Chapter 4 Product costing systems: general principles and job costing

Product costing systems §Product costing systems l accumulate product-related costs and uses a series of procedures to assign them to the organisation’s final products §Product costs are the input to the product costing system

Different product costs for different purposes §Product costs can include upstream, manufacturing and downstream costs §Inclusion of various costs depends on the time frame and type of decision to be made §Managers’ needs for product cost information will vary depending on the type of decision to be made and managers’ personal preferences

Designing product costing systems §Must identify the manager’s needs §All product cost information may not come from a single product costing system §Cost and benefits of various alternative systems must be assessed §Many small and medium businesses include only manufacturing costs as product costs to satisfy external reporting requirements

Costing in service organisations §Classifications of direct material, direct labour and manufacturing overhead may not be appropriate §Most service firms do not produce any inventory - therefore, no requirements to have a product costing system to value inventory Cont.

Costing in service organisations §Product costing system can be flexible enough to meet the format most useful for management §Many service firms produce limited cost information - their costing systems focus on estimating costs of responsibility centres and costs for planning and control

Costs vs benefits of product costing in service organisations §Complex to operate as each service is unique §High levels of overheads are difficult to assign to individual services §Service cost information may not be needed for decision making §Limited accounting resources (knowledge and time) to cost services

Flow of costs in manufacturing businesses §Many product costing systems assign only manufacturing costs to products, in line with Australian accounting standards §Systems involve several manufacturing ledger accounts l raw materials inventory, work in process inventory, finished goods inventory, cost of goods sold expense, and profit and loss account

Flow of costs in service firms §Service costing systems meet management rather than financial accounting needs §No inventory accounts §Only direct labour and overhead used §Service costs charged directly to a cost of sales account §All costs are period costs and included in the profit and loss statement

Allocating overhead costs to products §Identify the overhead cost driver §Calculate a predetermined (or budgeted) overhead rate per unit of cost driver §Apply manufacturing overhead costs to products at the budgeted (or predetermined) overhead rate, multiplied by the quantity of cost driver consumed by the product

Accounting for manufacturing overhead §Actual manufacturing overhead l manufacturing overhead costs incurred in production l debited to the manufacturing overhead account §Applied manufacturing overhead l estimate of the overhead resources used to manufacture a product l applied to products using a predetermined overhead rate

Disposing of underapplied or overapplied overhead rate §At the end of the accounting period l close the underapplied or overapplied to cost of goods sold, or l prorate (ie. distribute proportionately) the underapplied or overapplied overhead to cost of goods sold, work in process inventory and finished goods inventory

Allocating overhead costs to services §Firms that cost services usually apply overhead using a predetermined overhead rate §Service costing overhead rates usually include all indirect costs §Any underapplied or overapplied overhead is closed directly to the cost of sales account

Types of product costing systems §Job costing l manufacturing costs traced to individual jobs l where products are produced in distinct jobs/batches which are significantly different §Process costing l production costs traced to process/department, and averaged across all units produced l mass production or repetitive environment

Job costing - source documents §Bill of materials - lists all the materials required for a job §Material requisition forms - authorise the movement of raw materials from the warehouse to the production department §Job cost sheet - summarises the costs of direct material, direct labour and manufacturing overhead for a particular job

Job costing in service organisations §Well suited to many service organisations as outputs tend to be heterogeneous §Applies to jobs, cases, contracts and programs §Estimates of job costs provides a basis for controlling costs, planning cash flows and operations, and information for pricing decisions

Exhibit 4.2

Exhibit 4.5