Product Costing and Cost

Accumulation in a Batch
Production Environment
Chapter 3
McGraw-Hill/I rwin
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
3-2
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.
3-3
Learning Objective 2
3-4
Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished
Expense closed into
Income Summary at end
of accounting period
Work-in-Process Inventory Finished Goods Inventory
Cost of Goods Sold Income Summary
Flow of Costs in Manufacturing Firm
3-5
Learning Objective 3
3-6
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 one at
a time.
Batch-production operations
Multiple products in batches of relatively small
quantity.
Process
Costing
Job-Order
Costing
Types of Product-Costing Systems
3-7
Typical job-order cost applications:
Special-order printing
Building construction
Also used in the service industry
Hospitals
Law firms
Process
Costing
Job-Order
Costing
Types of Product-Costing Systems
3-8
Process
Costing
Job-Order
Costing
Used for production of small, identical, low cost
items.
Mass produced in automated continuous
production process.
Costs cannot be directly traced to each unit of
product.
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill
Types of Product-Costing Systems
3-9
The primary document
for tracking the costs
associated with a
given job is the
job-cost record.
Lets investigate using the
AFB Company
Accumulating Costs in a
Job-Order Costing System
3-10
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boats
Nov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit Price
Cost Item
Total direct material
Amount
Cost Summary
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Job-Order Cost Accounting
3-11
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boats
Nov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit Price
Cost Item
Total direct material
Amount
Cost Summary
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Lets see one
A materials requisition
form is used to
authorize the use of
materials on a job.
Job-Order Cost Accounting
3-12
Requisition No. 352 Date 11/1/x1
Job Number to Be Charged F16 Dept. Painting
Department Supervisor Timothy Williams
Item Quantity Unit Cost Amount
Aluminum 7,200 sq ft 2.50 $ 18,000.00 $
Authorized
Signature
Timothy Williams
Job-Order Cost Accounting
3-13
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1/x1 7,200 sq ft $18,000
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
$2.50
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boats
Nov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit Price
352
Cost Item
Total direct material
Amount
Cost Summary
$18,000
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Job-Order Cost Accounting
3-14
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
$2.50
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boats
Nov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit Price
803
Cost Item
Total direct material
Amount
Cost Summary
$18,000
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Accumulate
direct labor
costs by
means of a
work record,
such as a time
ticket, for each
employee.
Lets see one
Job-Order Cost Accounting
3-15
Employee Ron Bradley Date 11/5/20x1
Employee Number 12 Department Painting
Station
Shop cleanup
A26
11:30
1:00
12:00
5:00
Time Started Time Stopped Job Number
8:00 F16 11:30
Employee Time Ticket
3-16
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Various
dates 600 $12,000
Date Quantity Cost
Date Cost Balance
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Total cost
Unit cost
Total direct labor
Total manufacturing overhead
12,000
Cost Item
Total direct material
Amount
Cost Summary
$18,000
80 deluxe alum. fishing boats
Nov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803 $2.50
Direct Labor
Time Cards Unit Price
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Job-Order Cost Accounting
3-17
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Various
dates 600 $12,000
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
$2.50
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boats
Nov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803
Cost Item
Total direct material
Amount
Cost Summary
$18,000
Total direct labor
Total manufacturing overhead
12,000
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Apply manufacturing overhead to jobs using a
predetermined overhead rate based on direct
labor hours (DLH).
Lets do it
Job-Order Cost Accounting
3-18
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Various
dates 600 $12,000
Date Quantity Cost
11/30 600 $18,000
Date Cost Balance
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Total cost
Unit cost
Total direct labor
Total manufacturing overhead
12,000
18,000
Cost Item
Total direct material
Amount
Cost Summary
$18,000
Direct Labor Hours $30.00
80 deluxe alum. fishing boats
Nov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803 $2.50
Direct Labor
Requisition Number Unit Price
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Job-Order Cost Accounting
3-19
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Various
dates 600 $12,000
Date Quantity Cost
11/30 600 $18,000
Date Cost Balance
11/30 $12,000
Shipping Summary
Units Shipped
Units Remaining
in Inventory
60 20
Total cost $48,000
Unit cost $600
Total direct labor
Total manufacturing overhead
12,000
18,000
Cost Item
Total direct material
Amount
Cost Summary
$18,000
Direct Labor Hours $30.00
80 deluxe alum. fishing boats
Nov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803 $2.50
Direct Labor
Requisition Number Unit Price
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Job-Order Cost Accounting
3-20
Job Number F16 Description
Date Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Various
dates 600 $12,000
Date Quantity Cost
11/30 600 $18,000
Date Cost Balance
11/30 $12,000
Shipping Summary
Units Shipped
Units Remaining
in Inventory
60 20
Total cost $48,000
Unit cost $600
Total direct labor
Total manufacturing overhead
12,000
18,000
Cost Item
Total direct material
Amount
Cost Summary
$18,000
Direct Labor Hours $30.00
80 deluxe alum. fishing boats
Nov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803 $2.50
Direct Labor
Requisition Number Unit Price
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Job-Order Cost Accounting
3-21
Learning Objective 4
3-22
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
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
Manufacturing Overhead Costs
3-23
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR Actual activity
Recall the Aluminum Boat example where:
Overhead applied = $30 per DLH 600 DLH = $18,000
Manufacturing Overhead Costs
3-24
Learning Objective 5
3-25
Lets summarize
the document
flow we have
been discussing
in a job-order
costing system.
Job-Order Costing
Document Flow Summary
3-26
Production
Order for Job
The materials requisition indicates the cost of
direct material to charge to jobs and the cost of
indirect material to charge to overhead.
Material
Requisition
The production order for the job authorizes the start
of the production process.
Labor Time Records
Employee time tickets indicate the cost of direct
labor to charge to jobs and the cost of indirect
labor to charge to overhead.
Actual Cost Driver (or Activity Base)
X
Predetermined Overhead Rate
Apply Manufacturing Overhead
Job-Order Costing
Document Flow Summary
3-27
Lets examine the
cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
Job-Order System Cost Flows
3-28
Raw Materials
Material
Purchases
Direct
Material
Direct
Material
Mfg. Overhead
Indirect
Material
Indirect
Material
Work in Process
(Job-Cost Record)
Job-Order System Cost Flows
3-29
Next lets add
labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
Job-Order System Cost Flows
3-30
Direct
Labor
Mfg. Overhead
Indirect
Material
Direct
Material
Indirect
Labor
Direct
Labor
Indirect
Labor
Wages Payable
Work in Process
(Job-Cost Record)
Job-Order System Cost Flows
3-31
Direct
Labor
Mfg. Overhead
Indirect
Material
Direct
Material
Overhead
Applied to
Work in
Process
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.
Indirect
Labor
Direct
Labor
Overhead
Applied
Indirect
Labor
Wages Payable
Work in Process
(Job-Cost Record)
Job-Order System Cost Flows
3-32
Now lets
complete the
goods and sell
them. Still with
me?
Job-Order System Cost Flows
3-33
Cost of
Goods
Mfd.
Finished Goods
Cost of
Goods
Sold
Cost of
Goods
Mfd.
Cost of Goods Sold
Cost of
Goods
Sold
Direct
Material
Direct
Labor
Overhead
Applied
Work in Process
(Job-Cost Record)
Job-Order System Cost Flows
3-34
Lets return to
AFB Company
and see what we
will do if actual
and applied
overhead are not
equal.
Job-Order System Cost Flows
3-35
Actual Overhead costs for the year: $5,050,000
Actual direct labor hours worked for the year: 170,000
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH 170,000 DLH = $5,100,000
Applied overhead exceeds actual overhead by $50,000
This difference is called overapplied overhead.
Overhead Application Example
3-36
Work in
Process
Finished
Goods
Cost of
Goods Sold
$50,000
may be allocated
to these accounts.
$50,000 may be
closed directly to
cost of goods sold.
Cost of
Goods Sold
AFB Companys
Method
OR
Overapplied and Underapplied
Manufacturing Overhead
3-37
Actual
overhead
costs

$5,050,000
$50,000
overapplied
Unadjusted
Balance
$50,000
$50,000
Adjusted
Balance
Overhead
Applied
to jobs

$5,100,000
AFBs
Mfg. Overhead
for the year
AFBs Cost
of Goods Sold
for the year
Overapplied and Underapplied
Manufacturing Overhead
3-38
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . Allocation of Goods Sold
UNDERAPPLIED INCREASE INCREASE
Work in Process Cost of Goods Sold
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASE
Work in Process Cost of Goods Sold
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
Overapplied and Underapplied
Manufacturing Overhead -
Summary
3-39
Learning Objective 6
3-40
Schedule of Cost of Goods Manufactured
Direct material:
Raw material inventory, beginning $xxx
Add: Raw material purchases xxx
Raw material available for use $xxx
Deduct: Raw material, ending xxx
Raw material used $xxx
Direct labor xxx
Manufacturing overhead
Indirect material $xxx
Indirect labor xxx
Other actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overhead
or Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx
Total manufacturing costs $xxx
Add: Work-in-process inventory, beginning xxx
Subtotal $xxx
Deduct: Work-in-process inventory, ending xxx
Cost of goods manufactured $xxx
Schedule of Cost of Goods Manufactured
3-41
Schedule of Cost of Goods Sold
Finished goods inventory, beginning $xxx
Add: Cost of goods manufactured* xxx
Cost of goods available for sale $xxx
Deduct: Finished goods inventory, ending xxx
Cost of goods sold $xxx
Add: Underapplied overhead
or Deduct: Overapplied overhead xxx
Cost of goods sold (adjusted) $xxx
* From Cost of Goods Manufactured Schedule
Schedule of Cost of Goods Sold
3-42
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.
Actual and Normal Costing
3-43
Learning Objective 7
3-44
Cost pools
Stage One:
Costs assigned
to pools
Indirect
Labor
Indirect
Materials
Other
Overhead
Department
1
Department
2
Department
3
Two-Stage Cost Allocation
3-45
Departmental Overhead Rates
Department
1
Department
2
Department
3
Products
Cost pools
Direct
Labor
Hours
Machine
Hours
Raw
Materials
Cost
Stage One:
Costs assigned
to pools
Stage Two:
Costs applied
to products
Departmental Allocation Bases
Indirect
Materials
Other
Overhead
Indirect
Labor
3-46
Learning Objective 8
3-47
Contracts
Missions
Programs
Cases
THE JOB
Job-Order Costing in
Nonmanufacturing Organizations
3-48
Changing Technology in Manufacturing
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.
3-49
End of Chapter 3
3-50