Chapter 3

Product Costing and Cost

Accumulation in a Batch
Production Environment

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning
Objective
1

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Product and Service Costing

Managerial
Financial
Accounting and
Accounting
Cost Management
Product costs are used
to value inventory and Product costs are used
to compute cost of for planning, control,
goods sold. directing, and
management decision
making.
 Learning
Objective
2

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Flow
Flow of
of Costs
Costs in
in Manufacturing
Manufacturing Firm
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
 Learning
Objective
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 Types
Types of
of Product-Costing
Product-Costing
Systems
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.
 Types
Types of
of Product-Costing
Product-Costing
Systems
Systems
Process Job-Order
Costing Costing

 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.
 Types
Types of
of Product-Costing
Product-Costing
Systems
Systems
Process Job-Order
Costing Costing

 Typical job-order cost applications:

 Special-order printing
 Building construction
 Also used in service industry
 Hospitals
 Law firms
 Types
Types of
of Product-Costing
Product-Costing
Systems
Systems
Process Job-Order
Costing 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.
 Types
Types of
of Product-Costing
Product-Costing
Systems
Systems
Process Job-Order
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill
 Accumulating
Accumulating Costs
Costs in
in aa
Job-Order
Job-Order Costing
Costing System
System
The primary document
for tracking the costs
associated with a
given job is the job-
cost record.

Let’s investigate
Job-Order
Job-Order Cost
Cost Accounting
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
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

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
Job-Order
Job-Order Cost
Cost Accounting
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
Date Requisition Number Quantity Unit Price Cost

A materials requisition
Manufacturing Overhead
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 manufacturing overhead
Total cost
Unit cost

Shipping Summary
Let’s see one
Units Remaining
Date Units Shipped in Inventory Cost Balance
 Materials
Materials Requisition
Requisition Form
Form
Requisition No. 352 Date 1/28/x1
Job Number to Be Charged J621 Dept. Painting
Department Supervisor Timothy Williams

Item Quantity Unit Cost Amount

White enamel paint 8 galons $14.00 $112
Clear lacquer 2 gallons 11.00 22

Authorized
Signature Timothy
Williams
Job-Order
Job-Order Cost
Cost Accounting
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
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
Job-Order
Job-Order Cost
Cost Accounting
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
11/1 803 7,200 sq ft $2.50 $18,000 Accumulate
Direct Labor direct labor
Date Requisition Number Quantity Unit Price Cost
costs by
means of a
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost work record,
such as a time
Cost Summary
Cost Item Amount ticket, for each
Total direct material $18,000
Total direct labor employee.
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary Let’s see one

Units Remaining
Date Units Shipped in Inventory Cost Balance
 Employee
Employee Time
Time Ticket
Ticket
Employee Ron Bradley Date 12/19/x1
Employee Number 12 Department
Station Painting

Time Started Time Stopped Job Number

8:00 11:30 A267
11:30 12:00 Shop cleanup
1:00 5:00 J122
Job-Order
Job-Order Cost
Cost Accounting
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
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
Job-Order
Job-Order Cost
Cost Accounting
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
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Apply manufacturing overhead to jobs using a
Total direct labor
Total manufacturing overhead
12,000

predetermined overhead rate based on direct

Total cost
Unit cost
labor hours (DLH).
Shipping Summary
Units Remaining Let’s do it
Date Units Shipped in Inventory Cost Balance
Job-Order
Job-Order Cost
Cost Accounting
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
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Machine hours 2,000 $9.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
Job-Order
Job-Order Cost
Cost Accounting
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
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Machine hours 2,000 $9.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
11/30 60 20 $12,000
Job-Order
Job-Order Cost
Cost Accounting
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
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Machine hours 2,000 $9.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
11/30 60 20 $12,000
 Learning
Objective
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 Manufacturing
Manufacturing Overhead
Overhead Costs
Costs
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
1
Budgeted manufacturing overhead cost
POHR =
2 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
Manufacturing
Manufacturing Overhead
Overhead Costs
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

Recall the wooden crate example where:

Overhead applied = $4 per DLH × 8 DLH = $32
 Learning
Objective
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 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary

Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.
 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
Production Material
Order for Job Requisition

The production order The materials

for the job authorizes requisition indicates
the start of the the cost of direct
production process. material
to charge to
jobs
and the cost of
indirect material to
charge to overhead.
 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
Employee time
tickets indicate Direct Labor
the cost of Time Records
direct labor
to charge to
jobs
and the cost Indirect Labor
of indirect labor Time Records
to charge to
overhead.
 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary

Cost Driver (or X Predetermined

Activity Base) Overhead Rate
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Let’s examine the

cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
 Job-Order
Job-Order System
System Cost
Cost Flows
Flows
Work in Process
Raw Materials (Job-Cost Record)
•Material •Direct •Direct
Purchases Material Material
•Indirect
Material

Mfg. Overhead
•Indirect
Material
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Next let’s add

labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
Job-Order
Job-Order System
System Cost
Cost Flows
Flows
Work in Process
Wages Payable (Job-Cost Record)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor

Mfg. Overhead
•Indirect
Material
•Indirect
Labor
Job-Order
Job-Order System
System Cost
Cost Flows
Flows
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.
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Now let’s
complete the
goods and sell
them. Still with
me?
 Job-Order
Job-Order System
System Cost
Cost Flows
Flows
Work in Process
(Job-Cost Record) Finished Goods
•Direct
Material •Cost of •Cost of •Cost of
•Direct Goods Goods Goods
Mfd. Mfd. Sold
Labor
•Overhead
Applied
Cost of Goods Sold
•Cost of
Goods
Sold
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Let’s return to
RoseCo and see
what we will do if
actual and
applied overhead
are not equal.
Overhead
Overhead Application
Application Example
Example
Actual Overhead costs for the year: $650,000
Actual direct labor hours worked for the year: 170,000
 Overhead
Overhead Application
Application Example
Example

Actual Overhead costs for the year: $650,000

Actual direct labor hours worked for the year: 170,000

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 Overhead
Overhead Application
Application Example
Example

Actual Overhead costs for the year: $650,000

Actual direct labor hours worked for the year: 170,000

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Applied overhead exceeds actual overhead by

$30,000
This difference is called overapplied overhead.
 Overapplied
Overapplied and
and Underapplied
Underapplied
Manufacturing
Manufacturing Overhead
Overhead
$30,000 $30,000 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 RoseCo’s Method
 Overapplied
Overapplied and
and Underapplied
Underapplied
Manufacturing
Manufacturing Overhead
Overhead
RoseCo’s Cost RoseCo’s
of Goods Sold Mfg. Overhead
for the year for the year
Unadjusted Actual Overhead
Balance overhead Applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
 Overapplied
Overapplied and
and Underapplied
Underapplied
Manufacturing
Manufacturing Overhead
Overhead --
Summary
Summary
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
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Objective
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Schedule
Schedule of
of Cost
Cost of
of Goods
Goods Manufactured
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
 Schedule
Schedule of
of Cost
Cost of
of Goods
Goods Sold
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

 Actual
Actual and
and Normal
Normal Costing
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.
 Plantwide Overhead Rate

Companies tend to use direct labor

as the overhead allocation base.
Departmental Overhead Rates

Finishing Department
A two-stage process is
Painting Department necessary because different
departments may have
Shipping Department different cost drivers.
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Objective
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 Two-Stage
Two-Stage Cost
Cost Allocation
Allocation
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools

Department Department Department

Cost pools
1 2 3
 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 Bases
 Learning
Objective
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 Job-Order
Job-Order Costing
Costing in
in
Nonmanufacturing
Nonmanufacturing Organizations
Organizations

THE JOB

Cases Missions

Programs Contracts
 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.
 Learning
Objective
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The
The Concept
Concept of
of Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)
One of the most
Assigning
difficult tasks in overhead is
computing sure difficult.
I agree!
accurate unit costs
lies in determining
the proper amount
of overhead cost to
assign to each job.
The
The Concept
Concept of
of Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)
Activity-Based
Costing

Departmental
Overhead
i ty
Rates ex
pl
o m
Plantwide f C
Overhead l o
ve
Rate Le
Overhead Allocation
End of Chapter 3