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Flow of Costs in ABC for Managerial Accounting Mcom Delhi University


Flow of Costs in ABC for Managerial Accounting Mcom Delhi University

Flow of Costs in ABC for Managerial Accounting Mcom Delhi University:- we will provide complete details of Flow of Costs in ABC for Managerial Accounting Mcom Delhi University in this article.

Flow of Costs in ABC for Managerial Accounting Mcom Delhi University

As products physically move through the production process, the product costs associated with these products move through several important accounts as shown back in Figure 4.1 “A Comparison of Cost Flows for Job Costing and Process Costing”. In this section, we present a detailed look at how product costs flow through accounts using a process costing system. Later in the chapter, we explain how dollar amounts are established for product costs that flow through the accounts. As you review each of the following cost flows for a process costing system, remember that product costs are now tracked by department rather than by job.

Direct Materials

Question: In a process costing setting, direct materials are often used by several production departments. How do we record direct materials costs for each production department?

Answer: When direct materials are requisitioned from the raw materials storeroom, a journal entry is made to reduce the raw materials inventory account and increase the appropriate work-in-process inventory account. For example, assume the Assembly department of Desk Products, Inc., requisitions direct materials to be used in production. The journal entry to reflect this is as follows:

The use of direct materials is not limited to one production department. Suppose the Finishing department requisitions direct materials for production. The journal entry to reflect this is as follows:

Notice that two different work-in-process inventory accounts are used to track production costs—one for each department.

Direct Labor

Question: Each production department typically has a direct labor work force. How do we record direct labor costs for each production department?

Answer: Direct labor costs are recorded directly in the production department’s work-in-process inventory account. Assume direct labor costs are incurred by the Assembly department. The journal entry to reflect this is as follows:

As with direct materials, the use of direct labor is not limited to one production department. Suppose direct labor costs are incurred by the Finishing department. The journal entry to reflect this is as follows:

Manufacturing Overhead

Question: Manufacturing overhead costs are typically assigned to products using a predetermined overhead rate using a normal costing system as discussed in Chapter 2 “How Is Job Costing Used to Track Production Costs?” (job costing) and Chapter 3 “How Does an Organization Use Activity-Based Costing to Allocate Overhead Costs?” (activity-based costing). How do we record manufacturing overhead costs for each department?

Answer: Assume manufacturing overhead costs (often simply called overhead costs) are being applied to products going through the Assembly department. The journal entry to reflect this is as follows:

The journal entry to reflect manufacturing overhead costs being applied to products going through the Finishing department is as follows:

Transferred-In Costs

Question: At this point, we have discussed how to record product costs (direct materials, direct labor, and manufacturing overhead) related to each production department. As you review Figure 4.1 “A Comparison of Cost Flows for Job Costing and Process Costing”, notice that products often flow from one production department to the next. Transferred-in costs are the costs associated with products moving from one department to another. How do we record transferred-in costs for each department?

Answer: Assume the Assembly department at Desk Products, Inc., completes a batch of desks and moves the desks to the Finishing department. The costs associated with these desks must be transferred from the work-in-process inventory account for the Assembly department to the work-in-process inventory account for the Finishing department. Thus these costs are being transferred in to the Finishing department. The journal entry to reflect this is as follows:

Finished Goods

Question: Goods are completed and ready to sell once they have gone through the final production department. The final production department at Desk Products, Inc., is the Finishing department. How do we record production costs for products moved from the final production department to the finished goods warehouse?

Answer: When goods go through the final production department and are completed, the related costs are moved to the finished goods inventory account. The journal entry to reflect this is as follows:

The cost flows in a process costing system are similar to the cost flows in a job costing system. The primary difference between the two costing methods is that a process costing system assigns product costs—direct materials, direct labor, and manufacturing overhead—to each production department (or process) rather than to each job. Each production department has its own work-in-process inventory account when using process costing.

Flow of Costs in ABC for Managerial Accounting Mcom Delhi University
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