Product Cost Analysis

Introduction
Product costs are all the costs included to manufacture a product. These costs include direct materials, direct labor, and manufacturing overhead. Product costs are only those costs that can be directly related to the manufacturing process. The term used for costs that are not directly related to the manufacture of a product is “Period Costs” Period costs are those costs incurred to sell the finished product and the costs incurred to have management run the company. Period costs are referred to as non-value added cost because they do not increase the sales value of the end product. This document is designed to show the process from start to finish in assigning product costs to jobs.

Types of Product Costs:
   Direct Materials (material used during manufacturing of a product) Direct Labor (Labor of individuals working on the product) Manufacturing Overhead (factory depreciation, factory supervisor’s salary, Indirect materials, Indirect labor, accounts payable)

Types of Journal Entries
There are three types of journal entries dealing with the manufacture of a product. Actual Cost –The actual price paid during the process. Applied Cost –The estimated cost applied to the job cost sheets during the process of manufacturing. Product cost –which are the cost of the finished product that is transferred to the finished goods inventory at the end of the process.

Here is the web-link to the presentation for this Product Cost Analysis:
http://prezi.com/0afjqlk4ilhy/product-cost-analysis/

MJC

1

Product Cost Analysis

Transaction Description
To record actual purchases of Raw Materials To record actual factory labor

Account Titles
Raw Materials Inventory Accounts Payable Factory Labor Factory Wages Payable Employee Payroll Tax Payable Manufacturing Overhead Accounts Payable (other on account) Accumulated Depreciation (depreciation) Prepaid Factory Rent Raw Materials (indirect materials) Factory Labor (indirect labor) Work in Process Inventory Raw Material Inventory Work in Process Inventory Factory Labor Work in Process Inventory Manufacturing Overhead Finished Goods Inventory Work in Process Inventory Accounts Receivable

Debit
XXX

Credit
XXX

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

Actual Costs Applied Costs Goods Transferred and Sold

To record actual factory manufacturing overhead (List credits from highest to lowest) Do not copy what is in the brackets it is listed only as supportive information. To record direct materials place into work in process. Add Manufacturing Overhead if you are given indirect materials. To record direct labor placed into work in process. Add Manufacturing Overhead if you are given indirect labor To record estimated factory manufacturing overhead To record transfer of good out of work in process to finished goods inventory

To record sale of goods to customer and to remove those goods from finished goods inventory

Sales Revenue Cost of Goods Sold Finished Goods Inventory

MJC

2

Product Cost Analysis

Example Problem
Introduction
Blackburn Manufacturing uses a job order cost system and applies overhead to production on the bases of direct labor cost. At the beginning of the fiscal year on February 1, 2014, Job 2897 was the only job in process.

Beginning Work in Process
Job 2897 Job Cost Sheet Quantity 1 Date Requested: February 2013 Date Completed: Manufacturing Direct Labor Overhead 900

Job No: 2897 Item: Equipment For: Lawrence Company Date Jan 31, 2013 Direct Material 1,500

1,260

Cost of completed job Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit cost

Other Beginning Balances:
  Finished Goods balance of $ 5,300 consisting of Job 2896 Raw Materials balance of 5,000

MJC

3

Product Cost Analysis

2014 Manufacturing Activities:
During 2014, Blackburn Manufacturing began Jobs 2898 and 2899, and they completed Jobs 2897 and 2898. Jobs 2896 and 2897 were also sold on account during the year for $8,000 and 9,000 respectively.

2014 Actual Costs Incurred
1. Purchased additional raw materials of 4,500 on Account. 2. Incurred factory labor costs of $2,900. Of this amount $900 related to employer payroll taxes. 3. Incurred manufacturing overhead costs as follows: indirect materials $1,200; indirect labor $500; depreciation expense $2,000; and various other manufacturing overhead cost on account of $1,000.

Assigned Cost to Jobs:

Job No. 2897 2898 2899 Totals

Direct Materials 900 2,500 1,000

Direct Labor 600 1,350 900

Overhead

MJC

4

Product Cost Analysis

Instructions:
1. Calculate the predetermined overhead rate for 2014, assuming Blackburn Manufacturing estimates total manufacturing overhead costs of $4,500, direct labor costs of $3,000, and direct labor hours of 1,500 for the year. 2. Open job cost sheets for Jobs 2898 and 2899. Enter the beginning balance on the job cost sheet for Job 2897. 3. Prepare the journal entries to record 2014 actual cost incurred. 4. Prepare the journal entries to record 2014 applied cost. 5. Total the job cost sheets for any job(s) completed during the year. 6. Prepare the journal entries to record the completion of any job(s) during the year. 7. Prepare the journal entries for the sale of any job(s) during the year. 8. What is the balance in the Finished Goods Inventory account at the end of the year? What does the balance represent? 9. What is the amount of over or under applied overhead?

MJC

5

Product Cost Analysis

Answers:
(1) Formula: Estimated Overhead divided estimated labor cost equals Predetermined Overhead rate. 4,500 ÷ 3,000 = 1.50 X 100 = 150%
(2 & 5)

Job No: 2897 Item: Equipment For: Lawrence Company Date Jan 31, 2013 Feb 1, 2014 Direct Material 1,500 900

Job Cost Sheet Quantity 1 Date Requested: February 2013 Date Completed: Manufacturing Direct Labor Overhead 900 600

1,260 900

2,400 Cost of completed job Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit cost (6060 ÷ 1)

1,500

2,160

2,400 1,500 2,160 6,060 6,060

MJC

6

Product Cost Analysis

Job No: 2898 Item: Equipment For: Lawrence Company Date Feb 1, 2014 Direct Material 2,500

Job Cost Sheet Quantity 1 Date Requested: February 2013 Date Completed: Manufacturing Direct Labor Overhead 1,350

2,025

2,500 Cost of completed job Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit cost (5,875 ÷ 1)

1,350

2,025

2,500 1,350 2,025 5,875 5,875

Job No: 2899 Item: Equipment For: Lawrence Company Date Feb 1, 2014 Direct Material 1,000

Job Cost Sheet Quantity 1 Date Requested: February 2013 Date Completed: Manufacturing Direct Labor Overhead 900

1,350

Cost of completed job Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit cost

MJC

7

Product Cost Analysis

(3) Journal Entries to record actual product cost during the year:

Date Description & Account Titles Debit Credit 1 Raw Materials Inventory 4,500 Accounts Payable 4,500 (Purchases of Raw Materials on Account) 2 Factory Labor Factory Wages Payable Employee Payroll Taxes Payable (To record Factory Labor incurred) Manufacturing Overhead Accumulated depreciation Raw Materials Inventory Accounts Payable Factory Labor (To record actual overhead incurred) 2,900 2,000 900

3

4,700 2,000 1,200 1,000 500

(4) Journal Entries to record applied product cost during the year:

Date 1

Description & Account Titles Work in Process Raw Materials (To record materials used) Work in Process Factory Labor (To record labor incurred) Work in Process Manufacturing Overhead (To record applied overhead)

Debit 4,400

Credit 4,400

2

2,850 2,850

3

4,275 4,275

MJC

8

Product Cost Analysis

(4) Calculations for journal entries: Job No. 2897 2898 2899 Totals Direct Materials 900 2,500 1,000 4,400 Direct Labor 600 1,350 900 2,850 Overhead 900 2,025 1,350 4,275

Manufacturing Overhead Calculation (Direct Labor cost X Predetermined Overhead rate)

(6 & 7) Transfer of jobs to finish goods and the sale of jobs 2896 & 2897.

Date 1

Description & Account Titles Finished Goods Inventory Work in Process (To record transfer) Accounts Receivable Sales Revenue (To record sale of goods) Cost of Goods Sold Finished Goods Inventory (To record removal of goods)

Debit 11,935

Credit 11,935

2

17,000 17,000

3

11,360 11,360

MJC

9

Product Cost Analysis

(6 & 7) Calculations

1 Finished Goods Inventory and Work in Process Job 2897 Job 2898 Total (From Job Sheets Totals) 2 Accounts Receivable and Sales Revenues Job 2896 Job 2897 Total (From Stated Sales Price) 3 Cost of Goods Sold and Finished Goods Inventory Job 2896 Job 2897 Total (From Job Sheets Totals)

6,060

+

5,875 11,935

8,000

+

9,000 17,000

5,300 6,060

+

11,360

(8) Balance in Finished Goods Inventory

Finished Goods Inventory Beginning Balance 5,300 11,360 Goods Sold Goods transferred 11,935 Ending Balance 5,875 Beginning Balance represents Job 2896. Ending Balance Represents the cost of Job 2898, which was transferred to finished goods but has not yet been sold. (9) Manufacturing Overhead Account Manufacturing Overhead Actual 4,700 4,275 Applied Ending Balance 425 Under-applied Overhead of $425 Debit Balance results from Under-applied balance Credit Balance results from Over-applied balance

MJC

10

Sign up to vote on this title
UsefulNot useful