Mamagerial Accounting Chacpter 3 Ppt

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Chapter 3
Product
Costing and
Cost
Accumulation

© 2010 McGraw-Hill Ryerson Ltd.

1

Learning Objectives
1. Discuss the role of product and service
costing in manufacturing and
nonmanufacturing firms.
2. Diagram and explain the flow of costs
through the manufacturing accounts
used in product costing.
3. Distinguish between job-order costing and
process costing.
© 2010 McGraw-Hill Ryerson Ltd.

2

Learning Objectives (con’d)
4. Compute a predetermined overhead rate, and
explain its use in job-order costing for job-shop
and batch-production environments.
5. Prepare journal entries to record the costs of
direct material, direct labor, and manufacturing
overhead in a job-order costing system.
6. Prepare a schedule of cost of goods
manufactured, a schedule of cost of goods sold,
and an income statement for a manufacturer
using a normal costing system.
© 2010 McGraw-Hill Ryerson Ltd.

3

Learning Objectives (con’d)
7. Demonstrate the process of project
costing used in service industry firms
and nonprofit organizations.
8. Apply the two-stage allocation process
used to compute departmental overhead
rates (Appendix).

© 2010 McGraw-Hill Ryerson Ltd.

4

Learning Objective 1
Product and Service Costing
Our focus ranges from financial statement costs
to cost for operations.

Financial
Accounting
Product costs are
used to value
inventory and to
compute cost of
goods sold.

Managerial
Accounting and
Cost Management
Product costs are
used for planning,
control, directing,
and management
decision making.
© 2010 McGraw-Hill Ryerson Ltd.

5

Product and Service Costing
(con’d)
There is a growing need also for product
costing information in relationships between
firms and various outside organizations
e.g. utilities, hospitals.

LO-1
© 2010 McGraw-Hill Ryerson Ltd.

6

Learning Objective 2
Flow of Costs in a Manufacturing Firm
W
ork-in-Process Inventory

Direct m
aterial cost
Direct labor cost
Manufacturing overhead

Product cost transferred

Finished Goods Inventory

when product is finished

Cost of Goods Sold

Expense closed into

Retained Earnings

Retained Earnings at end
of accounting period

© 2010 McGraw-Hill Ryerson Ltd.

7

Learning Objective 3
Types of Product-Costing Systems
Process
Costing

Job-Order
Costing

 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 one at
a time.
 Batch-production operations
Multiple products in batches of relatively small
quantity.
© 2010 McGraw-Hill Ryerson Ltd.

8

Types of Product-Costing Systems (con’d)
Process
Costing

Job-Order
Costing

 Typical job-order cost applications:
 Special-order printing
 Building construction
 Also used in service industry
 Hospitals
 Law firms
LO-3

© 2010 McGraw-Hill Ryerson Ltd.

9

Types of Product-Costing Systems (con’d)
Process
Costing

Job-Order
Costing

 Used for production of small, identical, low cost
items.
 Mass produced in automated continuous
production process.
 Costs cannot be directly traced to each unit of
product.
Typical process cost applications:
Petrochemical refinery, paint manufacturer, paper mill

LO3

© 2010 McGraw-Hill Ryerson Ltd.

10

Learning Objective 4
Manufacturing Overhead Costs
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
1

Budgeted manufacturing overhead cost
POHR =
2 Budgeted amount of cost driver (or activity base)

Overhead applied = POHR × Actual activity
Based on estimates, and
determined before the
period begins

Actual amount of the allocation
base, such as direct labor hours,
incurred during the period

© 2010 McGraw-Hill Ryerson Ltd....
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