Product Costing and Cost Accumulation in a Batch Production Environment

1. 3 Chapter Three Product Costing andCost Accumulation in a Batch Production Environment

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

3. 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. Types of Product-Costing Systems ProcessCosting Job-OrderCosting

4. Types of Product-Costing Systems ProcessCosting Job-OrderCosting • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill

5. 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. Types of Product-Costing Systems ProcessCosting Job-OrderCosting

6. Types of Product-Costing Systems ProcessCosting Job-OrderCosting • 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.

7. Types of Product-Costing Systems ProcessCosting Job-OrderCosting • Typical job-order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals • Law firms

8. Sequence of Events in a Job-Order Costing System Receive orders from customers Begin production Schedulejobs Ordermaterials

9. Manufacturingoverhead (OH) Applied to eachjob using apredeterminedrate Accumulating Costs in aJob-Order Costing System Directmaterials Traced directly to each job THE JOB Traced directly to each job Direct labor

10. Accumulating Costs in aJob-Order Costing System Charge direct material and direct labor to each job as incurred. Direct Materials Job No. 1 Special documents are used to track costs for each job. Direct Labor Job No. 2 Manufacturing Overhead Job No. 3 Apply overhead to each job using a predetermined rate.

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

12. Job-Order Cost Accounting

13. A materials requisition form is used to authorize the use of materials on a job. Let’s see one Job-Order Cost Accounting

14. Will E. Delite Materials Requisition Form

15. Cost of material is charged to job A-143. Type, quantity, and total cost of material charged to job A-143. The materials requisition form is the source document for recording material usage in the accounting records. Will E. Delite Materials Requisition Form

16. Job-Order Cost Accounting

17. Job-Order Cost Accounting 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. Applymanufacturing overhead to jobs using apredetermined overhead rate based on direct labor hours (DLH). Let’s do it Job-Order Cost Accounting

21. Job-Order Cost Accounting

22. Budgeted manufacturing overhead cost POHR = Budgeted amount of cost driver (or activity base) 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. Overhead applied = POHR × Actual activity Based on estimates, anddetermined before the period begins Actual amount of the allocation base, such as direct labor hours, incurred during the period

23. Budgeted manufacturing overhead cost POHR = Budgeted amount of cost driver (or activity base) 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. Overhead applied = POHR × Actual activity Recall the wooden crate example where: Overhead applied = $4 per DLH × 8 DLH = $32

24. Overhead Application Example RoseCo applies overhead based on direct- labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000.What is RoseCo’s predetermined overhead rate?

25. Budgeted manufacturing overhead cost POHR = Budgeted amount of cost driver (or activity base) $640,000 POHR = 160,000 direct-labor hours (DLH) Overhead Application Example POHR = $4.00 per DLH For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.

26. Overhead Application Example What amount of overhead willRoseCo apply to Job X-32?

27. SOLUTION Overhead applied = POHR × Actual Direct Labor Hours Overhead applied = $4.00 per DLH × 26 DLH = $104 Overhead Application Example

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

29. Job Cost Sheets Job Cost Sheets Job Cost Sheets Job-Cost Records Manufacturing Overhead Account Job-Order CostingDocument Flow Summary The materials requisition indicates the cost of direct materialto charge tojobsand the cost of indirect materialto charge to overhead. Direct materials Materials Ledger Cards Materials Ledger Cards Materials Ledger Cards MaterialsRequisition Indirect materials

30. Job Cost Sheets Job Cost Sheets Job Cost Sheets Job-Cost Records Manufacturing Overhead Account Job-Order CostingDocument Flow Summary Direct Labor Employee time tickets indicate the cost of direct laborto charge tojobsand the costofindirect laborto charge to overhead. Employee Time Ticket Employee Time Ticket Employee Time Ticket Employee Time Ticket Indirect Labor

31. Job-Order CostingDocument Flow Summary IndirectLabor EmployeeTime Ticket Overhead AppliedwithPOHR OtherActual OHCharges Manufacturing Overhead Account Job-Cost Records MaterialsRequisition IndirectMaterial

32. 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.

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

34. 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?

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

36. Job-Order System Cost Flows Work in Process(Job-Cost Record) Wages Payable • Direct Labor • Direct Material • IndirectLabor • Direct Labor • Overhead Applied Mfg. Overhead 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 Material • OverheadApplied to Work inProcess • IndirectLabor

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

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

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

40. Overhead Application Example RoseCo’sactual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked. Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was appliedto all of RoseCo’s jobs during the year?

41. Overhead Application Example RoseCo’sactual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked. Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was appliedto all of RoseCo’s jobs during the year? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

42. Overhead Application Example RoseCo’sactual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked. Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was appliedto all of RoseCo’s jobs during the year? RoseCo has overappliedoverhead for the yearby $30,000. What willRoseCo do? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

43. $30,000may be allocatedto these accounts. $30,000 may beclosed directly to cost of goods sold. Work inProcess FinishedGoods Cost of Goods Sold Cost of Goods Sold Overapplied and Underapplied Manufacturing Overhead OR RoseCo’s Method

44. Overapplied and Underapplied Manufacturing Overhead RoseCo’sMfg. Overheadfor the year RoseCo’s Costof Goods Soldfor the year Unadjusted Balance Actualoverheadcosts $650,000 OverheadAppliedto jobs $680,000 $30,000 overapplied

45. Overapplied and Underapplied Manufacturing Overhead RoseCo’sMfg. Overheadfor the year RoseCo’s Costof Goods Soldfor the year Unadjusted Balance Actualoverheadcosts $650,000 OverheadAppliedto jobs $680,000 $30,000 $30,000 AdjustedBalance $30,000 overapplied

46. Overapplied and Underapplied Manufacturing Overhead - Summary

47. Actual and Normal Costing Actual direct materialand direct labor combined withactual overhead. Actual direct materialand direct labor combined withpredetermined overhead. Using a predetermined rate makes itpossible to estimate total job costs sooner. Actual overhead for the period is notknown until the end of the period.

48. Assigning overhead is sure difficult. I agree! 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.

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

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