Session – 2: Product Costing

(Job-Order)
PGP 2022-24

Prof. M. Shameem Jawed

McGraw-Hill/Irwin
 Quick Recap
• What is MANACC, Why MANACC; Product/Period/Expenses;
Direct/Indirect; Prime/Conversion;

• RM(used) = B’RM + RM(purchased) – E’RM

• TMC = RM(used) + Direct Labor + MoH

• COGM = B’WIP + TMC – E’WIP

• COGS = B’FGI + COGM – E’FGI

• Concept of Cost Drivers; Variable/Fixed; Sunk/Opportunity; etc.

Activities that cause costs to be incurred are
called COST DRIVERS:
• ACTIVITY COST DRIVER
– Machining operations Machine hours

– Machine Setup Setup hours

Manufacturing orders
– Production scheduling

Pieces inspected
– Product Inspection
(Manufacturing)

Purchase orders
– Purchasing
Shop orders
– Shop order handling
 Cost Classifications

Cost behavior means how a cost will react

to changes in the level of business activity.
– Total variable costs change when
activity changes.
– Total fixed costs remain unchanged
when activity changes.

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 Total Variable Cost Example
Your total cable pay-per-view bill is based on
how many movies you watch.
Total Pay-Per-View Bill

Pay-Per-View
Movies Watched 2-5
Variable Cost Per Unit Example

The cost per movie watched is constant.

For example, $4.00 per movie.

Per Movie Charge

Movies Watched
2-6
 Total Fixed Cost Example
Your monthly cable bill probably does not change
when you watch movies on channels that you have
elected to be paid on a monthly basis (HBO).
Monthly Charge for HBO
Bill

Number of HBO Movies

Watched 2-7
 Fixed Cost Per Unit Example
The average cost per HBO movie decreases as
more HBO movies are watched.

Monthly HBO Bill per Movie

Watched

Number of HBO Movies

Watched 2-8
 Direct and Indirect Costs
Direct costs Indirect costs
• Costs that can be • Costs that must be
easily and allocated in order to
conveniently traced be assigned to a
to a product or product or
department. department.
• Example: cost of • Example: cost of
paint in the paint national advertising
department of an for an airline is
automobile assembly indirect to a
plant. particular flight.
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 Controllable and
Uncontrollable Costs

A cost that can be significantly influenced

by a manager is a controllable cost.

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 Opportunity Cost

The potential benefit that is given

up when one alternative is
selected over another.
– Example: If you were
not attending college,
you could be earning
$30,000 per year.
Your opportunity cost
of attending college for one
year is $30,000.

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 Sunk Costs
All costs incurred in the past that cannot be changed
by any decision made now or in the future are sunk
costs. Sunk costs should not be considered in
decisions.
– Example: You bought an automobile that cost
$22,000 two years ago. The $22,000 cost is sunk
because whether you drive it, park it, trade it, or sell
it, you cannot change the $22,000 cost.

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 Differential Costs
Costs that differ between alternatives.
Example: You can earn $1,500 per month in your
hometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in your
hometown and $300 per month to the city.

What is your differential cost?

$300 - $50 = $250

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Marginal Costs and Average Costs

The total cost to

The extra cost
produce a quantity
incurred to produce
divided by the
one additional unit.
quantity produced.

Marginal and average costs are

largely a function of cost behavior
-- variable and fixed costs.
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Costs and Benefits of Information

Costs Benefits

More information does not mean more

benefits if information overload results.

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Did you solve the Handout problems?

• Any queries/questions?
Yang Corporation recently computed total product
costs of $567,000 and total period costs of $420,000,
excluding $35,000 of sales commissions that were
overlooked by the company's administrative assistant.
On the basis of this information, Yang's income
statement should reveal operating expenses of: 

• A. $35,000.
• B. $420,000.
• C. $455,000.
• D. $567,000.
• E. $602,000.
Yang Corporation recently computed total product
costs of $567,000 and total period costs of $420,000,
excluding $35,000 of sales commissions that were
overlooked by the company's administrative assistant.
On the basis of this information, Yang's income
statement should reveal operating expenses of: 

• A. $35,000.
• B. $420,000.
• C. $455,000.
• D. $567,000.
• E. $602,000.
The accounting records of Georgia Company
revealed the following costs: direct materials used,
$250,000; direct labor, $425,000; manufacturing
overhead, $375,000; and selling and administrative
expenses, $220,000. Georgia's product costs total:

• A. $1,050,000.
• B.  $830,000.
• C. $895,000.
• D. $1,270,000.
• E. None of the other answers are correct.
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The accounting records of Georgia Company
revealed the following costs: direct materials used,
$250,000; direct labor, $425,000; manufacturing
overhead, $375,000; and selling and administrative
expenses, $220,000. Georgia's product costs total:

• A. $1,050,000.
• B.  $830,000.
• C. $895,000.
• D. $1,270,000.
• E. None of the other answers are correct.
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Which of the following inventories
would a discount retailer such as Wal-
Mart report as an asset? 
• A. Raw materials.
• B. Work in process.
• C. Finished goods.
• D. Merchandise inventory.
• E. All of the other answers are correct.
Which of the following inventories
would a discount retailer such as Wal-
Mart report as an asset? 
• A. Raw materials.
• B. Work in process.
• C. Finished goods.
• D. Merchandise inventory.
• E. All of the other answers are correct.
Lake Appliance produces washers and dryers in an
assembly-line process. Labor costs incurred during
a recent period were: corporate executives,
$500,000; assembly-line workers, $180,000;
security guards, $45,000; and plant supervisor,
$110,000. The total of Lake's direct labor cost
was: 
• A. $110,000.
• B. $180,000.
• C. $155,000.
• D. $235,000.
• E. $735,000.
Lake Appliance produces washers and dryers in an
assembly-line process. Labor costs incurred during
a recent period were: corporate executives,
$500,000; assembly-line workers, $180,000;
security guards, $45,000; and plant supervisor,
$110,000. The total of Lake's direct labor cost
was: 
• A. $110,000.
• B. $180,000.
• C. $155,000.
• D. $235,000.
• E. $735,000.
Depreciation of factory equipment would be
classified as: 

• A. Operating cost.
• B. Other cost.
• C. Manufacturing overhead.
• D. Period cost.
• E. Administrative cost.
Depreciation of factory equipment would be
classified as: 

• A. Operating cost.
• B. Other cost.
• C. Manufacturing overhead.
• D. Period cost.
• E. Administrative cost.
Holden Industries began July with a finished-
goods inventory of $48,000. The finished-goods
inventory at the end of July was $56,000 and the
cost of goods sold during the month was $125,000.
The cost of goods manufactured during July was: 

• A. $104,000.
• B. $125,000.
• C. $117,000.
• D. $133,000.
• E. None of the other answers are correct.
Holden Industries began July with a finished-
goods inventory of $48,000. The finished-goods
inventory at the end of July was $56,000 and the
cost of goods sold during the month was $125,000.
The cost of goods manufactured during July was: 

• A. $104,000.
• B. $125,000.
• C. $117,000.
• D. $133,000.
• E. None of the other answers are correct.
Pumpkin Enterprises began operations on January 1, 2017,
with all of its activities conducted from a single facility.
The company's accountant concluded that the year's
building depreciation should be allocated as follows:
selling activities, 20%; administrative activities, 35%; and
manufacturing activities, 45%. If Pumpkin sold 60% of
2017 production during that year, what percentage of the
depreciation would appear (either directly or indirectly) on
the 2017 income statement? 

A. 27%. B. 45%.  C. 55%.  D. 82%. E. 100%.

Pumpkin Enterprises began operations on January 1, 2017,
with all of its activities conducted from a single facility.
The company's accountant concluded that the year's
building depreciation should be allocated as follows:
selling activities, 20%; administrative activities, 35%; and
manufacturing activities, 45%. If Pumpkin sold 60% of
2017 production during that year, what percentage of the
depreciation would appear (either directly or indirectly) on
the 2017 income statement? 

A. 27%. B. 45%.  C. 55%.  D. 82%. E. 100%.

The fixed costs per unit are $10 when a company
produces 10,000 units of product. What are the
fixed costs per unit when 8,000 units are produced? 

• A. $12.50.
• B. $10.00.
• C. $8.00.
• D. $6.50.
• E. $5.50.
The fixed costs per unit are $10 when a company
produces 10,000 units of product. What are the
fixed costs per unit when 8,000 units are produced? 

• A. $12.50.
• B. $10.00.
• C. $8.00.
• D. $6.50.
• E. $5.50.
 Which of the following costs should be
ignored when choosing among alternatives? 

• A. Opportunity costs.
• B. Sunk costs.
• C. Out-of-pocket costs.
• D. Differential costs.
• E. None of the other answers are correct.
 Classify each of the costs listed as
(1) a product or period cost and
(2) a variable or fixed cost
–A. Tomatoes used in the manufacture of Kisaan ketchup
–B. Administrative salaries of executives employed by Jet Blue Airlines
–C. Wages of assembly-line workers at a Ford plant
–D. Marketing expenditures of the Sunrisers’ Hyderabad IPL team
–E. Commissions paid to Coca-Cola's salespeople
–F. Straight-line depreciation on manufacturing equipment owned by Dell
Computer
–G. Shipping charges incurred by Office Depot on out-going orders
–H. Speakers used in Sony home-theater systems
–I. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant
Check Your Answers…
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. 3-36
Types of Product-Costing Systems

Process Job-Order
Costing Costing

 Typical job-order cost applications:

 Special-order printing
 Building construction
 Also used in the service industry
 Hospitals
 Law firms
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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.

Let’s investigate using the AFB

Company

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Job-Order Cost Accounting

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Job-Order Cost Accounting

A materials requisition
form is used to authorize
the use of materials on a
job.

Let’s see one

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Job-Order Cost Accounting

Timothy Williams

3-41
Job-Order Cost Accounting

3-42
Job-Order Cost Accounting

Accumulate
direct labor costs
by means of a
work record, such
as a time ticket,
for each
employee.

Let’s see one

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Employee Time Ticket

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Job-Order Cost Accounting

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 Job-Order Cost Accounting

Apply manufacturing overhead to jobs using a

predetermined overhead rate based on direct labor
hours (DLH).
Let’s do it

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Job-Order Cost Accounting

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Job-Order Cost Accounting

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Job-Order Cost Accounting

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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

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

Overhead applied = POHR × Actual activity

Based on estimates, and Actual amount of the allocation base,

determined before the such as direct labor hours, incurred
period begins during the period
3-50
 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

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

Overhead applied = POHR × Actual activity

3-51
Actual != Applied overhead

Let’s take an
example and see
what we will do if
actual and applied
overhead are not
equal.

3-52
 Overhead Application Example
Budgeted Overhead costs for the year: $63,000
Budgeted direct labor hours for the year: 900

Actual Overhead costs for the year: $85,000

Actual direct labor hours worked for the year: 1,000

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $70.00 per DLH × 1,000 DLH = $70,000

Applied overhead fall behind the Actual overhead by $15,000

This difference is called underapplied overhead.
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 Overapplied and Underapplied
Manufacturing Overhead

$15,000 $15,000 may be

may be deducted closed directly to
from these accounts. cost of goods sold.
OR
Work in Finished
Process Goods Cost of
Goods Sold
Cost of
Goods Sold

3-54
 Overapplied and Underapplied
Manufacturing Overhead - Summary

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The following costs were incurred in a project :

The firm's budget for the year included the following

estimates:
  

Actual professional labor during the year was $655,000

and actual overhead was $793,000.

Required:
A. Determine the total cost of the project.
B. Calculate the under- or overapplied overhead for the year.
 Actual and Normal Costing

Actual direct material Actual direct material

and direct labor and direct labor
combined with combined with
actual overhead. predetermined overhead.

Using a predetermined rate makes it

possible to estimate total job costs sooner.
Actual overhead for the period is not
known until the end of the period.
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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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 Job-Order Costing in
Nonmanufacturing Organizations

THE JOB

Cases Missions

Programs Contracts
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Let’s Solve some problems…

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End of Session - 2

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