1. Module 17
Product Costing

2. Product and Period Costs
For production companies all costs are either:
Product Costs
Period Costs
All production costs necessary to get products ready to sell
All costs other than product costs

3. Product Costs and Accounts

4. Direct Materials
Costs of primary raw materials that are converted into finished goods
Examples
Iron ore to a steel mill
Light fixtures for a house builder
Food stuffs for a restaurant
A finished good for one company may be the raw material for the next company.

5. Conversion Costs
Costs of converting raw materials into finished goods: direct labor cost and production overhead

6. Actual Overhead and Product Costs
Issues with actual overhead for most products or services:
Actual production overhead costs are unknown until after the end of the period
Seasonal costs vary: property taxes, utility bills
Volume of activity each month/year causes actual overhead costs per unit to differ
Used for large construction projects

7. Using Predetermined Overhead Rates
Established at beginning of year
Can use different cost drivers
Predicted total direct labor hours
Predicted total machine hours
Calculating the predetermined rate using direct labor hours (normalized):
Predicted total manufacturing overhead cost for the year
Predicted total direct labor hours for the year

8. Example
Predicted 2013 activity level of 400,000 direct labor hours with manufacturing overhead totaling $5,600,000.
Predetermined overhead rate =
Predicted total manufacturing overhead cost for the year
Predicted total direct labor hours for the year
$5,600,000
400,000 direct labor hours =
$14 per direct
labor hour

9. Applying Overhead Example
If production uses 22,000 direct labor hours in January, how much is applied overhead?
= 22,000 × $14 per direct labor hour = $308,000
Job #167 required $80 in materials and $100 in direct labor (10 hours):
Direct Materials $ 80
Direct labor
Production overhead (10 x $14) 140
Total job cost $320

10. The Production Order Specifies details for a unique production job
Quantity to be produced
Materials requirements
Based on bill of materials
Production operations and other activities
Based on operations list

11. The Job Cost Sheet
Serves as the record for recording the actual progress on the job
Basis for Work-in-Process & Finished goods
All production costs are included
Direct materials
Direct labor
Manufacturing overhead
Job-Cost Sheet
Job No.___________________ Start Date __________________
Product No_________ Description_________________ Quantity_____
Materials Cost
Requisition Total
Date Department Number Description Cost

12. Basic Production Cost Flows

13. Over and Under Applied Overhead
Balance in Production overhead at the end of year:
Exists because the amount of overhead applied is almost never the same amount as the overhead incurred
Actual overhead > Applied OH, then underapplied
Actual overhead < Applied OH, then overapplied
Transfer to Cost of goods sold as an adjustment
Underapplied will increase the COGS because it is too little overhead was applied.
Overapplied will decrease the COGS because too much overhead was applied.