12-1
Introduction
to Product
Costing
Prepared by
Douglas Cloud
Pepperdine University
12-2
Objectives
 Describe the flow of costs for manufacturers
After reading this
and service providers.
chapter, you should
 Describe three types of manufacturing
be able to:
processing and their related costing
requirements.
 Describe and illustrate job-order costing.
 Determine product costs using actual and
normal costing systems.
Continued
12-3
Objectives
 Analyze misapplied overhead into budget and
volume variances.
 Develop ABC overhead rates and apply them
to job-order costing companies.
 Discuss the role of overhead application in
pursuing strategies.
12-4
Absorption Costing
 Sometimes called full costing
 Includes fixed overhead costs in per-unit
inventory calculations
 Must use for financial reporting and
income tax purposes
 Can give misleading results for short-term
decisions
12-5
Product versus Period Costs
Product costs are
manufacturing
costs that are
expensed (cost of
goods sold) when
the product is sold.
12-6
Product versus Period Costs
Period costs are the
selling and
administrative costs
which are expensed in
the period incurred.
12-7
Three Types of Inventory in a
Manufacturing Firm
Materials and purchased
parts/components—consisting
of the various materials and
components that go into a
finished product, but have not
been put into production.
12-8
Three Types of Inventory in a
Manufacturing Firm
Work in process
inventory,
consisting of
semifinished units,
that is, product on
which some, but
not all, work has
been done.
12-9
Three Types of Inventory in a
Manufacturing Firm
Finished goods
inventory,
consisting of units
ready for sale. This
inventory is
equivalent to a
merchandiser’s
inventory.
12-10
Flow of Costs in a Manufacturer
Action
Purchase
materials
Pay
direct
laborers
Cost Collected
Initially
Cost Flow To and Through
Materials
Inventory
Direct
Labor
Incur
Manufacturing
overhead
Overhead
costs
Work in
Process
Inventory
Finished
Goods
Inventory
Cost of
Goods
Sold
12-11
Cost per Unit of Product
Cost per unit
=
of product
Total production costs
Total units processed
Example:
10,000 units were produced at a total
production cost of $150,000.
12-12
Job-Order Costing
Job-order costing keeps
track of the cost of
materials and labor used
on each job and then
applies, absorbs, or
assigns some amount of
manufacturing overhead
to each job.
12-13
Actual Costing
Under actual costing, the overhead incurred
during a period is applied to all jobs that were
in process during the period.
To assign all of the overhead costs to jobs, we
calculate the overhead rate by dividing total
actual overhead by the total amount of the
relevant input factor.
12-14
Actual Costing
Total manufacturing overhead
Overhead rate =
Overhead rate =
Total manufacturing activity
$105,000
10,500
Overhead rate = $10 per machine hour
12-15
Actual Costing
Overhead
Direct materials
Direct labor
Total cost of job
J-1
$30,000
20,000
10,000
$60,000
Job Number
J-2
$50,000
15,000
20,000
$85,000
J-3
$25,000
10,000
15,000
$50,000
12-16
Actual Costing
ZyCo
May
Total overhead costs:
$50,000 + (10,000 x $4)
$55,000 + (5,000 x $4)
Machine hours
Overhead rate per machine hour
December
$90,000
10,000
$9
$75,000
5,000
$15
12-17
Actual Costing
ZyCo
ZyCo does two similar jobs in May and December,
each requiring 100 machine hours, $500 in direct
labor, and $300 in materials. Actual costs are-May December
Materials
$ 300 $ 300
Direct labor
500
500
Overhead, 100 hours at $9 and $15
900
1,500
Totals
$1,700 $2,300
12-18
Normal Costing
Budgeted manufacturing overhead for year
Predetermined
=
overhead rate
Budgeted production activity for year
Overhead rate =
$1,080,000
120,000
Overhead rate = $9 per machine hour
12-19
Normal Costing
Budget
allowance
Variable
Amount
cost per
x
of
unit of
activity
activity
Fixed
=
costs +
Predetermined overhead rate =
$600,000 + $4 x 120,000
= $9
120,000
12-20
Normal Costing
Overhead
Direct materials
Direct labor
Total cost of job
J-1
$27,000
20,000
10,000
$57,000
Job Number
J-2
$45,000
15,000
20,000
$80,000
J-3
$22,500
10,000
15,000
$47,500
12-21
Normal Costing
Under actual costing
Actual hours
Overhead assigned
= worked on x
to job
job
Total actual
overhead
Total actual
hours
Under normal costing
Total budgeted
Actual hours
Overhead assigned
overhead
= worked on x
to job
Total budgeted
job
hours
12-22
Misapplied Overhead
Overhead Applied to Jobs Using
Actual Costing Normal Costing
Job J-1
Job J-2
Job J-3
Total
$ 30,000
50,000
25,000
$105,000
$27,000
45,000
22,500
$94,500
12-23
Overhead Variances
ZyCo’s July Results
The budget formula for annual overhead cost is
$600,000 fixed costs ($50,000 per month) plus $4
per machine hour variable. July’s flexible budget
based on 10,500 hours is as follows:
Actual costs, fixed and variable
$105,000
Budgeted costs [$50,000 + ($4 x 10,500 hours)
92,000
Budget variance, unfavorable
$ 13,000
12-24
Overhead Variances
ZyCo’s July Results
ZyCo planned 120,000 machine hours for the year
(monthly average, 10,000 hours). ZyCo worked
10,500 hours of machine time in July.
Budgeted overhead (from Slide 12-23)
Applied overhead ($9 x 10,500 hours)
Volume variance, favorable
$92,000
94,500
$ 2,500
12-25
Overhead Variances
ZyCo’s July Results
Variable Portion Fixed Portion
Budgeted cost (10,500
x $4)
Applied cost:
10,500 x $4
10,500 x $5
Volume variance (500 hours
x $5)
$42,000
$50,000
42,000
52,500
----
$ 2,500
12-26
Overhead Variances
Volume
=
variance
Total budgeted
Total applied
manufacturing – manufacturing
overhead
overhead
Total budgeted
Total applied fixed
Volume
– manufacturing
fixed
=
variance
manufacturing
overhead
overhead
Budgeted
Actual
Predetermined
Volume
= overhead rate x production – production
variance for fixed costs
activity
activity
12-27
Overhead Variances
Actual
Budgeted
Applied
Overhead
Overhead
Overhead
$50,000 + ($4 x 10,500)
$9 x 10,500
$105,000
$92,000
$94,500
$2,500 F
13,000 U
Budget variance
Volume variance
$10,500 U
Total underapplied
overhead
12-28
Income Statements, Actual
and Normal Costing
ZyCo Income Statements for July
Sales
Normal cost of sales
Plus underapplied overhead
Cost of sales
Gross profit
Selling and administrative
Profit
Normal
Costing
$110,000
Actual
Costing
$110,000
67,500
$ 42,500
30,000
$ 12,500
60,000
$ 50,000
30,000
$ 20,000
$57,000
10,500
12-29
Activity-Based Overhead Rates
Cool pools might consist of costs of
departments or costs related to such
activities as material use, number of
setups, cycle time, or engineering
changes.
12-30
Income Statements, Actual
and Normal Costing
ZyCo Normal Costing Income Statements for July
Sales
Normal cost of sales
Normal gross profit
Variances:
Unfavorable budget variance
Favorable volume variance
Gross profit
Selling and administrative expenses
Profit
$110,000
57,000
$ 53,000
$13,000
2,500
10,500
$ 42,500
30,000
$ 12,500
12-31
Activity-Based Costing Example
Tricomm Company
Direct Labor
Setups
Total
Budgeted overhead costs
Budgeted direct labor hours
Budgeted number of setups
$800,000
100,000
$400,000
$1,200,000
Rates
$8.00
per dlh
2,000
$200.00
per setup
If only direct labor hours are used to allocate overhead, the rate
is $12.
12-32
Calculated Price for Two Jobs
Using One Rate
Tricomm Company
Direct labor hours
Materials hours
Direct labor cost ($10)
OH applied ($12)
Total cost
Price
Job A
800
$10,000
8,000
9,600
$27,600
x 1.5
$41,400
Job B
200
$10,000
2,000
2,400
$14,400
x 1.5
$21,600
12-33
Calculated Price for Two Jobs
Using Activity-Based Rates
Direct labor hours
Materials hours
Direct labor cost ($10)
Overhead:
Labor-related ($8)
Setup-related ($200)
Total cost
Price
Job A
Job B
800
$10,000
8,000
200
$10,000
2,000
6,400
400
$24,800
x 1.5
$37,200
1,600
5,000
$18,600
x 1.5
$27,900
12-34
Chapter 12
The End
12-35