CHAPTER 3
Product Costing and Cost
Accumulation in a Batch
Production Environment
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Product and Service Costing
Financial
Accounting
Product costs are
used to value
inventory and to
compute cost of
goods sold.
Managerial
Accounting and
Cost Management
Product costs are
used for planning,
control, directing, and
management decision
making.
3-2
Flow of Costs in Manufacturing Firm
Work-in-Process Inventory
Direct material cost
Direct labor cost
Manufacturing overhead
Finished Goods Inventory
Product cost transferred
when product is finished
Cost of Goods Sold
Income Summary
Expense closed into
Income Summary at end
of accounting period
3-3
Types of Product-Costing Systems
Process
Costing
Job-Order
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.
3-4
Types of Product-Costing Systems
Process
Costing
Job-Order
Costing
 Typical job-order cost applications:
 Special-order printing
 Building construction
 Also used in the service industry
 Hospitals
 Law firms
3-5
Types of Product-Costing Systems
Process
Costing
Job-Order
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
3-6
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
3-7
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Date
Direct Material
Requisition Number
Quantity
Unit Price
Cost
Date
Direct Labor
Requisition Number
Quantity
Unit Price
Cost
Date
Manufacturing Overhead
Requisition Number
Quantity
Unit Price
Cost
Cost Summary
Cost Item
Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Cost Balance
3-8
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Date
Direct Material
Requisition Number
Quantity
Unit Price
Cost
Date
Requisition Number
Direct Labor
Quantity
Unit Price
Cost
A materials requisition
Date
Unit Price
form
isCostused to
Cost Summary authorize the use of
Cost Item
Amount
Total direct material
materials on a job.
Total direct labor
Manufacturing Overhead
Requisition Number
Quantity
Total manufacturing overhead
Total cost
Unit cost
Date
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Let’s see one
Cost Balance
3-9
Job-Order Cost Accounting
Requisition No. 352
Job Number to Be Charged F16
Department Supervisor Timothy Williams
Item
Aluminum
Quantity
7,200 sq ft
Authorized
Signature
Unit Cost
$
2.50
Date 11/1/x1
Dept. Painting
$
Amount
18,000.00
Timothy Williams
3-10
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
Date
11/1/x1
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Direct Material
Requisition Number
Quantity
352
7,200 sq ft
Direct Labor
Quantity
Date
Requisition Number
Date
Manufacturing Overhead
Requisition Number
Quantity
Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
Unit Price
$2.50
Cost
$18,000
Unit Price
Cost
Unit Price
Cost
Amount
$18,000
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Cost Balance
3-11
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Date
11/1
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Date
Requisition Number
Date
Manufacturing Overhead
Requisition Number
Quantity
Direct Labor
Quantity
Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
Unit Price
$2.50
Cost
$18,000
Unit Price
Cost
Unit Price
Cost
Amount
$18,000
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Accumulate
direct labor
costs by
means of a
work record,
such as a time
ticket, for each
employee.
Let’s see one
Cost Balance
3-12
Employee Time Ticket
Employee Ron Bradley
Employee Number 12
Time Started
8:00
11:30
1:00
Date 11/5/20x1
Department
Painting
Station
Time Stopped
11:30
12:00
5:00
Job Number
F16
Shop cleanup
A26
3-13
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
Date
11/1
Date
Various
dates
Date
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Time Cards
Direct Labor
Quantity
Various time cards
Manufacturing Overhead
Requisition Number
Quantity
Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
600
Unit Price
$2.50
Cost
$18,000
Unit Price
Cost
$20
$12,000
Unit Price
Cost
Amount
$18,000
12,000
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Cost Balance
3-14
Actual and Normal Costing
Actual direct material
and direct labor
combined with
actual overhead.
Actual direct material
and direct labor
combined with
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.
3-15
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.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Based on estimates, and
determined before the
period begins
Actual amount of the allocation
base, such as direct labor hours,
incurred during the period
3-16
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.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Recall the Aluminum Boat example where:
Overhead applied = $30 per DLH × 600 DLH = $18,000
3-17
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
Date
11/1
Date
Various
dates
Date
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Unit Price
$2.50
Cost
$18,000
Direct Labor
Requisition Number
Quantity
Unit Price
Cost
$20
$12,000
Unit Price
Cost
Various time cards
600
Manufacturing Overhead
Requisition Number
Quantity
Cost Summary
Cost Item
Total direct material
Amount
$18,000
12,000
Apply manufacturing
overhead to jobs using a
Total direct labor
Total manufacturing overhead
predetermined
overhead rate based on direct
Total cost
Unit cost
labor hours (DLH).
Shipping Summary
Let’s do it
Date
Units Shipped
Units Remaining
in Inventory
Cost Balance
3-18
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
Date
11/1
Date
Various
dates
Date
11/30
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Requisition Number
Direct Labor
Quantity
Various time cards
Manufacturing Overhead
Requisition Number
Quantity
Direct Labor Hours
600
Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
600
Unit Price
$2.50
Cost
$18,000
Unit Price
Cost
$20
$12,000
Unit Price
$30.00
Cost
$18,000
Amount
$18,000
12,000
18,000
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Cost Balance
3-19
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
Date
11/1
Date
Various
dates
Date
11/30
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Requisition Number
Direct Labor
Quantity
Various time cards
Manufacturing Overhead
Requisition Number
Quantity
Direct Labor Hours
600
Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
11/30
600
Unit Price
$2.50
Cost
$18,000
Unit Price
Cost
$20
$12,000
Unit Price
$30.00
Cost
$18,000
Amount
$18,000
12,000
18,000
$48,000
$600
Shipping Summary
Units Remaining
Units Shipped
in Inventory
60
20
Cost Balance
$12,000
3-20
Job-Order Cost Accounting
Job Number F16
Date Started Nov. 1, 20x1
Date
11/1
Date
Various
dates
Date
11/30
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Unit Price
$2.50
Cost
$18,000
Direct Labor
Requisition Number
Quantity
Unit Price
Cost
$20
$12,000
Unit Price
$30.00
Cost
$18,000
Various time cards
Manufacturing Overhead
Requisition Number
Quantity
Direct Labor Hours
600
Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
11/30
600
Amount
$18,000
12,000
18,000
$48,000
$600
Shipping Summary
Units Remaining
Units Shipped
in Inventory
60
20
Cost Balance
$12,000
3-21
Job-Order Costing
Document Flow Summary
Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.
3-22
Job-Order Costing
Document Flow Summary
Production
Order for Job
Material
Requisition
Labor Time Records
The production order for the job authorizes the start
of the production process.
The materials requisition indicates the cost of
direct material to charge to jobs and the cost of
indirect material to charge to overhead.
Employee time tickets indicate the cost of direct
labor to charge to jobs and the cost of indirect
labor to charge to overhead.
Apply Manufacturing Overhead
Actual Cost Driver (or Activity Base)
X
Predetermined Overhead Rate
3-23
Job-Order System Cost Flows
Let’s examine the
cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
3-24
Job-Order System Cost Flows
Raw Materials
•Material
Purchases
•Direct
Material
•Indirect
Material
Work in Process
(Job-Cost Record)
•Direct
Material
Mfg. Overhead
•Indirect
Material
3-25
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?
3-26
Job-Order System Cost Flows
Wages Payable
•Direct
Labor
•Indirect
Labor
Work in Process
(Job-Cost Record)
•Direct
Material
•Direct
Labor
Mfg. Overhead
•Indirect
Material
•Indirect
Labor
3-27
Job-Order System Cost Flows
Wages Payable
•Direct
Labor
•Indirect
Labor
Mfg. Overhead
•Indirect •Overhead
Material Applied to
Work in
•Indirect
Process
Labor
Work in Process
(Job-Cost Record)
•Direct
Material
•Direct
Labor
•Overhead
Applied
If actual and applied
manufacturing overhead are
not equal, a year-end
adjustment is required. We
will look at the procedure to
accomplish this later.
3-28
Job-Order System Cost Flows
Now let’s
complete the
goods and sell
them. Still with
me?
3-29
Job-Order System Cost Flows
Work in Process
(Job-Cost Record)
•Direct
Material
•Direct
Labor
•Overhead
Applied
•Cost of
Goods
Mfd.
Finished Goods
•Cost of
Goods
Mfd.
•Cost of
Goods
Sold
Cost of Goods Sold
•Cost of
Goods
Sold
3-30
Job-Order System Cost Flows
Let’s return to
AFB Company
and see what we
will do if actual
and applied
overhead are not
equal.
3-31
Overhead Application Example
Actual Overhead costs for the year: $5,050,000
Actual direct labor hours worked for the year: 170,000
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 170,000 DLH = $5,100,000
Applied overhead exceeds actual overhead by $50,000
This difference is called overapplied overhead.
3-32
Overapplied and Underapplied
Manufacturing Overhead
$50,000
may be allocated
to these accounts.
$50,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
Cost of
Goods Sold
AFB Company’s
Method
3-33
Overapplied and Underapplied
Manufacturing Overhead Summary
Alternative 1
If Manufacturing
Overhead is . . .
UNDERAPPLIED
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
Allocation
Alternative 2
Close to Cost
of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
INCREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
3-34
Schedule of Cost of Goods Manufactured
Schedule of Cost of Goods Manufactured
Direct material:
Raw material inventory, beginning
Add: Raw material purchases
Raw material available for use
Deduct: Raw material, ending
Raw material used
$xxx
xxx
$xxx
xxx
$xxx
Direct labor
Manufacturing overhead
Indirect material
Indirect labor
Other actual overhead charges
Total actual manufacturing overhead
Add: Overapplied overhead
or Deduct: Underapplied overhead
Overhead applied to work-in-process
Total manufacturing costs
Add: Work-in-process inventory, beginning
Subtotal
Deduct: Work-in-process inventory, ending
Cost of goods manufactured
xxx
$xxx
xxx
xxx
$xxx
xxx
xxx
$xxx
xxx
$xxx
xxx
$xxx
3-35
Schedule of Cost of Goods Sold
Schedule of Cost of Goods Sold
Finished goods inventory, beginning
Add: Cost of goods manufactured*
Cost of goods available for sale
Deduct: Finished goods inventory, ending
Cost of goods sold
Add: Underapplied overhead
or Deduct: Overapplied overhead
Cost of goods sold (adjusted)
$xxx
xxx
$xxx
xxx
$xxx
xxx
$xxx
* From Cost of Goods Manufactured Schedule
3-36
Two-Stage Cost Allocation
Stage One:
Costs assigned
to pools
Cost pools
Indirect
Labor
Indirect
Materials
Other
Overhead
Department
1
Department
2
Department
3
3-37
Departmental Overhead Rates
Stage One:
Costs assigned
to pools
Cost pools
Stage Two:
Costs applied
to products
Indirect
Labor
Indirect
Materials
Other
Overhead
Department
1
Department
2
Department
3
Direct
Labor
Hours
Machine
Hours
Raw
Materials
Cost
Products
Departmental Allocation Bases
3-38
Job-Order Costing in
Nonmanufacturing Organizations
THE JOB
Cases
Missions
Programs
Contracts
3-39
End of Chapter 3
3-40