chap003_candra.pdf

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Copyright 2009 by The McGraw -Hi ll Companies, Inc. Al l r ights reserved.McGraw-H i l l / I rw in

Product Costing and Cost

Accumulation in a Batch

Production Environment

Chapter 3Chapter 3


Learning

Objective1

Learning

Objective1


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Product and Service CostingProduct and Service Costing

FinancialAccounting

Product costs areused to valueinventory and tocompute cost of

goods sold.

ManagerialAccounting and

Cost Management

Product costs areused for planning,

control, directing, andmanagement decision

making.


Learning

Objective2

Learning

Objective2


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Direct material cost Product cost transferred

Direct labor cost

Manufacturing overhead when product is finished

Expense closed into

Income Summary at endof accounting period

Work-in-Process Inventory Finished Goods Inventory

Cost of Goods Sold Income Summary

Flow of Costs in Manufacturing Firm


Learning

Objective3

Learning

Objective3


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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 oneat a time.

Batch-production operations

Multiple products in batches of relatively smallquantity.

Process

Costing

Job-Order

Costing

Types of Product-Costing Systems

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Typical job-order cost applications:

Special-order printing

Building construction

Also used in service industry

Hospitals

Law firms

Process

Costing

Job-Order

Costing

Types of ProductTypes of Product--Costing SystemsCosting Systems


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Process

Costing

Job-Order

Costing

Used for prod uction of small, identical, low costitems.

Mass produced in automated continuous

production process. Costs cannot be directly traced to each unit ofproduct.

Typical process cost applications:Petrochemical refinery

Paint manufacturer

Paper mill

Types of ProductTypes of Product--CostingCosting SystemsSystems

Quick Check

Which of the following companies would belikely to use job-order costing rather thanprocess costing?

a. Scott Paper Company for Kleenex.b. Architects.

c. Heinz for ketchup.

d. Caterer for a wedding reception.

e. Builder of commercial fishing vessels.


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Quick CheckWhich of the following companies would belikely to use job-order costing rather thanprocess costing?

a. Scott Paper Company for Kleenex.

b. Architects.

c. Heinz for ketchup.

d. Caterer for a wedding reception.

e. Builder of commercial fishing vessels.

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The primary documentfor tracking the costs

associated with a

given job is the job-cost record.

Lets investigate usingthe AFB Company

Accumulating Costs in aAccumulating Costs in a

JobJob--Order Costing SystemOrder Costing System


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Job Number F16 Description

Date Started Nov. 1, 20x1 Date Completed

Number of Units Completed 80

Date Quantity Cost

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material

Requisition Number Unit Price

Direct Labor


80 deluxe alum. fishing boats

Nov. 22, 20x1

Manufacturing Overhead


Cost Item

Total direct material

Amount

Cost Summary

Total direct labor

Total manufacturing overhead

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

JobJob--Order CostOrder CostAccountingAccounting

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Date Quantity Cost

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


Direct Labor



Nov. 22, 20x1



Cost Item


Amount

Cost Summary

Total direct labor


Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Lets see one

A materials requisitionform is used to

authorize the use ofmaterials on a job.

JobJob--Order Cost AccountingOrder Cost Accounting


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Requisition No. 352 Date 11/1/x1

Job Number to Be Charged F16 Dept. Painting

Department Supervisor Timothy Willi ams

Item Quanti ty Unit Cost Amount

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

Authorized

SignatureTimothy Williams


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Date Quantity Cost

11/1/x1 7,200 sq ft $18,000

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


$2.50

Direct Labor



Nov. 22, 20x1



352

Cost Item


Amount

Cost Summary

$18,000

Total direct labor


Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory



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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity Cost

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


$2.50

Direct Labor



Nov. 22, 20x1



803

Cost Item


Amount

Cost Summary

$18,000

Total direct labor


Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Accumulatedirect labor

costs bymeans of a

work record,such as a timeticket, for each

employee.

Lets see one


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Employee Ron Bradl ey Date 11/5/20x1

Employee Number 12 Department Painting

Shop cleanup

A26

11:30

1:00

12:00

5:00

Time Started Time Stopped Job Number

8:00 F1611:30

Employee Time TicketEmployee Time Ticket


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Date Quantity Cost

11/1 7,200 sq ft $18,000

Date Quantity CostVarious

dates 600 $12,000

Date Quantity Cost

Date Cost Balance

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Total cost

Unit cost

Total direct labor


12,000

Cost ItemTotal direct material

Amount

Cost Summary

$18,000


Nov. 22, 20x1

Various time cards $20



803 $2.50

Direct Labor

Time Cards Unit Price

JOB-COST RECORD

Direct Material



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Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

Date Cost Balance

JOB-COST RECORD

Direct Material


$2.50

Direct Labor



Nov. 22, 20x1




803

Cost Item


Amount

Cost Summary

$18,000

Total direct labor


12,000

Total cost

Unit cost

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Apply manufactur ing overhead to jobs using apredetermined overhead rate based on direct

labor hours (DLH).Lets do it



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Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

11/30 600 $18,000

Date Cost Balance

Shipping Summary

Units Shipped

Units Remaining

in Inventory

Total cost

Unit cost

Total direct labor


12,000

18,000

Cost ItemTotal direct material Amount

Cost Summary

$18,000

Direct Labor Hours $30.00


Nov. 22, 20x1




803 $2.50

Direct Labor


JOB-COST RECORD

Direct Material



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Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

11/30 600 $18,000

Date Cost Balance

11/30 $12,000

Shipping Summary

Units Shipped

Units Remaining

in Inventory

60 20

Total cost $48,000

Unit cost $600

Total direct labor


12,000

18,000

Cost Item


Amount

Cost Summary

$18,000



Nov. 22, 20x1




803 $2.50

Direct Labor


JOB-COST RECORD

Direct Material




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Date Quantity Cost

11/1 7,200 sq ft $18,000


dates 600 $12,000

Date Quantity Cost

11/30 600 $18,000

Date Cost Balance

11/30 $12,000

Shipping Summary

Units Shipped

Units Remaining

in Inventory

60 20

Total cost $48,000

Unit cost $600

Total direct labor


12,000

18,000

Cost ItemTotal direct material

Amount

Cost Summary

$18,000



Nov. 22, 20x1




803 $2.50

Direct Labor


JOB-COST RECORD

Direct Material




Learning

Objective4

Learning

Objective4


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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 o f cost driver (or activity base)

Overhead applied = POHR Actual activity

Based on estimates, anddetermined before the

period begins

Actual amount o f the al locat ionbase, such as direct labor hours,

incurred during the period

1

2

Manufacturing Overhead CostsManufacturing Overhead Costs

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Overhead is appl ied to jobs using apredetermined overhead rate (POHR) based on

estimates made at the beginning of theaccounting period.

POHR =Budgeted manufacturing overhead cost

Budgeted amount o f 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

Manufacturing Overhead CostsManufacturing Overhead Costs


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Learning

Objective

5

Learning

Objective

5

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Lets summarizethe documentflow we have

been discussingin a job-order

costing system.

Job-Order Costing

Document Flow Summary


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ProductionOrder for Job

The materials requisition indicates the cost of

direct material to charge to jobs and the cost ofindirect materialindirect material to charge to overhead.

MaterialRequisition

The production order for the job authorizes the start

of the production process.

Labor Time Records

Employee time tickets indicate the cost ofdirectlabor to charge to jobs and the cost of indirectindirect

laborlabor to charge to overhead.

Actual Cost Dr iver (or Act iv ity Base)

XPredetermined Overhead Rate

Apply Manufacturing Overhead

JobJob--Order CostingOrder Costing

Document Flow SummaryDocument Flow Summary

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Lets examine thecost flows in a

job-order costingsystem. We willuse T-accountsand start with

materials.

Job-Order System Cost Flows


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Raw MaterialsMaterial

PurchasesDirectMaterial

DirectMaterial

Mfg. Overhead

IndirectMaterial

IndirectMaterial

Work in Process(Job-Cost Record)


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Next lets addlabor costs andapplied

manufacturingoverhead to thejob-order costflows. Are you

with me?



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DirectLabor

Mfg. Overhead

IndirectMaterial

DirectMaterial

IndirectLabor

DirectLabor

IndirectLabor

Wages PayableWork in Process

(Job-Cost Record)


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DirectLabor

Mfg. Overhead

IndirectMaterial

DirectMaterial

OverheadAppl ied to

Work inProcess

If actual and appliedmanufacturing overhead are

not equal, a year-endadjustment is required. Wewill look at the procedure to

accomplish this later.

IndirectLabor

Direct

LaborOverhea

dAppl ied

Indirect

Labor

Wages PayableWork in Process

(Job-Cost Record)



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Now letscomplete the

goods and sell

them. Still withme?


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Cost ofGoods

Mfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoods

Mfd.

Cost of Goods Sold

Cost ofGoodsSold

DirectMaterial

Direct

LaborOverhea

dAppl ied

Work in Process(Job-Cost Record)



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Lets return toAFB Companyand see what we

will do if actualand appliedoverhead are not

equal.


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

Actual d irect labor hours worked for the year: 170,000

Appl ied Overhead = POHR Actual Di rect Labor Hours

Appl ied Overhead = $30.00 per DLH 170,000 DLH = $5,100,000

Appl ied overhead exceeds actual overhead by $50,000

This dif ference is called overapplied overhead.

Overhead Application ExampleOverhead Application Example


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Work in

Process

Finished

Goods

Cost ofGoods Sold

$50,000may be allocated

to these accounts.

$50,000 may beclosed directly to

cost of goods sold.

Cost ofGoods Sold

AFB CompanysMethod

OR

Overapplied and UnderappliedOverapplied and Underapplied

Manufacturing OverheadManufacturing Overhead

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Actualoverhead

costs

$5,050,000

$50,000overapplied

UnadjustedBalance

$50,000

$50,000

AdjustedBalance

OverheadAppl iedto jobs

$5,100,000

AFBsMfg. Overhead

for the year

AFBs Costof Goods Sold

for the year


Manufacturing OverheadManufacturing Overhead


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Al ternat ive 1 Al ternative 2

If Manufacturing Close to Cost

Overhead is . . . Al location of Goods Sold

UNDERAPPLIED INCREASE INCREASE

W or k i n Pro cess Cost of Go od s So ld

(Appl ied OH is less Fini shed Goods

than actual OH) Cost of Goods Sol d

OVERAPPLIED DECREASE DECREASE

W or k i n Pro cess Cost of Go od s So ld

(App li ed OH i s gre ater Fi ni she d Good s

than actual OH) Cost of Goods Sol d


Manufacturing OverheadManufacturing Overhead --

SummarySummary


Learning

Objective6

Learning

Objective6


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Schedule of Cost of Goods Manufactur ed

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: W ork-in-process inventory, beginning xxx

Subtotal $xxx

Deduct: Work-in-process inventory, ending xxx

Cost of goods manufactured $xxx

Schedule of Cost of Goods ManufacturedSchedule of Cost of Goods Manufactured

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Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxxAdd: Cost of goods manufactured* xxx

Cost of goods available for sale $xxxDeduct: Finished goods inventory, ending xxxCost of goods sold $xxxAdd: Underapplied overheadorDeduct: Overapplied overhead xxxCost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule

Schedule of Cost of Goods SoldSchedule of Cost of Goods Sold


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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 itUsing a predetermined rate makes itpossible topossible to estimateestimate total job costs sooner.total job costs sooner.

Actual overhead for the period is notActual overhead for the period is notknown until the end of the period.known until the end of the period.

Actual and Normal CostingActual and Normal Costing


Learning

Objective7

Learning

Objective7


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Cost pools

Stage One:Costs assignedto pools

Indirect

Labor

Indirect

Materials

Other

Overhead

Department

1

Department

2

Department

3

TwoTwo--Stage Cost AllocationStage Cost Allocation

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Departmental Overhead RatesDepartmental Overhead Rates

Department1

Department2

Department3

Products

Cost pools

Direct

Labor

Hours

Machine

Hours

Raw

Materials

Cost

Stage One:Stage One:Costs assignedCosts assignedto poolsto pools

Stage Two:Costs appliedto products

Departmental Allocation Bases

Indirect

Materials

Other

Overhead

Indirect

Labor


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End of Chapter 3End of Chapter 3

Documents

chap003_candra.pdf