CHAPTER Measuring Product Costs PowerPoint Presentation by LuAnn Bean Professor of Accounting Florida Institute of Technology © 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Managerial Accounting 11E Maher/Stickney/Weil ☼ CHAPTER GOAL ☼ This chapter shows how the accounting system records and reports the flow of costs in organizations to answer questions such as these: To determine product/service cost To compare cost with management’s expectations LO DIRECT DIRECT MATERIALS: MATERIALS: Definition Definition Can be easily traced directly to a product LO DIRECT DIRECT LABOR: LABOR: Definition Definition Is labor of workers who transform materials into a finished product LO MANUFACTURING MANUFACTURING OVERHEAD: OVERHEAD: Definition Definition Includes all other costs of transforming the materials to a finished product LO How are materials, labor not directly traceable to a product categorized? All costs, including materials and labor, not directly traceable to a product are categorized as Manufacturing Overhead LO RESPONSIBILITY RESPONSIBILITY CENTER: CENTER: Definition Definition Is any organizational unit with its own manager or managers LO Responsibility center (department) Records costs & assigns to products Direct materials Direct labor Overhead Management compares costs to standards ACCOUNTING SYSTEM PURPOSES LO 1) 1) To To record record costs costs by by responsibility responsibility for for performance performance evaluation evaluation and and control control 2) 2) To To assign assign manufacturing manufacturing costs costs to to units units produced produced for for product product costing costing LO BASIC COST FLOW EQUATION Beginning + Transfers = Transfers + Ending Balance In Out Balance BB + TI = TO + EB* *Recall from financial accounting: Beginning Balance + Additions - Withdrawals = Ending Balance 10 LO EXAMPLE Actual direct labor hours for the month was 4,500 How much variable overhead did Plantimum charge to production for the month? 4,500 dlh X $2.00 per direct labor hour = $9,000 How much fixed overhead did Plantimum charge to production for the month? 4,500 dlh X $1.00 per direct labor hour = $4,500 14 LO COST SYSTEMS An effective cost system must have Decision focus: meets needs of decision makers Different costs for different purposes Variable costing for decision making Full absorption for financial reporting Cost-benefit test: benefits from cost system must exceed its costs 15 LO COST SYSTEMS: Examples Job costing For custom production jobs Users: accounting and consulting firms, health care organizations Process costing For standardized production Users: drink makers (e.g., Coca Cola, etc.) Operation costing A hybrid of job and process combined Users: Levi Strauss, Dell 16 LO PLANTIMUM PRODUCTION Plantimum produced modular homes during the month Plantimum wonders whether they should use job order costing or process costing? What you think? Continued 17 LO PLANTIMUM PLANTIMUM PRODUCTION PRODUCTION COSTS: COSTS: Using Using Job Job Order Order Jobs Direct Labor Direct Materials Overhead ($3/dlh) Total Cost Job #1001 $ 8,000 $20,800 $1,200 $30,000 Job #1002 6,000 18,100 900 25,000 Job #1003 5,000 11,250 750 17,000 $19,000 $50,150 $2,850 $72,000 Continued 18 PLANTIMUM PRODUCT COSTING: Using Process LO Unit costs = Total manufacturing costs / Units produced (DL + DM + Overhead) / ($19,000 + $50,150 + $2,850) / Average unit cost is $24,000 per modular house Continued 19 LO COMPARING COMPARING COST COST SYSTEMS SYSTEMS Nature of Production Heterogeneous Each Unit Units Large Homogeneous Many Continuous Units Small Units Process Costing System Used Job Costing Process Costing 20 LO FLOW OF COSTS: A Service Company Example An accounting or consulting service firm collects costs by job or client and uses an accounting method similar to that used in manufacturing The flow of costs accounted for include: Materials and overhead costs are transferred into Work-inProcess accounts for each job Work-in-Process costs are transferred to Cost of Services Billed 21 LO FLOW OF COSTS REPORTING The The income income statement statement reports: reports: Revenue Revenue Cost Cost of of services services billed billed == Gross Gross Margin Margin Expenses Expenses (e.g., (e.g., unbilled unbilled direct direct labor, labor, underapplied underapplied overhead, overhead, marketing marketing expenses) expenses) == Operating Operating Profit Profit 22 LO 10 CHARACTERISTICS OF JIT: (Just- in-Time Inventory) JIT inventory methods attempt to obtain materials just in time for production or sale Reduces/eliminates inventory and carrying costs Leads to immediate correction of defective units Helps expose production problems Relies on high-quality materials, production Charges all costs directly to cost of goods sold 23 LO 10 What happens to inventory leftover after costs are charged to cost of goods sold in a JIT system? Cost of leftover inventory is “backflushed,” i.e., taken out of cost of goods sold and put into finished goods inventory 24 LO 11 What are equivalent units? Equivalent units (E.U.) represent the translation of partially completed work into equivalent whole units 25 LO 11 The five steps required to compute product costs, the cost of ending Work-in- Process Inventory, and the cost of finished goods using equivalent units are: Summarize the Flow of Physical Units Compute Equivalent Units (For example, two units, each 50 percent complete, represent one equivalent unit.) Summarize Costs to Be Accounted For Compute Unit Costs for the Current Period Compute the Cost of Goods Completed and Transferred Out of Work-in-Process and the Cost of Ending Work-in-Process Inventory 26 Costs Costsflow flow from from basic basic records recordsof of materials materials purchases, purchases, labor labor costs, costs, and and overhead overhead costs costs to to Work-in-Process Work-in-Process Inventory Inventory accounts accounts that that show show the the cost cost of of ongoing ongoing work work When When products productsare are complete, complete, they they and and their their costs costs are are transferred transferred to to Finished Finished Goods Goods Inventory Inventory When When sold, sold, the the cost cost of of the the products productsisis transferred transferred out out of of Finished Finished Goods Goods Inventory Inventoryto to Cost Cost of of Goods GoodsSold Sold 27 End of CHAPTER 28 ... costs & assigns to products Direct materials Direct labor Overhead Management compares costs to standards ACCOUNTING SYSTEM PURPOSES LO 1) 1) To To record record costs costs by by responsibility...☼ CHAPTER GOAL ☼ This chapter shows how the accounting system records and reports the flow of costs in organizations to answer questions such as these: To determine product/service cost To. .. JIT: (Just- in-Time Inventory) JIT inventory methods attempt to obtain materials just in time for production or sale Reduces/eliminates inventory and carrying costs Leads to immediate correction