What are the three categories of costing methods in product costing?
- Cost measurement methods (standard, normal, or actual costing)
- Cost accumulation systems (job costing or process costing)
- The method to be used to allocate manufacturing overhead
When is process costing used?
It is used when many identical or similar units of a product or service are being manufactured, such as on an assembly line.
What is the main difference between when job order costing is used and when process costing is used?
Job-order costing can be used when all the products or production runs are unique and identifiable from each other.
Process costing is used for homogeneous products that are mass-produced.
What are the two classifications of costs accumulated in process costing?
- Direct materials
- Conversion costs
What are conversion costs?
They are costs necessary for converting raw materials into finished products. They include all manufacturing costs other than direct materials, specifically direct labor and manufacturing overhead.
In process costing, what are the sources of costs accumulated in a process during a period?
- Costs incurred by the department during the period
- Transferred-in costs from previous departments
- Beginning work-in-process (BWIP) costs
What is the purpose of calculating equivalent units of production?
To allocate total costs between (1) units completed and transferred out to either finished goods or the next process, and (2) incomplete units that remained in the department’s work-in-process inventory at the end of the period.
What is normal spoilage in manufacturing, and how is it accounted for?
Normal spoilage is the expected amount of spoilage during processing that cannot generally be prevented and for which the cost is allocated to the good units that passed inspection.
What is abnormal spoilage in manufacturing, and how is it accounted for?
Abnormal spoilage is any spoilage greater than the normal amount. It is expensed on the income statement as a loss from abnormal spoilage in the period in which it is recognized.
What is job-order costing?
A cost system in which all costs associated with a specific job or client are accumulated and charged to that job or client.
What are the benefits of job order costing?
- Best for custom work or service work
- Enables calculation of gross profit on individual jobs
- Allows management to track performance for cost control
- Provides accurate costs for items produced
- Allows management to analyze costs for better control
What is life-cycle costing?
It is used to accumulate all costs associated with a product or service during its entire life cycle as part of the product costs. It includes pre-production and after-sale costs, as well as manufacturing costs.
Life-cycle costing is used to determine pricing and profitability of a product, product line, or service. It is not used for external financial reporting but it is useful for internal decision making.
How does life-cycle costing differ from other costing methods?
Life-cycle costing treats pre-production (upstream) and after-sale (downstream) costs as part of the product costs, whereas other methods treat those costs as period costs expensed as incurred.
Life-cycle costing is a type of costing that is useful for internal decision-making but not for external financial reporting.
What are the three categories of costs in life-cycle costing?
- Upstream Costs (before production)
- Manufacturing Costs
- Downstream Costs (after production)
In life-cycle costing, what costs are included in upstream costs?
- Research and Development
- Design – prototyping, testing, engineering, quality development
In life-cycle costing, what costs are included in manufacturing costs?
- Purchasing
- Direct and indirect manufacturing costs (labor, materials, and overhead)
In life-cycle costing, what costs are included in downstream costs?
- Marketing and distribution
- Services and assurance-type warranties
For external financial reporting under GAAP, how are R&D and design costs treated and how does this differ from their treatment in life-cycle costing?
None of those costs are treated as product costs for external financial reporting. For external financial reporting, intangible assets purchased for R&D activities, materials purchased or constructed for R&D activities, and equipment or facilities purchased or constructed for R&D activities are expensed as incurred, unless they have alternative future uses, in which case they may be capitalized. Design costs are expensed as incurred.
However, for life-cycle costing and internal decision-making, R&D and design costs are treated as product costs that need to be recovered from the sale of the product.
What are the benefits of life-cycle costing?
- Life-cycle costing provides a long-term, complete perspective on the costs and profitability of a product or service.
- When long-term costs are recognized in advance, life-cycle costing can be used to lower them.
- It includes research and development costs and future costs such as warranty work, enabling better pricing for profitability over a product or service’s lifetime.
- It can be used to assess future resource requirements for the product during its life.
- It can help in determining when a product will reach the end of its economic life.
What are the limitations of life-cycle costing?
- The assumption may be made that the fixed assets will be as productive in later years as they were when they were new, which may not be the case.
- Accurate estimation of the operational and maintenance costs for a product during its whole lifetime can be difficult.
- Cost increases over the life of the product need to be considered.
- It can require a lot of time and resources, and the costs may outweigh the benefits.
What does customer life-cycle costing focus on?
The total costs that will be paid by the customer during the whole time the customer owns the product.
True or False:
Customer life-cycle costs are included in the company’s total life-cycle cost calculation.
False
Customer life-cycle costing looks at the cost of the product from the customer’s (the buyer’s) standpoint, not the company’s.
However, customer life-cycle costing is an important consideration for a company because it is part of its pricing decision.
What role does life-cycle costing play in strategic planning and decision making about products?
It helps in assessing whether a product should be manufactured at all, based on its ability to recover all life-cycle product costs.
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