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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

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.

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 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

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

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

slide28
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

slide32
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.

slide33
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
slide34
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?

slide35
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
slide36
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
slide37
Job-Order System Cost Flows

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

slide38
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
slide39
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

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.

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

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.
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

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