CHAPTER 3

Product Costing and Cost

Accumulation in a Batch
Production Environment

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Learning Objectives
1. LO1- Purpose of product and service costing
2. LO2- Flow of Costs in Manufacturing firms
3. LO3- Job Order Costing Vs Process Costing
4. LO4- Compute Predetermined Overhead Rate
5. LO5-Journal entries to record the costs of direct material,
direct labor, and manufacturing overhead
6. LO6- schedule of cost of goods manufactured, a schedule
of cost of goods sold, and an income statement
7. LO7-Two-stage allocation process used to assign
manufacturing overhead
8. LO8- project costing used in service industry firms and
2 non-profit organizations
Learning Objective 1: Purpose of
product and service costing

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 Product and Service Costing

Managerial
Financial
Accounting and
Accounting
Cost Management
Product costs are
used to value ? Product costs are
used ?

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Learning Objective 2: Flow of Costs in
Manufacturing firms

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Flow of Costs in Manufacturing Firm

Work-in-Process Inventory Finished Goods Inventory

Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished

Cost of Goods Sold Income Summary

Expense closed into

Income Summary at end

of accounting period

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Learning Objective 3: Job Order Costing
Vs Process Costing

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Types of Product-Costing Systems
Process Job-Order
Costing Costing

 Used for production of _____________.

 Built to order rather than mass produced.
 Many costs can be directly traced to each job.
 TWO TYPES:
 Job-shop operations
 Products manufactured in very low volumes or one at
a time.
 Batch-production operations
 Multiple products in batches of relatively small
8 quantity.
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Types of Product-Costing Systems

Process Job-Order
Costing Costing

 Typical job-order cost applications:

 Special-order printing
 Building construction
 Also used in the service industry
 Hospitals
 Law firms
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Types of Product-Costing Systems
Process Job-Order
Costing Costing

 Used for production of _______________________

Costs cannot be directly traced to each unit of
product.
 Typical process cost applications:
 Petrochemical refinery
 Paint manufacturer
 Paper mill

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Accumulating Costs in a
Job-Order Costing System
The primary document for
tracking the costs
associated with a given
job is the ?.

Let’s investigate using the

AFB Company

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 Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost

Direct Labor
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance

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 Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost

Direct Labor
Date Requisition Number Quantity Unit Price Cost

A materials requisition
Manufacturing Overhead
Date Requisition Number
form
Quantity
is used
Unit Price Cost
to ?.
Cost Summary
Cost Item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Let’s see one
Units Remaining
Date Units Shipped in Inventory Cost Balance

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 Job-Order Cost Accounting
Requisition No. 352 Date 11/1/x1
Job Number to Be Charged F16 Dept. Painting
Department Supervisor Timothy Williams

Item Quantity Unit Cost Amount

Aluminum 7,200 sq ft $ 2.50 $ 18,000.00

Authorized Timothy Williams

Signature

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 Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1/x1 352 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance

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 Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000
Accumulate
Direct Labor
Date Requisition Number Quantity Unit Price Cost direct labor
costs by
Manufacturing Overhead means of a
Date Requisition Number Quantity Unit Price Cost
work record,
Cost Summary such as a
Cost Item Amount
Total direct material $18,000 ______for each
Total direct labor
Total manufacturing overhead employee.
Total cost
Unit cost

Shipping Summary
Units Remaining
Let’s see one
Date Units Shipped in Inventory Cost Balance

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 Employee Time Ticket

Employee Ron Bradley Date 11/5/20x1

Employee Number 12 Department
Station Painting

Time Started Time Stopped Job Number

8:00 11:30 F16
11:30 12:00 Shop cleanup
1:00 5:00 A26

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 Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Time Cards Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
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 Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Apply manufacturing
Total direct labor overhead to jobs using a 12,000
Total manufacturing overhead
predetermined
Total cost overhead rate based on direct
Unit cost
labor hours (DLH).
Shipping Summary Let’s do it
Units Remaining
Date Units Shipped in Inventory Cost Balance
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 Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
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 Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
11/30 60 20 $12,000
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 Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
22 11/30 60 20 $12,000
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Learning Objective 4: Compute
Predetermined Overhead Rate

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 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.

Budgeted manufacturing overhead cost

POHR =
Budgeted amount of cost driver (or activity base)

Overhead applied = ? × ?

Based on estimates, and Actual amount of the allocation

determined before the base, such as direct labor hours,
period begins incurred during the period
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 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.

Budgeted manufacturing overhead cost

POHR =
Budgeted amount of cost driver (or activity base)

Overhead applied

Recall the Aluminum Boat example where:

Overhead applied = $30 per DLH × 600 DLH = $18,000
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 Learning Objective 5:Journal entries to
record the costs of direct material, direct
labor, and manufacturing overhead

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 Job-Order Costing
Document Flow Summary

Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.

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 Job-Order Costing
Document Flow Summary
Production The production order for the job authorizes the start
Order for Job of the production process.

The materials requisition indicates the cost of

Material direct material to charge to jobs and the cost of
indirect material to charge to overhead.
Requisition
Employee time tickets indicate the cost of direct
labor to charge to jobs and the cost of indirect
Labor Time Records labor to charge to overhead.

Actual Cost Driver (or Activity Base)

Apply Manufacturing Overhead
X
Predetermined Overhead Rate
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 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.
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 Job-Order System Cost Flows
Work in Process
Raw Materials (Job-Cost Record)
•Material •? •?
? Material Material
•?
Material

Mfg. Overhead
•?
Material

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 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?
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 Job-Order System Cost Flows
Work in Process
Wages Payable (Job-Cost Record)
•? •Direct
Labor Material
•? •?
Labor Labor

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

Now let’s
complete the
goods and sell
them. Still with
me?

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

Let’s return to
AFB Company
and see what we
will do if actual
and applied
overhead are not
equal.
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 Overhead Application Example

Actual Overhead costs for the year: $5,050,000

Actual direct labor hours worked for the year: 170,000

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH × 170,000 DLH = $5,100,000

Applied overhead exceeds actual overhead by $50,000

This difference is called overapplied overhead.

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 Overapplied and Underapplied
Manufacturing Overhead
$50,000 $50,000 may be
may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods Cost of
Goods Sold
Cost of
Goods Sold AFB Company’s
Method
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 Overapplied and Underapplied
Manufacturing Overhead
AFB’s Cost AFB’s
of Goods Sold Mfg. Overhead
for the year for the year
Unadjusted Actual Overhead
Balance overhead Applied
costs to jobs
$50,000 $5,050,000 $5,100,000

Adjusted $50,000 $50,000

Balance overapplied

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 Quiz
Alex Company had the following inventories at the
beginning and end of the month of January:
Direct materials purchased $189,000
Purchase returns and allowances 1,000
Transportation-in 3,000
Direct labor 300,000
Actual factory overhead 175,000
The following additional manufacturing data were
available for the month of January:
1-Jan31-Jan
Finished goods $125,000 $117,000
Work-in-process 235,000 251,000
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Direct materials 134,000 124,000
 Quiz cntd
 Alex Company applies factory overhead at a rate of 60%
of direct labor cost, and any overapplied or underapplied
factory overhead is deferred until the end of the year,
December 31. Alex Company's balance in factory
overhead control for January was:
A. $5,000 credit, under-applied.
B. $5,000 debit, over-applied.
C. $5,000 credit, over-applied.
D. $5,000 debit, under-applied.
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 Overapplied and Underapplied
Manufacturing Overhead -
Summary
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . Allocation of Goods Sold

UNDERAPPLIED INCREASE INCREASE

Work in Process Cost of Goods Sold
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Work in Process Cost of Goods Sold
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
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Learning Objective 6: schedule of cost of
goods manufactured, a schedule of cost
of goods sold, and an income statement

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Schedule of Cost of Goods Manufactured
Schedule of Cost of Goods Manufactured

Direct material:
Raw material inventory, beginning $xxx
Add: Raw material purchases xxx
Raw material available for use $xxx
Deduct: Raw material, ending xxx
Raw material used $xxx

Direct labor xxx

Manufacturing overhead
Indirect material $xxx
Indirect labor xxx
Other actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overhead
or Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx

Total manufacturing costs $xxx

Add: Work-in-process inventory, beginning xxx
Subtotal $xxx
Deduct: Work-in-process inventory, ending xxx
44 Cost of goods manufactured $xxx
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 Schedule of Cost of Goods Sold

Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxx

Add: Cost of goods manufactured* xxx
Cost of goods available for sale $xxx
Deduct: Finished goods inventory, ending xxx
Cost of goods sold $xxx
Add: Underapplied overhead
or Deduct: Overapplied overhead xxx
Cost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule

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 Actual and Normal Costing

Actual direct material Actual direct material

and direct labor and direct labor
combined with combined with
_____ overhead. ___________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.
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 Quiz
 Normal costing systems are said to offer a user several
distinct benefits when compared with actualcosting systems.
Which one of the following is not a benefit associated with
normal costing systems?
A. More timely costing of jobs and products.
B. A more economical way of attaching overhead to a job or
product.
C. A smoothing of product costs throughout the period.
D. Improved accuracy of job and product costing.

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Learning Objective 7: Two-stage
allocation process used to assign
manufacturing overhead

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 Two-Stage Cost Allocation
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools

Department Department Department

Cost pools
1 2 3

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 Departmental Overhead Rates
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools
Department Department Department
Cost pools
1 2 3
Direct Machine Raw
Stage Two: Labor Hours Materials
Costs applied Hours Cost
to products
Products
Departmental Allocation Bases
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Learning Objective 8: project costing
used in service industry firms and non-
profit organizations

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 Job-Order Costing in
Nonmanufacturing Organizations

THE JOB

Cases Missions

Programs Contracts
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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.

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 Exercise - 1
 For each of the following companies, indicate whether
job-order or process costing is more appropriate
 Manufacturer of household cleaning solutions.

 Manufacturer of custom hot tubs and spas

 Architectural firm.

 Manufacturer of ceramic tile.

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 Producer of yogurt.
 Exercise – 2
 Cherry Hill Glass Company employs a normal-costing
system. The following information pertains to the year just
ended.
 Total manufacturing costs were $1,250,000.
 Cost of goods manufactured was $1,212,500.
 Applied manufacturing overhead was 30 percent of total
manufacturing costs.
 Manufacturing overhead was applied to production at a
rate of 80 percent of direct-labor cost.
 Work-in-process inventory on January 1 was 75 percent
of work-in-process inventory on December 31.

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 Exercise – 2 cntd
 Compute Cherry Hill’s total direct-labor cost for the year

 Calculate the total cost of direct material used during the

year.

 Compute the value of the company’s work-in-process

inventory on December 31.

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 Exercise - 3

57
 Exercise – 3 cntd
 Compute the firm’s predetermined overhead rate for the
year using each of the following common cost drivers: ( a )
machine hours, ( b ) direct-labor hours, and ( c ) direct-labor
dollars.
 (a)POHR=

 (b)POHR=

 ©POHR=
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 Exercise – 3 cntd
 Calculate the overapplied or underapplied overhead for
the year using each of the cost drivers listed above.

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 Quiz
 Companies characterized by the production of
heterogeneous products will most likely use which
of the following methods for the purpose of
averaging costs and providing management with
unit cost data?
A. Job-order costing
B. Process costing.
C. Direct costing.
D. Relevant costing.
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 Quiz
 Cost allocation is the process of assigning indirect costs to a
cost object. The indirect costs are grouped in cost pools and
then allocated by a common allocation base to the cost object.
The base that is employed to allocate a homogeneous cost pool
should:
A. Have a high correlation with the cost items in the cost pool as
the sole criterion for selection.
B. Have a cause-and-effect relationship with the cost items in the
cost pool.
C. Be a nonfinancial measure (e.g., number of setups) because a
nonfinancial measure is more objective.
D. Assign the costs in the pool uniformly to cost objects even if
61 the cost objects use resources in a non-uniform way.
 Exercise
Madtack Company's beginning and ending inventories for
the month of November are:
1-Nov 30-Nov
Direct materials $ 67,000 $ 62,000

Work-in-process 145,000 171,000

Finished goods 85,000 78,000
Production data for the month of November:
Direct labor $200,000

Actual factory overhead 132,000

Direct materials purchased 163,000
Transportation in 4,000
Purchase returns and allowances 2,000
Madtack uses one factory overhead control account and charges factory
overhead to production at 70% of direct labor cost. The company does not
62
formally recognize over/underapplied overhead until year-end.
 Exercise
 Madtack Company's total manufacturing cost for
November is?
Solution

63
 Quiz
Multiple or departmental overhead rates are considered
preferable to a single or plantwide overhead rate when
A. Individual cost drivers cannot accurately be determined with
respect to cause-and-effect relationships.
B. Cost drivers, such as direct labor, are the same over all
processes.
C. Manufacturing is limited to a single product flowing through
identical departments in a fixed sequence.
D. Various products are manufactured that do not pass through
the same departments or use the same manufacturing
techniques.
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 What we learnt
1. LO1- Purpose of product and service costing
2. LO2- Flow of Costs in Manufacturing firms
3. LO3- Job Order Costing Vs Process Costing
4. LO4- Compute Predetermined Overhead Rate
5. LO5-Journal entries to record the costs of direct material,
direct labor, and manufacturing overhead
6. LO6- schedule of cost of goods manufactured, a schedule
of cost of goods sold, and an income statement
7. LO7-Two-stage allocation process used to assign
manufacturing overhead
8. LO8- project costing used in service industry firms and
65 non-profit organizations
 End of Chapter 3

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