Product Costing Systems:: Cost & Management Accounting 1, SEMESTER 1, 2020

ACC 731: Cost & Management Accounting 1,
SEMESTER 1, 2020
LECTURE 2
Product costing systems
Presented by: Silas Felix Qopu (Mr.),

School of Business & Management, Solomon Islands National University 1
Recap
discussions
2
Do It! 1: Managerial Accounting
Indicate whether the following statements are true or false.
1. Managerial accountants have a single role within
an organization: collecting and reporting costs to
management.
2. Financial accounting reports are general-purpose

and intended for external users.
3. Managerial accounting reports are special-purpose
and issued as frequently as needed.
3
LO 1
Do It! 1: Managerial Accounting
(Continued)
Indicate whether the following statements are true or false.
4. Managers’ activities and responsibilities can be
classified into three broad functions: cost
accounting, budgeting, and internal control.
5. Managerial accounting reports must now

comply with generally accepted accounting
principles (GAAP).
4
LO 1
Product Costs Versus Period Costs
LO 2
Can someone explain this slide 5
Manufacturing Costs
Activities and processes that convert raw materials into
finished goods.
6
LO 2
Product costs
• Company A produced 1,000 tables. To produce 1,000 tables, the
company incurred costs of:
• $12,000 on wood
• $2,000 on wages for carpenters and $5000 on wages for supervisor
• $100 for a bag of nails to hold the tables together
7
Product costing systems
• Product costing systems
• accumulate product-related costs and use procedures to assign them to
the final products
• In some businesses upstream and downstream costs are regarded as
product-related
• Product costs are the input to the product costing system

Different product costs for
different purposes
• Product costs can include upstream, manufacturing and
downstream costs
• Inclusion of various costs depends on the time frame and type of
decision to be made
• Managers’ needs for product cost information will vary depending
on the type of decision to be made and managers’ personal
preferences
continued
Designing product costing
systems
• Identify the managers’ needs
• All product cost information may not come from a single product
costing system
• Cost and benefits of various alternative systems must be assessed

Flow of costs in manufacturing
businesses
• When used for inventory valuation, manufacturing costs only are
assigned to products, in line with Australian accounting standards
• Manufacturing costs consist of
• Direct material
• Direct labour
• Manufacturing overhead
continued
Flow of costs in manufacturing
businesses
• Several manufacturing ledger accounts
• Raw materials inventory,
• Work in process inventory,
• Finished goods inventory,
• Cost of goods sold expense, and
• Profit and loss account

Allocating overhead costs
to products
• To estimate the cost of a product we need to identify the cost of

resources used to produce the product
• Some resources are consumed directly, and are traced directly to
each product
• Overhead costs are essential to production, but have no observable
relationships to the product  need to be allocated
continued
Allocating overhead costs to
products
• Identify the overhead cost driver
• Calculate a predetermined (or budgeted) overhead rate per unit of
cost driver
• Apply manufacturing overhead costs to products at the budgeted
(or predetermined) overhead rate, multiplied by the quantity of
cost driver consumed by the product

Accounting for manufacturing
overhead
• Actual manufacturing overhead
• Manufacturing overhead costs incurred in production
• Charged to the manufacturing overhead account
• Applied manufacturing overhead

• Estimate of the overhead resources used to manufacture a product
• Applied to products using a predetermined overhead rate
continued
overhead
• Disposing of underapplied or overapplied overhead at the end of
the accounting period…
• Close the underapplied or overapplied to cost of goods sold, or
• Prorate to cost of goods sold, work in process inventory and finished
goods inventory
continued
overhead
• Most firms close underapplied or overapplied overhead at the end
of the year only
• Do not close monthly as monthly fluctuations will average out over
a year

FINANCIAL STATEMENTS

Manufacturing Costs in Financial Statements
Cost of Goods Manufactured

Cost of Goods Sold Components – (Periodic Inventory
System)
Cost of goods sold sections of merchandising and

manufacturing income statements
Illustration 1-5
Determining the Cost of Goods Manufactured

Total Work in Process – (1) cost of beginning work in process
and (2) total manufacturing costs for the current period.
Total Manufacturing Costs – sum of direct material costs,
direct labor costs, and manufacturing overhead in the current
year. Illustration 1-6
Illustration 1-7
Illustration 1-8
Balance Sheet
Inventory accounts for a manufacturer
Illustration 1-8
The balance sheet for a merchandising company shows just one

category of inventory.
Balance Sheet
Current assets sections of merchandising and manufacturing balance
sheets
Illustration 1-9
Types of product costing systems
Conventional
Job order costing
Process Costing
Contemporary
Activity base costing

• Job costing
• Manufacturing costs traced to individual jobs
• Products are produced in distinct jobs/batches which are significantly
different
• Printers, furniture manufacturers, machinery manufacturers
• Many service firms—lawyers, accountants, consulting engineers
continued
• Process costing
• Production costs traced to process/department, and averaged across all
units produced
• Mass production or repetitive environment
• Petrol production, processed food, chemical and plastics manufacturers
• Repetitive services – routine processing of cheques by banks, handling of
license applications by government departments
continued
32
Own Practice
• See self practice exercises attached on Moodle
33
THE END
Thank you
34

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ACC 731: Cost & Management Accounting 1,

Product costing systems

Presented by: Silas Felix Qopu (Mr.),

2. Financial accounting reports are general-purpose

5. Managerial accounting reports must now

Presented by: Silas Felix Qopu (Mr.),

Presented by: Silas Felix Qopu (Mr.),

Presented by: Silas Felix Qopu (Mr.),

• To estimate the cost of a product we need to identify the cost of

Presented by: Silas Felix Qopu (Mr.),

• Applied manufacturing overhead

Presented by: Silas Felix Qopu (Mr.),

Presented by: Silas Felix Qopu (Mr.),

Cost of Goods Manufactured

Cost of goods sold sections of merchandising and

Determining the Cost of Goods Manufactured

The balance sheet for a merchandising company shows just one

Presented by: Silas Felix Qopu (Mr.),

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