ACCT 1022 Chapter 3: Product Costing

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8 Feb 2017
Chapter 3: Product Costing
Product and Service Costing
Product-costing system accumulates the costs incurred in a production process and
assigns those costs to the organization’s final products
Uses in financial accounting: value inventory on the balance sheet and to
compute cost of goods sold expense on the income statement
Use in managerial accounting: to help managers with planning and to provide
them with data for decision making
Use in cost management: product costs provide crucial data for a variety of
Use in reporting to interested organizations: between firms and outside
organizations to justify rate increases that must be approved by state regulatory
Product Costing in Nonmanufacturing Firms
Merchandising companies include the costs of transporting and buying
merchandise in their product costs
Service Firms and Nonprofit Organizations
Services that are consumed as they are produced
No inventoriable costs
Flow of Costs in Manufacturing Firms
Manufacturing costs consist of direct material, direct labor, manufacturing overhead
As production takes place, all manufacturing costs are added to work in process account
As soon as products are completed, their product costs are transferred to Finished
Goods Inventory
During the time period when products are sold, the product cost of the inventory sold is
removed from finished goods and added to cost of goods sold, which is an expense in
which the sale occurred
Types of Product-Costing Systems
Job Order Costing Systems
It is used by companies with job-shop operations or batch operations
Low volumes or one at a time
Each distinct batch of production is called a job or a job order
Process-Costing Systems
Used by companies that produce large numbers of identical units
Accumulates all the production costs for a large number of units of output, and
then these costs are averaged over all the units
Accumulating Costs in a Job Order Costing System
Costs of direct material, direct labor, and manufacturing overhead are assigned to each
production job
To keep track of each job, a subsidiary ledger is maintained
The ledger account assigned assigned to each job is a document called a job cost
Job Cost Record
The procedures used to accumulate the costs of direct material, direct labor, and
manufacturing overhead for a job constitute a set of activities performed by the
job costing system
Direct Materials Cost
As raw materials are needed for the production process, they are transferred
from the warehouse to the production department
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To authorize the release of materials, the production department supervisor
completes a material requisition form and presents it to the warehouse
A document such as this is used as the basis for an accounting entry is called a
source document
Supply Chain management
An organization’s supply chain refers to the flow of all goods, services,
and information into and out of the organization
It means proactively working with some or all of the organizations in a
company’s supply chain to improve service and to manage or reduce
Material Requirements Planning
For these products and components, material requisitions are based on a
bill of materials that lists all of the materials needed
MRP may be used as a management tool that assists managers in
scheduling production in each stage of the manufacturing process
Direct Labor Costs
The assigned costs to jobs is based on time records filled out by employees
A time record is a form that records the amount of time an employee spends on
each production job
Manufacturing Overhead Costs
Heterogeneous pool of indirect production costs, in material, labor, utility, and
The process of assigning MOH costs to production is called overhead application
Overhead application
Actual costs of manufacturing overhead are determined at the end of the
period before applying them to product costs
Predetermined overhead rate
Estimate made at the beginning of the period
Measures some volume based cost driver or activity base such as direct
labor hours, direct labor cost, or machine hours
Estimate is made on
Amount of MOH that will be incurred
Cost driver that will be used
Predetermined overhead rate = budgeted manufacturing overhead cost
/ budgeted amount of cost driver
Applying Overhead Costs
POHR is used to apply manufacturing overhead costs to production jobs
Quantity of cost driver required by a particular job is multiplied by the
predetermined rate to determine the amount of overhead cost applied to
the job
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