Prepared by Diane Tanner University of North Florida

1. Chapter 31 Normal Product Costing Prepared by Diane Tanner University of North Florida

2. Costing of Products and Services • Three methods • Actual costing • Normal costing • Standard costing • Differs from actual costing in how costs for manufacturing overhead are assigned to products or services

3. How Costs Get Assigned to Products • Direct materials and direct labor • Traced to a product or service provided • Easy to determine which product/service to which the cost belongs because they are direct • Manufacturing overhead • Consists solely of indirect costs • Indirect costs cannot be easily identified with one specific product or service • Allocated to products and services in a normal costing system

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

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

6. Transactions to Acquire Materials Same as Actual Costing Purchase Materials for Cash • Debit Raw Materials • Credit Cash Purchase Materials on Account • Debit Raw Materials • Credit Accounts Payable Pay for materials previously purchased on account • Debit Accounts Payable • Credit Cash • Credit Inventory for cash discount, if any

7. Will E. Delite Materials Requisition 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 form is sent to Accounting.

8. Normal Costing • Used effectively when there are multiple products • Accumulates manufacturing overhead costs into an expense account—Manufacturing Overhead Expense • Allocates a portion of the manufacturing overhead to individual products based on • A beginning of period rate calculation • A rate generated by estimates • Provides more timely product cost information

9. Using Materials (Normal Costing) Requisition of Direct Materials to Production • Debit Work in Process • Credit Raw Materials Requisition Indirect Materials to Production • Debit MOH expense • Credit Raw Materials Key Difference from Actual Costing

10. Materials Requisition Materials Storeroom Will E. Delite Factory/Production Area Materials requisition form authorizes the use of materials on a job

11. Time Tickets Factory/Production Area Materials Storeroom Time tickets to record the time spent on each job

12. Measuring and Tracking Direct Labor • Multiplying a wage rate for each employee by the number of hours that each employee works on each product • Overtime premium (the extra ‘half’ time paid) • If the result of production problems, treat as overhead • If the result of accepting a rush order, treat as direct labor • Idle time • Treat as overhead • Why?

13. Incurring Labor (Normal Costing) Incur Direct Labor Costs • Debit Work in Process • Credit Cash, salaries payable, etc. Incur Indirect Labor Costs • Debit MOH expense • Credit Cash, salaries payable, etc. Key Difference from Actual Costing

14. ‘Applying’ Manufacturing Overhead • Applying overhead means to add MOH cost to products based on a predetermined allocation • Why is MOH applied? • It is an indirect cost • I.e., impossible or impractical to trace to a particular product • Need to know job costs asproduction occurs, i.e., on a timely basis • For making decisions such as pricing, product changes, etc. • Waiting until the end of the period when actual costs are known makes information untimely

15. MOH Costs (Normal Costing) Incur MOH Costs • Debit MOH expense • Credit Cash, salaries payable, etc Apply MOH to Products • Debit Work in Process • Credit MOH expense Based on a predetermined rate

16. Examples of MOH Rates • $5.00 per direct labor hour • $3.00 per direct labor dollar • $1.50 per machine hour used • How to apply: • $5.00 x Actual DL hours on a product = MOH cost • $3.00 per direct labor dollar • $3.00 x Actual DL dollars on a product = MOH cost • $1.50 per machine hour used • $1.50 x Actual machine hours used on a product = MOH cost

17. The End