Chap003 Candra PDF

3-1
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
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.
3-3
Learning
Objective
2
McGraw-Hill/Irwin
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
3-5
Learning
Objective
3
McGraw-Hill/Irwin
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.
3-7
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
3-8
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
3-9
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.
3-6
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
3-12
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
Job Number F16
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
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
materials
on a job.
Total direct labor
Date
Requisition Number
Quantity

Total cost
Unit cost
Date
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Lets see one

Cost Balance
3-14
3-8

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
Job Number F16
Date
11/1/x1
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
80
Direct Material
Requisition Number
Quantity
352
7,200 sq ft
Direct Labor
Quantity
Date
Requisition Number
Date
Requisition Number
Quantity
Cost Summary
Cost Item
Total direct labor
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
3-9

Job
Job Number F16
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
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
Requisition Number
Quantity
Unit Price
Cost
Cost Summary
Cost Item
Total direct labor
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
3-17
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
3-18
3-10

Job
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
80
Job Number F16

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
Requisition Number
Quantity
Cost Summary
Cost Item
Amount
$18,000
12,000

Total direct labor
Total cost
Unit cost
Date
Shipping Summary
Units Remaining
Units Shipped
in Inventory
Cost Balance
3-19

Job
Job Number F16
Date
11/1
Date
Various
dates
Date
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
80
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Requisition Number
Direct Labor
Quantity
Various time cards
600
Requisition Number
Quantity
Cost Summary
Cost Item
Total direct labor
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
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
80
Job Number F16

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
Requisition Number
Quantity
Direct Labor Hours
600
Cost Summary
Cost Item

Total direct labor
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
Job Number F16
Date
11/1
Date
Various
dates
Date
11/30
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
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 labor
Total cost
Unit cost
Date
11/30
600
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
Job Number F16
Date
11/1
Date
Various
dates
Date
11/30
JOB-COST RECORD
Date Completed
Nov. 22, 20x1
80
Direct Material
Requisition Number
Quantity
803
7,200 sq ft
Requisition Number
Direct Labor
Quantity
Various time cards
Requisition Number
Quantity
Direct Labor Hours
600
Cost Summary
Cost Item

Total direct labor
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
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
3-26
3-14
Learning
Objective
5
McGraw-Hill/Irwin
Job-Order Costing
Document Flow Summary
Lets summarize
the document
flow we have
been discussing
in a job-order
costing system.
3-30
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.
3-32
3-16

Raw Materials
Material
Direct
Purchases Material
Indirect
Material
Work in Process
(Job-Cost Record)
Direct
Material
Mfg. Overhead
Indirect
Material
3-33
Next lets add

labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
3-34
3-17

Wages Payable
Direct
Labor
Indirect
Labor
Work in Process
(Job-Cost Record)
Direct
Material
Direct
Labor
Mfg. Overhead
Indirect
Material
Indirect
Labor
3-35

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
Now lets
complete the
goods and sell
them. Still with
me?
3-37

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
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

$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

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

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
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
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
3-56

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3-1

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

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

Product and Service Costing

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

Flow of Costs in Manufacturing Firm

Finished Goods Inventory

Cost of Goods Sold

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

Types of Product-Costing Systems

Used for production of large, unique, high-cost items.

Types of ProductProduct-Costing Systems

Typical job-order cost applications:

Types of ProductProduct-Costing Systems

Used for production of small, identical, low cost

a. Scott Paper Company for Kleenex.

a. Scott Paper Company for Kleenex.

Lets investigate using

Job--Order Cost Accounting

Total direct material

Job--Order Cost Accounting

Total manufacturing overhead

Lets see one

Job--Order Cost Accounting

Job--Order Cost Accounting

Job--Order Cost Accounting

Employee Time Ticket

Job--Order Cost Accounting

Job Number F16

Total direct material

Job--Order Cost Accounting

Various time cards

Apply manufacturing overhead to jobs using a

Job--Order Cost Accounting

Job Number F16

Various time cards

Total direct material

Job--Order Cost Accounting

Various time cards

Job--Order Cost Accounting

Various time cards

Total direct material

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

Manufacturing Overhead Costs

Budgeted manufacturing overhead cost

Overhead applied = POHR Actual activity

Actual amount of the allocation

Manufacturing Overhead Costs

Budgeted manufacturing overhead cost

Overhead applied = POHR Actual activity

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

The production order for the job authorizes the start

Apply Manufacturing Overhead

Actual Cost Driver (or Activity Base)

Job-Order System Cost Flows

Lets examine the

Job-Order System Cost Flows

Job-Order System Cost Flows

Next lets add

Job-Order System Cost Flows

Job-Order System Cost Flows

Job-Order System Cost Flows