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