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

Normal Product Costing

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 31

Production Departments2

Materials Storeroom Factory/Production Area

Costs in departments correlate to inventory

accounts.

Raw Materials

Work in Process

Finished Goods

Ready for

Sale

Normal Costing A better method of assigning manufacturing costs

to products• Direct materials and direct labor are traced to products • Manufacturing overhead costs are allocated:

Overhead costs are accumulated into an expense account—Manufacturing Overhead

Overhead is then allocated to individual products based on a ‘predetermined overhead rate’ as products are being produced Calculated for the entire company Calculated at the beginning of the year Based on estimates

• Provides more timely product cost information• Appropriate for companies with a multiple products

3

4

Acquiring Raw Materials

The Purchasing Manager fills out an electronic purchase order to order materials from a supplier

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

materials in the storeroom.

2

The Materials Storeroom Clerk sends the receiving report to Accounting for

payment.

3

Materials Storeroom

1

Same as Actual Costing

5

Transactions to Acquire Materials

Purchase Materials for Cash• Debit/increase Raw Materials• Credit/decrease Cash Purchase Materials on Account• Debit/increase Raw Materials• Credit/increase Accounts Payable Pay for materials previously purchased on account• Debit/decrease Accounts Payable• Credit/decrease Cash• Credit/decrease Inventory for cash discount, if

any

Same as Actual Costing

Materials Requisition6

The production supervisor fills out a materials requisition form.

1

The materials storeroom clerk delivers the

requested materials to the production area.

2

The processed form is sent to Accounting.

3

Factory/Production 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

Same as Actual Costing

7

Using Direct Materials

Requisition of Direct Materials to Production• Debit/Increase Work in Process • Credit/decrease Raw Materials

Same as Actual Costing

Direct Labor8

• Employees fill out time tickets which indicate the hours worked on each product

• Time tickets = source documents• Direct labor cost = gross wages + fringe benefits

Gross wages = Wage rate × hours worked on each product

Incur direct labor costs Debit/increase Work in Process Credit/decrease Cash, increase salaries payable,

etc.

9

Manufacturing Overhead

Includes indirect materials, indirect labor, and factory (production facility) related costs

Incur factory-related costs

• Debit/increase Manufacturing Overhead

• Credit/decrease Cash

Requisition indirect materials to production

• Debit/increase Manufacturing Overhead

• Credit/decrease Raw Materials

Incur indirect labor costs

• Debit/increase Manufacturing Overhead

• Credit/decrease Cash, increase salaries payable, etc.

Differs from

Actual Costing

Assigning Overhead to Products

• MOH is ‘applied’ (allocated) to products– Based on a predetermined allocation rate– Determined at the beginning of the period

• Why is MOH applied? – It is an indirect cost– I.e., impossible or impractical to trace to a

particular product– Need to know product and job costs as production

occurs, i.e., on a timely basis• Waiting until the end of the period when actual costs are

known makes information untimely– Useful for making decisions such as pricing, product

changes, etc.

10

11

Completing Products

The cost of completed goods is transferred out of Work in Process

Debit/increase Finished Goods Credit/decrease Work in Process

The cost transferred out is called Cost of Goods Manufactured

Same as Actual Costing

12

Selling Products Transfer the cost of products sold out of Finished

Goods Debit/increase Cost of Goods Sold Credit/decrease Finished Goods

Recognize the sale Debit/increase Cash or AR Credit/increase Sales Revenue

Same as Actual Costing

13

The End