Product Costing – Assigning Product Costs Chapter 30 Managerial Accounting Product Costing – Assigning Product Costs Prepared by Diane Tanner University of North Florida Copyright ©2015. University of North Florida. All rights reserved.

Inventory Accounts for Manufacturers Three inventory accounts Raw materials Materials to be used in production Direct and indirect 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 Reported on the balance sheet

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

Materials Storeroom Contains raw materials that will used in production Direct and indirect materials Cost totals the balance in the raw materials account Controlled by storeroom manager/clerk Counts and verifies materials received from suppliers Sends a copy of the receiving report to the accounting department for future payment Issues materials for production upon receipt of a materials requisition form from the factory production supervisor Coordinates the physical transfer of the materials to the production area

Factory Work Area Contains partially completed products Contains the production machinery and is the location in which production occurs Accumulated costs total the balance in the WIP account Direct materials requisitioned from the materials storeroom Costs of direct labor and MOH added Controlled by the production supervisor Responsible for producing products in accordance with the company's specifications

Shipping Area Typically a loading dock for shipment to customers Sometimes a showroom where goods are held for sale Contains completed inventory items held for sale Accumulated costs total the balance in the FG account Costs are transferred from the WIP account when units are completed Costs of goods sold are transferred out when units are sold

Assigning Costs to Products Direct materials and direct labor Traced to specific products Easily associated with specific products Increase WIP as incurred Manufacturing overhead Consists of only indirect costs Allocated to products Not easily associated with specific products

Acquiring Raw Materials 1 The Purchasing Manager fills out an electronic purchase order to order materials from a supplier When materials are received, the Materials Storeroom Clerk records and stocks the materials in the storeroom. 2 Materials Storeroom The Materials Storeroom Clerk sends the receiving report to Accounting for payment. 3 DR Raw Materials Inventory CR Cash or Accounts Payable

Using Direct Materials in Production 1 Factory Work Area The production supervisor fills out a materials requisition form. A materials requisition form authorizes the use of materials on a product or job 2 The materials storeroom clerk delivers the requested materials to the production area. 3 The processed form is sent to Accounting. DR Work in Process Inventory CR Raw Materials inventory

Incurring Direct Labor Costs 1 Employees fill out time tickets to record the time spent on each product/service Factory/Production Area 2 The processed form is sent to Accounting. Direct labor cost = Gross wages + fringe benefits Gross wages = Wage rate × Hours worked DR Work in Process Inventory CR Wages Payable or Cash 10

Incurring Manufacturing Overhead Accumulated in the Manufacturing Overhead expense account Three components Indirect materials Requisitioned by production supervisor on a materials requisition form Indirect labor Accumulated on time tickets or time cards Factory related costs Incurred in factory operations Indirect costs are not traceable. DR Manufacturing Overhead CR Raw Materials Inventory DR Manufacturing Overhead CR Wages Payable or Cash DR Manufacturing Overhead CR Various payables, cash, accumulated depreciation, etc.

Assigning Manufacturing Overhead Allocated to specific products Based on estimates of expected costs and a basis over which to allocate Allocated cost is removed from the MOH expense account and transferred to the WIP account DR Work in Process Inventory CR Manufacturing Overhead Indirect Costs Product A Product B Product C

The End