Chapter 3

Product Costing and Cost

Accumulation in a Batch
Production Environment

McGraw-Hill/Irwin Copyright © 2014

Learning Objective 3-1 – Discuss the role of product
and service costing in manufacturing and
non-manufacturing firms.

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 Product and Service Costing
Financial Managerial
Accounting Accounting and
Product costs are used Cost Management
to value inventory on Product costs are used
the balance sheet and for planning, control,
to compute cost of directing, and
goods sold on the management decision
income statement. making.

Other Interested Organizations

There is an ever increasing need to use
data in external organizations as well.
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Learning Objective 3-2 – Diagram and explain the flow
of costs through the manufacturing accounts used in product
costing.

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Flow of Costs in Manufacturing Firm

Work-in-Process Inventory Finished Goods Inventory

Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished

Cost of Goods Sold Income Summary

Expense closed into

Income Summary at end

of accounting period

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Learning Objective 3-3 – Distinguish between job-order
costing and process costing.

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Types of Product-Costing Systems

Process Job-Order
Costing Costing

 Used for production of large, unique, high-cost items.

 Built to order rather than mass produced.
 Many costs can be directly traced to each job.
 TWO TYPES:
 Job-shop operations
 Products manufactured in very low volumes or one at
a time.
 Batch-production operations
 Multiple products in batches of relatively small
quantity.
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Types of Product-Costing Systems

Process Job-Order
Costing Costing

 Used for production of small, identical, low cost

items.
 Mass produced in automated continuous
production process.
 Costs cannot be directly traced to each unit of
product.
 Typical process cost applications:
 Petrochemical refinery
 Paint manufacturer
 Paper mill 3-8
Accumulating Costs in a
Job-Order Costing System

The primary document

for tracking the costs
associated with a given
job is the
job-cost record.

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Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost

Direct Labor
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance

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Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost

Direct Labor
Date Requisition Number Quantity Unit Price Cost

A materials requisition
Manufacturing Overhead
Date Requisition Number
form
Quantity
Unit Price
isCostused to
Cost Summary authorize the use of
Cost Item Amount
Total direct material
Total direct labor
materials on a job.
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Let’s see one
Units Remaining
Date Units Shipped in Inventory Cost Balance

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 Job-Order Cost Accounting
Requisition No. 352 Date 11/1/x1
Job Number to Be Charged F16 Dept. Painting
Department Supervisor Timothy Williams

Item Quantity Unit Cost Amount

Aluminum 7,200 sq ft $ 2.50 $ 18,000.00

Authorized
Signature
Timothy Williams

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Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1/x1 352 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance

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Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000 Accumulate
Direct Labor direct labor
Date Requisition Number Quantity Unit Price Cost
costs by
means of a
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost work record,
such as a time
Cost Summary
Cost Item Amount ticket, for each
Total direct material $18,000
Total direct labor employee.
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary Let’s see one

Units Remaining
Date Units Shipped in Inventory Cost Balance

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 Employee Time Ticket

Employee Ron Bradley Date 11/5/20x1

Employee Number 12 Department
Station Painting

Time Started Time Stopped Job Number

8:00 11:30 F16
11:30 12:00 Shop cleanup
1:00 5:00 A26

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Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Time Cards Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance

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 Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Apply manufacturing overhead to jobs using a
Total direct labor
Total manufacturing overhead
12,000

predetermined overhead rate based on direct

Total cost
Unit cost
labor hours (DLH).
Shipping Summary
Units Remaining Let’s do it
Date Units Shipped in Inventory Cost Balance

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Job-Order Cost Accounting
JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance

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Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
11/30 60 20 $12,000
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Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Direct Labor Hours 600 $30.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
11/30 60 20 $12,000
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Learning Objective 3-4 – Compute a predetermined
overhead rate and explain its use in job-order costing for job-
shop and batch-production environments.

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 Manufacturing Overhead Costs
Overhead is applied to jobs using a predetermined overhead
rate based on estimates made at the beginning of the
accounting period.
Predetermined Budgeted manufacturing overhead cost
Rate = Budgeted amount of cost driver (or activity base)

Overhead applied = Rate × Actual activity

Based on estimates, and Actual amount of the allocation

determined before the base, such as direct labor hours,
period begins incurred during the period
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 Manufacturing Overhead Costs
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at the
beginning of the accounting period.

Budgeted manufacturing overhead cost

Rate =
Budgeted amount of cost driver (or activity base)

$360,000 / 40,000 hours = $9 per machine hour

Overhead applied = Hours on Job = 30 X $9 per hour = $270

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Learning Objective 3-5 – Prepare journal entries to
record the costs of direct material, direct labor, and
manufacturing overhead in a job-order costing system.

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 Job-Order Costing
Document Flow Summary
Production The production order for the job authorizes the start
Order for Job of the production process.

The materials requisition indicates the cost of

Material direct material to charge to jobs and the cost of
indirect material to charge to overhead.
Requisition
Employee time tickets indicate the cost of direct
labor to charge to jobs and the cost of indirect
Labor Time Records labor to charge to overhead.

Actual Cost Driver (or Activity Base)

Apply Manufacturing Overhead X
Predetermined Overhead Rate

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 Job-Order System Cost Flows
Work in Process
Raw Materials (Job-Cost Record)
•Material •Direct •Direct
Purchases Material Material
•Indirect
Material

Mfg. Overhead
•Indirect
Material

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 Journal Entry
Purchases of Raw Materials
 Journal Entry
Use of Direct Materials
 Journal Entry
Use of Indirect Materials
Job-Order System Cost Flows

Next let’s add

labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
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Job-Order System Cost Flows
Work in Process
Wages Payable (Job-Cost Record)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor

Mfg. Overhead
•Indirect
Material
•Indirect
Labor

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 Journal Entry
Use of Direct Labor
 Journal Entry
Use of Indirect Labor
 Journal Entry
Manufacturing Costs Incurred
Job-Order System Cost Flows
Work in Process
Wages Payable (Job-Cost Record)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor
•Overhead
Applied
Mfg. Overhead Actual and applied
•Indirect •Overhead manufacturing overhead are
Material Applied to usually not equal so a year-
•Indirect Work in end adjustment is required.
Labor Process We will look at the
procedure to accomplish
this later. 3-35
 Application of Overhead

Actual use of machine hours for the two jobs were as follows:
 Journal Entry
Application of Manufacturing
Overhead
Summary of Manufacturing
Overhead
 Journal Entry
Selling and Administrative Costs
Actual Costs Incurred

Journal Entry to record the costs

Job-Order System Cost Flows

Now let’s
complete the
goods and sell
them. Still with
me?

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 Job-Order System Cost Flows
Work in Process
(Job-Cost Record) Finished Goods
•Direct
Material •Cost of •Cost of •Cost of
•Direct Goods Goods Goods
Mfd. Mfd. Sold
Labor
•Overhead
Applied
Cost of Goods Sold
•Cost of
Goods
Sold

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 Journal Entry
Completion of a Production Job
Journal Entry
Sale of Goods
Job-Order System Cost Flows

Let’s return to the

Company and see
what we will do if
actual and
applied overhead
are not equal.

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Underapplied and Overapplied
Overhead
 Overapplied and Underapplied
Manufacturing Overhead -
Summary
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . Allocation of Goods Sold

UNDERAPPLIED INCREASE INCREASE

Work in Process Cost of Goods Sold
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Work in Process Cost of Goods Sold
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

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Learning Objective 3-6 – Prepare a schedule of cost of
goods manufactured, a schedule of cost of goods sold, and an
income statement for a manufacturer.

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Schedule of Cost of Goods Manufactured
Schedule of Cost of Goods Manufactured

Direct material:
Raw material inventory, beginning $xxx
Add: Raw material purchases xxx
Raw material available for use $xxx
Deduct: Raw material, ending xxx
Raw material used $xxx

Direct labor xxx

Manufacturing overhead
Indirect material $xxx
Indirect labor xxx
Other actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overhead
or Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx

Total manufacturing costs $xxx

Add: Work-in-process inventory, beginning xxx
Subtotal $xxx
Deduct: Work-in-process inventory, ending xxx
Cost of goods manufactured $xxx 3-48
Schedule of Cost of Goods Sold

Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxx

Add: Cost of goods manufactured* xxx
Cost of goods available for sale $xxx
Deduct: Finished goods inventory, ending xxx
Cost of goods sold $xxx
Add: Underapplied overhead
or Deduct: Overapplied overhead xxx
Cost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule

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The Income Statement
Learning Objective 3-7 – Describe the two-stage
allocation process used to assign manufacturing overhead
costs to production jobs.

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 Two-Stage Cost Allocation
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools

Department Department Department

Cost pools
1 2 3

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 Departmental Overhead Rates
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools
Department Department Department
Cost pools
1 2 3
Direct Machine Raw
Stage Two: Labor Hours Materials
Costs applied Hours Cost
to products
Products
Departmental Allocation Bases
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Learning Objective 3-8 – Describe the process of project
costing used in service industry firms and nonprofit
organizations.

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 Job-Order Costing in
Nonmanufacturing Organizations

THE JOB

Cases Missions

Programs Contracts
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End of Chapter 3

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