Management Accounting Consultancy Report
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Week4-LectureSlides.pptxChapter 4 Product Costing Systems
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For this topic you should be able to:
Explain the role of product costing systems in decision-making
Understand the flow of costs through the various manufacturing accounts
Use basic techniques to allocate manufacturing overhead costs to products
Distinguish between different types of product costing systems and understand what types of contexts each are most applicable to
Estimate product costs using a basic process or job costing system, and prepare journal entries to record costs
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Product Costing Systems
Accumulate product-related costs and use procedures to assign them to the organisation’s final products
Can include both manufacturing costs and upstream and downstream costs
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Electricity
Rent
Salaries/Wages
Supplies
Depreciation
Equipment
Loading Machine
Operating Machine
Packaging
Moving/Handling
Maintenance
Product Cost
Cost Allocation
For Example: Activity-Based Costing
We will come back to this in Week 7!
Why Do We Need Product Costing Systems?
GAAP requires the determination of the cost of goods sold or services performed for financial reporting
Many important strategic decisions are made at the product-line level – for example, product profitability helps guide product portfolio or pricing decisions (Week 8 topic)
Can help in cost and operational control
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Different Product Costs for Different Purposes
We need different measures of product costs for different management decisions.
Only manufacturing costs are included in product costs for external reporting purposes (e.g. inventory valuation)
For managerial decisions, product costs may include different combinations of upstream, manufacturing and downstream costs
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Scope of Product Costs
The types of costs to be included in product costs for managerial decisions depends on:
The type of managerial decision to be made
Whether the decision has short-term or long-term implications
Managers’ personal preferences
COMPLETELY DEPENDENT ON CONTEXT OF THE ORGANISATION AND NEEDS OF MANAGERS
When Choosing a Product Costing System…
Cost and benefits of providing various types of cost estimates must be assessed
Some organisations will use product costs developed for external reporting due to the high cost
of developing more relevant cost
estimates for managerial decision
making
When Designing a Product Costing System…
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External Financial Reporting….
Does not require a high level of accuracy or relevance for product costing - the method simply needs to be systematic and reasonable
Only manufacturing costs are assigned to products for the purposes of inventory valuation - as required by Australian accounting standards
Upstream and downstream costs are expensed in the period in which they are incurred – Internally, these may be included in product costs where relevant to managers’ decision making
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Direct Materials
from suppliers
Employees
Direct Labour
Manufacturing overhead consumed
factory rent
utilities
indirect labour
Etc.
Direct Materials store
Finished Goods Warehouse
Work in Progress
in the factory
Customer
Salesman
Physical Flows in Manufacturing
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
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Flow of Costs in Manufacturing Businesses
Manufacturing costs flow through several ledger accounts:
Raw materials inventory
Work in process inventory
Finished goods inventory
Cost of goods sold expense
Profit and loss account
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Allocating Overhead Costs to Products
To estimate the cost of a product we need to identify the cost of resources used to produce the product
Some resources are consumed directly by products and are traced directly to each product
Direct material and direct labour
Overhead costs are essential to production but as they have no observable relationship with the product they need to be allocated to products
These cost are indirect costs to the product
Inspection costs
Quality Training
Data Storage
Salaries of IT
staff
Cleaning
Rent
Council Rates
Quality Control
Property
Computing
Product
or department
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Steps in Allocating OH Costs to Products
Aggregate overhead costs into cost pools
Identify the overhead cost driver
the factor that causes the cost to be incurred (remember from last week?!)
Calculate a predetermined (or budgeted) overhead rate per unit of cost driver
Eg. If annual OH budget = $ 7.5M
Annual labour budget = 50K hours (and labour hours is the cost driver)
then budgeted OH rate = $150/hour
Apply manufacturing overhead costs to products at the budgeted (or predetermined) overhead rate, multiplied by the actual quantity of cost driver consumed by the product
- E.g. if producing a product required 10 labour hours
$1500 of overhead would be applied to the product ($150 x 10)
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Accounting for Manufacturing Overhead
Two types of manufacturing overhead are recorded :
Applied manufacturing overhead
Estimate of manufacturing overhead used to manufacture a product
Applied to products using a predetermined OH rate
Credited to the manufacturing overhead account
Actual manufacturing overhead
Actual manufacturing overhead costs incurred throughout the accounting period
Might be different to applied manufacturing overhead
Debited to the manufacturing overhead account
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Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
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At the end of an accounting period, total actual manufacturing overhead may not equal total applied manufacturing overhead
Disposing of underapplied or overapplied overhead at the end of the accounting period. Two options:
Close the underapplied or overapplied overhead to cost of goods sold
Or
Prorate the underapplied or overapplied overhead to cost of goods sold, work in process inventory and finished goods inventory
Accounting for Manufacturing Overhead
Illustration 1
The following data relate to Fine Furniture Pty Ltd for the year 2017:
Required:
1.Calculate predetermined MOH rate using:
a) Machine Hours b) DL Hrs c) DL Dollars
2. Calculate over/under-applied MOH using each of the cost drivers
3. Prepare journal entries in relation to MOH costs for the year (charge any under-/over-applied MOH to COGS)
| Budgeted machine hours | 20,000 | |
| Budgeted DL hours | 40,000 | |
| Budgeted DL rate | $25.00 | /hr |
| Budgeted MOH costs | $800,000 | |
| Actual MOH costs | $820,000 | |
| Actual machine hours | 22,000 | |
| Actual DL hours | 35,000 | |
| Actual DL rate | $26.00 | /hr |
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Calculations
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Types of Product Costing Systems
Conventional product costing systems range from job costing to process costing
Depends on the type of product being produced and the production environment
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Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Management Accounting: Information for managing and creating value 6e
Slides prepared by
Next week!
Production costs traced to process/department and averaged across all units produced
Mass production or repetitive processes environment
Used in petrol production, processed food, chemical and plastics manufacturers
Copyright © 2012 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Management Accounting: Information for managing and creating value 6e
Slides prepared by Kim Langfield-Smith
Process Costing
Used in areas where there are repetitive services such as routine processing of cheques by banks, handling of licence applications by government departments
Process Costing
Steps in determining product cost:
Estimate the cost of production processes
2. Calculate the average cost per unit by dividing the cost of the process by the number of units produced
Where there are sequential processes or departments, costs are transferred from one department to the next at an average unit cost for the department
Raw material Cleaning & mixing dept Packaging dept Finished goods
No work-in-process inventory
# units produced (i.e. number of boxes of cereal): 80,000
Cereal Manufacturer
Required: Calculate the product cost for June.
Simple Process Costing in a Manufacturer
Cleaning & Mixing cost / unit… $250,000 / 80,000 = $3.125 /unit
Packaging cost / unit .………….$150,000 / 80,000 = $1.875 /unit
Total product cost……………… $ 5.00 /unit
Note also: The value of completed units = 80,000 x $5 = $400,000
| June period | Cleaning & mixing | Packaging |
| Direct materials | $ 130,000 | $ 20,000 |
| Direct labour | $ 40,000 | $ 30,000 |
| Mfg Overhead | $ 80,000 | $ 100,000 |
| Total | $ 250,000 | $ 150,000 |
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To Think About…2 Issues
What if there was work-in-process inventory? For example, some units are 20% finished, some 70% finished
What would the product cost for June be given that not all manufacturing processes (and therefore costs) have been completed?
What if more than one type of cereal was produced?
What if some of the cereal products required complex manufacturing processes in some of the production department but not others?
How would we figure out how much cost should apply to different production departments and hence, cereal products that pass through them?
Hint: We have to come up with a better allocation method than the one on the previous slide
Stay tuned over the next week to find out more!
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Job Costing Systems
Manufacturing costs traced to individual jobs
Products produced are significantly different and may be produced in distinct jobs/batches
Used by printers, furniture manufacturers, machinery manufacturers
Use in service firms such as lawyers, accountants, consulting engineers
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Purchase of materials Debit Credit
Raw material inventory xxxx
Account payable/Cash xxxx
Transferring direct material to jobs
Work in process inventory xxxx
Raw material inventory xxxx
Journal Entries (Job Costing)
If purchased on credit
Charging direct labour to jobs Debit Credit
Work in process inventory xxxx
Wages payable/Cash xxxx
Accounting for indirect labour
Manufacturing overhead xxxx
Wages payable xxxx
Accounting for manufacturing costs
Manufacturing overhead xxxx
Prepaid rent xxxx
Depreciation on equipment xxxx
etc.
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Application of manufacturing overhead
Work in process inventory xxxx
Manufacturing overhead xxxx
Completion of production job
Finished goods inventory xxxx
Work in process inventory xxxx
Accumulated cost of the job (DM, DL + MOH)
Sale of goods
Accounts receivable xxxx
Sales revenue xxxx
Cost of goods sold xxxx
Finished goods inventory xxxx
Underapplied overhead Debit Credit
Cost of goods sold xxxx
Manufacturing overhead xxxx
Or the reverse entry if overhead is overapplied
Don’t forget!!!! Always THREE journal entries for manufacturing overhead:
1) Actual amount
2) Applied amount
3) Underapplied/overapplied amounts
Illustration 2
Aberat Pty Ltd manufactures custom made furniture and uses a job costing system. The following information relates to February.
1. Manufacturing supplies opening inventory $1,000
2. Direct material (plastic) opening inventory $4,500
3. WIP inventory (Job 101 (Chairs), started on Jan 10):
Direct materials (plastic) $1,000
Direct labor: 50 DLHs x $8 400
Manufacturing overhead: 50 DLHs x $6 300 $1,700
4. Finished goods opening inventory $0
5. Feb, 4: Purchase of direct materials (plastic): $2,000
6. During February, the following materials were issued to production:
Direct materials (plastic)
Job 101 (Chairs, started on Jan 10) $1,000
Job 102 (50 coffee tables, started on Feb 5) 1,100 $2,100
Indirect materials 200 $2,300
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Illustration 2 (Cont’d)
7. The payroll summary showed the following totals for February:
Job 101 – 100 hrs @ $4.50 $450
Job 102 – 45 hrs @ $8.00 360 $ 810
Indirect labour 400 $1,210
8. Other indirect manufacturing costs incurred during February: $400
9. On 20 February, Job 101 was completed, and all of the 100 chairs were transferred to finished goods inventory. The manufacturing overhead costs were added to the job cost sheet using the predetermined manufacturing overhead rate of $6.00 per direct labour hour.
10. Fifty (50) of the 100 chairs completed on Job 101 were shipped to the customer. The chairs were sold for $80 per unit.
11. Job 102 remained incomplete at the end of February. Manufacturing overhead costs were applied to Job 102.
Required: Complete the following ledger accounts to reflect the transactions for February.
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Ledger Transactions
| Manufacturing Supplies Inventory | Work in progress Inventory | Finished Goods Inventory | |||||||||||
| Direct Materials Inventory | Cost of Goods Sold | ||||||||||||
| Manufacturing Overhead | Wages Payable | Sales Revenue | |||||||||||
| Accounts payable | Accounts receivable | (various accounts) | |||||||||||
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Calculations
Presentation title
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Journal Entries: Job vs. Process Costing
The journal entries in process costing are basically similar to those made in job costing systems
The main difference is that, in process costing, there is often more than one work-in-process account –– one for each process
In contrast, job costing has just one work-in-process account
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Acknowledgement
Some slides contained in this presentation were adapted from:
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