Product Costing

By: Ronna Rica L. Co

Cost
- cash amount (or the cash equivalent) given up for an asset.
- includes all costs necessary to get an asset in place and
ready for use. 
Types of Cost
I. As to type III. As to behavior
1. Product Cost 1. Variable Cost
- inventoriable cost a. Total amount – varies
- necessary to production directly to change in
- assetable activity level or cost driver
b. Per unit – constant
2. Period Cost
- not necessary to production 2. Fixed Cost
- expensed as incurred a. Total amount – constant
b. Per unit – varies inversely
II. As to function
1. Manufacturing Cost
a. Direct Materials
b. Direct Labor
c. Factory Overhead

2. Non-manufacturing Cost
a. Research and Development
b. Marketing Cost
c. Selling Cost
d. Administrative Expense
Types of Product Costing System
• Absorption Costing
- Conventional or Full Costing
- cost are classified according to function
- GAAP format
- includes all manufacturing cost in the cost of a unit of product
- acceptable in financial reporting and tax purposes

• Variable Costing
- Direct Costing
- cost are classified according to behavior
- not in accordance with GAAP
- includes only variable manufacturing cost in the cost of a unit
of product
- violates matching principle
- acceptable only for internal use of management

• Throughput Costing
- only direct materials are treated as product cost
Formulas:
• Absorption Costing
Sales xx
Cost of Sales (xx) - based on units sold
Gross Margin xx
S&A Expense (xx)
NIBT xx

• Variable Costing
Sales xx
Variable Cost (xx) – based on units sold
Contribution Margin xx
Fixed Cost (xx) - total
NIBT xx

• Throughput Costing
Sales xx
Direct Materials (xx) – based on units sold
Throughput Margin xx
Direct Labor (xx) – based on units produced
V-Overhead (xx) - based on units produced
F-Overhead (xx) - total
V-S&A Expense (xx) – based on units sold
F-S&A Expense (xx) - total
NIBT xx
Reconciliation

P=S P>S P<S

E=B E>B E<B
A=V A>V A<V

Net Income – AC xx
+ BI x FOH per unit xx
- EI x FOH per unit (xx)
Net Income – VC xx

Net Income – AC xx
+ Sales x FOH per unit xx
- Production x FOH per u (xx)
Net Income – VC xx

Change in Income = Change in Inventory x FOH per unit

Example:
Clover Company produces hats. In May 2016, the company manufactured
20,000 hats. May sales were 18,400 hats, sold at P12 per unit. The cost
per unit for the 20,000 hats produced was:
Direct Materials P3.00
Direct Labor P2.00
Variable Overhead P1.00
Fixed Overhead P1.50
Total P7.50

There was no beginning inventory for May. Variable selling expense

amounted to P2.50 per unit, and fixed selling and administrative expense
totaled P15,000 during the month.

Required: For the month of May,

a. Compute the product cost per unit under absorption costing, variable
costing and throughput costing.
b. Income under three costing methods.
Solution:
Prod : 20,000 hats
Absorption Costing
Sales(18,400 x 12) 220,800
Sold : 18,400 hats @ P12
COS(18,400 x 7.5) (138,000)
EI : 1,600 hats
Gross Margin 82,800
VSA (18,400 x 2.5) (46,000)
FOH : P1.5 x 20,000 = P30,000
FSA (15,000)
Variable SA : P2.5 per unit
NIBT 21,800
Fixed SA : P15,000

Unit Cost: Variable Costing

AC VC TC Sales(18,400 x 12) 220,800
DM 3 3 3 VOH(18,400 x 6) (110,400)
DL 2 2 - Manufacturing Margin 110,400
VOH 1 1 - VSA(18,400 x 2.5) (46,000)
FOH 1.5 - - Contribution Margin 64,400
Unit Cost 7.5 6 3 FOH (30,000)
FSA (15,000)
Throughput Costing NIBT 19,400
Sales (18,400 x 12) 220,800
Reconciliation:
DM (18,400 x 3) (55,200)
NI-AC 21,800
Throughput Margin 165,600
BI (0 x 1.5) 0
DL (20,000 x 2) (40,000)
EI (1,600 x 1.5) (2,400)
VOH (20,000 x 1) (20,000)
NI-VC 19,400
FOH (30,000)
VSA (18,400 x 2.5) (46,000)
FSA (15,000)
NIBT 14,600