Product Costing and Cost Accumulation in a Batch Production Environment CHAPTER 3 Copyright © 2015...

Product Costing and Cost Accumulation in a Batch Production Environment

CHAPTER 3

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Product and Service CostingProduct and Service Costing

Financial Accounting

Product costs are used to value inventory and

to compute cost ofgoods sold.

Managerial Accounting and

Cost ManagementProduct costs are used

for planning, control, directing, and

management decision making.

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Direct material cost Product cost transferredDirect labor costManufacturing overhead when product is finished

Expense closed into

Income Summary at endof accounting period

Work-in-Process Inventory Finished Goods Inventory

Cost of Goods Sold Income Summary

Flow of Costs in Manufacturing FirmFlow of Costs in Manufacturing Firm

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Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job. TWO TYPES:

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.

ProcessCosting

Job-OrderCosting

Types of Product-Costing SystemsTypes of Product-Costing Systems

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Typical job-order cost applications: Special-order printing Building construction

Also used in the service industry Hospitals Law firms

ProcessCosting

Job-OrderCosting


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ProcessCosting

Job-OrderCosting

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.

Typical process cost applications: Petrochemical refinery

Paint manufacturer

Paper mill


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The primary document for

tracking the costs associated with a given job is the job-cost record.

Let’s investigate using the AFB Company

Accumulating Costs in aAccumulating Costs in aJob-Order Costing SystemJob-Order Costing System

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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed

Number of Units Completed 80

Date Quantity Cost

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct MaterialRequisition Number Unit Price

Direct LaborRequisition Number Unit Price

80 deluxe alum. fishing boatsNov. 22, 20x1

Manufacturing OverheadRequisition Number Unit Price

Cost ItemTotal direct material

AmountCost Summary

Total direct laborTotal manufacturing overheadTotal costUnit cost

Shipping Summary

Units ShippedUnits Remaining

in Inventory

Job-Order Cost AccountingJob-Order Cost Accounting

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Date Quantity Cost

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD






AmountCost Summary

Total direct laborTotal manufacturing overheadTotal costUnit cost

Shipping Summary


in Inventory

Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.


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Requisition No. 352 Date 11/1/x1Job Number to Be Charged F16 Dept. PaintingDepartment Supervisor Timothy Williams

Item Quantity Unit Cost AmountAluminum 7,200 sq ft 2.50$ 18,000.00$

Authorized Signature

Timothy Williams


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Date Quantity Cost11/1/x1 7,200 sq ft $18,000

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD


$2.50




352


AmountCost Summary

$18,000Total direct laborTotal manufacturing overheadTotal costUnit cost

Shipping Summary


in Inventory


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Date Quantity Cost11/1 7,200 sq ft $18,000

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD


$2.50




803


AmountCost Summary

$18,000Total direct laborTotal manufacturing overheadTotal costUnit cost

Shipping Summary


in Inventory

Accumulate direct labor

costs by means of a

work record, such as a time ticket, for each

employee.

Let’s see one


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Employee Ron Bradley Date 11/5/20x1Employee Number 12 Department Painting Station

Shop cleanupA26

11:301:00

12:005:00

Time Started Time Stopped Job Number8:00 F1611:30

Employee Time TicketEmployee Time Ticket

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Date Quantity CostVarious

dates 600 $12,000

Date Quantity Cost

Date Cost Balance

Shipping Summary


in Inventory

Total costUnit cost

Total direct laborTotal manufacturing overhead

12,000


AmountCost Summary

$18,000


Various time cards $20


803 $2.50

Direct LaborTime Cards Unit Price

JOB-COST RECORD



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Actual direct materialand direct labor combined with

actual overhead.

Actual direct materialand direct labor combined with

predetermined overhead.

Using a predetermined rate makes itUsing a predetermined rate makes itpossible to possible to estimateestimate total job costs sooner. total job costs sooner.

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

Actual and Normal CostingActual and Normal Costing

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Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at

the beginning of the accounting period.

POHR =Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

Overhead applied = POHR × Actual activity

Based on estimates, and determined before the

period begins

Actual amount of the allocation base, such as direct labor hours,

incurred during the period

Manufacturing Overhead CostsManufacturing Overhead Costs

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Overhead is applied to jobs using a predetermined overhead rate (POHR)

based on estimates made at the beginning of the accounting period.

POHR =Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

Overhead applied = POHR × Actual activity

Recall the Aluminum Boat example where:Overhead applied = $30 per DLH × 600 DLH = $18,000

Manufacturing Overhead CostsManufacturing Overhead Costs

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dates 600 $12,000

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD


$2.50





803


AmountCost Summary

$18,000Total direct laborTotal manufacturing overhead

12,000

Total costUnit cost

Shipping Summary


in Inventory

Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct

labor hours (DLH).Let’s do it


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dates 600 $12,000

Date Quantity Cost11/30 600 $18,000

Date Cost Balance

Shipping Summary


in Inventory

Total costUnit cost


12,000 18,000


AmountCost Summary

$18,000

Direct Labor Hours $30.00




803 $2.50


JOB-COST RECORD



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dates 600 $12,000


Date Cost Balance11/30 $12,000

Shipping Summary


in Inventory60 20

Total cost $48,000Unit cost $600


12,000 18,000


AmountCost Summary

$18,000





803 $2.50


JOB-COST RECORD



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dates 600 $12,000


Date Cost Balance11/30 $12,000

Shipping Summary


in Inventory60 20

Total cost $48,000Unit cost $600


12,000 18,000


AmountCost Summary

$18,000





803 $2.50


JOB-COST RECORD



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Let’s summarize the document flow we have

been discussing in a job-order

costing system.

Job-Order CostingJob-Order CostingDocument Flow SummaryDocument Flow Summary

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Production Order for Job

The materials requisition indicates the cost of direct material to charge to jobs and the cost of

indirect materialindirect material to charge to overhead.Material

Requisition

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

Labor Time Records

Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect indirect

laborlabor to charge to overhead.

Actual Cost Driver (or Activity Base)

XPredetermined Overhead Rate

Apply Manufacturing Overhead

Job-Order CostingJob-Order CostingDocument Flow SummaryDocument Flow Summary

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Let’s examine the cost flows in a

job-order costing system. We will use T-accounts and start with

materials.

Job-Order System Cost FlowsJob-Order System Cost Flows

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Raw Materials•Material

Purchases•Direct

Material•Direct

Material

Mfg. Overhead•Indirect Material

•Indirect Material

Work in Process(Job-Cost Record)


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Next let’s add labor costs and

applied manufacturing overhead to the job-order cost flows. Are you

with me?


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•Direct Labor


•Direct Material

•IndirectLabor

•Direct Labor

•IndirectLabor

Wages PayableWork in Process

(Job-Cost Record)


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•Direct Labor


•Direct Material

•OverheadApplied to

Work inProcess

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.

•IndirectLabor

•Direct Labor

•Overhead Applied

•IndirectLabor

Wages PayableWork in Process

(Job-Cost Record)


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Now let’s complete the

goods and sell them. Still with

me?


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•Cost ofGoodsMfd.

Finished Goods

•Cost ofGoodsSold

•Cost ofGoodsMfd.

Cost of Goods Sold

•Cost ofGoodsSold

•Direct Material

•Direct Labor

•Overhead Applied

Work in Process(Job-Cost Record)


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Let’s return to AFB Company

and see what we will do if actual

and applied overhead are not

equal.


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Actual Overhead costs for the year: $5,050,000

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

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH × 170,000 DLH = $5,100,000

Applied overhead exceeds actual overhead by $50,000

This difference is called overapplied overhead.

Overhead Application ExampleOverhead Application Example

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Work inProcess

FinishedGoods

Cost of Goods Sold

$50,000may be allocated

to these accounts.

$50,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

AFB Company’s Method

OR

Overapplied and Underapplied Overapplied and Underapplied Manufacturing OverheadManufacturing Overhead

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Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . Allocation of Goods Sold

UNDERAPPLIED INCREASE INCREASEWork in Process Cost of Goods Sold

(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASEWork in Process Cost of Goods Sold

(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

Overapplied and Underapplied Overapplied and Underapplied Manufacturing Overhead - Manufacturing Overhead -

SummarySummary

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Schedule of Cost of Goods Manufactured

Direct material:Raw material inventory, beginning $xxxAdd: Raw material purchases xxxRaw material available for use $xxxDeduct: Raw material, ending xxxRaw material used $xxx

Direct labor xxx

Manufacturing overheadIndirect material $xxxIndirect labor xxxOther actual overhead charges xxx

Total actual manufacturing overhead $xxxAdd: Overapplied overhead

or Deduct: Underapplied overhead xxxOverhead applied to work-in-process xxx

Total manufacturing costs $xxxAdd: Work-in-process inventory, beginning xxxSubtotal $xxxDeduct: Work-in-process inventory, ending xxxCost of goods manufactured $xxx

Schedule of Cost of Goods ManufacturedSchedule of Cost of Goods Manufactured

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Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxxAdd: Cost of goods manufactured* xxxCost of goods available for sale $xxxDeduct: Finished goods inventory, ending xxxCost of goods sold $xxxAdd: Underapplied overheador Deduct: Overapplied overhead xxxCost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule

Schedule of Cost of Goods SoldSchedule of Cost of Goods Sold

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Cost pools

Stage One:Costs assignedto pools

IndirectLabor

IndirectMaterials

OtherOverhead

Department1

Department2

Department3

Two-Stage Cost AllocationTwo-Stage Cost Allocation

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Departmental Overhead RatesDepartmental Overhead Rates

Department1

Department2

Department3

Products

Cost pools

Direct Labor Hours

MachineHours

RawMaterials

Cost

Stage One:Stage One:Costs assignedCosts assignedto poolsto pools

Stage Two:Costs appliedto products

Departmental Allocation Bases

IndirectMaterials

OtherOverhead

IndirectLabor

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Contracts

Missions

Programs

Cases

THE JOB

Job-Order Costing in Job-Order Costing in Nonmanufacturing OrganizationsNonmanufacturing Organizations

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End of Chapter 3End of Chapter 3

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Product Costing and Cost Accumulation in a Batch Production Environment CHAPTER 3 Copyright © 2015...

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