Copyright ©2015. University of North Florida. All rights reserved.

Product Costing – Assigning Product

Costs

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 30

2

Inventory Accounts for Manufacturers

• Three inventory accounts– Raw materials

• Materials to be used in production– Direct and indirect

– Work in process• Direct materials used in production• Direct labor costs incurred to produce• Manufacturing overhead costs identified as part

of the cost of production– Finished goods

• Goods completed and ready for sale

Reported on the balance sheet

Production Departments 3

Materials Storeroom Factory/Production Area

Costs in departments correlate to inventory

accounts.

Raw Materials

Work in Process

Finished Goods

Ready for

Sale

4Materials Storeroom Contains raw materials that will used in production

Direct and indirect materials Cost totals the balance in the raw materials account

Controlled by storeroom manager/clerk Counts and verifies materials received from suppliers Sends a copy of the receiving report to the accounting

department for future payment Issues materials for production upon receipt of a

materials requisition form from the factory production supervisor

Coordinates the physical transfer of the materials to the production area

5

Factory Work Area Contains partially completed products Contains the production machinery and is the

location in which production occurs Accumulated costs total the balance in the WIP

account Direct materials requisitioned from the materials storeroom Costs of direct labor and MOH added

Controlled by the production supervisor Responsible for producing products in accordance with the

company's specifications

6

Shipping Area Typically a loading dock for shipment to customers

Sometimes a showroom where goods are held for sale Contains completed inventory items held for sale Accumulated costs total the balance in the FG

account Costs are transferred from the WIP account when units

are completed Costs of goods sold are transferred out when units are

sold

7

Assigning Costs to ProductsDirect materials and direct labor• Traced to specific

products– Easily associated with

specific products• Increase WIP as incurred

Manufacturing overhead• Consists of only indirect

costs• Allocated to products

– Not easily associated with specific products

8

Acquiring Raw MaterialsThe Purchasing Manager fills out an electronic

purchase order to order materials from a supplier

1

When materials are received, the Materials Storeroom Clerk records and stocks the

materials in the storeroom.

2Materials Storeroom

The Materials Storeroom Clerk sends the receiving report to Accounting for payment.

3

DR Raw Materials InventoryCR Cash or Accounts Payable

Using Direct Materials in Production

9

The production supervisor fills out a materials requisition form.

1

The processed form is sent to Accounting.

3

Factory Work Area

PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date March 3Job No. A - 143Department B3

Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00

116.00$

Authorized Signature

A materials requisition form authorizes the use of materials on

a product or job

The materials storeroom clerk delivers the requested materials

to the production area.

2

DR Work in Process InventoryCR Raw Materials inventory

Incurring Direct Labor Costs 10

Factory/Production Area

10

Employees fill out time tickets to record the time spent on each

product/service

PearCo Employee Time Ticket

Time Ticket No. 36 Date March 4Employee I. M. Skilled Station 42

Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143

Totals 8.00 11.00$ 88.00$ A-143

Supervisor C. M. Workman

DR Work in Process InventoryCR Wages Payable or Cash

The processed form is sent to Accounting.

2

1

Direct labor cost = Gross wages + fringe benefitsGross wages =

Wage rate × Hours worked

11

Incurring Manufacturing Overhead• Accumulated in the

Manufacturing Overhead expense account

• Three components– Indirect materials

• Requisitioned by production supervisor on a materials requisition form

– Indirect labor • Accumulated on time

tickets or time cards– Factory related costs

• Incurred in factory operations

DR Manufacturing OverheadCR Raw Materials Inventory

DR Manufacturing OverheadCR Wages Payable or Cash

DR Manufacturing OverheadCR Various payables, cash, accumulated depreciation, etc.

Indirect costs are not traceable.

Assigning Manufacturing Overhead Allocated to specific products

Based on estimates of expected costs and a basis over which to allocate

Allocated cost is removed from the MOH expense account and transferred to the WIP account

12

DR Work in Process InventoryCR Manufacturing Overhead

Indirect Costs

Product A

Product B

Product C

13

The End