ACCT2012 Week 2 product costing Use of product costing Flow of cost in manufacturing firm Difference between job costing

& process costing Determineing predetermined overheads Calculation of under and over apploed MOH Process cost flows Calculation of equivalent units

Use of Product Costing

Product costs are used for Planning Control Directing Management decision making Product costing systmes Accumulate product-related costd and uses systematic procedures to assign them to the final products In some businesses upstream and downstream costs are regarded as product related Product costs are the inputs into the product costing systems Different product costs for different purposes Current product costs inventory valuation Future product costs releant for decision making

Flow of cost in manufacturing firm

Ledger accounts included Raw materials inventory Work in process inventory Finished goods inventory Cots of goods sold expense Profit & loss account Interrelationship of ledgers above.

Allocate overhead direct/indirect costs to products To estimate the costs of a product we need to identify the cost of resources used Resouces consumed directly, directly traced to each product direct costs Overhead costs, no observable relationships to the products need to be allocated

Difference between job costing & process costing

Job-order costing
Used for production of large, unique and expensive items Built to order rather than mass production Costs directly traced to each unit of product/jobs 2 types i. Job-shop operations products manufactured in very low volume or one at a time ii. Batch-production operations mutiple products in batched of relatively small number Egs: printers, furniture manufacturers, machinery manufacturers. Service firms lawyers, accountant, consulting firms Used for production of small, similar, low-cost items Mass production, automated continous production Production costs traced to process/department, and averaged across all units produced EGS: petrolchemial refinery, paint manufacturer, paper mill

Process Costing

Job-Order Process Many Single product Job Department Job Department -Direct Material -Direct Material -Direct Labour -Direct Labour& Overhead -Manufacturing Overhead (Conversion costs) PS: in process-costing system, when direct labour is a relatively small amount compared to material and overhead, it is often combined with overhead. Number of jobs worked Costs accumulated by Average cost computed by Costs related

Determining predetermined overheads

Overhead is applied to jobs using a predetermined over head rate (POHR)

POHR based on estimates, and determined before accounting period begins Actual Activitiy actual amount of the allocation base, such as direct labour hours, direct machine hours, direct labour dollars incurred during the period Calculation process 1. Estimate the level of production for the period 2. Estimate total amount of the allocation base for the period 3. Estimate total manufacturing overhead costs Manufacturing Overhead Account

Job-order costing Costs flows

Document flow summary

Production order for Job authorize the start of the production process

Material Requisition direct material charge to jobs indirect material charged to overhead

Labour Time Records direct labour charged to jobds indirect labour hours charged to overhead

Apply Manufacturing overhead Actual cost driver x POHR

Cost flows

Process- costing Costs flows

ONE PRODUCTION DEPARTMENT

2 SEQUENTIAL PRODUCTION DEPARTMENTS

Calculation of under and over apploed MOH

Overapplied actual costs < applied manufacturing costs Underapplied actual costs > applied manufacturing costs Option 1 allocation Option 2 Close to Cost of goods sold UNDERAPPLIED INCREASE INCREASE COGS Work in process Finished goods Cost of goods sold OVERAPPLIED DECREASE DECREASE COGS Work in process Finished goods Cost of goods sold - Schedule of Costs of Goods Manufactured -

Calculating and using equivalent units of production

Ananysis of physical flow of units

calculation of equivalent units

Computation of unit costs

Analysis of total costs

Weighted-Average Method
Makes no distinction between work done in the previous period and work done in the current period Blend together units and costs from the prior period and the current period