Product Costing and Cost

Accumulation in a Batch Production

Environment
Session 4 &
5

McGraw-Hill/Irwin
Product and Service Costing

Managerial
Financial
Accounting and
Accounting
Cost Management
Product costs are used
to value inventory and Product costs are used
to compute cost of for planning, control,
goods sold. directing, and
management decision
making.
3-2
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

3-3
Product costing Systems
Companies use product costing systems to
measure and record the cost of manufactured
products.
Product costing systems are an integrated set of
documents, ledgers, accounts and accounting
procedures.
There are two major product costing systems:
Job-order costing
Process costing system
The best system to use depends on the
manufacturing
Types of Product-Costing Systems
Process Job-Order
Costing 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.
 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
quantity.
3-5
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
3-6
Types of Product-Costing Systems
Process Job-Order
Costing 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.
 Typical process cost applications:
 Petrochemical refinery
 Paint manufacturer
 Paper mill
3-7
Lets solve
Exercise 3-23, pg 110
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 using the

AFB Company

3-9
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

3-10
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
Unit Price
isCostused to
Cost Summary authorize the use of
Cost Item Amount
Total direct material
Total direct labor
materials on a job.
Total manufacturing overhead
Total cost
Unit cost

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

3-11
 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
Signature
Timothy Williams

3-12
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

3-13
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 time
Cost Item Amount
Total direct material $18,000 ticket, 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

3-14
 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

3-15
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

3-16
 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

3-17
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

3-18
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

3-19
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
3-20
 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 = POHR × Actual activity

Based on estimates, and Actual amount of the allocation

determined before the base, such as direct labor hours,
period begins incurred during the period
3-21
 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 = POHR × Actual activity

Recall the Aluminum Boat example where:

Overhead applied = $30 per DLH × 600 DLH = $18,000

3-22
Lets solve
Exercise 3-33, pg 113
Job-Order Costing
Document Flow Summary

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

3-24
 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

3-25
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.
3-26
 Job-Order System Cost Flows
Work in Process
Raw Materials (Job-Cost Record)
•Material •Direct •Direct
Purchases Material Material
•Indirect
Material

Mfg. Overhead
•Indirect
Material

3-27
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?
3-28
Job-Order System Cost Flows
Work in Process
Wages Payable (Job-Cost Record)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor

Mfg. Overhead
•Indirect
Material
•Indirect
Labor

3-29
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.
3-30
Job-Order System Cost Flows

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

3-31
 Job-Order System Cost Flows
Work in Process
(Job-Cost Record) Finished Goods
•Direct
Material •Cost of •Cost of •Cost of
•Direct Goods Goods Goods
Mfd. Mfd. Sold
Labor
•Overhead
Applied
Cost of Goods Sold
•Cost of
Goods
Sold

3-32
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.

3-33
 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.
3-34
 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
3-35
 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

3-36
 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

3-37
Lets solve
Exercise 3-35, pg 114
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
Cost of goods manufactured $xxx
3-39
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

3-40
Lets solve
Problem 3-44, pg 117
Problem 3-48 pg 119
1. MISTER MUNCHIE, INC.
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X4

Direct material:
Raw-material inventory, 12/31/x3 $ 30,300
Add: Purchases of raw material 117,000
Raw material available for use $147,300
Deduct: Raw-material inventory, 12/31/x4 33,000
Raw material used $114,300
Direct labor 237,000
Manufacturing overhead:
Indirect material $ 14,700
Indirect labor 87,000
Depreciation on factory building 11,400
Depreciation on factory equipment 6,300
Utilities 18,000
Property taxes 7,200
Insurance 10,800
Rental of warehouse space† 9,300
Total actual manufacturing overhead $164,700
Add: Overapplied overhead* 9,300
Overhead applied to work in process 174,000
Total manufacturing costs $525,300
Add: Work-in-process inventory, 12/31/x3 24,300
Subtotal $549,600
Deduct: Work-in-process inventory, 12/31/x4 24,900
Cost of goods manufactured $524,700
2. MISTER MUNCHIE, INC.
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X4

Finished-goods inventory, 12/31/x3 $ 42,000

Add: Cost of goods manufactured* 524,700
Cost of goods available for sale $566,700
Deduct: Finished-goods inventory, 12/31/x4 46,200
Cost of goods sold $520,500
Deduct: Overapplied overhead† 9,300
Cost of goods sold (adjusted for overapplied overhead) $511,200
 MISTER MUNCHIE, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X4

Sales revenue $617,400

Less: Cost of goods sold 511,200
Gross margin $106,200
Selling and administrative expenses:
Salaries $41,400
Utilities 7,500
Depreciation 3,600
Rental of office space 5,100
Other expenses 12,000
Total 69,600
Income before taxes $36,600
Income tax expense 15,300
Net income $21,300
Lets solve
Problem 3-48 pg 119
 Traceable costs total $3,750,000, computed as
follows:

Percent Traceable
Total Cost Traceable Cost

Professional staff salaries……… $3,750,000 80% $3,000,000

Administrative support staff…… 450,000 60 270,000
Photocopying…………………….. 75,000 90 67,500
Travel………………………………. 375,000 90 337,500
Other operating costs…………… 150,000 50 75,000
Total……………………………. $4,800,000 $3,750,000
•The total cost of the Davis Manufacturing project is $96,000, and the billing is $115,200, as follows:

$61,500
Professional staff salaries… ………
Administrative support staff……… 3,900
Photocopying………………………… 750
Travel………………………………….. 6,750
Other operating costs………………. 2,100
Subtotal…………………………… $75,000
Overhead ($75,000 x 28%)…………. 21,000
Total cost…………………………. $96,000
Markup ($96,000 x 20%)……………. 19,200
Billing to ……………………… $115,200
 Actual and Normal Costing

Actual direct material Actual direct material

and direct labor and direct labor
combined with combined with
actual overhead. 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.
3-48
Lets solve
Problem 3-60, pg 60
 Two-Stage Cost Allocation
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools

Department Department Department

Cost pools
1 2 3

3-50
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
3-51
 Job-Order Costing in
Nonmanufacturing Organizations

THE JOB

Cases Missions

Programs Contracts
3-52
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.

3-53