Lecture Managerial accounting: Creating value in a dynamic business environment (10th edition): Chapter 3 - Ronald W. Hilton, David E. Platt

Chapter 3 - Product costing and cost accumulation in a batch production environment. After completing this chapter, you should be able to: Discuss the role of product and service costing in manufacturing and nonmanufacturing firms, diagram and explain the flow of costs through the manufacturing accounts used in product costing, distinguish between job-order costing and process costing,...

Chapter Product Costing and Cost Accumulation in a Batch Production Environment Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 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 3­2 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 3­3 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 one at a time Batch-production operations Multiple products in batches of relatively small quantity 3­4 Types of Product-Costing Systems Process Costing Job-Order Costing Typical job-order cost applications: Special-order printing Building construction Also used in the service industry Hospitals Law firms 3­5 Types of Product-Costing Systems Process Costing Job-Order Costing Used for production of small, identical, low cost items Mass produced in automated continuous production process Costs cannot be directly traced to each unit of product Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill 3­6 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 POHR = Budgeted manufacturing overhead cost 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 3­7 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 POHR = Budgeted manufacturing overhead cost Budgeted amount of cost driver (or activity base) Overhead applied = POHR × Actual activity Recall the Aluminum Boat example where: Overhead applied = $30 per DLH × 600 DLH = $18,000 3­8 Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system We will use T-accounts and start with materials 3­9 Job-Order System Cost Flows Raw Materials •Material Purchases •Direct Material •Indirect Material Work in Process (Job-Cost Record) •Direct Material Mfg Overhead •Indirect Material 3­10 Job-Order System Cost Flows Wages Payable •Direct Labor •Indirect Labor Mfg Overhead •Indirect •Overhead Material Applied to Work in •Indirect Process Labor Work in Process (Job-Cost Record) •Direct Material •Direct Labor •Overhead 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 3­13 Job-Order System Cost Flows Now let’s complete the goods and sell them Still with me? 3­14 Job-Order System Cost Flows Work in Process (Job-Cost Record) •Direct Material •Direct Labor •Overhead Applied •Cost of Goods Mfd Finished Goods •Cost of Goods Mfd •Cost of Goods Sold Cost of Goods Sold •Cost of Goods Sold 3­15 Job-Order System Cost Flows Let’s return to AFB Company and see what we will if actual and applied overhead are not equal 3­16 Overhead Application Example Actual Overhead costs for the year: $5,050,000 Actual direct labor hours worked for the year: 170,000 Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 170,000 DLH = $5,100,000 Applied overhead exceeds actual overhead by $50,000 This difference is called overapplied overhead 3­17 Overapplied and Underapplied Manufacturing Overhead $50,000 may be allocated to these accounts $50,000 may be closed directly to cost of goods sold OR Work in Process Finished Goods Cost of Goods Sold Cost of Goods Sold AFB Company’s Method 3­18 Overapplied and Underapplied Manufacturing Overhead AFB’s Cost of Goods Sold for the year Actual Overhead overhead Applied costs to jobs Unadjusted Balance $50,000 Adjusted Balance AFB’s Mfg Overhead for the year $5,050,000 $50,000 $5,100,000 $50,000 overapplied 3­19 Overapplied and Underapplied Manufacturing Overhead Summary Alternative If Manufacturing Overhead is UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) Allocation Alternative 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 3­20 Schedule of Cost of Goods Manufactured Schedule of Cost of Goods Manufactured Direct material: Raw material inventory, beginning Add: Raw material purchases Raw material available for use Deduct: Raw material, ending Raw material used $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 xxx $xxx xxx $xxx 3­21 Schedule of Cost of Goods Sold Schedule of Cost of Goods Sold 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 xxx $xxx * From Cost of Goods Manufactured Schedule 3­22 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 3­23 Two-Stage Cost Allocation Stage One: Costs assigned to pools Cost pools Indirect Labor Indirect Materials Other Overhead Department Department Department 3­24 Departmental Overhead Rates Stage One: Costs assigned to pools Cost pools Stage Two: Costs applied to products Indirect Labor Indirect Materials Other Overhead Department Department Department Direct Labor Hours Machine Hours Raw Materials Cost Products Departmental Allocation Bases 3­25 Job-Order Costing in Nonmanufacturing Organizations THE JOB Cases Missions Programs Contracts 3­26 Changing Technology in Manufacturing Operations Computerized data interchange has eliminated much of the paperwork associated with joborder cost systems Scanning devices have simplified data entry to record material and labor use 3­27 ... material: Raw material inventory, beginning Add: Raw material purchases Raw material available for use Deduct: Raw material, ending Raw material used $xxx xxx $xxx xxx $xxx Direct labor Manufacturing... Schedule 3? ?22 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... Manufacturing overhead Indirect material Indirect labor Other actual overhead charges Total actual manufacturing overhead Add: Overapplied overhead or Deduct: Underapplied overhead Overhead applied