Normal Product Costing Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 31

Production Departments 2 Materials StoreroomFactory/Production Area Costs in departments correlate to inventory accounts. Raw Materials Work in Process Finished Goods Ready for Sale

Normal Costing  A better method of assigning manufacturing costs to products Direct materials and direct labor are traced to products Manufacturing overhead costs are allocated:  Overhead costs are accumulated into an expense account— Manufacturing Overhead  Overhead is then allocated to individual products based on a ‘predetermined overhead rate’ as products are being produced  Calculated for the entire company  Calculated at the beginning of the year  Based on estimates Provides more timely product cost information Appropriate for companies with a multiple products 3

4 Acquiring Raw Materials 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 The Materials Storeroom Clerk sends the receiving report to Accounting for payment. 3 Materials Storeroom 1

5 Transactions to Acquire Materials Purchase Materials for Cash  Debit/increase Raw Materials  Credit/decrease Cash Purchase Materials on Account  Debit/increase Raw Materials  Credit/increase Accounts Payable Pay for materials previously purchased on account  Debit/decrease Accounts Payable  Credit/decrease Cash  Credit/decrease Inventory for cash discount, if any

Materials Requisition 6 The production supervisor fills out a materials requisition form. 1 The materials storeroom clerk delivers the requested materials to the production area. 2 The processed form is sent to Accounting. 3 Factory/Production Area A materials requisition form authorizes the use of materials on a product or job

7 Using Direct Materials Requisition of Direct Materials to Production  Debit/Increase Work in Process  Credit/decrease Raw Materials

Direct Labor 8 Employees fill out time tickets which indicate the hours worked on each product Time tickets = source documents Direct labor cost = gross wages + fringe benefits Gross wages = Wage rate × hours worked on each product Incur direct labor costs  Debit/increase Work in Process  Credit/decrease Cash, increase salaries payable, etc.

9 Manufacturing Overhead Includes indirect materials, indirect labor, and factory (production facility) related costs Incur factory-related costs  Debit/increase Manufacturing Overhead  Credit/decrease Cash Requisition indirect materials to production  Debit/increase Manufacturing Overhead  Credit/decrease Raw Materials Incur indirect labor costs  Debit/increase Manufacturing Overhead  Credit/decrease Cash, increase salaries payable, etc.

Assigning Overhead to Products MOH is ‘applied’ (allocated) to products – Based on a predetermined allocation rate – Determined at the beginning of the period Why is MOH applied? – It is an indirect cost – I.e., impossible or impractical to trace to a particular product – Need to know product and job costs as production occurs, i.e., on a timely basis Waiting until the end of the period when actual costs are known makes information untimely – Useful for making decisions such as pricing, product changes, etc. 10

Completing Products  The cost of completed goods is transferred out of Work in Process  Debit/increase Finished Goods  Credit/decrease Work in Process  The cost transferred out is called Cost of Goods Manufactured 11

Selling Products  Transfer the cost of products sold out of Finished Goods  Debit/increase Cost of Goods Sold  Credit/decrease Finished Goods  Recognize the sale  Debit/increase Cash or AR  Credit/increase Sales Revenue 12

13 The End