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Topic 1 Topic 2
Similarities of finacial management and accounting management Product costing systems
 Both branches of Accounting  accumulate product-related costs and use procedures to assign them to
 Both deal with economic events of a business. the final products
 Both require that economic events be quantified and  In some businesses upstream and downstream costs are regarded as
communicated to interested parties. product-related
Difference between financial accounting and managerial accounting Product costs -- are the input to the product costing system
 Both external and internal users Cost of Goods Sold Section of the Income Statement Different product costs for different purposes
 Financial statement  Product costs can include upstream, manufacturing and downstream
 Quarterly and annually costs
 General purpose  Inclusion of various costs depends on the time frame and type of
 pertains to a business as a whole decision to be made
Managerial  Managers’ needs for product cost information will vary depending on the
 Internal users only type of decision to be made and managers’ personal preferences
 Internal reports
 As frequently as needed Designing product costing systems
 Special purpose for specific decission  Identify the managers’ needs
Cost of goods manufactured
Function os management  All product cost information may not come from a single product costing
 Planning system
 Controlling  Cost and benefits of various alternative systems must be assessed
 Directing
Types of classifications of manufactured cost Manufacturing costs consist of
 Direct materials  Direct material
 Direct labour  Direct labour
 Manufactured overhead  Manufacturing overhead
Direct materials Several manufacturing ledger accounts
Work in Process – partially completed units of product
 Raw materials – Basic materials used in manufactuering  Raw materials inventory,
Total Manufacturing Costs – sum of direct material costs, direct labor costs, and
 Raw materials that can be physical and directly associated with  Work in process inventory,
manufacturing overhead; all incurred in the current year
the finished product are called.  Finished goods inventory,
Indirect materials  Cost of goods sold expense, and
Cost of goods manufactured
 Materials that cannot associate with finished good  Profit and loss account
 Represent too small in the part of the finished good
 Consider part of manufacturing overhead ]To estimate the cost of a product we need to identify the cost of resources used to
Direct labours produce the product
 Factory employees directly associate with coverting raw  Some resources are consumed directly, and are traced directly to each
materials in to finshed goods product
Indirect labour  Overhead costs are essential to production, but have no observable
 Factory employees not associate with the finshed product. relationships to the product  need to be allocated
Manufacturing cost
 Cost that are indirectly associated with manufacturing product Allocating overhead costs to products
 Manufacturing overhead including all the manufacturing cost  Identify the overhead cost driver
except direct materials and direct labours  Calculate a predetermined (or budgeted) overhead rate per unit of cost
Product cost Balance sheet – Inventories
 Direct materials  Apply manufacturing overhead costs to products at the budgeted (or
 Direct labours predetermined) overhead rate, multiplied by the quantity of cost driver
 Manufacturing overhead consumed by the product
Perid cost
 Selling expenses Accounting for manufacturing overhead
 Administration expenses  Actual manufacturing overhead
Product cost  Manufacturing overhead costs incurred in
 Consist of direct materials cost, the direct labour cost, and the production
manufacturing overhead cost  Charged to the manufacturing overhead account
 A necessary and intergral part of producing the product  Applied manufacturing overhead
 Record as the inventory as ocured  Estimate of the overhead resources used to
manufacture a product
 Applied to products using a predetermined
overhead rate
Accounting for manufacturing overhead Factory Labor Costs
Disposing of underapplied or overapplied overhead at the end of the  Consists of
accounting period…  gross earnings of factory workers,
 Close the underapplied or overapplied to cost of goods sold, or  employer payroll taxes on such earnings, and
 Distribute proportionately to cost of goods sold, work in process  Fringe benefits incurred by the employer. Manufacturing Overhead
inventory and finished goods inventory  Debited to Factory Labor when incurred.
There are two main categories of Product costing system Example: Example:
1. Conventional product costing system Wallace Manufacturing incurs $32,000 of factory labor costs, of which $27,000 relates to At Wallace Manufacturing, direct labor cost is the activity base.
 Job costing wages payable and $5,000 relates to payroll taxes payable in January. Estimated annual costs:
 Process costing Overhead costs $280,000
2. Contemporary product costing system Direct labor costs $350,000
 Activity Base costing Actual direct labor $28,000
The overhead rate is
$280,000 ÷ $350,000 = 80% of direct labor cost
Topic 3 Overhead applied for January is $22,400 ($28,000 X 80%) and is recorded through
There are two basic types of conventional product costing systems Manufacturing Overhead Costs
the following entry.
 Job Order Cost System  May be recognized daily
 Process Cost System  For example, machinery repairs, indirect materials, and indirect
Job Order Cost System  May also be recorded periodically through adjusting entries
 Costs are assigned to each job or batch  For example, property taxes, depreciation, and insurance.
 A job may be for a specific order or inventory  The summary entry for Wallace Manufacturing Company is:
 The objective: to compute the cost per job SUMMARY OF JOB ORDER COST FLOWS
 Measures costs for each job completed - not for set time periods

Two Major Steps in Flows of Costs

 Accumulate the manufacturing costs incurred
 Raw materials
 Factory Labor
Assignment for manufactured cost to work in process
 Manufacturing Overhead
 Manufacturing costs are assigned to work in process with
 Assign the accumulated costs to the work done
 Debits to Work in Process Inventory
Job order cost flow system
• Raw Materials Inventory  A debit balance in manufacturing overhead means that overhead is
• Factory Labor underapplied.
• Manufacturing Overhead  Overhead assigned to work in process is less than
 Entries assigning costs to work in process are usually made monthly overhead incurred.
Job cost sheet  A credit balance in manufacturing overhead means that overhead is
 Used to record the costs of a specific job. overapplied.
 Used to determine the total and unit costs of a completed job.  Overhead assigned to work in process is greater
Postings to job cost sheets are made daily. than overhead incurred.
Any year-end balance in Manufacturing Overhead is eliminated by adjusting cost
of goods sold.
Predetermined Overhead Rate  Underapplied overhead is debited to CGS
Raw Materials Costs  Based on the relationship between estimated annual overhead costs and  Overapplied overhead is credited to CGS
expected annual operating activity. Example:
 Raw materials are debited to Raw Materials Inventory when  Expressed in terms of an activity base such as Wallace Mfg. has a $2,500 credit balance in Manufacturing Overhead at December
purchased.  Direct labor costs 31. The adjusting entry for the overapplied overhead is
 At this point, the cost of materials is not assigned to specific  Direct labor hours
jobs or orders.  Machine hours, or
Example: Predetermined Overhead Rate
On January 4, Wallace Manufacturing purchases 2,000 handles at $5 per  Established at the beginning of the year.
unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of  May use a single, company-wide predetermined rate.
$42,000  May use a different rate for each department and each department may have a
different activity base.
 The formula for a predetermined overhead rate is