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8/13/2019 Ronald Hilton Chapter 3
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Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Product Costing and Cost Accumulation in a BatchProduction Environment
Chapter 3
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Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
LearningObjective
1
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3-3
Product and Service Costing
Financial Accounting
Product costs areused to valueinventory and tocompute cost of
goods sold.
Managerial Accounting and
Cost Management
Product costs areused for planning,
control, directing, andmanagement decision
making.
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LearningObjective
2
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3-5
Direct material cost Product cost transferredDirect labor costManufacturing overhead when product is finished
Expense closed into
Income Summary at endof accounting period
Work-in-Process Inventory Finished Goods Inventory
Cost of Goods Sold Income Summary
Flow of Costs in Manufacturing Firm
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LearningObjective
3
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Used for production of large, unique, high-cost items. Built to order rather than mass produced.
Many costs can be directly traced to each job.
TWO TYPES:
Job-shop operations
Products manufactured in very low volumes or oneat a time.
Batch-production operations
Multiple products in batches of relatively smallquantity.
ProcessCosting
Job-OrderCosting
Types of Product-Costing Systems
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Job Number F16 Description
Date Started Nov. 1, 20x1 Date CompletedNumber of Units Completed 80
Date Quantity Cost11/1 7,200 sq ft $18,000
Date Quantity Cost
Variousdates 600 $12,000
Date Quantity Cost11/30 600 $18,000
Date Cost Balance
JOB-COST RECORD
Direct MaterialRequisition Number Unit Price
$2.50
Direct Labor Requisition Number Unit Price
Direct Labor Hours $30.00
80 deluxe alum. fishing boats
Nov. 22, 20x1
Various time cards $20
Manufacturing OverheadRequisition Number Unit Price
803
Cost ItemTotal direct material
AmountCost Summary
$18,000Total direct labor Total manufacturing overhead
12,000 18,000
Total costUnit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Job-Order Cost Accounting
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LearningObjective
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Overhead is applied to jobs using a predeterminedoverhead rate (POHR) based on estimates made at
the beginning of the accounting period.
POHR = Budgeted manufacturing overhead costBudgeted amount of cost driver (or activity base)
Overhead applied = POHR Actual activity
Based on estimates , anddetermined before the
period begins
Actual amount of the allocationbase, such as direct labor hours,
incurred during the period
1
2
Manufacturing Overhead Costs
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LearningObjective
5
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Raw Materials Material
Purchases DirectMaterial
DirectMaterial
Mfg. Overhead IndirectMaterial
IndirectMaterial
Work in Process(Job-Cost Record)
Job-Order System Cost Flows
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DirectLabor
Mfg. Overhead IndirectMaterial
DirectMaterial
IndirectLabor
DirectLabor
IndirectLabor
Wages PayableWork in Process
(Job-Cost Record)
Job-Order System Cost Flows
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DirectLabor
Mfg. Overhead IndirectMaterial
DirectMaterial
OverheadApplied toWork inProcess
If actual and applied
manufacturing overhead arenot equal, a year-end
adjustment is required. Wewill look at the procedure to
accomplish this later.
IndirectLabor
DirectLabor
Overhead
Applied
IndirectLabor
Wages PayableWork in Process
(Job-Cost Record)
Job-Order System Cost Flows
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Cost ofGoods
Mfd.
Finished Goods
Cost ofGoods
Sold
Cost ofGoods
Mfd.
Cost of Goods Sold
Cost ofGoods
Sold
DirectMaterial DirectLabor
Overhead
Applied
Work in Process(Job-Cost Record)
Job-Order System Cost Flows
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Alternative 1 Alternative 2If Manufacturing Close to CostOverhead is . . . Allocation of Goods Sold
UNDERAPPLIED INCREASE INCREASEWork in Process Cost of Goods Sold
(Applied OH is less Finished Goods
than actual OH) Cost of Goods SoldOVERAPPLIED DECREASE DECREASE
Work in Process Cost of Goods Sold(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
Overapplied and Underapplied
Manufacturing Overhead - Summary
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LearningObjective
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Schedule of Cost of Goods Manufactured
Direct material:Raw material inventory, beginning $xxx
Add: Raw material purchases xxxRaw material available for use $xxxDeduct: Raw material, ending xxxRaw material used $xxx
Direct labor xxx
Manufacturing overheadIndirect material $xxxIndirect labor xxxOther actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overheador Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx
Total manufacturing costs $xxx Add: Work-in-process inventory, beginning xxxSubtotal $xxx
Deduct: Work-in-process inventory, ending xxxCost of goods manufactured $xxx
Schedule of Cost of Goods Manufactured
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Schedule of Cost of Goods Sold
Finished goods inventory, beginning $xxx Add: Cost of goods manufactured* xxxCost of goods available for sale $xxxDeduct: Finished goods inventory, ending xxxCost of goods sold $xxx
Add: Underapplied overheador Deduct: Overapplied overhead xxxCost of goods sold (adjusted) $xxx
* From Cost of Goods Manufactured Schedule
Schedule of Cost of Goods Sold
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Actual direct materialand direct labor
combined withactual overhead.
Actual direct materialand direct labor
combined withpredetermined overhead.
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
Actual and Normal Costing
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LearningObjective
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Departmental Overhead Rates
Department1
Department2
Department3
Products
Cost pools
DirectLaborHours
MachineHours
RawMaterials
Cost
Stage One:Costs assignedto pools
Stage Two:
Costs appliedto products
Departmental Allocation Bases
IndirectMaterials
OtherOverhead
IndirectLabor
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LearningObjective
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CAN BE USED IN NONMANUFACTURINGORGANIZATIONS
THE JOB Cases Programs Contracts Missions
CHANGING TECHNOLOGY IN MANUFACTURUNGOPERATIONS
Computerized data interchange has eliminated much ofthe paperwork associated with job-order cost systems.
Scanning devices have simplified data entry to record material andlabor use.
Job-Order Costing
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End of Chapter 3