1. 3
Chapter Three
Product Costing and Cost Accumulation in a Batch Production Environment

2. Product and Service Costing
Managerial Accounting and Cost Management
Product costs are used for planning, control, directing, and management decision making.
Financial Accounting
Product costs are used to value inventory and to compute cost of goods sold.

3. Types of Product-Costing Systems
Process Costing
Job-Order Costing
Used for production of small, identical, low cost items.
Mass produced in automated continuous production process.
Costs cannot be directly traced to each unit of product.

4. Types of Product-Costing Systems
Process Costing
Job-Order Costing
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill

5. Types of Product-Costing Systems
Process Costing
Job-Order Costing
Used for production of large, unique, high-cost items.
Built to order rather than mass produced.
Many costs can be directly traced to each job.

6. Types of Product-Costing Systems
Process Costing
Job-Order Costing
Job-shop operations
Products manufactured in very low volumes or one at a time.
Batch-production operations
Multiple products in batches of relatively small quantity.

7. Types of Product-Costing Systems
Process Costing
Job-Order Costing
Typical job-order cost applications:
Special-order printing
Building construction
Also used in service industry
Hospitals
Law firms

8. Sequence of Events in a Job-Order Costing System
Receive orders from customers
Begin production
Schedule jobs
Order materials

9. Accumulating Costs in a Job-Order Costing System
Manufacturing overhead (OH)
Applied to each job using a predetermined rate
Direct materials
Traced directly to each job
THE JOB
Traced directly to each job
Direct labor

10. Accumulating Costs in a Job-Order Costing System
Charge direct material and direct labor to each job as incurred.
Direct Materials
Job No. 1
Special documents are used to track costs for each job.
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
Apply overhead to each job using a predetermined rate.

11. Accumulating Costs in a Job-Order Costing System
The primary document for tracking the costs associated with a given job is the job-cost record.
Let’s investigate

12. Job-Order Cost Accounting

13. Job-Order Cost Accounting
Let’s see one
A materials requisition form is used to authorize the use of materials on a job.

14. Materials Requisition Form
Will E. Delite

15. Materials Requisition Form
Will E. Delite
Cost of material is charged to job A-143.
Type, quantity, and total cost of material charged to job A-143.
The materials requisition form is the source document for recording material usage in the accounting records.

16. Job-Order Cost Accounting

17. Job-Order Cost Accounting
Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
Let’s see one

18. Employee Time Ticket

19. Job-Order Cost Accounting

20. Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct labor hours (DLH).
Let’s do it

21. Job-Order Cost Accounting

22. Manufacturing Overhead Costs
Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Based on estimates, and determined before the period begins
Actual amount of the allocation base, such as direct labor hours, incurred during the period

23. Manufacturing Overhead Costs
Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32

24. Overhead Application Example
RoseCo applies overhead based on direct- labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is RoseCo’s predetermined overhead rate?

25. Overhead Application Example
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
$640,000
160,000 direct-labor hours (DLH)
POHR =
POHR = $4.00 per DLH
For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.

26. Overhead Application Example
What amount of overhead will RoseCo apply to Job X-32?

27. Overhead Application Example
SOLUTION
Overhead applied = POHR × Actual Direct Labor Hours
Overhead applied = $4.00 per DLH × 26 DLH = $104

28. Job-Order Costing Document Flow Summary
Let’s summarize the document flow we have been discussing in a job-order costing system.

29. Job-Order Costing Document Flow Summary
The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead.
Direct materials
Job Cost Sheets
Job-Cost Records
Manufacturing Overhead Account
Materials Ledger Cards
Materials Ledger Cards
Materials Ledger Cards
Materials Requisition
Indirect materials

30. Job-Order Costing Document Flow Summary
Direct Labor
Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.
Job Cost Sheets
Manufacturing Overhead Account
Job-Cost Records
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Indirect Labor

31. Job-Order Costing Document Flow Summary
Employee Time Ticket
Indirect Labor
Overhead
Applied with POHR
Other Actual OH Charges
Manufacturing Overhead Account
Job-Cost Records
Materials Requisition
Indirect Material

32. Job-Order System Cost Flows
Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.

33. Work in Process (Job-Cost Record)
Job-Order System Cost Flows
Work in Process (Job-Cost Record)
Raw Materials
Direct Material
Direct Material
Material
Purchases
Indirect Material
Mfg. Overhead
Indirect Material

34. Job-Order System Cost Flows
Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me?

35. Work in Process (Job-Cost Record)
Job-Order System Cost Flows
Work in Process (Job-Cost Record)
Wages Payable
Direct Labor
Direct Material
Indirect Labor
Direct Labor
Mfg. Overhead
Indirect Material
Indirect Labor

36. Work in Process (Job-Cost Record) Overhead Applied to Work in Process
Job-Order System Cost Flows
Work in Process (Job-Cost Record)
Wages Payable
Direct Labor
Direct Material
Indirect Labor
Direct Labor
Overhead Applied
Mfg. Overhead
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later.
Indirect Material
Overhead Applied to Work in Process
Indirect Labor

37. Now let’s complete the goods and sell them. Still with me?
Job-Order System Cost Flows
Now let’s complete the goods and sell them. Still with me?

38. Work in Process (Job-Cost Record)
Job-Order System Cost Flows
Work in Process (Job-Cost Record)
Finished Goods
Direct Material
Cost of Goods Mfd.
Cost of Goods Mfd.
Cost of Goods Sold
Direct Labor
Overhead Applied
Cost of Goods Sold
Cost of Goods Sold

39. Job-Order System Cost Flows
Let’s return to RoseCo and see what we will do if actual and applied overhead are not equal.

40. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?

41. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

42. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?
RoseCo has overapplied overhead for the year by $30,000. What will RoseCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

43. Overapplied and Underapplied Manufacturing Overhead
Work in Process
Finished Goods
Cost of Goods Sold
$30,000 may be allocated to these accounts.
$30,000 may be closed directly to cost of goods sold. OR
RoseCo’s Method

44. Overapplied and Underapplied Manufacturing Overhead
RoseCo’s Cost of Goods Sold for the year
RoseCo’s Mfg. Overhead for the year
Unadjusted Balance
Actual overheadcosts
$650,000
OverheadApplied to jobs
$680,000
$30,000 overapplied

45. Overapplied and Underapplied Manufacturing Overhead
RoseCo’s Cost of Goods Sold for the year
RoseCo’s Mfg. Overhead for the year
Unadjusted Balance
Actual overheadcosts
$650,000
OverheadApplied to jobs
$680,000
$30,000
Adjusted Balance
$30,000
$30,000 overapplied

46. Overapplied and Underapplied Manufacturing Overhead - Summary

47. Actual and Normal Costing
Actual direct material and direct labor combined with actual overhead.
Actual direct material and direct labor combined with predetermined overhead.
Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period.

48. The Concept of Activity-Based Costing (ABC)
One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job.
Assigning
overhead is
sure difficult.
I agree!

49. The Concept of Activity-Based Costing (ABC)
Departmental
Overhead
Rates
Level of Complexity
Plantwide
Overhead
Rate
Overhead Allocation

50. Plantwide Overhead Rate
Companies tend to use direct labor
as the overhead allocation base.

51. Departmental Overhead Rates
Finishing Department
Shipping Department
Painting Department
A two-stage process is
necessary because different
departments may have
different cost drivers.

52. Departmental Overhead Rates
Indirect
Labor
Indirect
Materials
Other
Overhead
Stage One:
Costs assigned
to pools
Department 1
Department 2
Department 3
Cost pools

53. Departmental Overhead Rates
Indirect
Labor
Indirect
Materials
Other
Overhead
Stage One:
Costs assigned
to pools
Department 1
Department 2
Department 3
Cost pools

54. Departmental Overhead Rates
Indirect
Labor
Indirect
Materials
Other
Overhead
Stage One:
Costs assigned
to pools
Department 1
Department 2
Department 3
Cost pools

55. Departmental Overhead Rates
Indirect
Labor
Indirect
Materials
Other
Overhead
Stage One:
Costs assigned
to pools
Department 1
Department 2
Department 3
Cost pools
Direct
Labor
Hours
Machine
Hours
Raw
Materials
Cost
Stage Two:
Costs applied
to products
Products
Departmental Allocation Bases

56. Activity-Based Costing
In the ABC method,
we recognize that many
activities within a
department drive
overhead costs.

57. Assigning Costs to Activity Centers
Assign costs to the activity centers where they are accumulated while waiting to be applied to products.

58. Selecting Cost Drivers
Assign costs from the activity center to the product using appropriate cost drivers.
When selecting a cost driver consider:
The ease of obtaining data.
The degree to which the cost driver measures actual consumption by products.

59. Job-Order Costing in Nonmanufacturing Organizations
THE JOB
Contracts
Missions
Programs
Cases

60. Changing Technology in Manufacturing Operations
Computerized data interchange has eliminated much of the paperwork associated with job-order cost systems.
Scanning devices have simplified data entry to record material and labor use.

61. Job-Order Costing – Typical Accounting Entries
Let’s look at summary journal entries for a job-order costing system. We’ll omit the numbers so that we can focus on accounts.

62. Raw material purchases are recorded in an inventory account.

63. Material Use
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used on a job are charged to Manufacturing Overhead and also decrease Raw Materials.

64. Labor
The cost of direct labor incurred on a job increases Work in Process and the cost of indirect labor on a job increases Manufacturing Overhead.

65. Other Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

66. Applying Manufacturing Overhead
Work in Process is increased when Manufacturing Overhead is applied to jobs.

67. Selling and Administrative Expenses
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

68. Cost of Goods Manufactured
As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process.

69. Sales
When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods.

70. Underapplied Manufacturing Overhead
Underapplied manufacturing overhead is closed into Cost of Goods Sold.

71. End of Chapter 3