1. Managerial Accounting: An Introduction To Concepts, Methods, And Uses
Chapter 2
Measuring Product Costs
Maher, Stickney and Weil

2. Learning Objectives (Slide 1 of 3)
Understand the nature of manufacturing costs.
Explain the need for recording costs by department and assigning costs to products.
Understand how the Work-in-Process account both describes the transformation of inputs into outputs in a company and accounts for the costs incurred in the process.

3. Learning Objectives (Slide 2 of 3)
Compare and contrast normal costing and actual costing.
Know various production methods and the different accounting systems each requires.
Compare and contrast job costing and process costing systems.
Compare and contrast product costing in service organizations to that in manufacturing companies.

4. Learning Objectives (Slide 3 of 3)
Understand the concepts of customer costing and profitability analysis.
Identify ethical issues in job costing.
Recognize components of just-in-time (JIT) production methods and understand how accountants adapt costing systems to them.
Know how to compute end-of-period inventory book value using equivalent units of production.

5. Manufacturing Costs Include three major categories: Direct materials
Easily traced to a product
Direct labor
Labor of workers who transform materials into a finished product
Manufacturing Overhead
All other costs of transforming materials into a finished product

6. Relation Between Departmental Costing and Product Costing(Slide 1 of 3)
Manufacturing costs are first assigned to departments or responsibility centers
A responsibility center is any organizational unit with its own manager
e.g., divisions, territories, plants
Aids in planning and performance evaluation

7. Relation Between Departmental Costing and Product Costing(Slide 2 of 3)
Record Costs
for Performance
Evaluation
Assign Costs
To Products
Product A
Assembly
Dept.
Direct Materials
Direct Labor
Manufacturing Overhead
Product B
Finishing
Dept.

8. Relation Between Departmental Costing and Product Costing(Slide 3 of 3)
Actual manufacturing costs recorded in departments can be compared to standard or budgeted amounts
Differences, called variances, can be investigated further
Costs are then assigned to products
Useful in managerial decision making such as evaluating product profitability

9. Model of Cost Flows Finished Goods Inventory Cost of Goods Sold
WIP-Dept.1
WIP-Dept.2
Transfer to
Dept.2
Beg. Inv.
Beg.Inv.
Direct Mat.
Direct Labor
Overhead
End.Inv.
Costs
Allocated
to Units
Finished
This Period
Costs
of Units
Sold This
Period
Added MLO
in Dept. 2
End. Inv.
Balance Sheet Accounts
Income Statement
Accounts
Mktg. &
Admin.

10. Basis Cost Flow Equation
Beginning Balance + Transfers In= Transfers Out + Ending Balance
Transfer In to Work-In-Process include:
Materials
Labor
Overhead
Equation is useful in determining reasonableness of inventories

11. Cost Measures (Slide 1 of 2)
Normal Costing--commonly used to assign costs to products
Assigns actual direct materials and direct labor plus “normal” manufacturing overhead
Overhead is applied to units produced using an application rate estimated before the accounting period begins

12. Cost Measures (Slide 2 of 2)
Actual Costing--assigns actual overhead to products
Actual overhead may vary for reasons unrelated to production activity resulting in product cost fluctuations unrelated to production activity
Normal costing tends to smooth out these fluctuations

13. Applying Overhead Costs
Normal costing works as follows:
1. Select a cost driver
2. Estimate overhead and the level of activity for the accounting period
3. Compute the predetermined manufacturing overhead rate
4. Apply overhead to production by multiplying the predetermined overhead rate times the actual activity

14. Overhead Rate Computation
Predetermined manufacturing overhead rate is calculated as follows:
Estimated Manufacturing Overhead =
Normal (or Estimated) Activity Level
Predetermined Overhead Rate

15. Example-Overhead Rate Computation
Plantimum Builders estimates that next year variable overhead will be $100,000 and direct labor will be 50,000 hours
The predetermined overhead rate for next year will be:
$100, = $2.00 Per Direct Labor Hour
50,000 DLHs

16. Cost Systems
Effective cost systems must have the following characteristics:
Decision focus
Provide different cost information for different purposes
Pass the cost-benefit test

17. Production Methods and Accounting Systems
Type Production Accounting System Type Product
Job Job Costing Customized
(e.g., Custom Homes)
Operations Operation Costing Mostly
(e.g., Cars) Standardized
Continuous Flow Process Costing Standardized
Processing
(e.g., Oil Refinery)

18. Job Costing Collect costs for each “unit” produced
Typically used by companies producing customized products or “jobs”
Examples: print shops, customized construction companies, defense contractors

19. Process Costing
Company accumulates costs in a department or production process
Those costs are spread evenly over units produced
Essentially, computes an average cost per unit
Examples: manufacture of soft drinks, paint, chemicals

20. Operation Costing A hybrid of job and process costing
Typically used when production involves a standardized method of making a product that is performed repeatedly
Products may share common production methods but differ in details
Examples: Clothing, computers, furniture

21. Service Organizations
Flow of costs is similar to that of a manufacturing company
Providing a service requires labor, overhead, and sometimes materials (called supplies)
Costs are collected by the job or client
Provides info for cost control, performance evaluation, and future pricing decisions

22. Ethical Issues in Job Costing
Improprieties in job costing generally arise from:
Misstating stage of completion
Charging costs to the wrong job
May be an attempt to avoid the appearance of cost overruns
Misrepresenting the costs of jobs
Causes problems when job is billed on a cost-plus-fee basis

23. Just-In-Time (JIT) Methods
Attempt to obtain materials or provide finished goods just in time
Reduces or eliminates inventories and related carrying costs
May allow production costs to be recorded directly to Cost of Goods Sold (COGS)
May involve use of “Backflush Costing”
Used to transfer costs back to inventories when production costs are initially recorded as COGS

24. Spoilage and Quality of Production
Normal waste is typically included in the cost of work performed
If waste is not “normal” it may be included in an expense account called “Abnormal Spoilage”
Companies concerned about quality production may not treat any waste or spoilage as normal
Prevents these costs from being buried in production costs

25. Computing Costs of Equivalent Production
Five steps required to compute costs of products, ending inventory, and finished goods
1. Summarize flow of physical units
2. Compute equivalent units
3. Summarize costs to be accounted for
4. Compute unit costs
5. Compute cost of goods completed and transferred out and cost of ending inventory of WIP

26. Dr. Donald R. Trippeer, CPA Colorado State University-Pueblo
If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:
Dr. Donald R. Trippeer, CPA
Colorado State University-Pueblo