Managerial Accounting:
An Introduction To Concepts, Methods,
And Uses
Chapter 2
Measuring Product Costs
Maher, Stickney and Weil
Learning Objectives (Slide 1 of 3)



Understand the nature of manufacturing
costs.
Explain the need for recording costs by
department and assigning costs to
products.
Understand how the Work-in-Process
account both describes the
transformation of inputs into outputs in
a company and accounts for the costs
incurred in the process.
Learning Objectives (Slide 2 of 3)

Compare and contrast normal costing
and actual costing.

Know various production methods and
the different accounting systems each
requires.

Compare and contrast job costing and
process costing systems.

Compare and contrast product costing in
service organizations to that in
manufacturing companies.
Learning Objectives (Slide 3 of 3)




Understand the concepts of customer
costing and profitability analysis.
Identify ethical issues in job costing.
Recognize components of just-in-time
(JIT) production methods and understand
how accountants adapt costing systems
to them.
Know how to compute end-of-period
inventory book value using equivalent
units of production (Appendix 2.1).
What are the three
manufacturing costs?
Relation Between Departmental
Costing & Product Costing (Slide 1 of 3)
 Manufacturing costs are first
assigned to departments or
responsibility centers
 A responsibility center is any
organizational unit with its own manager
 e.g., divisions, territories, plants
 Aids in planning and performance
evaluation
Relation Between Departmental
Costing & Product Costing (Slide 2 of 3)
Direct Materials
Direct Labor
Manufacturing
Overhead

Record Costs
for Performance
Evaluation
Assign Costs
To Products
Assembly
Dept.
Product A
Finishing
Dept.
Product B
Relation Between Departmental
Costing & Product Costing (Slide 3 of 3)
 Actual manufacturing costs recorded in
departments can be compared to standard
or budgeted amounts
 Differences, called variances, can be
investigated further
 Costs are then assigned to products
 Useful in managerial decision-making
such as evaluating product profitability
Draw the Flow of Costs
through T-Accounts
WIP-Dept.1
WIP-Dept.2
Balance Sheet Accounts
Finished Goods
Inventory
Cost of
Goods Sold
Income Statement
Accounts
Mktg. &
Admin.
What is the basic cost flow
equation?
Cost Measures (Slide 1 of 2)
Define Normal Costing
 Normal Costing--commonly used to
assign costs to products
 Assigns actual direct materials and
direct labor plus “normal” manufacturing
overhead
 Overhead is applied to units produced
using an application rate estimated
before the accounting period begins
Cost Measures (Slide 2 of 2)
Define Actual Costing
Applying Overhead Costs

Normal costing works as follows:
1. Select a cost driver
2. Estimate overhead and the level of
activity for the accounting period
3. Compute the predetermined
manufacturing overhead rate
4. Apply overhead to production by
multiplying the predetermined overhead
rate times the actual activity
Overhead Rate
Computation
 Predetermined manufacturing
overhead rate is calculated as
follows:
What is the equation?
Example-Overhead
Rate Computation
 Pizza Shack estimates that next year
variable overhead will be $108,000
and direct labor will be 12,000 hours
 The predetermined overhead rate for
next year will be:
Discuss Cost Systems
Production Methods and
Accounting Systems
Type Production
Job
Accounting System
Job Costing
Operations
Operation Costing
Continuous Flow
Process Costing
Type Product
Customized
(e.g., Custom Homes)
Mostly
Standardized
(e.g., Cars)
Standardized
Processing
(e.g., Oil Refinery)
Comment on Job Costing
Comment on Process
Costing
Comment on Operation
Costing
Service Organizations
 Flow of costs is similar to that of a
manufacturing company
 Providing a service requires labor,
overhead, & sometimes materials (called
supplies)
 Costs are collected by the job or client
 Provides info for cost control,
performance evaluation, and future
pricing decisions
Review Ethical Issues in
Job Costing
Just-In-Time (JIT) Methods
 Attempt to obtain materials or provide
finished goods just in time
 Reduces or eliminates inventories and
related carrying costs
 May allow production costs to be
recorded directly to Cost of Goods Sold
(COGS)
 May involve use of “Backflush Costing”
 Used to transfer costs back to inventories
when production costs are initially
recorded as COGS
Spoilage & Quality of
Production
 Normal waste is typically included in
the cost of work performed
 If waste is not “normal” it may be
included in an expense account called
“Abnormal Spoilage”
 Companies concerned about quality
production may not treat any waste or
spoilage as normal
 Prevents these costs from being buried in
production costs
Computing Costs of
Equivalent Production
What are the Five steps required to
compute costs of products, ending
inventory, and finished goods?
If you have any comments or suggestions concerning this
PowerPoint Presentation for Managerial Accounting, An Introduction
To Concepts, Methods, And Uses, please contact:
Dr. Michael Blue, CFE, CPA, CMA
blue@bloomu.edu
Bloomsburg University of Pennsylvania