Ch. 3: Product Costing and Cost Accumulation in a Batch Production Environment
volume-based cost driver
a cost driver that is closely associated with production volume, such as direct-labor hours or machine hours
two-stage cost allocation
a two-step procedure for assigning overhead costs to products or services produced; in the first stage, all production costs are assigned to the production departments; in the second stage, the costs that have been assigned to each production department are applied to the products or services produced in those departments
product costs
in financial accounting, _ are used to value inventory on the balance sheet and to compute the cost of goods sold on the income statement
product costs
in managerial accounting, _ are needed to help management plan, control, and direct operations. In addition, they are needed to help with management decision making
service departments
subunits in an organization that are not involved directly in producing the organization's output of goods or services
traditional product-costing systems
the accounting department chooses some measure of productive activity to use as the basis for overhead application; in _ , this measure is usually some volume-based cost driver (or activity base), such as direct-labor hours, direct-labor cost, or machine hours; an estimate is made of (1) the amount of manufacturing overhead that will be incurred during a specified period of time and (2) the amount of the cost driver (or activity base) that will be used or incurred during the same time period
cost distribution (cost allocation)
the first step in assigning manufacturing-overhead costs; overhead costs are assigned to all departmental overhead centers
supply chain
the flow of all goods, services, and information into and out of an organization
product-costing system
the process of accumulating the costs of a production process and assigning them to the products that constitute the organization's output
proration
the process of allocating underapplied or overapplied overhead to work-in-process inventory, finished-goods inventory, and cost of goods sold
1. job-shop operations 2. batch-production operations
2 types of job-order costing:
1. process costing 2. job-order costing
2 types of product-costing systems:
1. petrochemical refinery 2. paint manufacturer 3. paper mill
3. typical process cost applications:
overhead costs
_ , which are by definition indirect costs, cannot be traced easily to individual production jobs
manufacturing overhead
_ is a pool of indirect production costs, such as indirect material, indirect labor, utility costs, and depreciation; these costs often bear no obvious relationship to individual jobs or units of product, but they must be incurred for production to take place; therefore, it is necessary to assign _ costs to jobs in order to have a complete picture of product costs
job-order costing
_ is also used in service industry companies and other nonmanufacturing organizations; however, rather than referring to production "jobs," such organizations use terminology that reflects their operations; for example, hospitals may assign costs to "cases," and consulting firms might track "engagement" costs; law firms assign costs to cases, while government agencies typically refer to "programs" or "missions;" the need for cost accumulation exists in these and similar organizations for the same reasons found in manufacturing firms
overhead
_ is applied to jobs using a predetermined overhead rate based on estimates made at the beginning of the accounting period
overhead
_ is applied to the job-cost records using some cost driver or activity base and a predetermined _ rate
work-in-process
_ is increased with a debit for the amount of the raw materials and manufacturing overhead is increased with a debit for the amount of the indirect materials
process costing
_ is used by companies that produce large numbers of identical units
process costing
_ is used by companies that produce large numbers of identical units in a continuous-flow manufacturing process; n addition, some batch-production environments use this when the manufacturing process requires that the product be produced in discrete batches, but batch after batch of identical products are produced
job-order costing
_ is used by companies with job-shop operations or batch-production operations
process-costing system
a _ accumulates all the production costs for a large number of units of output, and then these costs are averaged over all of the units
product-costing system
a _ accumulates the costs incurred in a production process and assigns those costs to the organization's outputs
material requisition
a _ form is used to authorize the use of materials on a job
time record
a _ is a form that records the amount of time an employee spends on each production job
cost accounting department
a copy of the material requisition form goes to the _ ; there it is used as the basis for transferring the cost of the requisitioned material from the raw-material inventory account to the work-in-process inventory account, and for entering the direct-material cost on the job-cost record for the production job in process
overapplied overhead
a credit balance in the manufacturing overhead account that occurs when the amount of overhead cost applied to work in process exceeds the amount of overhead cost actually incurred during a period; this means that the actual overhead had been less than the applied overhead
underapplied overhead
a debit balance in the manufacturing overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to work in process during a period; this means that the predetermined overhead rate was underestimated by just a small amount
schedule of cost of goods sold
a detailed schedule showing the cost of goods sold and the change in finished-goods inventory during an accounting period
schedule of cost of goods manufactured
a detailed schedule showing the manufacturing costs incurred during an accounting period and the change in work-in-process inventory
source document
a document that is used as the basis for an accounting entry; examples include material requisition forms and direct-labor time tickets
time record
a document that records the amount of time an employee spends on each production job
job-cost record
a document that records the costs of direct material, direct labor, and manufacturing overhead for a particular production job or batch; the job-cost record is a subsidiary ledger account for the work-in-process inventory account in the general ledger
material requisition form
a document used by the production department supervisor to request the release of raw materials for production
actual costing
a few companies use _ , a system in which direct material and direct labor are added to work-in-process inventory at their actual amounts, and actual overhead is allocated to work in process using an actual overhead rate computed at the end of each accounting period; note that even though an actual overhead rate is used, the amount of overhead assigned to each production job is still an allocated amount
bill of materials
a list of all the materials needed to manufacture a product or product component
activity base
a measure of an organization's activity that is used as a basis for specifying cost behavior; the _ also is used to compute a predetermined overhead rate; the current trend is to refer to this as a volume-based cost driver
actual costing
a product-costing system in which actual direct-material, direct-labor, and actual manufacturing-overhead costs are added to work-in-process inventory
normal costing
a product-costing system in which actual direct-materials, actual direct-labor, and applied manufacturing-overhead costs are added to work-in-process inventory
job-order costing
a product-costing system in which costs are assigned to batches or job orders of production; used by firms that produce relatively small numbers of dissimilar products
process-costing system
a product-costing system in which production costs are averaged over a large number of product units; used by firms that produce large numbers of nearly identical products
direct-labor
accumulate _ costs by means of a work record, such as a time ticket, for each employee
actual activity
actual amount of the allocation base, such as direct labor hours, incurred during the period
year-end adjustment
actual and applied manufacturing overhead are usually not equal so a _ is required
cost of goods sold (COGS)
an expense of the period in which the sale occurred
plantwide overhead rate
an overhead rate calculated by averaging manufacturing-overhead costs for the entire production facility
departmental overhead rate
an overhead rate calculated for a single production department
departmental overhead centers
any department to which overhead costs are assigned via overhead cost distribution
predetermined overhead
apply manufacturing overhead to jobs using a _ rate based on direct labor hours (DLH)
work-in-process inventory (WIP)
as production takes place, all manufacturing costs are added to the _ account with a debit; as soon as products are completed, their product costs are transferred from _ to finished-goods inventory with a credit to _ and a debit to finished goods
production department
as raw materials are needed for the production process, they are transferred from the warehouse to the _ ; to authorize the release of materials, the _ supervisor completes a material requisition form and presents it to the warehouse supervisor
rate
based on estimates, and determined before the period begins
predetermined rate =
budgeted manufacturing overhead cost / budgeted amount of cost driver (or activity base) =
income summary
cost of goods sold is closed into the _ account at the end of the accounting period, along with all other expenses and revenues of the period
finished goods
during the time period when products are sold, the product cost of the inventory sold is removed from _ and added to cost of goods sold, which is an expense of the period in which the sale occurred; a credit to _ and a debit to cost of goods sold completes this step
trace costs to specific batches of production
firms that produce chemicals, microchips, gasoline, beer, fertilizer, textiles, processed food, and electricity are among those using process costing; in these kinds of firms, there is no need to _ because the products in the different batches are identical
job-order costing
in _ , each distinct batch of production is called a job or job order; the cost-accounting procedures are designed to assign costs to each job; then the total costs assigned to each job are divided by the units of production in the job to obtain an average cost per unit
batch-production (examples: furniture manufacture, printing, agricultural equipment, and pleasure boat production)
in a _ environment, multiple products are produced in batches of relatively small quantity
job-shop (examples: film production, custom home building, and aircraft manufacturing)
in a _ environment, products are manufactured in very low volumes or one at a time
two-stage cost allocation
in the first stage, all manufacturing-overhead costs are assigned to the production departments, such as machining and assembly; in the second stage, all of the manufacturing-overhead costs accumulated in each production department are assigned to the production jobs on which the department has worked; this process is called overhead application; in stage two, each production department has its own predetermined overhead rate; these rates often are based on different cost drivers
direct material direct labor manufacturing overhead
manufacturing costs consist of _ , _ , and _
raw materials
materials purchases are recorded with a debit to the _ account; when materials are placed into production, the _ account is credited
total direct material costs total direct labor costs total manufacturing overhead
once manufacturing overhead has been applied, the cost summary can be completed; _ , _ , and _ costs are added together to determine total costs; these costs are divided by the number of units completed to arrive at the unit cost
manufacturing overhead
overhead must be applied to each job-cost record based on the predetermined overhead rate and the actual activity for that job; the overhead applied is also recorded in the work-in-process account with a debit; the _ account is decreased by the amount of overhead applied with a credit; the actual overhead cost incurred and the amount of applied overhead rarely will match; this is caused by errors in the estimates of overhead and activity used to compute the predetermined overhead rate
product costing
produces data that are needed for a variety of purposes in financial accounting, managerial accounting, and cost management
outside organizations (examples: public utilities, hospitals, and governmental agencies)
product cost information is often required between firms and _
overhead applied =
rate x actual activity =
schedule of cost of goods manufactured
the _ details the costs of direct material, direct labor, and manufacturing overhead applied to work in process during the period and shows the change in work-in-process inventory; it is basically a summary of what went into and out of the work-in-process account
production order
the _ for the job authorizes the start of the production process
material requisition form
the _ identifies the amount of direct material to add to the job-cost records and the amount of indirect materials to add to the manufacturing overhead account
employee time tickets
the _ identity the amount of direct labor to add to the job-cost records and the amount of indirect labor to add to the manufacturing overhead account
shipping summary
the _ is completed when the completed units are shipped to the customer; this summary shows units shipped, units remaining, and the cost of the units remaining in inventory
cost of goods manufactured
the _ is shown in the last line of the schedule; this is the amount transferred from work-in-process inventory to finished-goods inventory during the period
actual manufacturing overhead
the actual costs incurred during an accounting period for manufacturing overhead. Includes actual indirect material, indirect labor, and other manufacturing costs
underapplied overhead
the amount by which the period's actual manufacturing overhead exceeds applied manufacturing overhead
overapplied overhead
the amount by which the period's applied manufacturing overhead exceeds actual manufacturing overhead
individual job-cost
the amount of direct materials for each job is recorded on the _ records
applied manufacturing overhead
the amount of manufacturing-overhead costs added to work-in-process Inventory during an accounting period
time records
the assignment of direct-labor costs to jobs is based on _ filled out by employees
product costing
the assignment of production costs to all output of the organization
throughput time (or cycle time)
the average amount of time required to convert raw materials into finished goods ready to be shipped to customers
job-cost record
the primary document for tracking the costs associated with a given job is the
overhead application
the process of assigning manufacturing-overhead costs to production jobs is called _ ; a predetermined overhead rate is used to apply overhead on the job-cost record
product costing
the process of assigning production costs to an organization's outputs
overhead application
the process of charging manufacturing overhead cost to job cost sheets and to the work in process account
predetermined overhead rate
the rate used to apply manufacturing overhead to work in process inventory, calculated as: estimated manufacturing overhead cost / estimated amount of cost driver (or activity base)
service department cost allocation
the second step in assigning manufacturing-overhead costs; all costs associated with a service department are assigned to the departments that use the services it produces
time record
the source document used in the cost accounting department as the basis for adding direct-labor costs to work-in-process inventory and to the job-cost records for the various jobs in process
overhead application (or absorption)
the third step in assigning manufacturing-overhead costs; all costs associated with each production department are assigned to the product units on which a department has worked
cost of goods manufactured
the total cost of direct material, direct labor, and manufacturing overhead transferred from work-in-process inventory to finished-goods inventory during an accounting period
schedule of cost of goods sold
this schedule shows the cost of goods sold for the period and details the changes in finished-goods inventory during the month; the adjusted cost of goods sold appears as an expense on the income statement
record the total cost and average unit cost for the job keep track of units shipped to customers
three major sections on the job-cost record are used to accumulate the costs of direct material, direct labor, and manufacturing overhead assigned to the job; the other two sections are used to record the _ , and to keep track of _
two-stage cost allocation
when a company uses departmental overhead rates, the assignment of manufacturing overhead costs to production jobs is accomplished in two stages, comprising what is called _
