mcgraw-hill/irwin 3-1 product costing and cost accumulation in a batch production environment 3...

McGraw-Hill/Irwin

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Product Costing andCost Accumulation in a Batch Production Environment

3Chapter Three

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Product 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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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.

Types of Product-Costing Systems

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Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill


ProcessCosting

Job-OrderCosting

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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.


ProcessCosting

Job-OrderCosting

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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 of relatively small quantity.


ProcessCosting

Job-OrderCosting

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

Also used in service industry Hospitals Law firms


ProcessCosting

Job-OrderCosting

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Receive orders from customers

Schedulejobs

Ordermaterials

Begin production

Sequence of Events in a Job-Order Costing System

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Accumulating Costs in aJob-Order Costing System

THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate

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Direct MaterialsDirect Materials

Direct LaborDirect Labor

Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct material and direct labor to each job as incurred.

Charge direct material and direct labor to each job as incurred.


Apply overhead to each job using a predetermined rate.

Apply overhead to each job using a predetermined rate.

Special documents are used to track costs

for each job.

Special documents are used to track costs

for each job.

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The primary document The primary document for tracking the costs for tracking the costs

associated with a associated with a given job is the given job is the job-job-

cost record.cost record.

Let’s investigate


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Job-Order Cost AccountingRoseCo Job-Cost Record

Job Number A - 143 Date Initiated 3-4-X2Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedAmount Date Number Balance

Direct MaterialsDirect LaborManufacturing OverheadTotal CostUnit Cost

Product Costs

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RoseCo Job-Cost Record



Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount


Direct MaterialsDirect LaborManufacturing OverheadTotal CostUnit Cost

Product Costs

Job-Order Cost Accounting

Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.

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Materials Requisition Form

RoseCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-X2Job 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 Will E. Delite

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Materials Requisition Form

RoseCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-X2Job 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 Will E. Delite

Cost of material is charged to job

A-143.

Type, quantity, and total cost of material charged to job A-143.

The materials requisition form is the source document for recording material usage in the accounting records.

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Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$


Direct Materials 116$ Direct LaborManufacturing OverheadTotal CostUnit Cost

Product Costs

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Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$


Direct Materials 116$ Direct LaborManufacturing OverheadTotal CostUnit Cost

Product Costs

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

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Employee Time Ticket

RoseCo Employee Time Ticket

Time Ticket No. 36 Date 3-5-X2

Employee I. M. Skilled Station 42

Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143

Totals 8.00 11.00$ 88.00$ A-143

Supervisor C. M. Workman

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Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$


Direct Materials 116$ Direct Labor 88$ Manufacturing OverheadTotal CostUnit Cost

Product Costs

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Product CostsApply manufacturing overhead to jobs using a predetermined overhead rate based on direct

labor hours (DLH).Let’s do it

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Job Number A - 143 Date Initiated 3-4-X2Date Completed 3-5-X2

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$


Direct Materials 116$ Direct Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$

Product Costs

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

at the beginning of the accounting period.at the beginning of the accounting period.

Manufacturing Overhead Costs

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

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

at the beginning of the accounting period.at the beginning of the accounting period.

Manufacturing Overhead Costs



Overhead applied = POHR × Actual activity

Recall the wooden crate example where:

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

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RoseCo applies overhead based on direct- RoseCo applies overhead based on direct- labor hours. Total labor hours. Total estimated estimated overhead for the overhead for the year is $640,000. Total year is $640,000. Total estimatedestimated labor cost is labor cost is $1,400,000 and total $1,400,000 and total estimatedestimated labor hours are labor hours are

160,000.160,000.What is RoseCo’s predetermined overhead What is RoseCo’s predetermined overhead

rate? rate?

Overhead Application Example

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$640,000

160,000 direct-labor hours (DLH)POHR =

POHR = $4.00 per DLH

For each direct labor hour worked on a job, $4.00 of factory overhead will be

applied to the job.




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Job Number X - 32 Date Initiated 3-9-X2Date Completed





Product Costs


What amount of overhead willRoseCo apply to Job X-32?

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Overhead Application ExampleRoseCo Job-Cost Record

Job Number X - 32 Date Initiated 3-9-X2Date Completed 3-11-X2

Department B3 Units Completed 6Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-7456 240$ 23 26 286$ 26 4$ 104$


Direct Materials 240$ Direct Labor 286$ Manufacturing Overhead 104$ Total CostUnit Cost

Product CostsSOLUTION

Overhead applied = POHR × Actual Direct Labor Hours

Overhead applied = $4.00 per DLH × 26 DLH = $104

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Let’s summarize the document flow we have

been discussing in a job-order

costing system.

Job-Order CostingDocument Flow Summary


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Materials Ledger CardsMaterials

Ledger CardsMaterials Ledger CardsMaterialsRequisition

Direct materials

The materials requisition

indicates the cost of direct

materialto charge to

jobsand the cost of

indirect materialindirect material to charge to overhead.

Indirect materials

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Job-Cost Records

Manufacturing Overhead Account

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Employee time tickets indicate

the cost of direct laborto charge to

jobsand the cost

of indirect laborindirect labor to charge to

overhead.

Job Cost Sheets


Job Cost Sheets

Job Cost Sheets

Job-Cost Records

Direct Labor

Indirect Labor

Employee Time TicketEmployee Time

TicketEmployee Time TicketEmployee Time

Ticket


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EmployeeTime Ticket

Job-Cost Records

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

OverheadApplied

withPOHR

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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 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

Mfg. Overhead



•Direct Material

•IndirectLabor

•Direct Labor

•IndirectLabor

Wages PayableWork in Process

(Job-Cost Record)

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•Direct Labor

Mfg. Overhead



•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 RoseCo and see what we will do if

actual and applied overhead

are not equal.


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RoseCo’sRoseCo’s actualactual overhead overhead for the year for the year was $650,000 was $650,000 and a total of 170,000 direct-labor hours were worked.and a total of 170,000 direct-labor hours were worked.

Using RoseCo’s predetermined overhead rate of $4.00 Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was per direct-labor hour, how much overhead was

appliedapplied to all of RoseCo’s jobs to all of RoseCo’s jobs during the yearduring the year? ?

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SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

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




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SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

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

RoseCo has overappliedoverhead for the yearby $30,000. What will

RoseCo do?

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Overapplied and Underapplied Manufacturing Overhead

Work inProcess

FinishedGoods

Cost of Goods Sold

$30,000may be allocated

to these accounts.

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

RoseCo’s Method

OR

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Actualoverhead

costs

$650,000$30,000

overapplied

OverheadAppliedto jobs

$680,000

Unadjusted Balance

RoseCo’sMfg. Overhead

for the year

RoseCo’s Costof Goods Sold

for the year

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Actualoverhead

costs

$650,000$30,000

overapplied

Unadjusted Balance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000

RoseCo’sMfg. Overhead

for the year

RoseCo’s Costof Goods Sold

for the year

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Overapplied and Underapplied Manufacturing Overhead - Summary

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

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Actual and Normal Costing

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.

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The Concept of Activity-Based Costing (ABC)

One of the most One of the most difficult tasks in difficult tasks in

computing accurate computing accurate unit costs lies in unit costs lies in determining the determining the

proper amount of proper amount of overhead cost to overhead cost to

assign to each job.assign to each job.

Assigningoverhead is

sure difficult.I agree!

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The Concept of Activity-Based Costing (ABC)

Level of C

omplexity

Level of C

omplexity

Overhead Allocation

Plantwide Overhead

Rate

DepartmentalOverhead

Rates

Activity-BasedCosting

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Plantwide Overhead Rate

Companies tend to use direct labor direct labor as the overhead allocation base.

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Departmental Overhead Rates

A two-stage process isnecessary because different

departments may have different cost drivers.

Finishing DepartmentFinishing Department

Shipping DepartmentShipping Department

Painting DepartmentPainting Department

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Cost poolsCost pools

Stage One:Stage One:Costs assignedCosts assignedto poolsto pools

IndirectIndirectLaborLabor

IndirectIndirectMaterialsMaterials

OtherOtherOverheadOverhead

Department1

Department2

Department3

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Department1

Department2

Department3

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Department1

Department2

Department3

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Department1

Department2

Department3

Products


Direct Labor Hours

MachineHours

RawMaterials

Cost


Stage Two:Stage Two:Costs appliedCosts appliedto productsto products

Departmental Allocation Bases




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Activity-Based Costing

In the ABC method, we recognize that many

activities within a department drive overhead costs.

In the ABC method, we recognize that many

activities within a department drive overhead costs.

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Assigning Costs to Activity Centers

Assign costs to the Assign costs to the activity centers activity centers where they are where they are

accumulated while accumulated while waiting to be waiting to be

applied to applied to products.products.

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Selecting Cost Drivers

Assign costs from Assign costs from

the activity center the activity center

to the product to the product

using appropriate using appropriate

cost drivers.cost drivers.

When selecting a cost When selecting a cost driver consider:driver consider:

The ease of The ease of obtaining data.obtaining data.

The degree to which The degree to which the cost driver the cost driver measures actual measures actual consumption by consumption by products.products.

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Job-Order Costing in Nonmanufacturing Organizations

Contracts

Missions

Programs

Cases

THE JOB

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Changing Technology in Manufacturing Operations

Computerized data Computerized data interchange has eliminated interchange has eliminated much of the paperwork much of the paperwork associated with job-orderassociated with job-ordercost systems.cost systems.

Scanning devices have Scanning devices have simplified data entry to record simplified data entry to record material and labor use. material and labor use.

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Let’s look at summary journal entries for a job-

order costing system. We’ll omit

the numbers so that we can focus

on accounts.

Job-Order Costing – Typical Accounting Entries

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Material Purchases

Raw material purchases are recorded in anRaw material purchases are recorded in aninventory account. inventory account.

GENERAL JOURNAL Page 3

Date DescriptionPost. Ref. Debit Credit

Raw Material Inventory XXXXX Accounts Payable XXXXX

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Direct materials issued to a job increase Work in Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect Process and decrease Raw Materials. Indirect

materials used on a job are charged to Manufacturing materials used on a job are charged to Manufacturing Overhead and also decrease Raw Materials. Overhead and also decrease Raw Materials.

Material Use



Work-in-Process Inventory XXXXXManufacturing Overhead XXXXX Raw Material Inventory XXXXX

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Labor



Work-in-Process Inventory XXXXXManufacturing Overhead XXXXX Wages Payable XXXXX

The cost of direct labor incurred on a job increases The cost of direct labor incurred on a job increases Work in Process and the cost of indirect labor on a Work in Process and the cost of indirect labor on a

job increases Manufacturing Overhead. job increases Manufacturing Overhead.

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Other Actual Manufacturing Overhead

In addition to indirect materials and indirect labor, In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged other manufacturing overhead costs are charged to the Manufacturing Overhead account as they to the Manufacturing Overhead account as they

are incurred. are incurred.



Manufacturing Overhead XXXXX Prepaid Rent XXXXX Accumulated Depreciation XXXXX Accounts Payable XXXXX Prepaid Insurance XXXXX

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Applying Manufacturing Overhead

Work in Process is increased when Manufacturing Work in Process is increased when Manufacturing Overhead is Overhead is appliedapplied to jobs. to jobs.



Work-in-Process Inventory XXXXX Manufacturing Overhead XXXXX

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Selling and Administrative Expenses



Selling and Admin. Expenses XXXXX Wages Payable XXXXX Accounts Payable XXXXX Prepaid Rent XXXXX Office Supplies Inventory XXXXX

Nonmanufacturing costs (period expensesperiod expenses) are charged to expense as they are incurred.

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Cost of Goods Manufactured

As jobs are completed, the cost of goods As jobs are completed, the cost of goods manufactured is transferred to Finished Goods manufactured is transferred to Finished Goods

from Work in Process. from Work in Process.



Finished-Goods Inventory XXXXX Work-in-Process Inventory XXXXX

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Sales

When finished goods are sold, two entries are When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods. Cost of Goods Sold and reduce Finished Goods.



Accounts Receivable XXXXX Sales XXXXX

Cost of Goods Sold XXXXX Finished-Goods Inventory XXXXX

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Underapplied Manufacturing Overhead

Underapplied manufacturing overhead is closed Underapplied manufacturing overhead is closed into Cost of Goods Sold.into Cost of Goods Sold.



Cost of Goods Sold XXXXX Manufacturing Overhead XXXXX

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End of Chapter 3

mcgraw-hill/irwin 3-1 product costing and cost accumulation in a batch production environment 3...

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