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Actual Product Costing

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

2 Methods of Costing Products
Actual Costing Normal Costing Standard Costing Direct Materials Actual Budgeted Direct Labor Manufacturing Overhead Budgeted* 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

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

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

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

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

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

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 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

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
Multiply each employee’s 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 Incurring Labor Incur Direct Labor Costs
Debit/Increase Work in Process Credit/decrease Cash, increase salaries payable, etc. Incur Indirect Labor Costs

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 Credit/decrease Raw Materials

16 The End

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