Product Costing and Cost Accumulation in a Batch Production Environment
CHAPTER 3
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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
Types of Product-Costing SystemsTypes of Product-Costing Systems
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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
Types of Product-Costing SystemsTypes of Product-Costing Systems
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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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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
Let’s see one
A materials requisition form is used to
authorize the use of materials on a job.
Job-Order Cost AccountingJob-Order Cost Accounting
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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
Job-Order Cost AccountingJob-Order Cost Accounting
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost11/1/x1 7,200 sq ft $18,000
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
$2.50
Direct LaborRequisition Number Unit Price
80 deluxe alum. fishing boatsNov. 22, 20x1
Manufacturing OverheadRequisition Number Unit Price
352
Cost ItemTotal direct material
AmountCost Summary
$18,000Total direct laborTotal manufacturing overheadTotal costUnit cost
Shipping Summary
Units ShippedUnits Remaining
in Inventory
Job-Order Cost AccountingJob-Order Cost Accounting
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost11/1 7,200 sq ft $18,000
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
$2.50
Direct LaborRequisition Number Unit Price
80 deluxe alum. fishing boatsNov. 22, 20x1
Manufacturing OverheadRequisition Number Unit Price
803
Cost ItemTotal direct material
AmountCost Summary
$18,000Total direct laborTotal manufacturing overheadTotal costUnit cost
Shipping Summary
Units ShippedUnits Remaining
in Inventory
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 AccountingJob-Order Cost Accounting
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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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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost11/1 7,200 sq ft $18,000
Date Quantity CostVarious
dates 600 $12,000
Date Quantity Cost
Date Cost Balance
Shipping Summary
Units ShippedUnits Remaining
in Inventory
Total costUnit cost
Total direct laborTotal manufacturing overhead
12,000
Cost ItemTotal direct material
AmountCost Summary
$18,000
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing OverheadRequisition Number Unit Price
803 $2.50
Direct LaborTime Cards Unit Price
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
Job-Order Cost AccountingJob-Order Cost Accounting
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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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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost11/1 7,200 sq ft $18,000
Date Quantity CostVarious
dates 600 $12,000
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
$2.50
Direct LaborRequisition Number Unit Price
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing OverheadRequisition Number Unit Price
803
Cost ItemTotal direct material
AmountCost Summary
$18,000Total direct laborTotal manufacturing overhead
12,000
Total costUnit cost
Shipping Summary
Units ShippedUnits Remaining
in Inventory
Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct
labor hours (DLH).Let’s do it
Job-Order Cost AccountingJob-Order Cost Accounting
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost11/1 7,200 sq ft $18,000
Date Quantity CostVarious
dates 600 $12,000
Date Quantity Cost11/30 600 $18,000
Date Cost Balance
Shipping Summary
Units ShippedUnits Remaining
in Inventory
Total costUnit cost
Total direct laborTotal manufacturing overhead
12,000 18,000
Cost ItemTotal direct material
AmountCost Summary
$18,000
Direct Labor Hours $30.00
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing OverheadRequisition Number Unit Price
803 $2.50
Direct LaborRequisition Number Unit Price
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
Job-Order Cost AccountingJob-Order Cost Accounting
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost11/1 7,200 sq ft $18,000
Date Quantity CostVarious
dates 600 $12,000
Date Quantity Cost11/30 600 $18,000
Date Cost Balance11/30 $12,000
Shipping Summary
Units ShippedUnits Remaining
in Inventory60 20
Total cost $48,000Unit cost $600
Total direct laborTotal manufacturing overhead
12,000 18,000
Cost ItemTotal direct material
AmountCost Summary
$18,000
Direct Labor Hours $30.00
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing OverheadRequisition Number Unit Price
803 $2.50
Direct LaborRequisition Number Unit Price
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
Job-Order Cost AccountingJob-Order Cost Accounting
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost11/1 7,200 sq ft $18,000
Date Quantity CostVarious
dates 600 $12,000
Date Quantity Cost11/30 600 $18,000
Date Cost Balance11/30 $12,000
Shipping Summary
Units ShippedUnits Remaining
in Inventory60 20
Total cost $48,000Unit cost $600
Total direct laborTotal manufacturing overhead
12,000 18,000
Cost ItemTotal direct material
AmountCost Summary
$18,000
Direct Labor Hours $30.00
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing OverheadRequisition Number Unit Price
803 $2.50
Direct LaborRequisition Number Unit Price
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
Job-Order Cost AccountingJob-Order Cost Accounting
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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)
Job-Order System Cost FlowsJob-Order System Cost Flows
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Next let’s add labor costs and
applied manufacturing overhead to the job-order cost flows. Are you
with me?
Job-Order System Cost FlowsJob-Order System Cost Flows
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•Direct Labor
Mfg. Overhead•Indirect Material
•Direct Material
•IndirectLabor
•Direct Labor
•IndirectLabor
Wages PayableWork in Process
(Job-Cost Record)
Job-Order System Cost FlowsJob-Order System Cost Flows
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•Direct Labor
Mfg. Overhead•Indirect Material
•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)
Job-Order System Cost FlowsJob-Order System Cost Flows
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Now let’s complete the
goods and sell them. Still with
me?
Job-Order System Cost FlowsJob-Order System Cost Flows
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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)
Job-Order System Cost FlowsJob-Order System Cost Flows
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Let’s return to AFB Company
and see what we will do if actual
and applied overhead are not
equal.
Job-Order System Cost FlowsJob-Order System Cost Flows
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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
3-39
End of Chapter 3End of Chapter 3
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