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Chapter 3. Product Costing and Cost Accumulation in a Batch Production Environment. Learning Objective 1. Product and Service Costing. Our focus changes from financial statement costs to operations. Managerial Accounting and Cost Management

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Chapter 3

Chapter 3

Product Costing and Cost Accumulation in a Batch Production Environment


Learning objective 1

Learning Objective1


Product and service costing

Product and Service Costing

Our focus changes from financial

statement costs to operations

Managerial Accounting and Cost Management

Product costs are used for planning, control, directing, and management decision making.

Financial Accounting

Product costs are used to value inventory and to compute cost ofgoods sold.


Learning objective 2

Learning Objective2


Flow of costs in manufacturing firm

Flow of Costs in Manufacturing Firm


Learning objective 3

Learning Objective3


Types of product costing systems

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

  • Built to order rather than mass produced.

  • Many costs can be directly traced to each job.

Types of Product-Costing Systems

ProcessCosting

Job-OrderCosting


Types of product costing systems1

Types of Product-Costing Systems

ProcessCosting

Job-OrderCosting

  • 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.


Types of product costing systems2

Types of Product-Costing Systems

ProcessCosting

Job-OrderCosting

  • Typical job-order cost applications:

    • Special-order printing

    • Building construction

  • Also used in service industry

    • Hospitals

    • Law firms


Types of product costing systems3

  • 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.

Types of Product-Costing Systems

ProcessCosting

Job-OrderCosting


Types of product costing systems4

Types of Product-Costing Systems

ProcessCosting

Job-OrderCosting

  • Typical process cost applications:

    • Petrochemical refinery

    • Paint manufacturer

    • Paper mill


Accumulating costs in a job order costing system

Accumulating Costs in aJob-Order Costing System

The primary document for tracking the costs associated with a given job is the job-cost record.

Let’s investigate


Job order cost accounting

Job-Order Cost Accounting


Job order cost accounting1

A materials requisition form is used to authorize the use of materials on a job.

Let’s see one

Job-Order Cost Accounting


Materials requisition form

Materials Requisition Form

Timothy Williams


Job order cost accounting2

Job-Order Cost Accounting


Job order cost accounting3

Job-Order Cost Accounting

Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.

Let’s see one


Employee time ticket

Employee Time Ticket


Job order cost accounting4

Job-Order Cost Accounting


Job order cost accounting5

Job-Order Cost Accounting

Apply manufacturing overhead to jobs using apredetermined overhead rate based on direct labor hours (DLH).

Let’s do it


Job order cost accounting6

Job-Order Cost Accounting


Job order cost accounting7

Job-Order Cost Accounting


Job order cost accounting8

Job-Order Cost Accounting


Learning objective 4

Learning Objective4


Manufacturing overhead costs

Budgeted manufacturing overhead cost

POHR =

Budgeted amount of cost driver (or activity base)

Manufacturing Overhead Costs

Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.

1

2

Overhead applied = POHR × Actual activity

Based on estimates, and determined before the period begins

Actualamount of the allocation base, such as direct labor hours, incurred during the period


Manufacturing overhead costs1

Budgeted manufacturing overhead cost

POHR =

Budgeted amount of cost driver (or activity base)

Manufacturing Overhead Costs

Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.

Overhead applied = POHR × Actual activity

Recall the wooden crate example where:

Overhead applied = $4 per DLH × 8 DLH = $32


Learning objective 5

Learning Objective5


Chapter 3

Job-Order CostingDocument Flow Summary

Let’s summarize the document flow we have been discussing in a job-order costing system.


Job order costing document flow summary

Job-Order CostingDocument Flow Summary

Production Order for Job

Material Requisition

The materials requisition indicates the cost ofdirect materialto charge tojobsand the cost ofindirect materialto charge to overhead.

The production order for the job authorizes the start of the production process.


Job order costing document flow summary1

Job-Order CostingDocument Flow Summary

Employee time tickets indicate the cost ofdirect laborto charge tojobsand the cost of indirect laborto charge to overhead.

Direct Labor Time Records

Indirect Labor Time Records


Job order costing document flow summary2

Job-Order CostingDocument Flow Summary

Cost Driver (or Activity Base)

Predetermined Overhead Rate

X


Chapter 3

Job-Order System Cost Flows

Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.


Chapter 3

Job-Order System Cost Flows

Work in Process(Job-Cost Record)

Raw Materials

  • Direct Material

  • Direct Material

  • Material

  • Purchases

  • Indirect Material

Mfg. Overhead

  • Indirect Material


Chapter 3

Job-Order System Cost Flows

Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me?


Chapter 3

Job-Order System Cost Flows

Work in Process(Job-Cost Record)

Wages Payable

  • Direct Labor

  • Direct Material

  • IndirectLabor

  • Direct Labor

Mfg. Overhead

  • Indirect Material

  • IndirectLabor


Chapter 3

Job-Order System Cost Flows

Work in Process(Job-Cost Record)

Wages Payable

  • Direct Labor

  • Direct Material

  • IndirectLabor

  • Direct Labor

  • Overhead Applied

Mfg. Overhead

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 Material

  • OverheadApplied to Work inProcess

  • IndirectLabor


Chapter 3

Job-Order System Cost Flows

Now let’s complete the goods and sell them. Still with me?


Chapter 3

Job-Order System Cost Flows

Work in Process(Job-Cost Record)

Finished Goods

  • Direct Material

  • Cost ofGoodsMfd.

  • Cost ofGoodsMfd.

  • Cost ofGoodsSold

  • Direct Labor

  • Overhead Applied

Cost of Goods Sold

  • Cost ofGoodsSold


Chapter 3

Job-Order System Cost Flows

Let’s return to RoseCo and see what we will do if actual and applied overhead are not equal.


Overhead application example

Overhead Application Example

Actual Overhead costs for the year: $650,000

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


Overhead application example1

Overhead 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 = $680,000


Overhead application example2

Overhead 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 = $680,000

Applied overhead exceeds actual overhead by $30,000

This difference is called overapplied overhead.


Overapplied and underapplied manufacturing overhead

$30,000may be allocatedto these accounts.

$30,000 may beclosed directly to cost of goods sold.

Work inProcess

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

Overapplied and Underapplied Manufacturing Overhead

OR

RoseCo’sMethod


Overapplied and underapplied manufacturing overhead1

Overapplied and Underapplied Manufacturing Overhead

RoseCo’sMfg. Overheadfor the year

RoseCo’s Costof Goods Soldfor the year

Unadjusted Balance

Actualoverheadcosts

$650,000

OverheadAppliedto jobs

$680,000

$30,000

$30,000

AdjustedBalance

$30,000 overapplied


Overapplied and underapplied manufacturing overhead summary

Overapplied and Underapplied Manufacturing Overhead - Summary


Learning objective 6

Learning Objective6


Schedule of cost of goods manufactured

Schedule of Cost of Goods Manufactured


Schedule of cost of goods sold

Schedule of Cost of Goods Sold


Actual and normal costing

Actual and Normal Costing

Actual direct materialand direct labor combined withactual overhead.

Actual direct materialand direct labor combined withpredetermined overhead.

Using a predetermined rate makes itpossible to estimate total job costs sooner.

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


Plantwide overhead rate

Plantwide Overhead Rate

Companies tend to use direct labor

as the overhead allocation base.


Departmental overhead rates

Finishing Department

Painting Department

Shipping Department

Departmental Overhead Rates

A two-stage process is

necessary because different

departments may have

different cost drivers.


Learning objective 7

Learning Objective7


Two stage cost allocation

Two-Stage Cost Allocation

Indirect

Labor

Indirect

Materials

Other

Overhead

Stage One:

Costs assigned

to pools

Department

1

Department

2

Department

3

Cost pools


Departmental overhead rates1

Departmental Overhead Rates

Indirect

Labor

Indirect

Materials

Other

Overhead

Stage One:

Costs assigned

to pools

Department

1

Department

2

Department

3

Cost pools

Direct

Labor

Hours

Machine

Hours

Raw

Materials

Cost

Stage Two:

Costs applied

to products

Products

Departmental Allocation Bases


Learning objective 8

Learning Objective8


Job order costing in nonmanufacturing organizations

Cases

Missions

Programs

Contracts

Job-Order Costing in Nonmanufacturing Organizations

THE JOB


Changing technology in manufacturing operations

Changing Technology in Manufacturing Operations

  • Computerized data interchange has eliminated much of the paperwork associated with job-ordercost systems.

  • Scanning devices have simplified data entry to record material and labor use.


Learning objective 9

Learning Objective9


The concept of activity based costing abc

Assigning

overhead is

sure difficult.

I agree!

The Concept of Activity-Based Costing (ABC)

One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job.


The concept of activity based costing abc1

The Concept of Activity-Based Costing (ABC)

Activity-Based

Costing

Departmental

Overhead

Rates

Level of Complexity

Plantwide

Overhead

Rate

Overhead Allocation


End of chapter 3

End of Chapter 3


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