Product costing and cost accumulation in a batch production environment Essay

As production takes place, manufacturing appeals are tracked in the Work-in-Process Inventory account. Every product is made up of three cost components ingest materials, direct labor, and manufacturing crash. After products are completed, the corresponding cost leaves the Work-in-Process account and is debited to the Finished-Goods account. (A merchandising sloshed buys its goods already completed and directly debits the items cost to Merchandise Inventory.)When units are sold, the Finished-Goods Inventory account is credited and Cost of Goods Sold is debited.A product-costing system must be adapted to match the environment in which it ope judge.A billet-order costing system is used in an industry where products are made individu wholey, or in relatively small batches, and one product or batch is readily distinguishable from the other.Candidates for job-costing systems would be custom homebuilding, custom printing, custom furniture construction, legal cases, medical cases, audi ts, and research projects.A process-costing system is employed in an environment at the other end of the continuum the mass production of like units. Users might include manufacturers of chemicals, gasoline, and microchips. This topic is discussed fully in Chapter 4.4.ACCUMULATING COSTS IN A JOB-ORDER COSTING SYSTEMA job-cost record is used to accumulate the actual direct materials, actual direct labor, and applied manufacturing command processing overhead time costs for to each one job. The recording of costs on this record and in the general ledger is triggered by various source documents.Material requisition forms authorize the transfer of direct materials from the store to production. In some firms, the requisitions are based on a bill of materials that lists all of the materials (e.g., parts) take awayed.Supply chainthe flow of all goods, services, and information into and out of the organization. The add together chain often has ramifications for materials, as manufactu rers work with vendors to achieve improved delivery schedules and reductions in material cost.Time records are used to gather the amount of direct labor worked on a specific job.Manufacturing overhead is entered on the job-cost record in the form of applied (i.e., estimated) overhead. Source documents, such as invoices for factory indemnification and schedules for factory depreciation, trigger a general-ledger entry that debits the Manufacturing Overhead account.5.OVERHEAD APPLICATIONOverhead accounting involves a number of steps. Chapter 3 focuses on the final step the masking of overhead to jobs and products.Although overhead cannot be directly traced to the product, the use of an application rate should allocate an equitable amount of cost to each job (known as overhead application).Step 1 Set a predetermined overhead rate at the beginning of the accounting period. This is done by dividing the periods estimated (budgeted) overhead by the periods estimated number of cost-device driver units.Step 2 Use the predetermined overhead rate to apply an equitable portion of overhead to each job. As the actual number of cost-driver units used on a job becomes known, it is multiplied by the predetermined overhead rate.Actual overhead costs incurred during the category are debited to the Manufacturing Overhead control account. In contrast, applied overhead is debited to Work-in-Process Inventory and credited to Manufacturing Overhead.The year-end difference between actual and applied amounts is known as over-or underapplied overhead. This figure is adjusted in the process of closing the Manufacturing Overhead account to zero by eitherCharging or crediting the amount to cost of goods sold. This surface is acceptable if the over- or underapplication is small or if most of the products made during the period have been sold.Prorating the amount among work in process, finished goods, and cost of goods sold.Teaching accomplishment Emphasize that under- and overapplied ov erhead is the difference between actual and applied overhead, not actual and budgeted overhead. The budgeted figure is used solely in the determination of the predetermined rate.6. broad ILLUSTRATION OF JOB COSTINGAs noted earlier, the Work-in-Process Inventory account contains charges for direct materials used, direct labor, and applied manufacturing overhead.Period costs are expensed and not charged to Manufacturing Overhead.A sale requires two journal entries one to record the sales revenue and some other to transfer the goods cost from Finished-Goods Inventory to Cost of Goods Sold.Teaching bound Although the text illustration appears relatively complicated, it is simply presenting the expatiate that accompany the flow of goods (and costs) from work in process, to finished goods, to cost of goods sold.7.FINANCIAL SCHEDULES FOR MANAGERSThe schedule of cost of goods manufactured details the activity in the Work-in-Process account (beginning balance, direct materials used, dir ect labor, applied overhead, and ending balance).The schedule of cost of goods sold details the activity in the Finished- Goods Inventory account. It is uniform to the cost-of-goods-sold schedule as shown in financial accounting courses for merchandising companies, except the purchases amount is replaced with cost of goods manufactured.8.FURTHER ASPECTS OF OVERHEAD APPLICATIONActual and normal costingAccountants p match predetermined application rates, which are used in a normal-costing system. Such rates help to smooth product costs over time and countenance users to cost products/jobs upon completion.In contrast, users of actual-costing systems derive an actual overhead rate at the end of the accounting period. Product-cost information to management is therefore delayed.Choosing an appropriate cost driverDirect labor has been a very common and appropriate cost driver. Past processes were labor intensive, and products incurring more labor often produced higher amounts of manufac turing overhead.Today, many processes are automated and less dependent on labor. Thus, firms now use machine hours, process time, throughput (cycle) time (the average amount of time to convert mad materials into finished goods), and other measures as cost drivers.Single vs. multiple overhead ratesCompanies commonly use multiple (rather than single) application rates. With computerized accounting systems, multiple rates are easily generated, thus lowering the cost of producing highly accurate information.A single overhead rate is commonly known as a plantwide rate multiple rates are often known as subdivisional rates.Two-stage cost allocationStage one Overhead is first collect in production departments. This frequently requires the allocation of service department costs to production departments.Stage two As a final step, production department costs are assigned to individual jobs and products via overhead application.9.PROJECT COSTINGProject costing refers to job costing in a non manufacturing environment. Jobs in this case refer to cases, contracts, and/or programs.Costing involves tracking the direct, easily traceable costs and subdividing them by project. Overhead is then applied by using a predetermined rate, with a possible application base being a projects direct professional labor cost.Technology such as bar cryptograph may be used to track appropriate costs to projects, although this is just one of many possible applications. Service providers, along with manufacturers, are also qualification use ofElectronic selective information interchange (EDI), which involves the electronic transfer of information from one organization to another by using a computer-to-computer interface.Extensible markup language (XML), which is web-based and allows users to share structured data such as product order lists and price data.Teaching OverviewI begin the topic of job costing by explaining that students should not expect to apply a so-called textbook system to an y sincere-world company, because cost systems must be designed to meet a firms unique needs. However, the two traditional system models, job order and process costing, give users the ability to build-in various modifications for use in actual situations.The major difficulty that students encounter in job costing is the concept of manufacturing overhead. The first area needing clarification is terminology, namelyEstimated = budgetedApplied = allocatedIncurred = actualThe second area in need of clarification is the sequence of procedures for overhead application calculating predetermined overhead rates, using the rates, and adjusting the over- or underapplied amount. This problem stems from the fact that students are doing textbook assignments where all the information is given simultaneously. Therefore, the question arises, Why use an imperfect predetermined overhead rate when I have all the totally correct, actual data in the next paragraph? It is helpful to be on the lookout for this line of thinking when discussing homework assignments and to remind students how and when information becomes available in the real world. (I suspect this is a problem mainly for undergraduates with limited work experience.)Based on many years of teaching, I also find that students vie with the journal entries required to handle a sale. Two entries are needed one to transfer the cost of units sold from finished goods to cost of goods sold another is needed to record revenue. Students often forget one or the other or exhibit some creativity, creating a new account entitled profits on Sale. Be sure to spend a few extra minutes with this issue.After the preceding issues have been handled, students generally are quite implicated in job-costing concepts, particularly those who have worked in a family business or who plan to start their own business. Students are also interested in job costing in a service enterprise (discuss something as basic as the activities of a sports agent who represents clients across the country) and the impact of changing manufacturing techniques (such as the erudition of new, state-of-the-art production technology) on product-costing procedures.I recommend Exercise 3-35 (manufacturing overhead) and Problem 3-46 (job costing and journal entries) as lecture demonstration problems.