Module 17 Product Costing

Product and Period Costs For production companies all costs are either: Product Costs Period Costs All production costs necessary to get products ready to sell All costs other than product costs

Product Costs and Accounts

Direct Materials Costs of primary raw materials that are converted into finished goods Examples Iron ore to a steel mill Light fixtures for a house builder Food stuffs for a restaurant A finished good for one company may be the raw material for the next company.

Conversion Costs Costs of converting raw materials into finished goods: direct labor cost and production overhead

Actual Overhead and Product Costs Issues with actual overhead for most products or services: Actual production overhead costs are unknown until after the end of the period Seasonal costs vary: property taxes, utility bills Volume of activity each month/year causes actual overhead costs per unit to differ Used for large construction projects

Using Predetermined Overhead Rates Established at beginning of year Can use different cost drivers Predicted total direct labor hours Predicted total machine hours Calculating the predetermined rate using direct labor hours (normalized): Predicted total manufacturing overhead cost for the year Predicted total direct labor hours for the year

Example Predicted 2013 activity level of 400,000 direct labor hours with manufacturing overhead totaling $5,600,000. Predetermined overhead rate = Predicted total manufacturing overhead cost for the year Predicted total direct labor hours for the year $5,600,000 400,000 direct labor hours = $14 per direct labor hour

Applying Overhead Example If production uses 22,000 direct labor hours in January, how much is applied overhead? = 22,000 × $14 per direct labor hour = $308,000 Job #167 required $80 in materials and $100 in direct labor (10 hours): Direct Materials $ 80 Direct labor 100 Production overhead (10 x $14) 140 Total job cost $320

The Production Order Specifies details for a unique production job Quantity to be produced Materials requirements Based on bill of materials Production operations and other activities Based on operations list

The Job Cost Sheet Serves as the record for recording the actual progress on the job Basis for Work-in-Process & Finished goods All production costs are included Direct materials Direct labor Manufacturing overhead Job-Cost Sheet Job No.___________________ Start Date __________________ Product No_________ Description_________________ Quantity_____ Materials Cost Requisition Total Date Department Number Description Cost

Basic Production Cost Flows

Over and Under Applied Overhead Balance in Production overhead at the end of year: Exists because the amount of overhead applied is almost never the same amount as the overhead incurred Actual overhead > Applied OH, then underapplied Actual overhead < Applied OH, then overapplied Transfer to Cost of goods sold as an adjustment Underapplied will increase the COGS because it is too little overhead was applied. Overapplied will decrease the COGS because too much overhead was applied.