TC = FC + (VC per unit × Units produced)
o Select highest and lowest level of activity
o

𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝐶𝑜𝑠𝑡 𝐿𝑒𝑣𝑒𝑙
VC per unit = 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙
o Calculate fixed cost by re-arranging one either the highest or lowest level of activity.
o Write cost function.
Relevant Range is the range of activity over which a particular cost behaviour is assumed to be valid.
Cost of Goods Manufactured (COGM) =
 + Beginning Work-in-Progress (WIP)
 + Total Manufacturing Costs
 - Ending WIP
Cost of Goods Sold (COGS) =
 + Beginning Finished Goods
 + COGM
 - Ending Finished Goods
Lecture 2 - Product Costing Systems: Job Costing
Product Costing System: A system that accumulates product-related costs and uses a series of procedures to
assign them to the organization's final products.
Product Costing is useful as it allows us to evaluate:
 Price
 Performance
 Planning and Controlling costs.
Different product costs are used for different purposes:
 External Reporting – Only manufacturing costs are included in product costs.
 Managerial Decisions:
o Short Term – Variable manufacturing and downstream costs (See Value Chain)
o Long Term – Total costs associated with the product. (Up and Downstream Costs)
Allocating manufacturing overhead (MOH) costs to products
1. Aggregate the overhead costs into cost pools.
2. Identify the overhead cost driver.
3. Calculate a predetermined overhead rate: 𝑃𝑟𝑒. 𝑂𝐻 𝑅𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
4. Apply overhead costs to products at the predetermined overhead rate:
𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝑂𝐻 𝑅𝑎𝑡𝑒 = 𝑃𝑟𝑒. 𝑂𝐻 𝑅𝑎𝑡𝑒 × 𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑒𝑣𝑒𝑙 𝑜𝑓 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
Accounting for MOH – Two types:

Actual
o Manufacturing overhead costs incurred throughout the accounting period
o Debited to the manufacturing overhead account
 Applied
o Estimate of the overhead resources used to manufacture a product (Applied OH Rate)
o Credited to the manufacturing overhead account
o Debited to the WIP account
If Actual MOH > Applied MOH
 Under applied MOH = actual MOH – applied MOH
o DR COGS
o CR MOH
If Actual MOH < Applied MOH
 Over applied MOH = applied MOH – actual MOH
o Dr MOH
o Cr COGS
Types of product costing systems
Job Costing System – a costing system that assigns manufacturing (or product-related) costs to individual jobs.
Calculation:
1. Identify Direct Costs
a. Direct Materials
b. Direct Labour
2. Allocating overhead costs to the job
a. Aggregating the overhead costs into cost pools
b. Identifying overhead cost driver (allocation base)
c. Calculate a predetermined overhead rate
d. Applying manufacturing overhead costs to products
Journal Entries and T-Accounts
No. Account
Purchase of Materials (Credit)
1
Raw Material Inventory
Account Payable
Charging direct labour costs
3
Work in process inventory
Wages payable
MOH actually incurred
5
Manufacturing overhead
Various accounts
Sale of goods
7
Cost of goods sold
Finished goods inventory
Accounts receivable
Sales revenue
DR
CR
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
No. Account
Transferring direct materials to WIP
2
Work in process inventory
Raw material inventory
MOH applied
4
Work in process inventory
Manufacturing overhead
Completion of production
6
Finished goods inventory
Work in process inventory
Adjust under/over applied overhead
8
Cost of goods sold
U
Manufacturing overhead
8
Manufacturing overhead
O
Cost of goods sold
DR
CR
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
Process costing system – a costing system that assigns all production costs to processes or departments, and
averages them across all units produced.
Lecture 3 - Process Costing
Process costing system accumulates the cost of each process then average these costs across all units
produced. Two scenarios:
 Process costing with zero beginning and ending WIP inventory;
 Process costing with some beginning and ending WIP inventory
Two main steps to calculate product costs:
 Accumulates total costs of the production processes
o Cost in each production process = DM +DL+MOH;
o Total costs= costs from all production processes.
 Calculate the average cost per unit by dividing total costs of the processes by the number of units
produced
o Average cost/unit = Total costs/Total no. of units produced
Process costing: journal entries and T-accounts