Chapter 3
Product Costing and Cost
Accumulation in a Batch
Production Environment
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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
at a time.
one
 Batch-production operations
Multiple products in batches of relatively small
quantity.
3-4
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
600
Amount
$18,000
12,000
18,000
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Cost Balance
3-5
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.
1
Budgeted manufacturing overhead cost
POHR =
2 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
3-6
Job-Order System Cost Flows
Raw Materials
•Material
•Direct
Purchases Material
•Indirect
Material
Work in Process
(Job-Cost Record)
•Direct
Material
Mfg. Overhead
•Indirect
Material
3-7
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
3-8
Job-Order System Cost Flows
Wages Payable
•Direct
Labor
•Indirect
Labor
Mfg. Overhead
•Indirect •Overhead
Material Applied to
•Indirect Work in
Process
Labor
Work in Process
(Job-Cost Record)
•Direct
Material
•Direct
Labor
•Overhea
d
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.
3-9
Job-Order System Cost Flows
Work in Process
(Job-Cost Record)
•Direct
Material
•Direct
Labor
•Overhea
d
Applied
•Cost of
Goods
Mfd.
Finished Goods
•Cost of
Goods
Mfd.
•Cost of
Goods
Sold
Cost of Goods Sold
•Cost of
Goods
Sold
3-10
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
3-11
Schedule of Cost of Goods Manufactured
Schedule of Cost of Goods Sold
Schedule of Cost of Goods Manufactured
Schedule of Cost of Goods Sold
Direct material:
Raw material inventory, beginning
Add: Raw material purchases
Raw material available for use
Deduct: Raw material, ending
Raw material used
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
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
* From Cost of Goods Manufactured Schedule
$xxx
xxx
xxx
$xxx
xxx
xxx
$xxx
xxx
$xxx
xxx
$xxx
3-12
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.
3-13
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
3-14
Job-Order Costing
• CAN BE USED IN NONMANUFACTURING
ORGANIZATIONS
– THE JOB
•
•
•
•
Cases
Programs
Contracts
Missions
• CHANGING TECHNOLOGY IN MANUFACTURUNG
OPERATIONS
– Computerized data interchange has eliminated much of
the paperwork associated with job-order cost systems.
– Scanning devices have simplified data entry to record material and
labor use.
3-15