Chap003 7e Edited

8/8/2019 Chap003 7e Edited

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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Product Costing and CostAccumulation in a BatchProduction Environment

Chapter 3Chapter 3


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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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L

earningObjective2

L

earningObjective2


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Flow of Costs in Manufacturing FirmFlow of Costs in Manufacturing FirmFlow of Costs in Manufacturing FirmFlow of Costs in Manufacturing Firm

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


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L

earningObjective3

L

earningObjective3


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

Built to order rather than massproduced.

Many costs can be directly tracedto each job.

Types of ProductTypes of Product--CostingCosting

SystemsSystems


SystemsSystemsProcessCosting

Job-OrderCosting


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Job-shop operations

Products manufactured in very

low volumes or one at a time. Batch-production operations

Multiple products in batches ofrelatively small quantity.


SystemsSystems



Job-OrderCosting


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Typical job-order cost applications:

Special-order printing

Building construction Also used in service industry

Hospitals

Law firms


SystemsSystems



Job-OrderCosting


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ProcessCosting

Job-OrderCosting

Used for production of small,identical, low cost items.

Mass produced in automatedcontinuous production process.

Costs cannot be directly traced toeach unit of product.


SystemsSystems


SystemsSystems


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The primarydocument for

tracking the costsassociated with agiven job is thejob-

cost record.

Lets investigate

Accumulating Costs in aAccumulating Costs in aJobJob--Order Costing SystemOrder Costing SystemAccumulating Costs in aAccumulating Costs in aJobJob--Order Costing SystemOrder Costing System


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JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost AccountingJob Number F16 DescriptionDate 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


80 deluxe alum. fishing boatsNov. 22, 20x1

Manufacturing Overhead


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


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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed


Date Quantity Cost

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


Direct Labor





Cost Item


Amount

Cost Summary

Total direct labor


Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost Accounting

Lets see one

A materials requisitionform is used to

authorize the use of

materials on a job.


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Materials Requisition FormMaterials Requisition FormMaterials Requisition FormMaterials Requisition Form

Requisition No. 352 Date 1/28/x1

ob Number to Be Charged 621 Dept. Painting

Department Supervisor imothy Williams

Item Quantity Unit Cost Amount

White enamel paint 8 galons $14.00 $112

Clear lacquer 2 gallons 11.00 22

Authorized

Signature Timothy Williams


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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Total cost

Unit cost

Total direct labor


Cost Item


Amount

Cost Summary

$18,000




803 $2.50

Direct Labor


JOB-COST RECORD

Direct Material



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Job Numb

F

D

ip

ionD

d Nov.

,

D

Compl

d

Numb

ofUni

Compl

d

D

Qu

n

i

Cost

11/1 7,

sq ft $18,

D

te Qu

ntity Cost

D

te Qu

ntity Cost

D

te CostB

l

n

e

JOB CO

T R

CORD

Di ect

teri

l

Requisition Number Unit

rice

$2.

Direct L

bor

Requisition Number Unit rice

80 delu

e

lum. fishing boatsNov. 22, 20x1


Requisition Number Unit

rice

803

Cost Item


Amount

Cost

ummary

$18,000Total direct labor


Total cost

Unit cost

Shipping Summary

UnitsShipped

UnitsRemaining

in Inventory


Accumulatedirect labor

costs bymeans of a

work record,such as a timeticket, for each

employee.

Lets see one


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Employee Time TicketEmployee Time TicketEmployee Time TicketEmployee Time Ticket

Employee Ron Br ley Date 12/19/x1

Employee Number 12 Department Painting

Shop cleanup

J122

11:30

1:00

11:30

12:00

5:00

Time Started Time Stopped Job Number8:00 A267


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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost

Variousdates 600 $12,000

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


$2.50

Direct Labor



Various time cards $20



803

Cost Item


Amount

Cost Summary



12,000

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory


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Job Nu

b

r F!

"

D

# $

riptionD

%

t

&

t%

rt

d No'

.!,

( )

0

!D

%

t

Co

pl

t

d

Nu

b

r of Unit#

Co

pl

t

d1 )

D%

t

2

u%

ntit3

Co#

t

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4

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q ft5

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D%

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ntit3

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t6

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riou#

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D%

t

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u%

ntit3

Co#

t

D%

t

Co#

t B%

l%

n$

JOB-COST R7

CORD

Dir $

t8

%

t

ri%

l

R

qui#

ition Nu b

r Unit 9 ri$

5

(

.@

)

Dir $

t L%

bor

R

qui#

ition Nu

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r Unit9

ri$

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d

lu

0

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lu

. fi

#

hing bo

%

t

#

No'

.( (

,( )

0

!

6

%

riou#

ti

$ %

rd#

5

( )

8

%

nuf% $

turing Overhead

Requi#

ition Nu ber Unit 9 ri$

e

803

Co#

t Item

Total directmaterial

Amount

Co#

tSummar3

5

! 8,000Total direct labor

Totalmanufacturing overhead

!(

,000

Total co#

t

Unit co#

t

Shipping Summar3

Unit#

Shipped

Unit#

Remaining

in Inventor3


Apply manufacturing overhead to jobs using apredetermined overhead rate based on direct

labor hours (DLH).Lets do it


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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost


Date Quantity Cost

11/30 2,000 $18,000

Date Cost Balance

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Total cost

Unit cost

Total direct labor


12,000

18,000

Cost Item


Amount

Cost Summary

$18,000

Machine hours $9.00





803 $2.50

Direct Labor


JOB-COST RECORD

Direct Material




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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost


Date Quantity Cost

11/30 2,000 $18,000

Date Cost Balance

11/30 $12,000

JOB-COST RECORD

Direct Material


$2.50

Direct Labor


Machine hours $9.00





803

Cost Item


Amount

Cost Summary



12,000

18,000

Total cost $48,000

Unit cost $600

Shipping Summary

Units Shipped

Units Remaining

in Inventory

60 20



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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost


Date Quantity Cost

11/30 2,000 $18,000

Date Cost Balance

11/30 $12,000

JOB-COST RECORD

Direct Material


$2.50

Direct Labor


Machine hours $9.00





803

Cost Item


Amount

Cost Summary



12,000

18,000

Total cost $48,000

Unit cost $600

Shipping Summary

Units Shipped

Units Remaining

in Inventory

60 20



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LearningObjective

4

LearningObjective

4


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Overhead is applied to jobs using a predeterminedoverhead rate (POHR) based on estimates made at

the beginning of the accounting period.

Manufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead Costs

POHR =Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

Overhead applied = POHR Actual activity

Based on estimates, anddetermined before the

period begins

Actual amount of the allocationbase, such as direct labor hours,

incurred during the period

1

2


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Overhead is applied to jobs using apredetermined overhead rate (POHR) based on

estimates made at the beginning of theaccounting period.

Manufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead Costs

POHR =Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

Overhead applied = POHR Actual activity

Recall the wooden crate example where:

Overhead applied = $4 per DLH DLH = $32


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LearningObjective

5

LearningObjective

5


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JobJob--Order CostingOrder CostingDocument Flow SummaryDocument Flow Summary


ProductionOrder forJob

The materialsrequisition indicates

the cost ofdirectmaterial

to charge tojobs

and the cost ofindirect materialindirect material tocharge to overhead.

MaterialRequisition

The production orderfor the job authorizes

the start of theproduction process.


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Employee timetickets indicate

the cost ofdirect laborto charge to

jobs

and the costofindirect laborindirect laborto charge tooverhead.



Indirect LaborTime Records

Direct LaborTime Records


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Cost Driver (orActivity Base)

X PredeterminedOverhead Rate


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Lets examine thecost flows in a

job-order costingsystem. We willuse T-accountsand start with

materials.

Job-Order System Cost FlowsJob-Order System Cost Flows


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Raw MaterialsMaterial

PurchasesDirectMaterial

DirectMaterial

Mfg. Overhead

IndirectMaterial


IndirectMaterial

Work in Process(Job-Cost Record)


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Next lets addlaborcosts and

appliedmanufacturing

overhead to thejob-order costflows. Are you

with me?



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DirectLabor

Mfg. Overhead


IndirectMaterial

DirectMaterial

IndirectLabor

DirectLabor

IndirectLabor

Wages Payable Work in Process(Job-Cost Record)


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DirectLabor

Mfg. Overhead

IndirectMaterial

DirectMaterial

OverheadApplied to

Work inProcess

If actual and applied

manufacturing overhead arenot equal, a year-end

adjustment is required. Wewill look at the procedure to

accomplish this later.

IndirectLabor

DirectLabor

Overhead

Applied

IndirectLabor

Wages Payable Work in Process(Job-Cost Record)



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Now letscomplete the

goods and sell

them. Still withme?



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Cost ofGoods

Mfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoods

Mfd.

Cost of Goods Sold

Cost ofGoods

Sold


DirectMaterial

DirectLaborOverhea

dApplied

Work in Process(Job-Cost Record)


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Lets return toRoseCo and seewhat we will do if

actual andapplied overhead

are not equal.



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Overhead Application ExampleOverhead Application ExampleOverhead Application ExampleOverhead Application Example

Actual Overhead costs for the year: $650,000

Actual direct labor hours worked for the year: 170,000


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Overhead Application ExampleOverhead Application ExampleOverhead Application ExampleOverhead Application Example

Actual Overhead costs for the year: $650,000

Actual direct labor hours worked for the year: 170,000

Applied Overhead = POHR Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH 170,000 DLH = $6 0,000


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Overapplied and UnderappliedOverapplied and UnderappliedManufacturing OverheadManufacturing Overhead

Overapplied and UnderappliedOverapplied and UnderappliedManufacturing OverheadManufacturing Overhead

Work in

Process

Finished

Goods

Cost ofGoods Sold

$30,000may be allocated

to these accounts.

$30,000 may beclosed directly to

cost of goods sold.

Cost ofGoods Sold

RoseCos Method

OR


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Overapplied and UnderappliedOverapplied and Underapplied

Manufacturing OverheadManufacturing Overhead

Overapplied and UnderappliedOverapplied and Underapplied

Manufacturing OverheadManufacturing Overhead

Actualoverhead

costs

$650,000

$30,000overapplied

UnadjustedBalance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$6 0,000

RoseCosMfg. Overhead

for the year

RoseCos Costof Goods Sold

for the year


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LearningObjective

6

LearningObjective

6


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Actual and Normal CostingActual and Normal CostingActual and Normal CostingActual and Normal Costing

Actual direct materialand direct labor

combined withactual overhead.

Actual direct materialand direct labor

combined withpredetermined 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.


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Plantwide Overhead RatePlantwide Overhead Rate

Companies tend to use direct labordirect laboras the overhead allocation base.


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Departmental Overhead RatesDepartmental Overhead Rates

A two-stage process isnecessary because different

departments may havedifferent cost drivers.

Finishing DepartmentFinishing Department

Shipping DepartmentShipping Department

Painting DepartmentPainting Department


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LearningObjective

7

LearningObjective

7


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TwoTwo--Stage Cost AllocationStage Cost AllocationTwoTwo--Stage Cost AllocationStage Cost Allocation

Cost pools

Stage One:Costs assignedto pools

ndirectLabor

ndirectMaterials

OtherOverhead

Department1

Department2

Department3


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Departmental Overhead RatesDepartmental Overhead Rates

Department1

Department2

Department3

Products

Cost pools

DirectLabor

Hours

MachineHours

RawMaterials

Cost

Stage One:Stage One:Costs assignedCosts assignedto poolsto pools

Stage Two:

Costs appliedto products

Departmental Allocation Bases

ndirectMaterials

OtherOverhead

ndirectLabor


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LearningObjective

8

LearningObjective

8


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JobJob--Order Costing inOrder Costing inNonmanufacturing OrganizationsNonmanufacturing Organizations

JobJob--Order Costing inOrder Costing inNonmanufacturing OrganizationsNonmanufacturing Organizations

Contracts

Missions

Programs

Cases

THEJOB


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LearningObjective

9

LearningObjective

9

Th C t f A ti it B dTh C t f A ti it B d


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The Concept of Activity-BasedCosting (ABC)

The Concept of Activity-BasedCosting (ABC)

One of the mostdifficult tasks in

computingaccurate unit costslies in determining

the proper amountof overhead cost toassign to each job.

Assigningoverhead is

sure difficult.I agree!

Th C t f A ti itTh C t f A ti it B dB dTh C t f A ti itTh C t f A ti it B dB d


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The Concept of ActivityThe Concept of Activity--BasedBasedCosting (ABC)Costing (ABC)

The Concept of ActivityThe Concept of Activity--BasedBasedCosting (ABC)Costing (ABC)

Overhead Allocation

PlantwideOverhead

Rate

DepartmentalOverhead

Rates

Activity-BasedCosting


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Chap003 7e Edited