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Product Costing and Cost

Accumulation in a Batch

Production Environment

Chapter 3Chapter 3

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LearningObjective1

LearningObjective1

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Product and Service CostingProduct and Service Costing

FinancialAccounting

Product costs areused to valueinventory and tocompute cost of

goods sold.

ManagerialAccounting and

Cost Management

Product costs areused for planning,

control, directing, andmanagement decision

making.

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Direct material cost Product cost transferred

Direct labor costManufacturing overhead when product is finished

Expense closed into

Income Summary at endof accounting period

Work-in-Process Inventory Finished Goods Inventory

Cost of Goods Sold Income Summary

Flow of Costs in Manufacturing FirmFlow of Costs in Manufacturing Firm

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3-7

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 ata time.

Batch-production operations

Multiple products in batches of relatively smallquantity.

Process

Costing

Job-Order

Costing

Types of ProductTypes of Product--Costing SystemsCosting Systems

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Job Number F16 DescriptionDate 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

JOB-COST RECORD

Direct Material

Requisition Number Unit Price

$2.50

Direct Labor

Requisition Number Unit Price

Direct Labor Hours $30.00

80 deluxe alum. fishing boatsNov. 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

18,000

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

JobJob--Order Cost AccountingOrder Cost Accounting

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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

1

2

Manufacturing Overhead CostsManufacturing Overhead Costs

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DirectLabor

Mfg. Overhead

IndirectMaterial

DirectMaterial

IndirectLabor

DirectLaborIndirectLabor

Wages Payable Work in Process(Job-Cost Record)

Job-Order System Cost Flows

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DirectLabor

Mfg. Overhead

IndirectMaterial

DirectMaterial

OverheadApplied to

Work in

Process

If actual and applied

manufacturing overhead arenot equal, a year-end

adjustment is required. We

will look at the procedure to

accomplish this later.

IndirectLabor

DirectLaborOverhea

d

Applied

IndirectLabor

Wages Payable Work in Process(Job-Cost Record)

Job-Order System Cost Flows

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Cost ofGoods

Mfd.

Finished Goods

Cost ofGoods

Sold

Cost ofGoods

Mfd.

Cost of Goods Sold

Cost ofGoods

Sold

DirectMaterial

DirectLaborOverhea

d

Applied

Work in Process(Job-Cost Record)

Job-Order System Cost Flows

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1

N N N

V

Overapplied and UnderappliedOverapplied and Underapplied

Manufacturing OverheadManufacturing Overhead -- SummarySummary

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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 overheador 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 xxxCost of goods manufactured $xxx

Schedule of Cost of Goods ManufacturedSchedule of Cost of Goods Manufactured

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Finished goods inventory, beginning $xxx

Add: Cost of goods manufactured* xxxCost of goods available for sale $xxx

Deduct: Finished goods inventory, ending xxx

Cost of goods sold $xxx

Add: Underapplied overhead

orDeduct: Overapplied overhead xxx

Cost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule

Schedule of Cost of Goods SoldSchedule of Cost of Goods Sold

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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 itUsing a predetermined rate makes it

possible topossible to estimateestimate total job costs sooner.total job costs sooner.

Actual overhead for the period is notActual overhead for the period is notknown until the end of the period.known until the end of the period.

Actual and Normal CostingActual and Normal Costing

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7

LearningObjective

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Departmental Overhead RatesDepartmental Overhead Rates

Department

1

Department

2

Department

3

Products

Cost pools

Direct

LaborHours

Machine

Hours

Raw

Materials

Cost

Stage One:Stage One:

Costs assignedCosts assigned

to poolsto pools

Stage Two:

Costs appliedto products

Departmental Allocation Bases

Indirect

Materials

Other

Overhead

Indirect

Labor

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8

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CAN BE USED IN NONMANUFACTURINGORGANIZATIONS THE JOB

Cases

Programs Contracts

Missions

CHANGING TECHNOLOGY IN MANUFACTURUNGOPERATIONS

Computerized data interchange has eliminated much ofthe paperwork associated with job-order cost systems.

Scanning devices have simplified data entry to record material and

labor use.

JobJob--Order CostingOrder Costing

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End of Chapter 3End of Chapter 3