12-1 Introduction to Product Costing Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University 12

12-2  Describe the flow of costs for manufacturers and service providers.  Describe three types of manufacturing processing and their related costing requirements.  Describe and illustrate job-order costing.  Determine product costs using actual and normal costing systems. ObjectivesObjectives After reading this chapter, you should be able to: ContinuedContinued

12-3  Analyze misapplied overhead into budget and volume variances.  Develop ABC overhead rates and apply them to job-order costing companies.  Discuss the role of overhead application in pursuing strategies. ObjectivesObjectives

12-4 Absorption Costing Sometimes called full costing Includes fixed overhead costs in per-unit inventory calculations Must use for financial reporting and income tax purposes Can give misleading results for short-term decisions

12-5 Product versus Period Costs Product costs are manufacturing costs that are expensed (cost of goods sold) when the product is sold.

12-6 Period costs are the selling and administrative costs which are expensed in the period incurred. Product versus Period Costs

12-7 Three Types of Inventory in a Manufacturing Firm Materials and purchased parts/components—consisting of the various materials and components that go into a finished product, but have not been put into production.

12-8 Three Types of Inventory in a Manufacturing Firm Work in process inventory, consisting of semifinished units, that is, product on which some, but not all, work has been done.

12-9 Three Types of Inventory in a Manufacturing Firm Finished goods inventory, consisting of units ready for sale. This inventory is equivalent to a merchandiser’s inventory.

12-10 Flow of Costs in a Manufacturer Materials Inventory Purchase materials Direct Labor Pay direct laborers Manufacturing Overhead Incur overhead costs Cost Collected Action Initially Cost Flow To and Through Work in Process Inventory Finished Goods Inventory Cost of Goods Sold

12-11 Cost per Unit of Product Cost per unit of product Total production costs Total units processed = Example: 10,000 units were produced at a total production cost of $150,000.

12-12 Job-Order Costing Job-order costing keeps track of the cost of materials and labor used on each job and then applies, absorbs, or assigns some amount of manufacturing overhead to each job.

12-13 Under actual costing, the overhead incurred during a period is applied to all jobs that were in process during the period. To assign all of the overhead costs to jobs, we calculate the overhead rate by dividing total actual overhead by the total amount of the relevant input factor. Actual Costing

12-14 Overhead rate = Total manufacturing overhead Total manufacturing activity Overhead rate = $105,000 10,500 Overhead rate = $10 per machine hour Actual Costing

12-15 Overhead$30,000$50,000$25,000 Direct materials20,00015,00010,000 Direct labor 10,000 20,000 15,000 Total cost of job$60,000$85,000$50,000 Job Number J-1 J-2 J-3 Actual Costing

12-16 May December Total overhead costs: $50,000 + (10,000 x $4)$90,000 $55,000 + (5,000 x $4)$75,000 Machine hours10,0005,000 Overhead rate per machine hour$9$15 ZyCo Actual Costing

12-17 Actual Costing ZyCo ZyCo does two similar jobs in May and December, each requiring 100 machine hours, $500 in direct labor, and $300 in materials. Actual costs are-- May December Materials$ 300$ 300 Direct labor Overhead, 100 hours at $9 and $ ,500 Totals$1,700$2,300

12-18 Normal Costing Predetermined overhead rate Budgeted manufacturing overhead for year Budgeted production activity for year Overhead rate = $1,080, ,000 Overhead rate = $9 per machine hour =

12-19 Normal Costing Budget allowance Fixed costs = + Variable cost per unit of activity x Amount of activity Predetermined overhead rate = $600,000 + $4 x 120, ,000 = $9

12-20 Normal Costing Overhead$27,000$45,000$22,500 Direct materials20,00015,00010,000 Direct labor 10,000 20,000 15,000 Total cost of job$57,000$80,000$47,500 Job Number J-1 J-2 J-3

12-21 Normal Costing Overhead assigned to job = Actual hours worked on job Total actual overhead Total actual hours x Under actual costing Overhead assigned to job = Actual hours worked on job Total budgeted overhead Total budgeted hours x Under normal costing

12-22 Misapplied Overhead Job J-1$ 30,000$27,000 Job J-250,00045,000 Job J-3 25,000 22,500 Total$105,000$94,500 Overhead Applied to Jobs Using Actual Costing Normal Costing

12-23 Overhead Variances The budget formula for annual overhead cost is $600,000 fixed costs ($50,000 per month) plus $4 per machine hour variable. July’s flexible budget based on 10,500 hours is as follows: ZyCo’s July Results Actual costs, fixed and variable$105,000 Budgeted costs [$50,000 + ($4 x 10,500 hours) 92,000 Budget variance, unfavorable$ 13,000

12-24 Overhead Variances ZyCo’s July Results ZyCo planned 120,000 machine hours for the year (monthly average, 10,000 hours). ZyCo worked 10,500 hours of machine time in July. Budgeted overhead (from Slide 12-23)$92,000 Applied overhead ($9 x 10,500 hours) 94,500 Volume variance, favorable$ 2,500

12-25 Overhead Variances ZyCo’s July Results Variable Portion Fixed Portion Budgeted cost (10,500 x $4)$42,000$50,000 Applied cost: 10,500 x $442,000 10,500 x $5 52,500 Volume variance (500 hours x $5)----$ 2,500

12-26 Overhead Variances Volume variance = Total budgeted manufacturing overhead – Total applied manufacturing overhead Volume variance = Total budgeted fixed manufacturing overhead – Total applied fixed manufacturing overhead Volume variance = Predetermined overhead rate for fixed costs x Budgeted production activity Actual production activity –

,000 U Budget variance Volume variance $2,500 F $10,500 U Total underapplied overhead Actual Overhead Budgeted Overhead Applied Overhead $105,000 $92,000 $94,500 $50,000 + ($4 x 10,500) $9 x 10,500 Overhead Variances

12-28 Income Statements, Actual and Normal Costing Sales$110,000$110,000 Normal cost of sales$57,000 Plus underapplied overhead 10,500 Cost of sales 67,500 60,000 Gross profit$ 42,500$ 50,000 Selling and administrative 30,000 30,000 Profit$ 12,500$ 20,000 Normal Costing Actual Costing ZyCo Income Statements for July

12-29 Activity-Based Overhead Rates Cool pools might consist of costs of departments or costs related to such activities as material use, number of setups, cycle time, or engineering changes.

12-30 Income Statements, Actual and Normal Costing Sales$110,000 Normal cost of sales 57,000 Normal gross profit$ 53,000 Variances: Unfavorable budget variance$13,000 Favorable volume variance 2,500 10,500 Gross profit$ 42,500 Selling and administrative expenses 30,000 Profit$ 12,500 ZyCo Normal Costing Income Statements for July

12-31 Activity-Based Costing Example Direct LaborSetups Total Budgeted overhead costs$800,000$400,000$1,200,000 Budgeted direct labor hours100,000 Budgeted number of setups2,000 Rates $8.00$ per dlhper setup If only direct labor hours are used to allocate overhead, the rate is $12. Tricomm Company

12-32 Calculated Price for Two Jobs Using One Rate Job AJob B Direct labor hours Materials hours$10,000$10,000 Direct labor cost ($10) 8,0002,000 OH applied ($12) 9,600 2,400 Total cost$27,600$14,400 x 1.5 x 1.5 Price$41,400$21,600 Tricomm Company

12-33 Calculated Price for Two Jobs Using Activity-Based Rates Job AJob B Direct labor hours Materials hours$10,000$10,000 Direct labor cost ($10) 8,0002,000 Overhead: Labor-related ($8)6,4001,600 Setup-related ($200) 400 5,000 Total cost$24,800$18,600 x 1.5 x 1.5 Price$37,200$27,900

12-34 The End Chapter 12

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