MA10e IPPTChap003

CIA2009: Management Accounting
Lecture 4: 4 October 2017
CHAPTER 3
Product Costing and Cost

Accumulation in a Batch
Production Environment
Dr. Elaine Y.N. Oon

Learning Objective 1
Discuss the role of product and service costing in

manufacturing and nonmanufacturing firms.
3-2
Product and Service Costing
Managerial
Financial
Accounting and
Accounting
Cost Management
Product costs are
used to value Product costs are
inventory and to used for planning,
compute cost of control, directing, and
goods sold. management decision
making.
3-3
Explain the flow of costs through the

manufacturing accounts used in product costing.
3-4
Flow of Costs in Manufacturing Firm
Work-in-Process Inventory Finished Goods Inventory

Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished
Cost of Goods Sold Income Summary

Expense closed into
Income Summary at end

of accounting period
3-5
Distinguish between job-order costing and

process costing.
3-6
Types of Product-Costing Systems
Process Job-Order
Costing 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. (Eg. Movie, custom ship/house building)
Batch-production operations
Multiple products in batches of relatively small
quantity. (Eg.: printing, custom furniture)
3-7
Process Job-Order
Costing Costing
Typical job-order cost applications:

Special-order printing
Building construction
Also used in the service industry
Hospitals
Law firms
3-8
Process Job-Order
Costing Costing
Typical job-order cost applications:

Example companies: printing
Special-order
1. Boeing (aircraft construction
Building manufacturing)
2. Bechtel International (large scale construction)
Also used in the service industry
3. Walt Disney Studios (movie production)
Hospitals
Law firms
3-9
Process Job-Order
Costing Costing
Used for large production of small, identical, low cost

items. Thus, can assign same average cost per unit.
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
3-10
Process Job-Order
Costing Costing
Used for production of small, identical, low cost

items.
Mass produced
Example in automated continuous
companies:
production process.
1. Weyerhaeuser (paper manufacturing)
Costs cannot be directly traced to each unit of
2. Reynolds Aluminum (refining aluminum ingots)
product.
3.Coca-Cola (mixing and bottling beverages)
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill
3-11
Comparing Process and Job-Order Costing
Job-Order Process
Number of jobs worked Many
Individual Single Product
Cost accumulated by Job Department
Average cost computed by Job Department
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.
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
The primary document for
tracking the costs
associated with a given
job is the
job-cost record.
Lets investigate using

the AFB Company
3-15
Job-Order Cost Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
Direct Labor
Manufacturing Overhead
Cost Summary
Cost Item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
3-16
Job-Order Cost Accounting
JOB-COST RECORD
Direct Material
Direct Labor
A materials requisition
Date Requisition Number
form
Quantity
Unit Price
isCostused to
Cost Summary authorize the use of
Cost Item Amount
Total direct material
Total direct labor
materials on a job.
Total cost
Unit cost
Shipping Summary
Lets see one
Units Remaining
3-17
Requisition No. 352 Date 11/1/x1
Job Number to Be Charged F16 Dept. Painting
Department Supervisor Timothy Williams
Item Quantity Unit Cost Amount

Aluminum 7,200 sq ft $ 2.50 $ 18,000.00
Authorized Timothy Williams

Signature
3-18
Direct Material
11/1/x1 352 7,200 sq ft $2.50 $18,000
Direct Labor
Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor
Total cost
Unit cost
Shipping Summary
Units Remaining
3-19
JOB-COST RECORD
Direct Material
11/1 803 7,200 sq ft $2.50 $18,000
Accumulate
Direct Labor
Date Requisition Number Quantity Unit Price Cost direct labor
costs by
Manufacturing Overhead means of a
work record,
Cost Summary such as a time
Cost Item Amount
Total direct material $18,000 ticket, for each
Total direct labor
Total manufacturing overhead employee.
Total cost
Unit cost
Shipping Summary
Units Remaining
Lets see one
3-20
Employee Time Ticket
Employee Ron Bradley Date 11/5/20x1

Employee Number 12 Department
Station Painting
Time Started Time Stopped Job Number

8:00 11:30 F16
11:30 12:00 Shop cleanup
1:00 5:00 A26
3-21
JOB-COST RECORD
Direct Material
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Date Time Cards Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000
Cost Summary
Cost Item Amount
Total direct labor 12,000
Total cost
Unit cost
Shipping Summary
Units Remaining
3-22
JOB-COST RECORD
Direct Material
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Various
Cost Summary
Cost Item Amount
Apply manufacturing
Total direct labor overhead to jobs using a 12,000
predetermined
Total cost overhead rate based on direct
Unit cost
labor hours (DLH).
Shipping Summary Lets do it
Units Remaining
3-23
Direct Material
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Various
11/30 Direct Labor Hours 600 $30.00 $18,000
Cost Summary
Cost Item Amount
Total manufacturing overhead 18,000
Total cost
Unit cost
Shipping Summary
Units Remaining
3-24
Direct Material
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Various
Cost Summary
Cost Item Amount
Total cost $48,000
Unit cost $600
Shipping Summary
Units Remaining
11/30 60 20 $12,000
3-25
Direct Material
11/1 803 7,200 sq ft $2.50 $18,000
Direct Labor
Various
Cost Summary
Cost Item Amount
Total cost $48,000
Unit cost $600
Shipping Summary
Units Remaining
11/30 60 20 $12,000
3-26
Compute a predetermined overhead rate and

explain its use in job-order costing for job-shop
and batch-production environments.
3-27
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.
Budgeted manufacturing overhead cost

POHR =
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR Actual activity
Based on estimates, and Actual amount of the allocation

determined before the base, such as direct labor hours,
period begins incurred during the period
3-28
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.
Budgeted manufacturing overhead cost

POHR =
Budgeted amount of cost driver (or activity base)
Recall the Aluminum Boat example where:

Overhead applied = $30 per DLH 600 DLH = $18,000
3-29
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are
in process. An allocation/activity base (cost
driver), such as direct labor hours, direct labor
dollars, or machine hours, is used to assign
manufacturing overhead to individual jobs.
We use an allocation/activity base because:

1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging
from the grease used in machines to production managers salary.
3. Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
Manufacturing Overhead Application
The predetermined overhead rate (POHR) used to apply
overhead to jobs is determined before the period
begins.
Budgeted(estimated) total manufacturing

overhead cost for the coming period
POHR =
Budgeted(estimated) total units in the
activity base for the coming period
Ideally, the allocation or

activity base is a cost
driver that causes
overhead to be incurred.
The Need for a POHR
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.
Application of Manufacturing Overhead
Based on estimates, and

determined before the
period begins.
Actual amount of the allocation

based upon the actual level of
activity.
Example: Overhead Application Rate
Budgeted total manufacturing
overhead cost for the coming period
POHR =
Budgeted total units in the
activity base for the coming period
$640,000
POHR =
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For each direct labor hour worked on a

particular job, $4.00 of factory overhead
will be applied to that job.
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and
10 direct labor hours at $15 per hour. Estimated total overhead
for the year was $760,000 and estimated direct labor hours
were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and
10 direct labor hours at $15 per hour. Estimated total overhead
for the year was $760,000 and estimated direct labor hours
were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
Pred. ovhd. rate $760,000/20,000hours $38
c. $380.
d. $730. Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $38 x 10 hours $380
Total cost $730
Prepare journal entries to record the costs of

direct material, direct labor, and manufacturing
overhead in a job-order costing system
3-37
Job-Order Costing
Document Flow Summary
Lets summarize
the document
flow we have
been discussing
in a job-order
costing system.
3-38
Job-Order Costing
A sales order is the A production

basis of issuing a order initiates
production order. work on a job.
Job-Order Costing
Materials used
may be either Direct Job Cost
direct or materials Sheets
indirect.
Materials
Requisition
Manufacturing
Indirect
Overhead
materials
Account
Job-Order Costing
An employees
time may be either Direct Job Cost
direct or indirect. Labor Sheets
Labour Time
Records
(Employee Time Ticket)
Manufacturing
Indirect
Overhead
Labor
Account
Job-Order Costing
Employee Indirect
Time Ticket Labor
Other Manufacturing Applied

Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account
Materials Indirect
Requisition Material
Job-Order Costing
Production The production order for the job authorizes the start
Order for Job of the production process.
The materials requisition indicates the cost of

Material direct material to charge to jobs and the cost of
indirect material to charge to overhead.
Requisition
Employee time tickets indicate the cost of direct
labor to charge to jobs and the cost of indirect
Labor Time Records labor to charge to overhead.
Actual Cost Driver (or Activity Base)

Apply Manufacturing Overhead
X
Predetermined Overhead Rate
3-43
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.
3-44
Work in Process
Raw Materials (Job-Cost Record)
Material Direct Direct
Purchases Material Material
Indirect
Material
Mfg. Overhead
Indirect
Material
3-45
Next lets add

labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
3-46
Work in Process
Wages Payable (Job-Cost Record)
Direct Direct
Labor Material
Indirect Direct
Labor Labor
Mfg. Overhead
Indirect
Material
Indirect
Labor
3-47
Work in Process
Wages Payable (Job-Cost Record)
Direct Direct
Labor Material
Indirect Direct
Labor Labor
Overhead
Applied
Mfg. Overhead If actual and applied
Indirect Overhead manufacturing overhead are
Material Applied to not equal, a year-end
Indirect Work in adjustment is required. We
Labor Process will look at the procedure to
accomplish this later.
3-48
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to

individual jobs; rather they are expensed in the
period incurred.
Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.
Now lets
complete the
goods and sell
them. Still with
me?
3-50
Work in Process
(Job-Cost Record) Finished Goods
Direct
Material Cost of Cost of Cost of
Goods Goods Goods
Direct
Mfd. Mfd. Sold
Labor
Overhead
Applied
Cost of Goods Sold
Cost of
Goods
Sold
3-51
Lets return to
AFB Company
and see what we
will do if actual
and applied
overhead are not
equal.
3-52
Overhead Application Example
AFB Company
Actual Overhead costs for the year: $5,050,000

Actual direct labor hours worked for the year: 170,000 DLH
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.
3-53
Overapplied and Underapplied
$50,000 $50,000 may be
may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods Cost of
Goods Sold
Cost of
Goods Sold AFB Companys
Method
3-54
AFBs Cost AFBs
of Goods Sold Mfg. Overhead
for the year for the year
Unadjusted Actual Overhead
Balance overhead Applied
costs to jobs
$50,000 $5,050,000 $5,100,000
Adjusted $50,000 $50,000

Balance overapplied
3-55
Manufacturing Overhead -
Summary AFB Companys
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . Allocation of Goods Sold
UNDERAPPLIED INCREASE INCREASE

Work in Process Cost of Goods Sold
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASE

Work in Process Cost of Goods Sold
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
3-56
Problems of Overhead Application
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead Overapplied overhead

exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of $4.00
per machine hour. Tiger, Inc. worked 290,000 machine
hours during the period. Tigers manufacturing
overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of $4.00
per machine hour. Tiger, Inc. worked 290,000 machine
hours during the period. Tigers manufacturing
overhead is
a. $50,000 overapplied. Overhead Applied
$4.00 per hour 290,000 hours
b. $50,000 underapplied. = $1,160,000
c. $60,000 overapplied. Underapplied Overhead
d. $60,000 underapplied. $1,210,000 - $1,160,000
= $50,000
Quick Check
What effect will the overapplied overhead have on
PearCos net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Quick Check
What effect will the overapplied overhead have on
PearCos net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Prepare a schedule of cost of goods

manufactured, a schedule of cost of goods sold,
and an income statement for a manufacturer
3-62
Schedule of Cost of Goods Manufactured
Schedule of Cost of Goods Manufactured
Direct material:
Raw material inventory, beginning $xxx
Add: Raw material purchases xxx
Raw material available for use $xxx
Deduct: Raw material, ending xxx
Raw material used $xxx
Direct labor xxx
Manufacturing overhead
Indirect material $xxx
Indirect labor xxx
Other actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overhead
or Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx
Total manufacturing costs $xxx

Add: Work-in-process inventory, beginning xxx
Subtotal $xxx
Deduct: Work-in-process inventory, ending xxx
Cost of goods manufactured $xxx
3-63
Schedule of Cost of Goods Sold
Schedule of Cost of Goods Sold
Finished goods inventory, beginning $xxx

Add: Cost of goods manufactured* xxx
Cost of goods available for sale $xxx
Deduct: Finished goods inventory, ending xxx
Cost of goods sold $xxx
Add: Underapplied overhead
or Deduct: Overapplied overhead xxx
Cost of goods sold (adjusted) $xxx
* From Cost of Goods Manufactured Schedule
3-64
Actual and Normal Costing
Actual direct material Actual direct material

and direct labor and direct labor
combined with combined with
actual overhead. 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.
3-65
Describe the two-stage allocation process used

to assign manufacturing overhead costs to
production jobs.
3-66
Two-Stage Cost Allocation
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools
Department Department Department

Cost pools
1 2 3
3-67
Departmental Overhead Rates
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools
Department Department Department
Cost pools
1 2 3
Direct Machine Raw
Stage Two: Labor Hours Materials
Costs applied Hours Cost
to products
Products
Departmental Allocation/Activity Bases
3-68
Describe the process of project costing used in

service industry firms and non-profit
organizations.
3-69
Job-Order Costing in
Nonmanufacturing Organizations
THE JOB
Cases Missions
Programs Contracts
3-70
Changing Technology in Manufacturing
Operations
Computerized data interchange has

eliminated much of the paperwork
associated with job-order
cost systems.
Scanning devices have simplified

data entry to record material and
labor use.
3-71
End of Chapter 3
3-72

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CIA2009: Management Accounting

Lecture 4: 4 October 2017

Product Costing and Cost

Dr. Elaine Y.N. Oon

Discuss the role of product and service costing in

Explain the flow of costs through the

Work-in-Process Inventory Finished Goods Inventory

Cost of Goods Sold Income Summary

Income Summary at end

Distinguish between job-order costing and

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

Typical job-order cost applications:

Typical job-order cost applications:

Used for large production of small, identical, low cost

Used for production of small, identical, low cost

Lets investigate using

Item Quantity Unit Cost Amount

Authorized Timothy Williams

Employee Ron Bradley Date 11/5/20x1

Time Started Time Stopped Job Number

Compute a predetermined overhead rate and

Budgeted manufacturing overhead cost

Overhead applied = POHR Actual activity

Based on estimates, and Actual amount of the allocation

Budgeted manufacturing overhead cost

Overhead applied = POHR Actual activity

Recall the Aluminum Boat example where:

We use an allocation/activity base because:

Budgeted(estimated) total manufacturing

Ideally, the allocation or

Actual overhead for the period is not

Based on estimates, and

Overhead applied = POHR Actual activity

Actual amount of the allocation

POHR = $4.00 per DLH

For each direct labor hour worked on a

Prepare journal entries to record the costs of

A sales order is the A production

Other Manufacturing Applied

The materials requisition indicates the cost of

Actual Cost Driver (or Activity Base)

Lets examine the

Next lets add

Nonmanufacturing costs are not assigned to

Actual Overhead costs for the year: $5,050,000

Applied Overhead = POHR Actual Direct Labor Hours

Applied overhead exceeds actual overhead by $50,000

Adjusted $50,000 $50,000

UNDERAPPLIED INCREASE INCREASE

OVERAPPLIED DECREASE DECREASE

Underapplied overhead Overapplied overhead

Prepare a schedule of cost of goods

Direct labor xxx

Total manufacturing costs $xxx

Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxx

* From Cost of Goods Manufactured Schedule

Actual direct material Actual direct material

Using a predetermined rate makes it

Describe the two-stage allocation process used

Department Department Department

Describe the process of project costing used in

Computerized data interchange has