managerial accounting, chap 3, 7e

8/22/2019 Managerial Accounting, Chap 3, 7e

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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Product Costing and CostAccumulation in a Batch

Production Environment

Chapter 3


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Learning

Objective

1


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Product and Service Costing

FinancialAccounting

Product costs areused to valueinventory and tocompute cost of

goods sold.

ManagerialAccounting and

Cost Management

Product costs areused for planning,

control, directing, andmanagement decision

making.


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Learning

Objective

2


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Flow of Costs in Manufacturing Firm

Direct material cost Product cost transferred

Direct labor cost

Manufacturing 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


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Learning

Objective

3


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

Built to order rather than massproduced.

Many costs can be directly tracedto each job.

Types of Product-Costing

Systems

Process

Costing

Job-Order

Costing


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Job-shop operations

Products manufactured in very

low volumes or one at a time. Batch-production operations

Multiple products in batches ofrelatively small quantity.


Systems

Process

Costing

Job-Order

Costing


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Typical job-order cost applications:

Special-order printing

Building construction Also used in service industry

Hospitals

Law firms


Systems

Process

Costing

Job-Order

Costing


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Process

Costing

Job-Order

Costing

Used for production of small,identical, low cost items.

Mass produced in automatedcontinuous production process.

Costs cannot be directly traced toeach unit of product.


Systems


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Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill


Systems

Process

Costing

Job-Order

Costing


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The primarydocument for

tracking the costsassociated with a

given job is thejob-cost record.

Lets investigate

Accumulating Costs in a

Job-Order Costing System


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Job-Order Cost AccountingJob Number F16 Description

Date Started Nov. 1, 20x1 Date CompletedNumber of Units Completed 80

Date Quantity Cost

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material

Requisition Number Unit Price

Direct Labor


80 deluxe alum. fishing boats

Nov. 22, 20x1

Manufacturing Overhead


Cost Item

Total direct material

Amount

Cost Summary

Total direct labor

Total manufacturing overhead

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory


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Job Number F16 Description

Date 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 Material


Direct Labor



Nov. 22, 20x1



Cost Item


Amount

Cost Summary

Total direct labor


Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Job-Order Cost Accounting

Lets see one

A materials requisitionform is used to

authorize the use of

materials on a job.


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Materials Requisition Form

Requisition No. 352 Date 1/28/x1

Job Number to Be Charged J621 Dept. Painting

Department Supervisor Timothy Williams

Item Quantity Unit Cost Amount

White enamel paint 8 galons $14.00 $112Clear lacquer 2 gallons 11.00 22

Authorized

Signature Timothy Williams


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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Total cost

Unit cost

Total direct labor


Cost Item


Amount

Cost Summary

$18,000


Nov. 22, 20x1



803 $2.50

Direct Labor


JOB-COST RECORD

Direct Material



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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


$2.50

Direct Labor



Nov. 22, 20x1



803

Cost Item


Amount

Cost Summary

$18,000Total direct labor


Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory


Accumulatedirect labor

costs bymeans of awork record,

such as a timeticket, for each

employee.

Lets see one


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Employee Time Ticket

Employee Ron Bradley Date 12/19/x1

Employee Number 12 Department Painting

Shop cleanup

J122

11:30

1:00

11:30

12:00

5:00

Time Started Time Stopped Job Number 8:00 A267


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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity CostVarious

dates 600 $12,000

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


$2.50

Direct Labor



Nov. 22, 20x1

Various time cards $20



803

Cost Item


Amount

Cost Summary



12,000

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory


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Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


$2.50

Direct Labor



Nov. 22, 20x1




803

Cost Item


Amount

Cost Summary



12,000

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory


Apply manufacturing overhead to jobs using apredetermined overhead rate based on direct

labor hours (DLH).Lets do it


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Date Started Nov. 1, 20x1 Date Completed

Number of Units Completed 80

Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

11/30 2,000 $18,000

Date Cost Balance

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Total cost

Unit cost

Total direct labor


12,000

18,000

Cost Item


Amount

Cost Summary

$18,000

Machine hours $9.00


Nov. 22, 20x1




803 $2.50

Direct Labor


JOB-COST RECORD

Direct Material




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Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

11/30 2,000 $18,000

Date Cost Balance

11/30 $12,000

JOB-COST RECORD

Direct Material


$2.50

Direct Labor


Machine hours $9.00


Nov. 22, 20x1




803

Cost Item


Amount

Cost Summary



12,000

18,000

Total cost $48,000

Unit cost $600

Shipping Summary

Units Shipped

Units Remaining

in Inventory

60 20



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Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

11/30 2,000 $18,000

Date Cost Balance

11/30 $12,000

JOB-COST RECORD

Direct Material


$2.50

Direct Labor


Machine hours $9.00


Nov. 22, 20x1




803

Cost Item


Amount

Cost Summary



12,000

18,000

Total cost $48,000

Unit cost $600

Shipping Summary

Units Shipped

Units Remaining

in Inventory

60 20



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Learning

Objective

4


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

the beginning of the accounting period.

Manufacturing Overhead Costs

POHR = Budgeted manufacturing overhead costBudgeted amount of cost driver (or activity base)

Overhead applied = POHR Actual activity

Based on estimates, anddetermined before the

period begins

Actualamount of the allocationbase, such as direct labor hours,

incurred during the period

1

2


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Overhead is applied to jobs using apredetermined overhead rate (POHR) based on

estimates made at the beginning of theaccounting period.

Manufacturing Overhead Costs

POHR =Budgeted manufacturing overhead cost

Budgeted amount of cost driver (or activity base)

Overhead applied = POHR Actual activity

Recall the wooden crate example where:

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


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Learning

Objective

5


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Lets summarize

the documentflow we have

been discussingin a job-ordercosting system.

Job-Order Costing

Document Flow Summary


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Job-Order Costing


ProductionOrder for Job

The materialsrequisition indicates

the cost ofdirect

material

to charge tojobs

and the cost of

indirect material to

charge to overhead.

MaterialRequisition

The production order

for the job authorizes

the start of the

production process.

O C


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Employee timetickets indicate

the cost of

direct laborto charge to

jobsand the cost

ofindirect laborto charge tooverhead.

Job-Order Costing


Indirect LaborTime Records

Direct LaborTime Records

J b O d C i


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Job-Order Costing


Cost Driver (orActivity Base)

X PredeterminedOverhead Rate


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Lets examine thecost flows in a

job-order costingsystem. We willuse T-accountsand start with

materials.

Job-Order System Cost Flows


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Raw MaterialsMaterial

PurchasesDirectMaterial

DirectMaterial

Mfg. Overhead

IndirectMaterial


Indirect

Material

Work in Process

(Job-Cost Record)


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Next lets addlaborcosts and

appliedmanufacturing

overhead to thejob-order costflows. Are you

with me?



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DirectLabor

Mfg. Overhead


IndirectMaterial

DirectMaterial

IndirectLabor

Direct

Labor

Indirect

Labor

Wages Payable

Work in Process

(Job-Cost Record)


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DirectLabor

Mfg. Overhead

IndirectMaterial

DirectMaterial

OverheadApplied to

Work inProcess

If actual and applied

manufacturing overhead arenot equal, a year-end

adjustment is required. Wewill look at the procedure to

accomplish this later.

IndirectLabor

Direct

LaborOverhea

dApplied

Indirect

Labor

Wages Payable

Work in Process

(Job-Cost Record)



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Now lets

complete thegoods and sell

them. Still withme?



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Cost ofGoods

Mfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoods

Mfd.

Cost of Goods Sold

Cost ofGoods

Sold


DirectMaterial

Direct

LaborOverhea

dApplied

Work in Process

(Job-Cost Record)


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Lets return to

RoseCo and seewhat we will do if

actual andapplied overhead

are not equal.



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Overhead Application Example

Actual Overhead costs for the year: $650,000

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


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Applied Overhead = POHR Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000


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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


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Work inProcess

FinishedGoods

Cost ofGoods Sold

$30,000may be allocated

to these accounts.

$30,000 may beclosed directly to

cost of goods sold.

Cost ofGoods Sold

RoseCosMethod

OR

O li d d U d li d


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Actualoverhead

costs

$650,000

$30,000overapplied

UnadjustedBalance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000

RoseCosMfg. Overhead

for the year

RoseCos Costof Goods Sold

for the year

O li d d U d li d


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Manufacturing Overhead -

Summary

Alternative 1 Alternative 2

If Manufacturing Close to Cost

Overhead is . . . Allocation of Goods Sold

UNDERAPPLIED INCREASE INCREASE

Work in Process Cost of Goods Sold

(Applied OH is less Finished Goods

than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Work in Process Cost of Goods Sold

(Applied OH is greater Finished Goods

than actual OH) Cost of Goods Sold


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Learning

Objective6


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Schedule of Cost of Goods Manufactured

Schedule of Cost of Goods Manufactured

Direct material:Raw material inventory, beginning $xxx

Add: Raw material purchases xxx

Raw material available for use $xxx

Deduct: Raw material, ending xxx

Raw material used $xxx

Direct labor xxx

Manufacturing overhead

Indirect material $xxx

Indirect labor xxx

Other actual overhead charges xxx

Total actual manufacturing overhead $xxx

Add: Overapplied overhead

or Deduct: Underapplied overhead xxx

Overhead applied to work-in-process xxx

Total manufacturing costs $xxx

Add: Work-in-process inventory, beginning xxx

Subtotal $xxx

Deduct: Work-in-process inventory, ending xxx

Cost of goods manufactured $xxx


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Schedule of Cost of Goods Sold

Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxxAdd: Cost of goods manufactured* xxx

Cost of goods available for sale $xxxDeduct: Finished goods inventory, ending xxxCost of goods sold $xxxAdd: Underapplied overheadorDeduct: Overapplied overhead xxxCost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule


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Actual and Normal Costing

Actual direct material

and direct labor

combined withactual overhead.

Actual direct material

and direct labor

combined withpredetermined overhead.

Using a predetermined rate makes it

possible to estimate total job costs sooner.

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


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Plantwide Overhead Rate

Companies tend to use direct labor

as the overhead allocation base.


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Departmental Overhead Rates

A two-stage process isnecessary because different

departments may havedifferent cost drivers.

Finishing Department

Shipping Department

Painting Department


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Learning

Objective7


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Two-Stage Cost Allocation

Cost pools

Stage One:Costs assignedto pools

Indirect

Labor

Indirect

Materials

Other

Overhead

Department

1

Department

2

Department

3


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Departmental Overhead Rates

Department

1

Department

2

Department

3

Products

Cost pools

Direct

Labor

Hours

Machine

Hours

Raw

Materials

Cost

Stage One:Costs assignedto pools

Stage Two:

Costs appliedto products

Departmental Allocation Bases

Indirect

Materials

Other

Overhead

Indirect

Labor


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Learning

Objective8

Job Order Costing in


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Job-Order Costing in

Nonmanufacturing Organizations

Contracts

Missions

Programs

Cases

THE JOB

Changing Technology in


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Changing Technology in

Manufacturing Operations

Computerized data

interchange has eliminated

much of the paperworkassociated with job-order

cost systems.

Scanning devices havesimplified data entry to

record material and labor

use.


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Learning

Objective9

The Concept of Activity-Based


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Costing (ABC)

One of the most

difficult tasks in

computingaccurate unit costs

lies in determining

the proper amountof overhead cost to

assign to each job.

Assigningoverhead is

sure difficult. I agree!



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Costing (ABC)

Overhead Allocation

PlantwideOverheadRate

DepartmentalOverheadRates

Activity-BasedCosting


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End of Chapter 3

managerial accounting, chap 3, 7e

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