Product Costing and Cost Accumulation in A Batch Production Environment

Chapter 3
Product Costing and Cost Accumulation in a Batch Production Environment
McGraw-Hill/Irwin
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1
3-2
Product and Service Costing
Financial Accounting
Product costs are used to value inventory and to compute cost of goods sold.
Managerial Accounting and Cost Management

Product costs are used for planning, control, directing, and management decision making.
3-3
3-4
Flow of Costs in Manufacturing Firm

Work-in-Process Inventory Direct material cost Direct labor cost Manufacturing overhead Product cost transferred when product is finished Finished Goods Inventory
Cost of Goods Sold Expense closed into Income Summary at end of accounting period
Income Summary
3-5
3-6
Types of Product-Costing Systems

Process Costing Job-Order 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 at a time. one
Batch-production operations
Multiple products in batches of relatively small quantity.
3-7

Typical job-order cost applications: Special-order printing Building construction Also used in service industry Hospitals Law firms
3-8

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
3-9
Accumulating Costs in a Job-Order Costing System

The primary document for tracking the costs associated with a given job is the jobcost record.
Lets investigate using the AFB Company
3-10
Job-Order Cost Accounting

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price Cost Date Direct Material Requisition Number Quantity
Date
Requisition Number
Direct Labor Quantity
Unit Price
Cost
Date
Manufacturing Overhead Requisition Number Quantity
Unit Price
Cost
Cost Summary Cost Item Total direct material Total direct labor Total manufacturing overhead Total cost Unit cost
Amount
Date
Shipping Summary Units Remaining Units Shipped in Inventory
Cost Balance
3-11

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price Cost Date Direct Material Requisition Number Quantity
Date
Requisition Number
Direct Labor Quantity
Unit Price
Cost
A materials requisition Date Unit Price form isCost used to Cost Summary authorize the use of Cost Item Amount Total direct material materials on a job. Total direct labor
Manufacturing Overhead Requisition Number Quantity Total manufacturing overhead Total cost Unit cost Shipping Summary Units Remaining Units Shipped in Inventory
Lets see one

Cost Balance
3-12
Date

Requisition No. 352 Job Number to Be Charged F16 Department Supervisor Timothy Williams Item Aluminum Quantity 7,200 sq ft Unit Cost $ 2.50 Date 11/1/x1 Dept. Painting
Amount 18,000.00
Authorized Signature
Timothy Williams
3-13

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price $2.50 Cost $18,000 Date 11/1/x1 Direct Material Requisition Number Quantity 352 7,200 sq ft Direct Labor Requisition Number Quantity
Date
Unit Price
Cost
Date
Unit Price
Cost
Amount $18,000
Date
Cost Balance
3-14

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price $2.50 Cost $18,000 Date 11/1 Direct Material Requisition Number Quantity 803 7,200 sq ft Direct Labor Quantity
Date
Requisition Number
Unit Price
Cost
Date
Unit Price
Cost
Amount $18,000
Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
Lets see one
Date
Cost Balance
3-15
Employee Time Ticket

Employee Ron Bradley Employee Number 12 Date 11/5/20x1 Department Painting Station
Time Started 8:00 11:30 1:00
Time Stopped 11:30 12:00 5:00
Job Number F16 Shop cleanup A26
3-16

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price $2.50 Cost $18,000 Date 11/1 Direct Material Requisition Number Quantity 803 7,200 sq ft Direct Labor Quantity 600
Date Various dates
Time Cards Various time cards
Unit Price $20
Cost $12,000
Date
Unit Price
Cost
Amount $18,000 12,000
Date
Cost Balance
3-17

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price $2.50 Cost $18,000 Date 11/1 Direct Material Requisition Number Quantity 803 7,200 sq ft Direct Labor Requisition Number Quantity Various time cards 600
Date Various dates
Unit Price $20
Cost $12,000
Date
Unit Price
Cost
Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct labor hours (DLH). Shipping Summary Lets do it Units Remaining
Date Units Shipped in Inventory Cost Balance
3-18
Amount $18,000 12,000

Job Number F16 Date Started Nov. 1, 20x1 JOB-COST RECORD Description 80 deluxe alum. fishing boats Date Completed Nov. 22, 20x1 Number of Units Completed 80 Unit Price $2.50 Cost $18,000 Date 11/1 Direct Material Requisition Number Quantity 803 7,200 sq ft Direct Labor Requisition Number Quantity Various time cards 600
Date Various dates
Unit Price $20
Cost $12,000
Date 11/30
Manufacturing Overhead Requisition Number Quantity Direct Labor Hours 600 Cost Summary Cost Item
Unit Price $30.00
Cost $18,000
Total direct material Total direct labor Total manufacturing overhead Total cost Unit cost
Amount $18,000 12,000 18,000
Date
Cost Balance
3-19

Date Various dates
Requisition Number Various time cards
Unit Price $20
Cost $12,000
Date 11/30
Unit Price $30.00
Cost $18,000
Amount $18,000 12,000 18,000 $48,000 $600
Date 11/30
Shipping Summary Units Remaining Units Shipped in Inventory 60 20
Cost Balance $12,000
3-20

Date Various dates
Requisition Number Various time cards
Unit Price $20
Cost $12,000
Date 11/30
Unit Price $30.00
Cost $18,000
Amount $18,000 12,000 18,000 $48,000 $600
Date 11/30
Shipping Summary Units Remaining Units Shipped in Inventory 60 20
Cost Balance $12,000
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3-22
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 = 2 Budgeted amount of cost driver (or activity base)
1
Overhead applied = POHR Actual activity

Based on estimates, and determined before the period begins Actual amount of the allocation base, such as direct labor hours, incurred during the period
3-23
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.
POHR =
Budgeted manufacturing overhead cost 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
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3-25
Job-Order Costing Document Flow Summary
Lets summarize the document flow we have been discussing in a job-order costing system.
3-26
Job-Order Costing Document Flow Summary

Production Order for Job Material Requisition Labor Time Records
The production order for the job authorizes the start of the production process. The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.
Actual Cost Driver (or Activity Base)
Apply Manufacturing Overhead
X Predetermined Overhead Rate

3-27
Job-Order System Cost Flows
Lets examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.
3-28

Raw Materials
Material Direct Purchases Material Indirect Material
Work in Process (Job-Cost Record)

Direct Material
Mfg. Overhead
Indirect Material
3-29
Next lets add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me?
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Wages Payable
Direct Labor Indirect Labor

Direct Material Direct Labor
Mfg. Overhead
Indirect Material Indirect Labor
3-31

Wages Payable
Direct Labor Indirect Labor

Direct Material Direct Labor Overhea d Applied 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.
3-32
Mfg. Overhead
Indirect Overhead Material Applied to Work in Indirect Process Labor
Now lets complete the goods and sell them. Still with me?
3-33

Direct Material Direct Labor Overhea d Applied Cost of Goods Mfd.
Finished Goods
Cost of Goods Mfd. Cost of Goods Sold
Cost of Goods Sold

Cost of Goods Sold
3-34
Lets return to AFB Company and see what we will do if actual and applied overhead are not equal.
3-35
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.
3-36
Overapplied and Underapplied Manufacturing Overhead

$50,000 may be allocated to these accounts. $50,000 may be closed directly to cost of goods sold.
OR
Work in Process Finished Goods Cost of Goods Sold
Cost of Goods Sold
AFB Companys Method

3-37
Overapplied and Underapplied Manufacturing Overhead

AFBs Cost of Goods Sold for the year
Unadjusted Balance $50,000 Adjusted Balance
AFBs Mfg. Overhead for the year

Actual Overhead overhead Applied costs to jobs
$5,050,000 $5,100,000
$50,000
$50,000 overapplied
3-38
Overapplied and Underapplied Manufacturing Overhead Summary

Alternative 1 If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold Alternative 2 Close to Cost of Goods Sold INCREASE Cost of Goods Sold
DECREASE Cost of Goods Sold
3-39
3-40
Schedule of Cost of Goods Manufactured

Schedule of Cost of Goods Manufactured Direct material: Raw material inventory, beginning Add: Raw material purchases Raw material available for use Deduct: Raw material, ending Raw material used Direct labor Manufacturing overhead Indirect material Indirect labor Other actual overhead charges Total actual manufacturing overhead Add: Overapplied overhead or Deduct: Underapplied overhead Overhead applied to work-in-process Total manufacturing costs Add: Work-in-process inventory, beginning Subtotal Deduct: Work-in-process inventory, ending Cost of goods manufactured $xxx xxx $xxx xxx $xxx xxx
$xxx xxx xxx $xxx xxx xxx $xxx xxx $xxx xxx $xxx
3-41
Schedule of Cost of Goods Sold

Schedule of Cost of Goods Sold Finished goods inventory, beginning Add: Cost of goods manufactured* Cost of goods available for sale Deduct: Finished goods inventory, ending Cost of goods sold Add: Underapplied overhead or Deduct: Overapplied overhead Cost of goods sold (adjusted) * From Cost of Goods Manufactured Schedule $xxx xxx $xxx xxx $xxx xxx $xxx
3-42
Actual and Normal Costing

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 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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3-44
Two-Stage Cost Allocation

Stage One: Costs assigned to pools
Indirect Labor
Indirect Materials
Other Overhead
Cost pools
Department 1
Department 2
Department 3
3-45
Departmental Overhead Rates

Stage One: Costs assigned to pools
Indirect Labor
Indirect Materials
Other Overhead
Cost pools
Stage Two: Costs applied to products
Department 1
Direct Labor Hours
Department 2
Machine Hours
Department 3
Raw Materials Cost
Products
Departmental Allocation Bases
3-46
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Job-Order Costing in Nonmanufacturing Organizations

THE JOB
Cases Programs
Missions Contracts
3-48
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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End of Chapter 3
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Product Costing and Cost Accumulation in A Batch Production Environment

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Chapter 3

Product Costing and Cost Accumulation in a Batch Production Environment

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Product and Service Costing

Managerial Accounting and Cost Management

Flow of Costs in Manufacturing Firm

Types of Product-Costing Systems

Used for production of large, unique, high-cost items.

Many costs can be directly traced to each job.

Types of Product-Costing Systems

Types of Product-Costing Systems

Used for production of small, identical, low cost

Accumulating Costs in a Job-Order Costing System

Lets investigate using the AFB Company

Job-Order Cost Accounting

Direct Labor Quantity

Manufacturing Overhead Requisition Number Quantity

Shipping Summary Units Remaining Units Shipped in Inventory

Job-Order Cost Accounting

Direct Labor Quantity

Lets see one

Job-Order Cost Accounting

Job-Order Cost Accounting

Manufacturing Overhead Requisition Number Quantity

Shipping Summary Units Remaining Units Shipped in Inventory

Job-Order Cost Accounting

Manufacturing Overhead Requisition Number Quantity

Shipping Summary Units Remaining Units Shipped in Inventory

Employee Time Ticket

Time Started 8:00 11:30 1:00

Time Stopped 11:30 12:00 5:00

Job Number F16 Shop cleanup A26

Job-Order Cost Accounting

Date Various dates

Time Cards Various time cards

Unit Price $20

Manufacturing Overhead Requisition Number Quantity

Amount $18,000 12,000

Shipping Summary Units Remaining Units Shipped in Inventory

Job-Order Cost Accounting

Date Various dates

Unit Price $20

Manufacturing Overhead Requisition Number Quantity

Amount $18,000 12,000

Job-Order Cost Accounting

Date Various dates

Unit Price $20

Unit Price $30.00

Amount $18,000 12,000 18,000

Shipping Summary Units Remaining Units Shipped in Inventory

Job-Order Cost Accounting

Date Various dates

Requisition Number Various time cards

Unit Price $20

Unit Price $30.00

Amount $18,000 12,000 18,000 $48,000 $600

Shipping Summary Units Remaining Units Shipped in Inventory 60 20

Cost Balance $12,000

Job-Order Cost Accounting

Date Various dates

Requisition Number Various time cards

Unit Price $20

Unit Price $30.00