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Prepared by Diane Tanner University of North Florida

Chapter 30. Actual Product Costing. Prepared by Diane Tanner University of North Florida. Methods of Costing Products. Three methods Actual costing Normal costing Standard costing How they differ

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Prepared by Diane Tanner University of North Florida

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  1. Chapter 30 Actual Product Costing Prepared by Diane Tanner University of North Florida

  2. Methods of Costing Products • Three methods • Actual costing • Normal costing • Standard costing • How they differ • Whether actual or budgeted costs are used to determine the ‘cost’ of products or services

  3. How Costs Get Assigned to Products • Direct materials and direct labor • Traced to (specifically identified with) a product or service provided • Easy to determine which product/service to which the cost belongs because they are direct • Manufacturing overhead • Consists of indirect costs • Indirect costs cannot be easily identified with one specific product or service • For a single product, assigned to that product by default

  4. Inventory Accounts for Manufacturers • Three inventory accounts • Raw materials • Materials to be used in production • Work in process • Direct materials used in production • Direct labor costs incurred to produce • Manufacturing overhead costs identified as part of the cost of production • Finished goods • Goods completed and ready for sale

  5. Production Departments Factory/Production Area Materials Storeroom Raw Materials Work in Process Finished Goods Costs in departments correlate to inventory accounts. Ready for Sale

  6. Materials Storeroom Acquiring Raw Materials The Purchasing Manager fills out a purchase order to order materials from a supplier 1 When materials are received, the Materials Storeroom Clerk records and stocks the materials in the storeroom. 2 Factory/Production Area The Materials Storeroom Clerk sends the receiving report to Accounting for payment. 3

  7. 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

  8. Materials Requisition Will E. Delite Materials Storeroom Factory/Production Area 1 The production supervisor fills out a materials requisition form. The materials storeroom clerk delivers the requested materials to the production area. 2 Authorizes the use of materials on a job 3 The processed form is sent to Accounting.

  9. Materials Requisition Form Why do we bother with a materials requisition form every time production needs materials for a job? Internal control of assets Tracing material costs to particular products/ services To mitigate theft and waste, and prevent overstocking of unneeded inventory which can tie up cash. To determine the cost of products to set selling prices and make other management decisions

  10. Actual Costing • Used when there is only one product or one services • Cost of inventory is • Actual direct materials • Actual direct labor • Actual manufacturing overhead • All inventory costs are added (debited) directly to work in process

  11. Using Materials (Actual Costing) Requisition of Direct Materials to Production • Debit/Increase Work in Process • Credit/decrease Raw Materials Requisition Indirect Materials to Production • Debit/increase Work in Process • Credit/decrease Raw Materials

  12. Time Tickets Factory/Production Area Materials Storeroom Employees fill out time tickets to record the time spent on each product/service

  13. Measuring and Tracking Direct Labor • Multiply each employee’s wage rate by the number of hours that each employee works on each product • Gross wages • Add fringe benefits • Overtime premium (the extra ‘half’ time paid) when employees work over 40 hours • If the result of production problems or idle time, treat as overhead • If the result of accepting a rush order, treat as direct labor

  14. Incurring Labor Incur Direct Labor Costs • Debit/Increase Work in Process • Credit/decrease Cash, increase salaries payable, etc. Incur Indirect Labor Costs • Debit/Increase Work in Process • Credit/decrease Cash, increase salaries payable, etc.

  15. Manufacturing Overhead Includes indirect materials, indirect labor, and factory (production facility) related costs Incur Indirect Labor or Factory Related Costs • Debit/Increase Work in Process • Credit/decrease Cash Incur Indirect Material Costs • Debit/Increase Work in Process • Credit/decrease Raw Materials

  16. The End

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