Product Costing and Cost Accumulation in a Batch Production Environment
ANSWERS TO REVIEW QUESTIONS
Use in financial accounting: In financial accounting, product costs are needed to determine the value of inventory on the balance sheet and to compute the cost-of-goods-sold expense on the income statement.
b) Use in managerial accounting: In managerial accounting, product costs are needed for planning, for cost control, and for decision making.
c) Use in cost management: In order to manage, control, or reduce the costs of manufacturing products or providing services, management needs a clear idea of what those costs are.
Use in reporting to interested organizations: Product cost information is used in reporting on relationships between firms and various outside organizations. For example, public utilities such as electric and gas companies record product costs to justify rate increases that must be approved by state regulatory agencies.
In a job-order costing system, costs are assigned to batches or job orders of production. Job-order costing systems are used by firms that produce relatively small numbers of dissimilar products. In a process-costing system, production costs are averaged over a large number of product units. Process-costing systems are used by firms that produce large numbers of nearly identical products.
Concepts of product costing are applied in service industry firms to inform management of the costs of producing services. For example, banks record the costs of producing financial services for the purposes of planning, cost control, and decision making.
Material requisition form: A document upon which the production department supervisor requests the release of raw materials for production.
Labor time record: A document upon which employees record the time they spend working on each production job or batch.
Job-cost record: A document on which the costs of direct material, direct labor, and manufacturing overhead are recorded for a particular production job or batch. The job-cost sheet is a subsidiary ledger account for the Work-in-Process Inventory account in the general ledger.
Although manufacturing-overhead costs are not directly traceable to products, manufacturing operations cannot take place without incurring overhead costs. Consequently, overhead costs are applied to products for the purpose of making pricing decisions, in order to ensure that product prices cover all of the costs of production.
The primary benefit of using a predetermined overhead rate instead of an actual overhead rate is to provide timely information for decision making, planning, and control.
An advantage of prorating overapplied or underapplied overhead is that it results in the adjustment of all the accounts affected by misestimating the overhead rate. These accounts include the Work-in-Process Inventory account, the Finished-Goods Inventory account, and the Cost of Goods Sold account. The resulting balances in these accounts are more accurate when proration is used than when overapplied or underapplied overhead is closed directly into Cost of Goods Sold. The primary disadvantage of prorating overapplied or underapplied overhead is that it is more complicated and time-consuming than the simpler alternative of closing overapplied or underapplied overhead directly into Cost of Goods Sold.
An important cost-benefit issue involving accuracy versus timeliness in accounting for overhead involves the use of a predetermined overhead rate or an actual overhead rate. Since an actual overhead rate is computed after costs have been incurred and activity has been recorded, it is more accurate than a predetermined rate. However, a predetermined overhead rate is more timely than an actual rate, since the predetermined rate is computed earlier and in time to be used for making decisions, planning, and...
Please join StudyMode to read the full document