Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith Chapter 4 Product costing systems

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 2 Product costing systems  Product costing systems Ùaccumulate product-related costs and use procedures to assign them to the final products ÙIn some businesses upstream and downstream costs are regarded as product-related  Product costs are the input to the product costing system

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 3

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 4 Different product costs for different purposes  Product costs can include upstream, manufacturing and downstream costs  Inclusion of various costs depends on the time frame and type of decision to be made  Managers’ needs for product cost information will vary depending on the type of decision to be made and managers’ personal preferences continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 5 Different product costs for different purposes  Cost for inventory valuation for eternal reporting must include only manufacturing costs  For long-term decision about products a wider definition may be used  Product costs are used to value inventory, for short-term and strategic decision making, for planning and controlling costs and for cost reimbursement continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 6

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 7 Different product costs for different purposes  Current or future product costs? ÙCurrent product costs are relevant for inventory valuation ÙFuture product costs may be relevant for input into some decisions  Frequency of cost information? ÙInfrequently for long-term decisions, or even short-term decisions ÙMore regularly for inventory valuation

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 8 Designing product costing systems  Identify the managers’ needs  All product cost information may not come from a single product costing system  Cost and benefits of various alternative systems must be assessed

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 9 Flow of costs in manufacturing businesses  When used for inventory valuation, manufacturing costs only are assigned to products, in line with Australian accounting standards  Manufacturing costs consist of ÙDirect material ÙDirect labour ÙManufacturing overhead continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 10 Flow of costs in manufacturing businesses  Several manufacturing ledger accounts ÙRaw materials inventory, ÙWork in process inventory, ÙFinished goods inventory, ÙCost of goods sold expense, and ÙProfit and loss account

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 11

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 12 Allocating overhead costs to products  To estimate the cost of a product we need to identify the cost of resources used to produce the product  Some resources are consumed directly, and are traced directly to each product  Overhead costs are essential to production, but have no observable relationships to the product  need to be allocated continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 13 Allocating overhead costs to products  Identify the overhead cost driver  Calculate a predetermined (or budgeted) overhead rate per unit of cost driver  Apply manufacturing overhead costs to products at the budgeted (or predetermined) overhead rate, multiplied by the quantity of cost driver consumed by the product

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 14 Accounting for manufacturing overhead  Actual manufacturing overhead ÙManufacturing overhead costs incurred in production ÙCharged to the manufacturing overhead account  Applied manufacturing overhead ÙEstimate of the overhead resources used to manufacture a product ÙApplied to products using a predetermined overhead rate continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 15

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 16 Accounting for manufacturing overhead  Disposing of underapplied or overapplied overhead at the end of the accounting period… ÙClose the underapplied or overapplied to cost of goods sold, or ÙProrate to cost of goods sold, work in process inventory and finished goods inventory continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 17 Accounting for manufacturing overhead  Most firms close underapplied or overapplied overhead at the end of the year only  Do not close monthly as monthly fluctuations will average out over a year

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 18 Types of product costing systems  Job costing ÙManufacturing costs traced to individual jobs ÙProducts are produced in distinct jobs/batches which are significantly different ÙPrinters, furniture manufacturers, machinery manufacturers ÙMany service firms—lawyers, accountants, consulting engineers continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 19 Types of product costing systems  Process costing ÙProduction costs traced to process/department, and averaged across all units produced ÙMass production or repetitive environment ÙPetrol production, processed food, chemical and plastics manufacturers ÙRepetitive services – routine processing of cheques by banks, handling of license applications by government departments continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 20 Types of product costing systems  Process costing involves … ÙEstimate the cost of production processes, and ÙCalculate the average cost per unit by dividing the cost of the process by the number of units produced ÙThe costs of products that are produced in one department are transferred into the next department  Some product costing systems have features of both job costing and process costing

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 21

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 22 Job costing  Bill of materials: lists all the materials required for a job  Material requisition forms - authorise the movement of raw materials from the warehouse to the production department  Job cost sheet - summarises the costs of direct material, direct labour and manufacturing overhead for a particular job

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 23 Job costing  Purchase of materials Raw material inventoryxxxx Account payablexxxx  Transferring direct material to jobs Work in process inventoryxxxx Raw material inventoryxxxx continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 24 Job costing  Use of indirect material Manufacturing overheadxxxx Manufacturing supplies inventoryxxxx  Charging direct labour to jobs Work in process inventoryxxxx Wages payablexxxx continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 25 Job costing  Accounting for indirect labour Manufacturing overheadxxxx Wages payablexxxx  Accounting for manufacturing expenses Manufacturing overheadxxxx Prepaid rentxxxx Depreciation on equipmentxxxx …etc continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 26 Job costing  Application of manufacturing overhead Work in process inventoryxxxx Manufacturing overheadxxxx  Completion of production job Finished goods inventoryxxxx Work in process inventoryxxxx continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 27 Job costing  Sale of goods Accounts receivablexxxx Sales revenuexxxx Cost of goods soldxxxx Finished goods inventoryxxxx continued

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 28 Job costing  Underapplied and overapplied overhead Manufacturing overheadxxxx Indirect materialxxxx Indirect labourxxxx Depreciation on equipmentxxxx …etc Cost of goods soldxxxx Manufacturing overheadxxxx

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 29 Process costing  The approach taken in process costing depends on ÙThe existence of WIP inventory at the end of the accounting period ÙTheir degree to which products are identical in their consumption of direct material and specific production processes  Simple forms of process costing assume no WIP inventory

Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-Smith 30