McGraw-Hill/Irwin 3-1 Product Costing and Cost Accumulation in a Batch Production Environment 3 Chapter Three

McGraw-Hill/Irwin 3-2 Product and Service Costing Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. Managerial Accounting and Cost Management Product costs are used for planning, control, directing, and management decision making.

McGraw-Hill/Irwin 3-3 Accumulating Costs in a Job-Order Costing System THE JOB Direct materials Direct labor Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate

McGraw-Hill/Irwin 3-4 Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. Manufacturing Overhead Costs POHR = Budgeted manufacturing overhead cost Budgeted amount of cost driver (or activity base) Overhead applied = POHR × 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

McGraw-Hill/Irwin 3-5 Job-Order Costing Document Flow Summary Materials Ledger Cards Materials Requisition Direct material s indirect material The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Indirect materials Job Cost Sheets Job-Cost Records Manufacturing Overhead Account

McGraw-Hill/Irwin 3-6 indirect labor Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Job-Cost Records Direct Labor Indirect Labor Employee Time Ticket Job-Order Costing Document Flow Summary

McGraw-Hill/Irwin 3-7 Job-Order Costing Document Flow Summary Manufacturing Overhead Account Employee Time Ticket Job-Cost Records Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Overhead Applied with POHR

McGraw-Hill/Irwin 3-8 The Concept of Activity-Based Costing (ABC) Level of Complexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing

McGraw-Hill/Irwin 3-9 Activity-Based Costing In the ABC method, we recognize that many activities within a department drive overhead costs. In the ABC method, we recognize that many activities within a department drive overhead costs.

McGraw-Hill/Irwin 3-10 Assigning Costs to Activity Centers Assign costs to the activity centers where they are accumulated while waiting to be applied to products. Assign costs to the activity centers where they are accumulated while waiting to be applied to products.

McGraw-Hill/Irwin 3-11 Selecting Cost Drivers Assign costs from the activity center to the product using appropriate cost drivers. Assign costs from the activity center to the product using appropriate cost drivers. When selecting a cost driver consider: ÊThe ease of obtaining data. ËThe degree to which the cost driver measures actual consumption by products.

McGraw-Hill/Irwin 3-12 End of Chapter 3