1. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Product Costing and Cost Accumulation in a Batch Production Environment Chapter 3

2. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 1

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

4. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 2

5. Flow of Costs in Manufacturing Firm

6. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 3

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

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

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

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

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

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

13. Job-Order Cost Accounting

14. Let’s see one A materials requisition form is used to authorize the use of materials on a job.

15. Materials Requisition Form Timothy Williams

16. Job-Order Cost Accounting

17. 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. 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

24. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 4

25. Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. Manufacturing Overhead Costs 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 1 2

26. Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. Manufacturing Overhead Costs 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

27. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 5

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

29. Production Order for Job indirect material The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Material Requisition The production order for the job authorizes the start of the production process.

30. indirect 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-Order Costing Document Flow Summary Indirect Labor Time Records Direct Labor Time Records

31. Job-Order Costing Document Flow Summary Cost Driver (or Activity Base) X Predetermined Overhead Rate

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

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

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

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

36. Direct Labor Mfg. Overhead Indirect Material Direct Material Overhead Applied to Work in Process 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 Labor Direct Labor Overhea d Applied Indirect Labor Wages Payable Work in Process (Job-Cost Record) Job-Order System Cost Flows

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

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

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

40. Overhead Application Example Actual Overhead costs for the year: $650,000 Actual direct labor hours worked for the year: 170,000

41. Overhead Application Example Actual Overhead costs for the year: $650,000 Actual direct labor hours worked for the year: 170,000 Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

42. Overhead Application Example Actual Overhead costs for the year: $650,000 Actual direct labor hours worked for the year: 170,000 Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 Applied overhead exceeds actual overhead by $30,000 This difference is called overapplied overhead.

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. Cost of Goods Sold RoseCo’s Method OR

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

45. Overapplied and Underapplied Manufacturing Overhead - Summary

46. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 6

47. Schedule of Cost of Goods Manufactured

48. Schedule of Cost of Goods Sold

49. 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. 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. Actual overhead for the period is not known until the end of the period.

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

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

52. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 7

53. Two-Stage Cost Allocation Cost pools Stage One: Costs assigned to pools Indirect Labor Indirect Materials Other Overhead Department 1 Department 2 Department 3

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

55. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 8

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

57. 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.

58. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 9

59. 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!

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

61. End of Chapter 3