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Introduction How do managerial accountants determine the cost of the products or services being produced and sold by a company?
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Chapter 3
Job Costing, Process Costing, and Operations
Costing
Introduction
How do managerial accountants
determine the cost of the products or
services being produced and sold
by a company?
Introduction
How is the cost of the product used?Determining the selling priceBuying or making a component
Product Costing Systems
Job Costing
Customized Production: Home,
Furniture, Print Order
Customized Service:
Tax Return, Audit, Patient
Product Costing Systems
Process Costing: A homogeneous product being produced on a
continuous basis.
Oil refineries, Breweries, Paint
and Paper Manufacturers
Product Costing Systems
Operations Costing:
A hybrid of job and process
costingUsed by
manufacturers who make products in
batchesAutomobiles,
Clothing
Basic Job-Order Costing
Measuring and Tracking Direct Material
Normal Spoilage: Results from the regular operation of the production
processAbnormal Spoilage: Results from improper handling, poorly trained craftspeople, equipment that is in
poor condition
Measuring and Tracking Direct Labor
Direct Labor is calculated by multiplying a wage rate for each
employee by the number of hours that each employee works on each
product.Add Fringe Benefits such as
employer’s cost for health, dental and other insurance, retirement plans,
employer portion of social security tax and state and federal unemployment taxes (often 30-35% of the base
wage).
Direct Labor or Overhead?
Idle time?Overtime
premiums?
Measuring and Tracking Manufacturing Overhead
RentDepreciationRepairs and Maintenance
UtilitiesIndirect Labor
Indirect Materials
Allocation of Manufacturing Overhead
The choice of an allocation base requires a thorough understanding of
what causes overhead costs to be incurred.
Allocate based on the number of units produced.
Allocate based on the number of direct labor hours or machine hours.
Cost PoolsInstead of identifying cost drivers for each component of overhead,
companies have traditionally lumped overhead into similar Cost
Pools to simplify the task.May have one cost pool for the
entire factory.May have separate pools of
overhead for each department.May have a cost pool for each activity performed in making a
product.
Predetermined Overhead Rates
Key FormulaPredetermined Overhead Rate (for a Cost Pool)
=Estimated Overhead for the Cost PoolEstimated Units of the Cost Driver
The Problem of Over- and Underapplied Overhead
Overapplied Overhead: Applied overhead is greater than actual
overheadUnderapplied Overhead: Applied
overhead is less than actual overhead
Basic Process CostingDirect materialsDirect laborManufacturing overhead
Process AProcess BProcess CFinishe
d Goods
Cost of Goods Sold
Basic Process Costing
+ =One Full Glas
s1/21/2
Equivalent Units
Backflush Costing
For companies using JIT:All manufacturing costs are flushed
directly into cost of goods sold.If the company has small amounts of inventory on hand at the end of the
period, manufacturing costs are backflushed into the appropriate
materials inventory, WIP inventory or finished goods inventory.
End of Chapter 3
How much would the new product cost?
