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Prepared by Diane Tanner University of North Florida Chapter 30 1 Actual Product Costing.

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Presentation on theme: "Prepared by Diane Tanner University of North Florida Chapter 30 1 Actual Product Costing."— Presentation transcript:

1 Prepared by Diane Tanner University of North Florida Chapter 30 1 Actual Product Costing

2 Methods of Costing Products Three methods Actual costing Normal costing Standard costing How they differ Whether actual or budgeted costs are used to determine the cost of products or services 2

3 3 How Costs Get Assigned to Products Direct materials and direct labor Traced to (specifically identified with) a product or service provided Easy to determine which product/service to which the cost belongs because they are direct Manufacturing overhead Consists of indirect costs Indirect costs cannot be easily identified with one specific product or service For a single product, assigned to that product by default

4 4 Inventory Accounts for Manufacturers Three inventory accounts Raw materials Materials to be used in production Work in process Direct materials used in production Direct labor costs incurred to produce Manufacturing overhead costs identified as part of the cost of production Finished goods Goods completed and ready for sale

5 Production Departments 5 Materials Storeroom Factory/Production Area Ready for Sale Costs in departments correlate to inventory accounts. Raw Materials Raw Materials Work in Process Work in Process Finished Goods Finished Goods

6 6 Acquiring Raw Materials Materials Storeroom Factory/Production Area The Purchasing Manager fills out a purchase order to order materials from a supplier 1 2 When materials are received, the Materials Storeroom Clerk records and stocks the materials in the storeroom. The Materials Storeroom Clerk sends the receiving report to Accounting for payment. 3

7 7 Transactions to Acquire Materials Purchase Materials for Cash Debit/increase Raw Materials Credit/decrease Cash Purchase Materials on Account Debit/increase Raw Materials Credit/increase Accounts Payable Pay for materials previously purchased on account Debit/decrease Accounts Payable Credit/decrease Cash Credit/decrease Inventory for cash discount, if any

8 Materials Requisition 8 Materials Storeroom Factory/Production Area The production supervisor fills out a materials requisition form. Will E. Delite 1 The materials storeroom clerk delivers the requested materials to the production area. 2 Authorizes the use of materials on a job Authorizes the use of materials on a job The processed form is sent to Accounting. 3

9 9 Materials Requisition Form Why do we bother with a materials requisition form every time production needs materials for a job? Tracing material costs to particular products/ services To mitigate theft and waste, and prevent overstocking of unneeded inventory which can tie up cash. Internal control of assets To determine the cost of products to set selling prices and make other management decisions

10 10 Actual Costing Used when there is only one product or one services Cost of inventory is Actual direct materials Actual direct labor Actual manufacturing overhead All inventory costs are added (debited) directly to work in process

11 11 Using Materials (Actual Costing) Requisition of Direct Materials to Production Debit/Increase Work in Process Credit/decrease Raw Materials Requisition Indirect Materials to Production Debit/increase Work in Process Credit/decrease Raw Materials

12 12 Time Tickets Materials Storeroom Factory/Production Area Employees fill out time tickets to record the time spent on each product/service

13 Measuring and Tracking Direct Labor 13 Multiply each employees wage rate by the number of hours that each employee works on each product Gross wages Add fringe benefits Overtime premium (the extra half time paid) when employees work over 40 hours If the result of production problems or idle time, treat as overhead If the result of accepting a rush order, treat as direct labor

14 14 Incurring Labor Incur Direct Labor Costs Debit/Increase Work in Process Credit/decrease Cash, increase salaries payable, etc. Incur Indirect Labor Costs Debit/Increase Work in Process Credit/decrease Cash, increase salaries payable, etc.

15 15 Manufacturing Overhead Includes indirect materials, indirect labor, and factory (production facility) related costs Incur Indirect Labor or Factory Related Costs Debit/Increase Work in Process Credit/decrease Cash Incur Indirect Material Costs Debit/Increase Work in Process Credit/decrease Raw Materials

16 16 The End


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