Chapter 30
Managerial Accounting
Product Costing –
Assigning Product Costs
Prepared by Diane Tanner
University of North Florida
Inventory Accounts for Manufacturers
 Three inventory accounts
 Raw materials
Reported on the
balance sheet
 Materials to be used in production
 Direct and indirect
 Work in process
 Direct materials used in production
 Direct labor costs incurred to produce
 Manufacturing overhead costs identified as part
of the cost of production
 Finished goods
 Goods completed and ready for sale
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Production Departments
Materials Storeroom
Factory/Production Area
Raw Materials
Work in Process
Costs in departments
correlate to inventory
accounts.
Ready
for
Sale
Finished Goods
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Materials Storeroom
 Contains raw materials that will used in production
 Direct and indirect materials
 Cost totals the balance in the raw materials account
 Controlled by storeroom manager/clerk
 Counts and verifies materials received from suppliers
 Sends a copy of the receiving report to the accounting
department for future payment
 Issues materials for production upon receipt of a
materials requisition form from the factory production
supervisor
 Coordinates the physical transfer of the materials to the
production area
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Factory Work Area
 Contains partially completed products
 Contains the production machinery and is the
location in which production occurs
 Accumulated costs total the balance in the WIP
account
 Direct materials requisitioned from the materials storeroom
 Costs of direct labor and MOH added
 Controlled by the production supervisor
 Responsible for producing products in accordance with the
company's specifications
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Shipping Area
 Typically a loading dock for shipment to customers
 Sometimes a showroom where goods are held for sale
 Contains completed inventory items held for sale
 Accumulated costs total the balance in the FG
account
 Costs are transferred from the WIP account when units
are completed
 Costs of goods sold are transferred out when units are
sold
Assigning Costs to Products
Direct materials and
direct labor
• Traced to specific
products
– Easily associated with
specific products
• Increase WIP as incurred
Manufacturing overhead
• Consists of only indirect
costs
• Allocated to products
– Not easily associated with
specific products
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Acquiring Raw Materials
1
The Purchasing Manager fills out an electronic
purchase order to order materials from a supplier
Materials Storeroom
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2
When materials are received, the Materials
Storeroom Clerk records and stocks the
materials in the storeroom.
The Materials Storeroom Clerk sends the
receiving report to Accounting for payment.
DR Raw Materials Inventory
CR Cash or Accounts Payable
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Using Direct Materials in Production
1
The production supervisor
fills out a materials
requisition form.
Factory Work Area
A materials requisition form
authorizes the use of materials on
a product or job
2
The materials storeroom clerk
delivers the requested materials
to the production area.
3 The processed form is
sent to Accounting.
DR Work in Process Inventory
CR Raw Materials inventory
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1
Incurring Direct Labor Costs
Employees fill out time
tickets to record the
time spent on each
product/service
Factory/Production Area
2 The processed form is
Direct labor cost =
Gross wages + fringe benefits
Gross wages =
Wage rate × Hours worked
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sent to Accounting.
DR Work in Process Inventory
CR Wages Payable or Cash
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Incurring Manufacturing Overhead
 Accumulated in the
Manufacturing Overhead
expense account
 Three components
 Indirect materials
 Requisitioned by production
supervisor on a materials
requisition form
 Indirect labor
 Accumulated on time
tickets or time cards
 Factory related costs
 Incurred in factory
operations
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Indirect costs are not
traceable.
DR Manufacturing Overhead
CR Raw Materials Inventory
DR Manufacturing Overhead
CR Wages Payable or Cash
DR Manufacturing Overhead
CR Various payables, cash,
accumulated depreciation, etc.
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Assigning Manufacturing Overhead
 Allocated to specific products
 Based on estimates of expected costs and a basis over
which to allocate
 Allocated cost is removed from the MOH expense
account and transferred to the WIP account
DR Work in Process Inventory
CR Manufacturing Overhead
Indirect
Costs
Product B
The End
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