Managerial Accounting

Creating value in a Dynamic Business Environment

Tenth Edition

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

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Learning Objective 3-1 – Discuss the role
of product and service costing in
manufacturing and non-manufacturing firms.

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 Product and Service Costing
Financial Accounting
Product costs are used to value inventory on the balance
sheet and to compute cost of goods sold on the income
statement.
Managerial Accounting and Cost Management
Product costs are used for planning, control, directing,
and management decision making.
Other Interested Organizations
There is an ever increasing need to use data in external
organizations as well.

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Learning Objective 3-2 – Diagram and
explain the flow of costs through the
manufacturing accounts used in product
costing.

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Flow of Costs in Manufacturing
Firm

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Learning Objective 3-3 – Distinguish
between job-order costing and process
costing.

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 Types of Product-Costing Systems
(1 of 2)
• 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 one at a
time.
– Batch-production operations
 Multiple products in batches of relatively small
quantity.
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 Types of Product-Costing Systems
(2 of 2)
• 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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 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.

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 Employee Time Ticket

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Job-Order Cost Accounting (1 of 10)

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 Job-Order Cost Accounting (2 of 10)

A materials requisition form is used to

authorize the use of materials on a job.

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Job-Order Cost Accounting (3 of 10)

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Job-Order Cost Accounting (4 of 10)

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Job-Order Cost Accounting (5 of 10)
Accumulate direct labor costs by means of a
work record, such as a time ticket, for each
employee.

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Job-Order Cost Accounting (6 of 10)

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Job-Order Cost Accounting (7 of 10)
Apply manufacturing overhead to jobs using
a predetermined overhead rate based on
direct labor hours (DLH).

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Job-Order Cost Accounting (8 of 10)

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Job-Order Cost Accounting (9 of 10)

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Job-Order Cost Accounting (10 of 10)

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Learning Objective 3-4 – Compute a
predetermined overhead rate and explain
its use in job-order costing for job-shop
and batch-production environments.

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 Manufacturing Overhead Costs
(1 of 2)
Overhead is applied to jobs using a
predetermined overhead rate based on estimates
made at the beginning of the accounting period.

Budgeted manufacturing overhead cos t

Pr e det er min ed Rate 
Budgeted amount of cos t driver  or avtivity base
Overhead applied  Rate  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

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 Manufacturing Overhead Costs
(2 of 2)
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
Budgetedmanufacturing overhead cos t
Rate 
Budgeted amount of cos t driver  or activity base

$360,000 / 40,000 hours = $9 per machine hour

Overhead applied = Hours on Job = 30 × $9 per
hour = $270

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Learning Objective 3-5 – Prepare
journal entries to record the costs of
direct material, direct labor, and
manufacturing overhead in a job-order
costing system.

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 Job-Order Costing
Document Flow Summary (1 of 2)
Production Order for Job
The production order for the job authorizes the
start of the production process.
Material Requisition
The materials requisition indicates the cost of
direct material to charge to jobs and the cost
of indirect material to charge to overhead.

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 Job-Order Costing
Document Flow Summary (2 of 2)
Labor Time Records
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

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 Journal Entry
Purchases of Raw Materials

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 Journal Entry
Use of Direct Labor

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 Journal Entry
Manufacturing Costs Incurred
Manufacturing overhead:
Rent on factory building $5,000
Depreciation on equipment 6,000
Utilities (electricity and natural gas) 4,750
Property taxes 2,500
Insurance 2,000
Total $20,250

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 Job-Order System Cost Flows
(1 of 6)

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 Job-Order System Cost Flows
(2 of 6)
Next let’s add labor costs and applied
manufacturing overhead to the job-order
cost flows. Are you with me?

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 Job-Order System Cost Flows
(3 of 6)

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 Job-Order System Cost Flows
(4 of 6)

Actual and applied manufacturing overhead are

usually not equal so a year-end adjustment is
required. We will look at the procedure to accomplish
this later.
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 Job-Order System Cost Flows
(5 of 6)
Now let’s complete the goods and sell them.
Still with me?

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 Job-Order System Cost Flows
(6 of 6)

Let’s return to the Company and see what

we will do if actual and applied overhead are
not equal.

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 Application of Overhead (1 of 2)
Predetermined Budgeted total manufacturing overhed for 20x1

overhead rate Budgeted total machine hours for 20x1
$360,000
  $9.00 per machine hour
40,000 hours
Actual use of machine hours for the two jobs were as
follows:
Machine hours used: Job number D42……………………………………. 1,800 hours
Machine hours used: Job number S116………………………………….. 2,000 hours
Total machine hours…………………………………………………………………. 3,800 hours

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 Application of Overhead (2 of 2)

Machine Predetermined Manufacturing Overhead

Hours Overhead Rate Applied
Job number 1,800 × $9.00 = $16,200
D42………………
Job number 2,000 × $9.00 = 18,000
S116…………….
Total $34,200
manufacturing
overhead………

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 Journal Entry
Application of Manufacturing
Overhead

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 Summary of Manufacturing
Overhead

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 Journal Entry
Selling and Administrative Costs
Actual Costs Incurred
Rental of sales and administrative offices……………………………… $1,500

Salaries of sales personnel…………………………………………………….. 4,000

Salaries of management…………………………………………………………. 8,000
Advertising……………………………………………………………………………... 1,000
Office supplies used………………………………………………………………… 300
Total……………………………………………………………………………………..... $14,800

Journal Entry to record the costs

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 Journal Entry
Completion of a Production Job
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

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 Journal Entry Sale of Goods
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

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 Underapplied and Overapplied
Overhead
Actual manufacturing overhead*…………………………………. $34,450
Applied manufacturing overhead†………………………………… 34,200
Underapplied overhead………………………………………………… $250

*Sum of debit entries in the Manufacturing-Overhead

account: $200+$14,000+$20,250. See Exhibit 3-11.
†Applied overhead: $9.00 per machine hour x 3,800
machine hours.

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 Overapplied and Underapplied
Manufacturing Overhead -
Summary

If Manufacturing Alternative 1 Alternative 2

Overhead is… Allocation Close to Cost Goods
Sold
UNDERAPPLIED INCREASE INCREASE
(Applied OH is less Work in Process Cost of Goods Sold
than actual OH) Finished Goods Cost of
Goods Sold
OVERAPPLIED DECREASE DECREASE
(Applied OH is greater Work in Process Cost of Goods Sold
than actual OH) Finished Goods Cost of
Goods Sold

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Learning Objective 3-6 – Prepare a
schedule of cost of goods manufactured, a
schedule of cost of goods sold, and an
income statement for a manufacturer.

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 Schedule of Cost of Goods
Manufactured

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Schedule of Cost of Goods Sold

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 The Income Statement

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Learning Objective 3-7 – Describe the
two-stage allocation process used to
assign manufacturing overhead costs to
production jobs.

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 Two-Stage Cost Allocation

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 Departmental Overhead Rates

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Learning Objective 3-8 – Describe the
process of project costing used in service
industry firms and nonprofit
organizations.

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 Job-Order Costing in
Nonmanufacturing Organizations
THE JOB
• Cases
• Programs
• Contracts
• Missions

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