Chapter 6: Fundamentals of Product and
Service Costing
Cost Management System / Cost System
 system to provide information about the
costs of process, products, and services
used and produced by an organization
 goal is to balance the potential distortion
in reported product costs
Cost Allocation and Product Costing
Cost flow diagram
 helpful in studying product costing
 provides a graphical representation of
product costing process
Fundamental Themes Underlying the
Design of Cost Systems for Managerial
Purposes
3 Points that Relate to Designing a New
Cost System for Managerial Purposes
1. Cost systems should have a decision
focus.
 cost systems must meet the need
of the decision makers
2. Different cost information is used for
different purposes.
 cost information must provide the
appropriate data for its intended
purpose
3. Cost information for managerial
purposes must meet the cost-benefit
test.
 benefits of improvements must
outweigh the costs making the
improvements
Costing in a Single Product, Continuous
Process Industry
Cost flow model
 fundamental framework for recording
costs in any type of firm
 basic inventory equation
 Beginning Balance (BB) + Transfers
in (TI) – Transfers out (TO) = Ending
Balance (EB)
Costing with Ending Work-in-Process
Inventories
Predetermined Overhead Rate
 cost per unit of the allocation base used
to charge overhead products

2 Approaches to Aid in Making the Choice
1. Analyze the overhead accounts to
determine which allocation base seems
to be most highly related to overhead.
2. Estimate the correlation between
overhead cost and activity using
statistical analysis.
Two-stage Cost Allocation
 process of first allocating costs to
intermediate cost pools and then to the
individual cost objects using different
allocation bases
Jobs
 unit of a product that is easily
distinguishable from other units
custom furniture factory – individual units
paint factory – batches

Job costing
 accounting system that traces costs to
individual units or to specific jobs,
contracts, or batches of goods
 records costs and revenues for each
individual job

Process costing
 accounting system used when identical
units are produced through a series of
uniform production steps
 does not separate and record costs for
each unit
 an accounting system used when
identical units are produced through
uniform production steps

Production Flows and Product Costing

Systems

Continuous flow processing

 system that generally mass-produces a
single, homogenous output in a
continuing process
 used in manufacturing chemicals,
grinding flour, and refining oil
 use process costing methods

Operations costing
 hybrid costing system in manufacturing
goods that have some common
characteristics and some individual
characteristics

Operation
 standardized method or technique of
making a product that is repeatedly
performed