Module 17
Product Costing
Product and Period Costs
For production companies all costs are
either:
Product Costs
Period Costs
All production costs
necessary to get
products ready to sell
All costs other than
product costs
Product Costs and Accounts
Direct Materials


Costs of primary raw materials that are
converted into finished goods
Examples



Iron ore to a steel mill
Light fixtures for a house builder
Food stuffs for a restaurant
A finished good for one company may be the
raw material for the next company.
Conversion Costs

Costs of converting raw materials into finished
goods: direct labor cost and production
overhead
Actual Overhead and Product Costs

Issues with actual overhead for most products
or services:




Actual production overhead costs are unknown until after the
end of the period
Seasonal costs vary: property taxes, utility bills
Volume of activity each month/year causes actual overhead
costs per unit to differ
Used for large construction projects
Using Predetermined
Overhead Rates


Established at beginning of year
Can use different cost drivers
Predicted total direct labor hours
 Predicted total machine hours


Calculating the predetermined rate using direct
labor hours (normalized):
Predicted total manufacturing overhead cost for the year
Predicted total direct labor hours for the year
Example
Predicted 2013 activity level of 400,000 direct
labor hours with manufacturing overhead totaling
$5,600,000.
Predetermined overhead rate =
Predicted total manufacturing overhead cost for the year
Predicted total direct labor hours for the year
=
$5,600,000
$14 per direct
400,000 direct labor hours =
labor hour
Applying Overhead Example
If production uses 22,000 direct labor hours in
January, how much is applied overhead?
= 22,000 × $14 per direct labor hour = $308,000
Job #167 required $80 in materials and $100 in direct
labor (10 hours):
Direct Materials
$ 80
Direct labor
100
Production overhead (10 x $14)
140
Total job cost
$320
The Production Order

Specifies details for a unique production job


Quantity to be produced
Materials requirements


Based on bill of materials
Production operations and other activities

Based on operations list
The Job Cost Sheet



Serves as the record for recording the actual
progress on the job
Basis for Work-in-Process & Finished goods
All production costs are included



Direct materials
Direct labor
Manufacturing overhead
Job-Cost Sheet
Job No.___________________ Start Date __________________
Product No_________ Description_________________ Quantity_____
Materials Cost
Date
Department
Requisition
Number
Description
Total
Cost
Basic Production Cost Flows
Over and Under Applied Overhead


Balance in Production overhead at the end of year:
 Exists because the amount of overhead applied is almost
never the same amount as the overhead incurred
 Actual overhead > Applied OH, then underapplied
 Actual overhead < Applied OH, then overapplied
Transfer to Cost of goods sold as an adjustment
 Underapplied will increase the COGS because it is too
little overhead was applied.
 Overapplied will decrease the COGS because too much
overhead was applied.