Module 17 Product Costing. Product and Period Costs For production companies all costs are either: Product Costs Period Costs All production costs necessary.

Module 17Module 17

Product Product CostingCosting

Product and Period CostsProduct and Period Costs

For production companies all For production companies all costs are either:costs are either:

Product Costs

Product Costs

Period Costs

Period CostsAll production costs

necessary to get products ready to sell

All costs other than product costs

Product Costs and AccountsProduct Costs and Accounts

Direct MaterialsDirect Materials

Costs of primary raw materials that Costs of primary raw materials that are converted into finished goodsare converted into finished goods

ExamplesExamples Iron ore to a steel millIron ore to a steel mill Light fixtures for a house builderLight fixtures for a house builder Food stuffs for a restaurantFood stuffs for a restaurant

A finished good for one company may be the raw material for the next company.

A finished good for one company may be the raw material for the next company.

Conversion CostsConversion Costs Costs of converting raw materials Costs of converting raw materials

into finished goods: direct labor into finished goods: direct labor cost and production overheadcost and production overhead

Actual Overhead and Actual Overhead and Product CostsProduct Costs

Issues with actual overhead for most Issues with actual overhead for most products or services:products or services: Actual production overhead costs are Actual production overhead costs are

unknown until unknown until afterafter the end of the period the end of the period Seasonal costs vary: property taxes, utility Seasonal costs vary: property taxes, utility

billsbills Volume of activity each month/year causes Volume of activity each month/year causes

actual overhead costs per unit to differactual overhead costs per unit to differ Used for large construction projectsUsed for large construction projects

Using Predetermined Using Predetermined Overhead RatesOverhead Rates

Established at beginning of year Established at beginning of year Can use different cost driversCan use different cost drivers

Predicted total direct labor hoursPredicted total direct labor hours Predicted total machine hoursPredicted total machine hours

Calculating the predetermined rate Calculating the predetermined rate using direct labor hours (normalized):using direct labor hours (normalized):

Predicted total manufacturing overhead cost for the year

Predicted total direct labor hours for the year

ExampleExample

Predicted 2013 activity level of 400,000 Predicted 2013 activity level of 400,000 direct labor hours with manufacturing direct labor hours with manufacturing overhead totaling $5,600,000.overhead totaling $5,600,000.

Predicted total manufacturing overhead cost for the year

Predicted total direct labor hours for the year

Predetermined overhead rate =

$5,600,000400,000 direct labor hours

=$14 per direct labor hour=

Applying Overhead Applying Overhead ExampleExample

If production uses 22,000 direct labor hours If production uses 22,000 direct labor hours in January, how much is applied overhead?in January, how much is applied overhead?

= 22,000 × $14 per direct labor hour = $308,000

Job #167 required $80 in materials and $100 in direct labor (10 hours):

Direct Materials $ 80

Direct labor 100

Production overhead (10 x $14) 140

Total job cost $320

The Production OrderThe Production Order

Specifies details for a unique Specifies details for a unique production jobproduction job Quantity to be produced Quantity to be produced Materials requirementsMaterials requirements

Based on bill of materialsBased on bill of materials Production operations and other Production operations and other

activitiesactivities Based on operations listBased on operations list

The Job Cost SheetThe Job Cost Sheet

Serves as the record for recording Serves as the record for recording the actual progress on the job the actual progress on the job

Basis for Work-in-Process & Finished Basis for Work-in-Process & Finished goodsgoods

All production costs are includedAll production costs are included Direct materialsDirect materials Direct laborDirect labor Manufacturing overheadManufacturing overhead

Job-Cost Sheet

Job No.___________________ Start Date __________________

Product No_________ Description_________________ Quantity_____

Materials Cost

Requisition TotalDate Department Number Description Cost

Basic Production Cost Flows

Over and Under Applied Overhead

Balance in Production overhead at the end of year: Exists because the amount of overhead

applied is almost never the same amount as the overhead incurred Actual overhead > Applied OH, then

underapplied Actual overhead < Applied OH, then

overapplied Transfer to Cost of goods sold as an

adjustment Underapplied will increase the COGS

because it is too little overhead was applied.

Overapplied will decrease the COGS because too much overhead was applied.