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Chapter 3

Chapter 3. Product Costing and Cost Accumulation in a Batch Production Environment. Learning Objective 1. Product and Service Costing. Our focus changes from financial statement costs to operations. Managerial Accounting and Cost Management

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Chapter 3

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  1. Chapter 3 Product Costing and Cost Accumulation in a Batch Production Environment

  2. Learning Objective1

  3. Product and Service Costing Our focus changes from financial statement costs to operations Managerial Accounting and Cost Management Product costs are used for planning, control, directing, and management decision making. Financial Accounting Product costs are used to value inventory and to compute cost ofgoods sold.

  4. Learning Objective2

  5. Flow of Costs in Manufacturing Firm

  6. Learning Objective3

  7. Used for production of unique, high-cost items. • Built to order rather than mass produced. • Many costs can be directly traced to each job. Types of Product-Costing Systems ProcessCosting Job-OrderCosting

  8. Types of Product-Costing Systems ProcessCosting Job-OrderCosting • 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.

  9. Types of Product-Costing Systems ProcessCosting Job-OrderCosting • Typical job-order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals • Law firms

  10. 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 ProcessCosting Job-OrderCosting

  11. Types of Product-Costing Systems ProcessCosting Job-OrderCosting • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill

  12. Accumulating Costs in aJob-Order Costing System The primary document for tracking the costs associated with a given job is the job-cost record. Let’s investigate

  13. Job-Order Cost Accounting

  14. A materials requisition form is used to authorize the use of materials on a job. Let’s see one Job-Order Cost Accounting

  15. Materials Requisition Form Timothy Williams

  16. Job-Order Cost Accounting

  17. 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

  18. Employee Time Ticket

  19. Job-Order Cost Accounting

  20. Job-Order Cost Accounting Apply manufacturing overhead to jobs using apredetermined overhead rate based on direct labor hours (DLH). Let’s do it

  21. Job-Order Cost Accounting

  22. Job-Order Cost Accounting

  23. Job-Order Cost Accounting

  24. Learning Objective4

  25. Budgeted manufacturing overhead cost POHR = Budgeted amount of cost driver (or activity base) Manufacturing Overhead Costs Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. 1 2 Overhead applied = POHR × Actual activity Based on estimates, and determined before the period begins Actualamount of the allocation base, such as direct labor hours, incurred during the period

  26. Budgeted manufacturing overhead cost POHR = Budgeted amount of cost driver (or activity base) Manufacturing Overhead Costs Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. Overhead applied = POHR × Actual activity Recall the wooden crate example where: Overhead applied = $4 per DLH × 8 DLH = $32

  27. Learning Objective5

  28. Job-Order CostingDocument Flow Summary Let’s summarize the document flow we have been discussing in a job-order costing system.

  29. Job-Order CostingDocument Flow Summary Production Order for Job Material Requisition The materials requisition indicates the cost ofdirect materialto charge tojobsand the cost ofindirect materialto charge to overhead. The production order for the job authorizes the start of the production process.

  30. Job-Order CostingDocument Flow Summary Employee time tickets indicate the cost ofdirect laborto charge tojobsand the cost of indirect laborto charge to overhead. Direct Labor Time Records Indirect Labor Time Records

  31. Job-Order CostingDocument Flow Summary Cost Driver (or Activity Base) Predetermined Overhead Rate X

  32. Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.

  33. Job-Order System Cost Flows Work in Process(Job-Cost Record) Raw Materials • Direct Material • Direct Material • Material • Purchases • Indirect Material Mfg. Overhead • Indirect Material

  34. Job-Order System Cost Flows Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me?

  35. Job-Order System Cost Flows Work in Process(Job-Cost Record) Wages Payable • Direct Labor • Direct Material • IndirectLabor • Direct Labor Mfg. Overhead • Indirect Material • IndirectLabor

  36. Job-Order System Cost Flows Work in Process(Job-Cost Record) Wages Payable • Direct Labor • Direct Material • IndirectLabor • Direct Labor • Overhead Applied Mfg. Overhead 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. • Indirect Material • OverheadApplied to Work inProcess • IndirectLabor

  37. Job-Order System Cost Flows Now let’s complete the goods and sell them. Still with me?

  38. Job-Order System Cost Flows Work in Process(Job-Cost Record) Finished Goods • Direct Material • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labor • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold

  39. Job-Order System Cost Flows Let’s return to RoseCo and see what we will do if actual and applied overhead are not equal.

  40. Overhead Application Example Actual Overhead costs for the year: $650,000 Actual direct labor hours worked for the year: 170,000

  41. Overhead Application Example Actual Overhead costs for the year: $650,000 Actual direct labor hours worked for the year: 170,000 Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

  42. Overhead Application Example Actual Overhead costs for the year: $650,000 Actual direct labor hours worked for the year: 170,000 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.

  43. $30,000may be allocatedto these accounts. $30,000 may beclosed directly to cost of goods sold. Work inProcess FinishedGoods Cost of Goods Sold Cost of Goods Sold Overapplied and Underapplied Manufacturing Overhead OR RoseCo’sMethod

  44. Overapplied and Underapplied Manufacturing Overhead RoseCo’sMfg. Overheadfor the year RoseCo’s Costof Goods Soldfor the year Unadjusted Balance Actualoverheadcosts $650,000 OverheadAppliedto jobs $680,000 $30,000 $30,000 AdjustedBalance $30,000 overapplied

  45. Overapplied and Underapplied Manufacturing Overhead - Summary

  46. Learning Objective6

  47. Schedule of Cost of Goods Manufactured

  48. Schedule of Cost of Goods Sold

  49. Actual and Normal Costing Actual direct materialand direct labor combined withactual overhead. Actual direct materialand direct labor combined withpredetermined overhead. Using a predetermined rate makes itpossible to estimate total job costs sooner. Actual overhead for the period is notknown until the end of the period.

  50. Plantwide Overhead Rate Companies tend to use direct labor as the overhead allocation base.

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