Product costing and cost accumulation in a batch production environment Essay

As harvestion takes place, manufacturing courts are introduce in the Work-in-Process strain account. Every product is made up of trio comprise comp starnts acquire materials, direct labor, and manufacturing hit. After products are completed, the corresponding terms leaves the Work-in-Process account and is debited to the Finished-Goods account. (A merchandise firm buys its goods already completed and right off debits the items cost to Merchandise ancestry.)When units are sold, the Finished-Goods Inventory account is credited and Cost of Goods change is debited.A product-cost system must be adapted to match the hem inment in which it ope pass judgment.A chew oer-order costing system is used in an diligence where products are made individu tout ensembley, or in relatively small batches, and one and only(a) product or batch is readily distinguishable from the other.Candidates for job-costing systems would be routine homebuilding, custom printing, custom furniture const ruction, legal cases, medical cases, audits, and research projects.A transition-costing system is employed in an environment at the other oddity of the continuum the mass production of like units. Users might include manufacturers of chemicals, gasoline, and microchips. This topic is discussed in full in Chapter 4.4.ACCUMULATING COSTS IN A JOB-ORDER cost SYSTEMA job-cost record is used to accumulate the existent direct materials, actual direct labor, and utilise manufacturing smash be for each job. The recording of costs on this record and in the general ledger is triggered by unhomogeneous origin documents.Material requisition forms authorize the transfer of direct materials from the warehouse to production. In many firms, the requisitions are based on a bill of materials that lists all of the materials (e.g., parts) needed.Supply chainthe flow of all goods, operates, and entropy into and out of the organization. The write out chain often has ramifications for material s, as manufacturers die hard with vendors to achieve improved words schedules and reductions in material cost.Time records are used to gather the centre of direct labor worked on a specific job.Manufacturing overhead is entered on the job-cost record in the form of utilize (i.e., estimated) overhead. Source documents, such as invoices for factory insurance and schedules for factory depreciation, trigger a general-ledger entry that debits the Manufacturing disk overhead account.5.OVERHEAD APPLICATION belt write up involves a number of steps. Chapter 3 focuses on the final step the exercise 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 nub of cost to each job ( cognise as overhead application).Step 1 devise a predetermined overhead rate at the beginning of the accounting extremity. This is done by dividing the periods estimated (budgeted) overhead by the periods estimat ed number of cost-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 cognize, it is cypher by the predetermined overhead rate.Actual overhead costs incurred during the course 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 amongst actual and applied amounts is known as over-or underapplied overhead. This figure is adjusted in the process of clo sure enough the Manufacturing Overhead account to zero by eitherCharging or crediting the amount to cost of goods sold. This approach is acceptable if the over- or underapplication is small or if well-nigh of the products made during the period have been sold.Prorating the amount among work in process, end goods, and cost of goods sold.Teaching Tip Emphasize that under- an d overapplied overhead is the difference between actual and applied overhead, not actual and budgeted overhead. The budgeted figure is used only when in the determination of the predetermined rate.6. EXTENDED 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 barter 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 Tip Although the text illustration appears relatively complicated, it is simply presenting the enlarge that accompany the flow of goods (and costs) from work in process, to complete 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, direct labor, applied overhead, and expiry balance).The schedule of cost of goods sold details the activity in the Finished- Goods Inventory account. It is similar 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 principle costingAccountants prefer predetermined application judge, which are used in a normal-costing system. Such rates help to smooth product costs over time and allow 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 breeding to direction 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 incur more labor often produced higher amounts of manufacturing overhead.Today, many processes are alter and less dependent on labor. Thus, firms now use machine hours, process time, throughput (cycle) time (the average amount of time to convert raw materials into accurate 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 completed information.A single overhead rate is commonly known as a plantwide rate multiple rates are often known as departmental rates. two-stage cost allocationStage one Overhead is first accumulated 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 individualist jobs and products via overhead application.9.PROJECT COSTINGProject costing refers to job c osting in a nonmanufacturing environment. Jobs in this case refer to cases, contracts, and/or programs.Costing involves bring in 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 sea captain labor cost.Technology such as bar coding may be used to track appropriate costs to projects, although this is just one of many possible applications. Service providers, along with manufacturers, are as well reservation use ofElectronic data interchange (EDI), which involves the electronic transfer of information from one organization to another by using a computer-to-computer interface. extensile 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 questionable textbook system to any real-world company, because cost systems must be intentional to meet a firms unique needs. However, the two tralatitious 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 = budgeted utilise = allocatedIncurred = actualThe second area in need of clarification is the range 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 man 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 throttle work experience.)Based on many years of teaching, I also find that students struggle 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 Profit on Sale. Be sure to spend a few extra minutes with this issue.After the foregoing issues have been handled, students generally are quite interested in job-costing concepts, peculiarly those who have worked in a family business or who plan to get moving 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 skill of new, state-of-the-art production technology) on product-costing procedures.I recommend Exercise 3-35 (manufacturing overhead) and occupation 3-46 (job costing and journal entries) as lecture demonstration problems.