Product Costing Systems Product Costing Systems
Jan 15, 2016
Product Costing SystemsProduct Costing Systems
JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE FINANCIAL ACCOUNTING OF ICMAP STAGE
1,3,4 ICAP MODULE B, B.COM, BBA, MBA & 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.
JOIN KHALID AZIZJOIN KHALID AZIZ
FRESH CLASSESFRESH CLASSESICMAP STAGE 3ICMAP STAGE 3
COST ACCOUNTING COST ACCOUNTING PERFORMANCE PERFORMANCE APPRAISALAPPRAISAL
2222ndnd FEBRUARY 2010 FEBRUARY 2010INDIVIDUAL & GROUPSINDIVIDUAL & GROUPS
JOIN KHALID AZIZJOIN KHALID AZIZ
FRESH CLASSESFRESH CLASSESICMAP STAGE 3ICMAP STAGE 3
FINANCIAL FINANCIAL ACCOUNTINGACCOUNTING
2222ndnd FEBRUARY 2010 FEBRUARY 2010INDIVIDUAL & GROUPSINDIVIDUAL & GROUPS
JOIN KHALID AZIZJOIN KHALID AZIZ
FRESH CLASSESFRESH CLASSESICMAP STAGE 2ICMAP STAGE 2
COST ACCOUNTINGCOST ACCOUNTING2222ndnd FEBRUARY 2010 FEBRUARY 2010INDIVIDUAL & GROUPSINDIVIDUAL & GROUPS
The two most common systems of product The two most common systems of product costing are:costing are:
Job-order costing andJob-order costing and
Process costingProcess costing
Job-Order CostingJob-Order Costing
Job-order costing Job-order costing (or simply(or simply job job costingcosting) allocates costs to products that ) allocates costs to products that are readily identified by individual units or are readily identified by individual units or batches, each of which requires varying batches, each of which requires varying degrees of attention and skill.degrees of attention and skill.
Process CostingProcess Costing
Process costing Process costing allocates costs to allocates costs to products by averaging costs over large products by averaging costs over large numbers of nearly identical products. numbers of nearly identical products.
Job-Order-Costing SystemJob-Order-Costing System
The basic records maintained in a job-The basic records maintained in a job-costing system include:costing system include:
Job-cost record,Job-cost record,
Materials requisitions, andMaterials requisitions, and
Labor time tickets.Labor time tickets.
Job-Cost RecordJob-Cost Record
The centerpiece of a job-costing The centerpiece of a job-costing system is the system is the job-cost record job-cost record (also (also called a called a job-cost sheet job-cost sheet or or job orderjob order).).
All costs for a particular product, All costs for a particular product, service, or batch of products are service, or batch of products are recorded on the job-cost record.recorded on the job-cost record.
Materials RequisitionsMaterials Requisitions
Materials Materials requisitions requisitions are are records of materials records of materials used in particular jobs used in particular jobs and are summarized and are summarized in the job-cost record.in the job-cost record.
LaboLabouur Time Ticketsr Time Tickets
LaboLabouur time tickets r time tickets (or (or time cardstime cards) record ) record the time a particular the time a particular direct labodirect labouurer spends rer spends on each job and are on each job and are summarized in the job-summarized in the job-cost record.cost record.
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System
Transaction 1:Transaction 1:
Direct-Materials InventoryDirect-Materials Inventory 1,900,0001,900,000
Accounts PayableAccounts Payable 1,900,000 1,900,000
To record purchase of materials toTo record purchase of materials to
be used directly in the manufacturingbe used directly in the manufacturing
process.process.
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System Transaction 2:Transaction 2:
WIP InventoryWIP Inventory 1,890,0001,890,000Direct-Materials InventoryDirect-Materials Inventory
1,890,000 1,890,000
To record materials requisitionedTo record materials requisitionedinto the manufacturing process.into the manufacturing process.
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System
Transaction 3:Transaction 3:
WIP InventoryWIP Inventory 390,000 390,000
Accrued PayrollAccrued Payroll 390,000 390,000
To record direct-labor costTo record direct-labor cost
incurred in the manufacturingincurred in the manufacturing
process.process.
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System
Transaction 4a:Transaction 4a:
Factory Depart. Overhead ControlFactory Depart. Overhead Control 392,000 392,000
Cash, Accounts Payable, andCash, Accounts Payable, and
various other balance sheetvarious other balance sheet
accountsaccounts 392,000392,000
To record factory overhead incurred.To record factory overhead incurred.
(Accounting for factory overhead will be covered (Accounting for factory overhead will be covered
later in greater detail.)later in greater detail.)
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System Transaction 4b:Transaction 4b:
WIP InventoryWIP Inventory 375,000 375,000Factory Depart. Overhead ControlFactory Depart. Overhead Control
375,000375,000
To record factory overhead applied,To record factory overhead applied,Rs95,000 + Rs280,000 = Rs375,000.Rs95,000 + Rs280,000 = Rs375,000.
(Accounting for factory overhead will be covered (Accounting for factory overhead will be covered later in greater detail.)later in greater detail.)
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System
Transaction 5:Transaction 5:
Finished Goods InventoryFinished Goods Inventory 2,500,0002,500,000
WIP InventoryWIP Inventory 2,500,0002,500,000
To transfer cost of goods completedTo transfer cost of goods completed
from work-in-process inventory to from work-in-process inventory to
finished goods inventory.finished goods inventory.
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System
Transaction 6a:Transaction 6a:
Accounts ReceivableAccounts Receivable 4,000,0004,000,000
SalesSales 4,000,000 4,000,000
To record sales of merchandiseTo record sales of merchandise
on account.on account.
Typical Journal Entries Typical Journal Entries for a Job-Costing Systemfor a Job-Costing System
Transaction 6b:Transaction 6b:
Cost of Goods SoldCost of Goods Sold 2,480,0002,480,000
Finished Goods InventoryFinished Goods Inventory 2,480,000 2,480,000
To record (transfer) the cost of theTo record (transfer) the cost of the
merchandise sold from finished goodsmerchandise sold from finished goods
inventory to cost of goods sold (expense).inventory to cost of goods sold (expense).
How Factory Overhead is How Factory Overhead is Applied to ProductsApplied to Products
Managers need to know Managers need to know product costs in order to product costs in order to make ongoing decisions make ongoing decisions such as which products to such as which products to emphasize or de-emphasize or de-emphasize and the pricing emphasize and the pricing of products.of products.
How Factory Overhead is How Factory Overhead is Applied to ProductsApplied to Products
Ideally, all costs, including overhead, are Ideally, all costs, including overhead, are known when these decisions must be made.known when these decisions must be made.
Unfortunately, actual overhead costs are not Unfortunately, actual overhead costs are not available when managers need them. For this available when managers need them. For this reason, budgeted overhead rates are used to reason, budgeted overhead rates are used to apply overhead to jobs as they are completed.apply overhead to jobs as they are completed.
Budgeted OverheadBudgeted OverheadApplication RatesApplication Rates
The following steps summarize how to The following steps summarize how to account for factory overhead:account for factory overhead:1. 1. Select one or more cost drivers to serve as a Select one or more cost drivers to serve as a base for applying overhead costs.base for applying overhead costs.
2. 2. Prepare a factory-overhead budget for the Prepare a factory-overhead budget for the planning period, ordinarily a year. The two key planning period, ordinarily a year. The two key items are (1) budgeted overhead and (2) budgeted items are (1) budgeted overhead and (2) budgeted volume of the cost driver.volume of the cost driver.
Budgeted OverheadBudgeted OverheadApplication RatesApplication Rates
3. 3. Compute the Compute the budgeted factory-overhead budgeted factory-overhead rate(s) rate(s) by dividing the budgeted total overhead for by dividing the budgeted total overhead for each cost pool by the budgeted cost-driver level.each cost pool by the budgeted cost-driver level.
4. 4. Obtain actual cost-driver data (such as Obtain actual cost-driver data (such as machine-hours) as jobs are produced.machine-hours) as jobs are produced.
5. 5. Apply the budgeted overhead to the jobs by Apply the budgeted overhead to the jobs by multiplying the budgeted rate(s) times the actual multiplying the budgeted rate(s) times the actual cost-driver data.cost-driver data.
Budgeted OverheadBudgeted OverheadApplication RatesApplication Rates
6. 6. At the end of the year, account for any At the end of the year, account for any differences between the amount of overhead differences between the amount of overhead actually incurred and overhead applied to actually incurred and overhead applied to products.products.
Compute BudgetedCompute BudgetedFactory-Overhead RateFactory-Overhead Rate
A budgeted overhead rate is computed as A budgeted overhead rate is computed as follows:follows:
budgeted overhead application ratebudgeted overhead application rate
==
total budgeted factory overheadtotal budgeted factory overhead
total budgeted amount of cost drivertotal budgeted amount of cost driver
Choice of Cost DriversChoice of Cost Drivers
No one cost driver is right for all No one cost driver is right for all situations.situations.
The accountant’s goal is to find the driver The accountant’s goal is to find the driver that best links cause and effect.that best links cause and effect.
Choice of Cost DriversChoice of Cost Drivers
Look for the activity that causes the most Look for the activity that causes the most overhead cost and then keep track of that overhead cost and then keep track of that activity.activity.
For example, if use of machines causes For example, if use of machines causes the most overhead with depreciation and the most overhead with depreciation and repairs, then keep track of machine-hours repairs, then keep track of machine-hours used for each job.used for each job.
Normalized Overhead RatesNormalized Overhead Rates
A normalized overhead rate is when an A normalized overhead rate is when an annual average overhead rate is used annual average overhead rate is used consistently throughout the year for product consistently throughout the year for product costing, without altering it from day to day costing, without altering it from day to day and from month to month. The resultant and from month to month. The resultant “normal” product costs include an average or “normal” product costs include an average or normalized chunk of overhead.normalized chunk of overhead.
Normalized Overhead RatesNormalized Overhead Rates
During the year and at year end, the During the year and at year end, the actual overhead amount incurred will actual overhead amount incurred will rarely equal the amount applied.rarely equal the amount applied.
The variance between incurred and The variance between incurred and applied cost is due to many factors such applied cost is due to many factors such as:as:
Normalized Overhead RatesNormalized Overhead Rates
A different level of volume than the level A different level of volume than the level used as a denominator in calculating the used as a denominator in calculating the budgeted overhead rate,budgeted overhead rate,
Poor forecasting,Poor forecasting, Inefficient use of overhead items, Inefficient use of overhead items, Price changes in individual items,Price changes in individual items, Erratic behavior of individual overhead items, Erratic behavior of individual overhead items,
andand Calendar variations.Calendar variations.
Normalized Overhead RatesNormalized Overhead Rates
Thus, an annual rate is budgeted and Thus, an annual rate is budgeted and used regardless of the month-to-month used regardless of the month-to-month peculiarities of specific overhead costs.peculiarities of specific overhead costs.
Because overhead cannot be traced to Because overhead cannot be traced to physical products, overhead is applied on physical products, overhead is applied on an average or normalized basis to get an average or normalized basis to get representative or normal inventory representative or normal inventory valuations.valuations.
Normal Costing SystemNormal Costing System
Hence, we shall label the system a Hence, we shall label the system a normal costing systemnormal costing system: The cost : The cost system in which overhead is applied on an system in which overhead is applied on an average or normalized basis, in order to average or normalized basis, in order to get representative or normal inventory get representative or normal inventory valuations.valuations.
Overapplied OverheadOverapplied Overhead
When the amount of overhead applied to When the amount of overhead applied to products exceeds the amount of actual products exceeds the amount of actual overhead incurred by departments, the overhead incurred by departments, the difference is called difference is called overapplied overapplied overheadoverhead..
Underapplied OverheadUnderapplied Overhead
When the amount of overhead applied to When the amount of overhead applied to products is less than the amount of actual products is less than the amount of actual overhead incurred by departments, the overhead incurred by departments, the difference is called difference is called underapplied underapplied overheadoverhead..
Disposition of Underapplied or Disposition of Underapplied or Overapplied OverheadOverapplied Overhead
At year end, the difference between At year end, the difference between actual overhead incurred and overhead actual overhead incurred and overhead applied is disposed of through either:applied is disposed of through either:
a write-off ora write-off or
proration.proration.
Disposition of Underapplied or Disposition of Underapplied or Overapplied OverheadOverapplied Overhead
Illustration using transactions Illustration using transactions journalized earlier:journalized earlier:
TransactionTransaction 4a. Factory overhead incurred4a. Factory overhead incurred Rs392,000 Rs392,000 4b. Factory overhead applied4b. Factory overhead applied 375,000 375,000
Underapplied factory overheadUnderapplied factory overhead Rs 17,000 Rs 17,000
Immediate Write-OffImmediate Write-Off
The theory underlying direct write-off is The theory underlying direct write-off is that most of the goods worked on have that most of the goods worked on have been sold, and a more elaborate method been sold, and a more elaborate method of disposition is not worth the extra of disposition is not worth the extra trouble.trouble.
The immediate write-off eliminates the The immediate write-off eliminates the Rs17,000 difference with a simple journal Rs17,000 difference with a simple journal entry as follows:entry as follows:
Immediate Write-OffImmediate Write-Off
Transaction 7:Transaction 7:
Cost of Goods SoldCost of Goods Sold 17,000 17,000
Factory Depart. Overhead ControlFactory Depart. Overhead Control 17,00017,000
To close ending underapplied overheadTo close ending underapplied overhead
directly to Cost of Goods Sold.directly to Cost of Goods Sold.
Proration Among InventoriesProration Among Inventories
To To prorateprorate underapplied overhead or underapplied overhead or overapplied overhead means to assign it overapplied overhead means to assign it in proportion to the sizes of the ending in proportion to the sizes of the ending account balances in Work-in-Process account balances in Work-in-Process Inventory, Finished Goods Inventory, and Inventory, Finished Goods Inventory, and Cost of Goods Sold.Cost of Goods Sold.
Proration Among InventoriesProration Among Inventories
Underapplied overhead Underapplied overhead is then added to the is then added to the ending balances and ending balances and overapplied overhead is overapplied overhead is subtracted from the subtracted from the ending balances.ending balances.
Proration Among InventoriesProration Among Inventories
Theoretically, if the objective is to obtain Theoretically, if the objective is to obtain as accurate a cost allocation as possible, as accurate a cost allocation as possible, all the overhead costs of the individual all the overhead costs of the individual jobs worked on should be recomputed, jobs worked on should be recomputed, using the actual, rather than the budgeted, using the actual, rather than the budgeted, rates.rates.
Proration Among InventoriesProration Among Inventories
This approach is rarely feasible, so a This approach is rarely feasible, so a practical attack is to prorate on the basis practical attack is to prorate on the basis of the ending balances in each of three of the ending balances in each of three accounts, WIP, Finished Goods, and Cost accounts, WIP, Finished Goods, and Cost of Goods Sold.of Goods Sold.
In our illustration, the proration is In our illustration, the proration is calculated as follows:calculated as follows:
Proration Among InventoriesProration Among Inventories
UnadjustedUnadjusted
BalanceBalance Proration of Proration of
End of 19X2End of 19X2 Underapplied OverheadUnderapplied Overhead
WIPWIP Rs 155,000 Rs 155,000 155/2,667 x Rs17,000 155/2,667 x Rs17,000
Finished GoodsFinished Goods 32,000 32,000 32/2,667 x Rs17,000 32/2,667 x Rs17,000
Cost of Goods SoldCost of Goods Sold 2,480,0002,480,000 2,480/2,667 x Rs17,0002,480/2,667 x Rs17,000
Rs2,667,000Rs2,667,000
Proration Among InventoriesProration Among Inventories
Proration ofProration of Adjusted AdjustedUnderappliedUnderapplied Balance Balance OverheadOverhead End of 19X2End of 19X2
WIPWIP = Rs 988= Rs 988 Rs 155,988Rs 155,988 Finished GoodsFinished Goods = 204= 204 32,204 32,204 Cost of Goods SoldCost of Goods Sold = 15,808= 15,808 2,495,808 2,495,808
Rs17,000Rs17,000 Rs2,684,000Rs2,684,000
Proration Among InventoriesProration Among Inventories
The journal entry for the proration follows:The journal entry for the proration follows:
WIPWIP 988 988
Finished GoodsFinished Goods 204 204
Cost of Goods SoldCost of Goods Sold 15,808 15,808
Factory Depart. Overhead ControlFactory Depart. Overhead Control 17,000 17,000
To prorate ending underapplied overheadTo prorate ending underapplied overhead
among three accounts.among three accounts.
Activity-Based Costing in aActivity-Based Costing in aJob Order EnvironmentJob Order Environment
As is the case with any business, As is the case with any business, understanding profitability means understanding profitability means understanding the cost structure of the entire understanding the cost structure of the entire business.business.
One of the key advantages of an ABC One of the key advantages of an ABC system is its focus on understanding how system is its focus on understanding how work (activity) is related to the consumption work (activity) is related to the consumption of resources (costs).of resources (costs).
Activity-Based Costing in aActivity-Based Costing in aJob Order EnvironmentJob Order Environment
In developing an ABC system, begin by In developing an ABC system, begin by focusing on the most critical (core) focusing on the most critical (core) processes across the value chain.processes across the value chain.
After the initial system is in place, the After the initial system is in place, the remaining phases of the value chain can remaining phases of the value chain can be added.be added.
Activity-Based Costing in aActivity-Based Costing in aJob-Order EnvironmentJob-Order Environment
To understand product-line profitability, To understand product-line profitability, the key activities must be identified.the key activities must be identified.
Once the key activities have been Once the key activities have been identified, appropriate cost drivers are identified, appropriate cost drivers are used to allocate activity costs to the used to allocate activity costs to the assembly lines that produced the product assembly lines that produced the product lines.lines.
Product Costing in Service and Product Costing in Service and Nonprofit OrganizationsNonprofit Organizations
The job-costing approach is used in The job-costing approach is used in nonmanufacturing situations too.nonmanufacturing situations too.
The focus shifts from the costs of The focus shifts from the costs of products to the costs of services.products to the costs of services.
Product Costing inProduct Costing inNonprofit OrganizationsNonprofit Organizations
In nonprofit organizations, the “product” is In nonprofit organizations, the “product” is usually called a “program” or a “class of usually called a “program” or a “class of service.”service.”
A “program” is an identifiable group of A “program” is an identifiable group of activities that frequently produces outputs activities that frequently produces outputs in the form of services rather than goods.in the form of services rather than goods.
Product Costing inProduct Costing inService OrganizationsService Organizations
In service industries each customer order In service industries each customer order is a different job with a special account or is a different job with a special account or order number.order number.
Sometimes only costs are traced directly Sometimes only costs are traced directly to the job, sometimes only revenue is to the job, sometimes only revenue is traced, and sometimes both.traced, and sometimes both.
Job-Order-Costing Systems Job-Order-Costing Systems Track Costs to ProductsTrack Costs to Products
The basic records used to accumulate The basic records used to accumulate and track costs in a job-order-costing and track costs in a job-order-costing system are:system are:
materials requisitionsmaterials requisitions, , labor time ticketslabor time tickets, and , and job-cost recordsjob-cost records..
Job-Order-Costing Job-Order-Costing Systems Track Costs to Systems Track Costs to
ProductsProducts
The job-cost record The job-cost record summarizes summarizes information on the information on the direct materials and direct materials and direct labor used as direct labor used as well as the factory well as the factory overhead applied.overhead applied.
Job-Order-Costing Job-Order-Costing Systems Track Costs to Systems Track Costs to
ProductsProducts Journal entries that Journal entries that
record the basic record the basic transactions center transactions center around the three around the three inventory accounts inventory accounts with particular focus on with particular focus on the WIP Inventory the WIP Inventory account.account.
PROCESS EXAMPLE
PROCESS EXAMPLE
JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE FINANCIAL ACCOUNTING OF ICMAP STAGE
1,3,4 ICAP MODULE B, B.COM, BBA, MBA & 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.