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Rooney.D. CPA Charles W. Ph..B.. D. Booker. .D.D. All rights reserved.. Inc. CPA.Fundamentals of Product and Service Costing Chapter 6 PowerPoint Authors: Susan Coomer Galbreath. Ph.. CPA McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies.A. Ph. CIA Cynthia J. Caldwell. CMA Jon A.

and services. The objective of the cost management system is to provide information about costs relevant for decision making.LO 6-1 Cost Management Systems LO 6-1 Explain the fundamental themes underlying the design of cost systems. 6-3 . The cost management system accumulates and reports costs about processes. products.

LO 6-2 Cost Allocation and Product Costing LO 6-2 Explain how cost allocation is used in a cost management system. Basic Cost Flow Diagram Cost pools Direct materials Direct labor Manufacturing overhead Indirect Cost allocation rule Cost objects (allocated by direct labor cost) Direct Alpha Beta 6-4 .

LO 6-3 Basic Cost Flow Model LO 6-3 Explain how a basic product costing system works. How costs and units move through inventories: This is true for the following accounts: – Raw Materials (RM) – Work-in-Process (WIP) – Finished Goods (FG) 6-5 .

000. Cost of resources used in April: Materials Labor Manufacturing overhead Total $ 400.000 $1.000 gallons of paint in April and has no ending work-in-process inventory.LO 6-3 Costing with No Work-inProcess Inventories Baxter Paint begins production on April 1. It starts and completes production of 100.000 6-6 .000 100.000 500.

000 was added to work-in-process and then transferred out to finished goods.LO 6-3 Costing with No Work-inProcess Inventories What are the costs at the end of the period? $1. 6-7 .000.000 gallons of paint. Since Baxter produced 100. then the cost per gallon of paint is $10.

000 6-8 .000 20.000 110.LO 6-3 Costing with Ending Work-inProcess Inventories Production for Baxter Paint for May follows (gallons): Beginning inventory Started in May Total Ending WIP (50% complete) Transferred out -0110.000 90.

000 equivalent gallons of paint.000 10.000 gallons finished.000 100.LO 6-3 Costing with Ending Work-inProcess Inventories How do we cost Baxter’s 20. Gallons of paint transferred out Equivalent gallons of finished paint Total equivalent gallons of paint 90.000 6-9 .000 equivalent gallons of finished paint equals 100.000 gallons half finished is equivalent to 10.000 gallons of paint that are only half finished? 20.000 gallons transferred out plus 10. 90.

000/100.000 gallons = $9.000 gallons × $9.000 $990.90/gallon = $891.LO 6-3 Costing with Ending Work-inProcess Inventories Costs incurred in May Year 2: Materials Labor Manufacturing overhead Total $390.000 6-10 .000 500.000 100.000 $990.90 per gallon Costs transferred to finished goods: 90.

LO 6-3 Costing with Ending Work-inProcess Inventories 6-11 .

LO 6-4 Predetermined Overhead Rates LO 6-4 Understand how overhead cost is allocated to products. Indirect costs are allocated using a predetermined overhead rate (POHR). POHR is the cost per unit of the allocation base used to charge overhead to products. POHR = $ ÷ Base 6-12 .

LO 6-4 Predetermined Overhead Rates What are the estimated costs? POHR = Estimated overhead $ Estimated allocation base What activity drives the overhead costs? Why use estimates? • Products need to have costs applied during the period. • The exact amount of indirect costs are not known until the end of the period. 6-13 .

We can use two or more allocation bases to allocate manufacturing overhead to products. 6-14 .LO 6-5 Multiple Allocation Bases and Two-Stage Systems LO 6-5 Explain the operation of a two-stage allocation system for product costing.

(cornflakes. process.LO 6-6 Product Costing Systems LO 6-6 Describe the three basic types of product costing systems: job order. services) Process costing: – An accounting system used when identical units are produced through a series of uniform production steps. (custom homes. or batches of goods. facial tissues. and operations. paint) 6-15 . movies. contracts. Job costing: – An accounting system that traces costs to individual units or to specific jobs.

computers. (automobiles.LO 6-6 Product Costing Systems Operation costing: – A hybrid costing system often used in manufacturing of goods that have some common characteristics plus some individual characteristics. clothing) 6-16 .

End of Chapter 6 6-17 .