Chapter 3

Product Costing and Cost Accumulation in a Batch Production Environment

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective 1

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Product and Service Costing

Financial Accounting
Product costs are used to value inventory and to compute cost of goods sold.

Managerial Accounting and Cost Management

Product costs are used for planning, control, directing, and management decision making.
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Learning Objective 2

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Flow of Costs in Manufacturing Firm

Work-in-Process Inventory Direct material cost Direct labor cost Manufacturing overhead Product cost transferred when product is finished

Finished Goods Inventory

Cost of Goods Sold Expense closed into Income Summary at end of accounting period

Income Summary

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Learning Objective 3

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Types of Product-Costing Systems

Process Costing Job-Order Costing

Used for production of large, unique, high-cost items.

Built to order rather than mass produced.

Many costs can be directly traced to each job.

TWO TYPES: Job-shop operations Products manufactured in very low volumes or at a time. one

Batch-production operations
Multiple products in batches of relatively small quantity.
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Job-Order Cost Accounting

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price $2.50 Cost $18,000 Direct Material Requisition Number Quantity 803 7,200 sq ft Direct Labor Requisition Number Quantity Various time cards 600

Date 11/1

Date Various dates

Unit Price $20

Cost $12,000

Date 11/30

Manufacturing Overhead Requisition Number Quantity Direct Labor Hours 600 Cost Summary Cost Item

Unit Price $30.00

Cost $18,000

Total direct material Total direct labor Total manufacturing overhead Total cost Unit cost

Amount $18,000 12,000 18,000

Date

Shipping Summary Units Remaining Units Shipped in Inventory

Cost Balance

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Learning Objective 4

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Manufacturing Overhead Costs

Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.
Budgeted manufacturing overhead cost POHR = 2 Budgeted amount of cost driver (or activity base)
1

Overhead applied = POHR Actual activity

Based on estimates, and determined before the period begins Actual amount of the allocation base, such as direct labor hours, incurred during the period
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Learning Objective 5

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order System Cost Flows

Raw Materials
Material Direct Purchases Material Indirect Material

Work in Process (Job-Cost Record)

Direct Material

Mfg. Overhead
Indirect Material

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Job-Order System Cost Flows

Wages Payable
Direct Labor Indirect Labor

Work in Process (Job-Cost Record)

Direct Material Direct Labor

Mfg. Overhead
Indirect Material Indirect Labor
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Job-Order System Cost Flows

Wages Payable
Direct Labor
Indirect Labor

Work in Process (Job-Cost Record)

Direct Material Direct Labor Overhea d Applied If actual and applied
manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later.
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Mfg. Overhead
Indirect Overhead Material Applied to Indirect Work in Process Labor

Job-Order System Cost Flows

Work in Process (Job-Cost Record)
Direct Material Direct Labor Overhea d Applied Cost of Goods Mfd.

Finished Goods
Cost of Goods Mfd. Cost of Goods Sold

Cost of Goods Sold

Cost of Goods Sold
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Overapplied and Underapplied Manufacturing Overhead - Summary

Alternative 1 If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold Alternative 2 Close to Cost of Goods Sold INCREASE Cost of Goods Sold

DECREASE Cost of Goods Sold

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Learning Objective 6

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Schedule of Cost of Goods Manufactured

Schedule of Cost of Goods Manufactured Direct material: Raw material inventory, beginning Add: Raw material purchases Raw material available for use Deduct: Raw material, ending Raw material used Direct labor Manufacturing overhead Indirect material Indirect labor Other actual overhead charges Total actual manufacturing overhead Add: Overapplied overhead or Deduct: Underapplied overhead Overhead applied to work-in-process Total manufacturing costs Add: Work-in-process inventory, beginning Subtotal Deduct: Work-in-process inventory, ending Cost of goods manufactured

$xxx xxx $xxx xxx $xxx xxx

$xxx xxx xxx $xxx xxx xxx $xxx xxx $xxx xxx $xxx

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Schedule of Cost of Goods Sold

Schedule of Cost of Goods Sold Finished goods inventory, beginning Add: Cost of goods manufactured* Cost of goods available for sale Deduct: Finished goods inventory, ending Cost of goods sold Add: Underapplied overhead or Deduct: Overapplied overhead Cost of goods sold (adjusted) * From Cost of Goods Manufactured Schedule $xxx xxx $xxx xxx $xxx xxx $xxx

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Actual and Normal Costing

Actual direct material and direct labor combined with actual overhead.

Actual direct material and direct labor combined with predetermined overhead.

Using a predetermined rate makes it possible to estimate total job costs sooner.

Actual overhead for the period is not known until the end of the period.
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Learning Objective 7

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Departmental Overhead Rates

Stage One: Costs assigned to pools

Indirect Labor

Indirect Materials

Other Overhead

Cost pools
Stage Two: Costs applied to products

Department 1
Direct Labor Hours

Department 2
Machine Hours

Department 3
Raw Materials Cost

Products
Departmental Allocation Bases
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Learning Objective 8

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing
CAN BE USED IN NONMANUFACTURING ORGANIZATIONS
THE JOB
Cases Programs Contracts Missions

CHANGING TECHNOLOGY IN MANUFACTURUNG OPERATIONS

Computerized data interchange has eliminated much of the paperwork associated with job-order cost systems. Scanning devices have simplified data entry to record material and labor use.

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End of Chapter 3

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