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Chapter 3
Product Costing and Cost
Accumulation in a Batch
Production Environment

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning
Objective
1

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

3-2

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.
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Learning
Objective
2

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

3-3

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

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Learning
Objective
3

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

3-4

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.

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Types of ProductProduct-Costing Systems


Process
Costing

Job-Order
Costing

Typical job-order cost applications:


Special-order printing
Building construction
Also used in service industry
Hospitals
Law firms
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3-5

Types of ProductProduct-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

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Quick Check
Which of the following companies would be
likely to use job-order costing rather than
process costing?

a. Scott Paper Company for Kleenex.


b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.

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Quick Check
Which of the following companies would be
likely to use job-order costing rather than
process costing?

a. Scott Paper Company for Kleenex.


b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.

Accumulating Costs in a
Job--Order Costing System
Job
The primary document
for tracking the costs
associated with a
given job is the jobcost record.

Lets investigate using


the AFB Company

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3-7

Job--Order Cost Accounting


Job
Job Number F16
Date Started Nov. 1, 20x1

JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80

Date

Direct Material
Requisition Number
Quantity

Unit Price

Cost

Date

Requisition Number

Direct Labor
Quantity

Unit Price

Cost

Date

Manufacturing Overhead
Requisition Number
Quantity

Unit Price

Cost

Cost Summary
Cost Item

Amount

Total direct material


Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Date

Shipping Summary
Units Remaining
Units Shipped
in Inventory

Cost Balance

3-13

Job--Order Cost Accounting


Job
Job Number F16
Date Started Nov. 1, 20x1

JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80

Date

Direct Material
Requisition Number
Quantity

Unit Price

Cost

Date

Requisition Number

Direct Labor
Quantity

Unit Price

Cost

A materials requisition
Unit Price
form
isCostused to
Cost Summary authorize the use of
Cost Item
Amount
Total direct material
materials
on a job.
Total direct labor
Date

Manufacturing Overhead
Requisition Number
Quantity

Total manufacturing overhead


Total cost
Unit cost

Date

Shipping Summary
Units Remaining
Units Shipped
in Inventory

Lets see one


Cost Balance

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3-8

Job--Order Cost Accounting


Job
Requisition No. 352
Job Number to Be Charged F16
Department Supervisor Timothy Williams
Item
Aluminum

Quantity
7,200 sq ft

Date 11/1/x1
Dept. Painting

Unit Cost
2.50

Amount
18,000.00

Timothy Williams

Authorized
Signature

3-15

Job--Order Cost Accounting


Job
Job Number F16
Date Started Nov. 1, 20x1

Date
11/1/x1

JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80

Direct Material
Requisition Number
Quantity
352
7,200 sq ft
Direct Labor
Quantity

Date

Requisition Number

Date

Manufacturing Overhead
Requisition Number
Quantity

Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Date

Unit Price
$2.50

Cost
$18,000

Unit Price

Cost

Unit Price

Cost

Amount
$18,000

Shipping Summary
Units Remaining
Units Shipped
in Inventory

Cost Balance

3-16

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Job--Order Cost Accounting


Job
Job Number F16
Date Started Nov. 1, 20x1

JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80

Date
11/1

Direct Material
Requisition Number
Quantity
803
7,200 sq ft

Unit Price
$2.50

Cost
$18,000

Date

Direct Labor
Requisition Number
Quantity

Unit Price

Cost

Date

Manufacturing Overhead
Requisition Number
Quantity

Unit Price

Cost

Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Date

Amount
$18,000

Shipping Summary
Units Remaining
Units Shipped
in Inventory

Accumulate
direct labor
costs by
means of a
work record,
such as a time
ticket, for each
employee.
Lets see one

Cost Balance

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Employee Time Ticket


Employee Ron Bradley
Employee Number 12

Time Started
8:00
11:30
1:00

Date 11/5/20x1
Department
Painting
Station

Time Stopped
11:30
12:00
5:00

Job Number
F16
Shop cleanup
A26

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3-10

Job--Order Cost Accounting


Job
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80

Job Number F16


Date Started Nov. 1, 20x1

Date
11/1

Date
Various
dates

Date

Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Direct Labor
Quantity

Time Cards
Various time cards

Unit Price
$2.50

Cost
$18,000

Unit Price

Cost

$20

$12,000

Unit Price

Cost

600

Manufacturing Overhead
Requisition Number
Quantity

Cost Summary
Cost Item

Amount
$18,000
12,000

Total direct material


Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Date

Shipping Summary
Units Remaining
Units Shipped
in Inventory

Cost Balance

3-19

Job--Order Cost Accounting


Job
Job Number F16
Date Started Nov. 1, 20x1

Date
11/1

Date
Various
dates

Date

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

Requisition Number

Direct Labor
Quantity

Various time cards

600

Manufacturing Overhead
Requisition Number
Quantity

Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Unit Price
$2.50

Cost
$18,000

Unit Price

Cost

$20

$12,000

Unit Price

Cost

Amount
$18,000
12,000

Apply manufacturing overhead to jobs using a


predetermined overhead rate based on direct
labor hours (DLH).
Shipping Summary
Lets do it
Units Remaining
Date

Units Shipped

in Inventory

Cost Balance

3-20

3-11

Job--Order Cost Accounting


Job
JOB-COST RECORD
Description 80 deluxe alum. fishing boats
Date Completed
Nov. 22, 20x1
Number of Units Completed
80

Job Number F16


Date Started Nov. 1, 20x1

Date
11/1

Date
Various
dates

Date
11/30

Direct Material
Requisition Number
Quantity
803
7,200 sq ft

Requisition Number

Direct Labor
Quantity

Various time cards

Cost
$18,000

Unit Price

Cost

$20

$12,000

Unit Price
$30.00

Cost
$18,000

600

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

Unit Price
$2.50

Amount
$18,000
12,000
18,000

Shipping Summary
Units Remaining
Units Shipped
in Inventory

Cost Balance

3-21

Job--Order Cost Accounting


Job
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

Requisition Number

Direct Labor
Quantity

Various time cards

Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Date
11/30

600

Manufacturing Overhead
Requisition Number
Quantity
Direct Labor Hours
600

Unit Price
$2.50

Cost
$18,000

Unit Price

Cost

$20

$12,000

Unit Price
$30.00

Cost
$18,000

Amount
$18,000
12,000
18,000
$48,000
$600

Shipping Summary
Units Remaining
Units Shipped
in Inventory
60
20

Cost Balance
$12,000

3-22

3-12

Job--Order Cost Accounting


Job
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

Requisition Number

Direct Labor
Quantity

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
11/30

600

Unit Price
$2.50

Cost
$18,000

Unit Price

Cost

$20

$12,000

Unit Price
$30.00

Cost
$18,000

Amount
$18,000
12,000
18,000
$48,000
$600

Shipping Summary
Units Remaining
Units Shipped
in Inventory
60
20

Cost Balance
$12,000

3-23

Learning
Objective
4

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

3-13

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

POHR =

Budgeted manufacturing overhead cost


Budgeted
amount of cost driver (or activity base)
2

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
3-25

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
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3-14

Learning
Objective
5

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing
Document Flow Summary

Lets summarize
the document
flow we have
been discussing
in a job-order
costing system.

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3-15

Job-Order Costing
JobDocument Flow Summary
Production
Order for Job
Material
Requisition
Labor Time Records

The production order for the job authorizes the start


of the production process.
The materials requisition indicates the cost of
direct material to charge to jobs and the cost of
indirect material to charge to overhead.
Employee time tickets indicate the cost of direct
labor to charge to jobs and the cost of indirect
labor to charge to overhead.

Apply Manufacturing Overhead

Actual Cost Driver (or Activity Base)

X
Predetermined Overhead Rate

3-31

Job-Order System Cost Flows

Lets examine the


cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
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3-16

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

3-33

Job-Order System Cost Flows

Next lets add


labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
3-34

3-17

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
3-35

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
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.
3-36

3-18

Job-Order System Cost Flows

Now lets
complete the
goods and sell
them. Still with
me?

3-37

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
3-38

3-19

Job-Order System Cost Flows

Lets return to
AFB Company
and see what we
will do if actual
and applied
overhead are not
equal.
3-39

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.

3-40

3-20

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 Companys
Method
3-41

Overapplied and Underapplied


Manufacturing Overhead
AFBs Cost
of Goods Sold
for the year

Actual Overhead
overhead Applied
costs
to jobs

Unadjusted
Balance
$50,000
Adjusted
Balance

AFBs
Mfg. Overhead
for the year

$5,050,000

$50,000

$5,100,000

$50,000
overapplied
3-42

3-21

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

3-43

Learning
Objective
6

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

3-22

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

3-47

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

3-48

3-23

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.
3-49

Learning
Objective
7

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

3-24

Two--Stage Cost Allocation


Two
Stage One:
Costs assigned
to pools
Cost pools

Indirect
Labor

Indirect
Materials

Other
Overhead

Department
1

Department
2

Department
3

3-51

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
3-52

3-25

End of Chapter 3

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