12-1

Introduction
to Product
Costing
Prepared
Preparedby
by

Douglas
DouglasCloud
Cloud

Pepperdine
PepperdineUniversity
University

12

12-2

Objectives
Objectives
Describe the flow of costs for manufacturers
After
reading
this
After
reading
this
and service providers.
chapter,
you
should
chapter,
you
should
Describe three
types of manufacturing
be
able
to:
be
able
to: costing
processing and their related
requirements.
Describe and illustrate job-order costing.
Determine product costs using actual and
normal costing systems.
Continued
Continued

12-3

Objectives
Objectives
Analyze misapplied overhead into budget and
volume variance.
Develop ABC overhead rates and apply them
to job-order costing companies.
Discuss the role of overhead application in
pursuing strategies.

12-4

Absorption
Absorption Costing
Costing
Sometimes called full costing
Includes fixed overhead costs in per-unit
inventory calculations
Must use for financial reporting and
income tax purposes
Can give misleading results for short-term
decisions

12-5

Product
Product versus
versus Period
Period Costs
Costs
Product costs are
manufacturing
costs that are
expensed (cost of
goods sold) when
the product is sold.

12-6

Product
Product versus
versus Period
Period Costs
Costs
Period costs are the
selling and
administrative costs
which are expensed in
the period incurred.

12-7

Three
Three Types
Types of
of Inventory
Inventory in
in aa
Manufacturing
Manufacturing Firm
Firm
Materials and purchased
parts/componentsconsisting
of the various materials and
components that go into a
finished product, but have not
been put into production.

12-8

Three
Three Types
Types of
of Inventory
Inventory in
in aa
Manufacturing
Manufacturing Firm
Firm
Work in process
inventory,
consisting of
semifinished units,
that is, product on
which some, but
not all, work has
been done.

12-9

Three
Three Types
Types of
of Inventory
Inventory in
in aa
Manufacturing
Manufacturing Firm
Firm
Finished goods
inventory,
consisting of units
ready for sale. This
inventory is
equivalent to a
merchandisers
inventory.

Flow of Costs in a Manufacturer

Action

Cost Collected
Initially

Purchase
materials

Materials
Inventory

Pay
direct
laborers

Direct
Labor

Incur
Manufacturing
overhead
Overhead
costs

12-10

Cost Flow To and Through

Work in
Process
Inventory

Finished
Goods
Inventory

Cost of
Goods
Sold

12-11

Cost
Cost per
per Unit
Unit of
of Product
Product
Cost per unit
=
of product

Total production costs

Total units processed

Example:
10,000 units were produced at a total
production cost of $150,000.

12-12

Job-Order
Job-Order Costing
Costing
Job-order costing keeps
track of the cost of
materials and labor used
on each job and then
applies, absorbs, or
assigns some amount of
manufacturing overhead
to each job.

12-13

Actual
Actual Costing
Costing
Under actual costing, the overhead incurred
during a period is applied to all jobs that were
in process during the period.
To assign all of the overhead costs to jobs, we
calculate the overhead rate by dividing total
actual overhead by the total amount of the
relevant input factor.

12-14

Actual
Actual Costing
Costing
Total manufacturing overhead
Overhead rate =
Overhead rate =

Total manufacturing activity

$105,000
$10,500

Overhead rate = $10 per machine hour

12-15

Actual
Actual Costing
Costing

Overhead
Direct materials
Direct labor
Total cost of job

J-1
$30,000
20,000
10,000
$60,000

Job Number
J-2
$50,000
15,000
20,000
$85,000

J-3
$25,000
10,000
15,000
$50,000

12-16

Actual
Actual Costing
Costing
ZyCo
Total overhead costs:
$50,000 + (10,000 x $4)
$55,000 + (5,000 x $4)
Machine hours
Overhead rate per machine hour

May

December

$90,000
10,000
$9

$75,000
5,000
$15

12-17

Actual
Actual Costing
Costing
ZyCo
ZyCo does two similar jobs in May and December,
each requiring 100 machine hours, $500 in direct
labor, and $300 in materials. Actual costs are-May December
Materials
$ 300 $ 300
Direct labor
500
500
Overhead, 100 hours at $9 and $15
800
1,500
Totals
$1,700 $2,300

12-18

Normal
Normal Costing
Costing
Budgeted manufacturing overhead per year
Predetermined
=
overhead rate
Budgeted production activity for year
Overhead rate =

$105,000
$10,500

Overhead rate = $10 per machine hour

12-19

Normal
Normal Costing
Costing
Budget
allowance

Variable
Amount
cost per
x
of
unit of
activity
activity

Fixed
=
+
costs

Predetermined overhead rate =

$600,000 + $4 x 120,000

= $9

120,000

12-20

Normal
Normal Costing
Costing

Overhead
Direct materials
Direct labor
Total cost of job

J-1
$27,000
20,000
10,000
$57,000

Job Number
J-2
$45,000
15,000
20,000
$80,000

J-3
$22,500
10,000
15,000
$47,500

12-21

Normal
Normal Costing
Costing
Under actual costing
Actual hours
Overhead assigned
= worked on x
to job
job
Under normal costing

Total actual
overhead
Total actual
hours

Total budgeted
Actual hours
Overhead assigned
overhead
= worked on x
to job
Total budgeted
job
hours

12-22

Misapplied
Misapplied Overhead
Overhead
Overhead Applied to Jobs Using
Actual Costing Normal Costing

Job J-1
Job J-2
Job J-3
Total

$ 30,000$27,000
50,00045,000
25,000 22,500
$105,000$94,500

12-23

Overhead
Overhead Variances
Variances
ZyCos July Results
The budget formula for annual overhead cost is
$600,000 fixed costs ($50,000 per month) plus $4
per machine hour variables. Julys flexible budget
based on 10,500 hours is as follows:
Actual costs, fixed and variable
$105,000
Budgeted costs [$50,000 + ($4 x 10,500 hours)
92,000
Budget variance, unfavorable
$ 13,000

12-24

Overhead
Overhead Variances
Variances
ZyCos July Results
ZyCo planned 120,000 machine hours for the year
(monthly average, 10,000 hours). ZyCo worked
10,500 hours of machine time in July.
Budgeted overhead (from Slide 12-23)
Applied overhead ($9 x 10,500 hours)
Volume variance, favorable

$92,000
94,500
$ 2,500

12-25

Overhead
Overhead Variances
Variances
ZyCos July Results
Variable Portion
Budgeted cost (10,500
x $4)
$42,000
Applied cost:
10,500 x $4
42,000
10,500 x $5
Volume variance (500 hours
x $5)
----

Fixed Portion
$50,000

52,500
$ 2,500

12-26

Overhead
Overhead Variances
Variances
Volume
=
variance

Total budgeted
Total applied
manufacturing manufacturing
overhead
overhead

Total budgeted
Total applied fixed
Volume
= manufacturing manufacturing
variance
overhead
overhead
Budgeted
Actual
Predetermined
Volume
= overhead rate x production production
variance for fixed costs
activity
activity

12-27

Overhead
Overhead Variances
Variances
Actual

Budgeted

Applied

Overhead

Overhead

Overhead

$50,000 + ($4 x 10,500)

$9 x 10,500

$105,000

$92,000

$94,500
$2,500 F

13,000 U

Budget variance

Volume variance

$10,500 U
Total underapplied
overhead

12-28

Income
Income Statements,
Statements, Actual
Actual
and
and Normal
Normal Costing
Costing
ZyCo Income Statements for July
Normal
Costing
Sales
Normal cost of sales
Plus underapplied overhead
Cost of sales
Gross profit
Selling and administrative
Profit

$110,000$110,000
$57,000
10,500
67,500 60,000
$ 42,500$ 50,000
30,000 30,000
$ 12,500$ 20,000

Actual
Costing

12-29

Activity-Based
Activity-Based Overhead
Overhead Rates
Rates
Cool
Cool pools
pools might
might consist
consist of
of costs
costs
of
of departments
departments or
or costs
costs related
related to
to
such
such activities
activities as
as material
material use,
use,
number
number of
of setups,
setups, cycle
cycle time,
time, or
or
engineering
engineering changes.
changes.

12-30

Income
Income Statements,
Statements, Actual
Actual
and
and Normal
Normal Costing
Costing
ZyCo Normal Costing Income Statements for July
Sales
Normal cost of sales
Normal gross profit
Variances:
Unfavorable budget variance
Favorable volume variance
Gross profit
Selling and administrative expenses
Profit

$110,000
57,000
$ 53,000
$13,000
2,500 10,500
$ 42,500
30,000
$ 12,500

12-31

Activity-Based
Activity-Based Costing
Costing Example
Example
Direct Labor

Setups

Total

Budgeted overhead costs

Budgeted direct labor hours
Budgeted number of setups

$800,000
100,000

$400,000

$1,200,000

Rates

$8.00
per dlh

2,000

$200.00
per setup

If only direct labor hours are used to allocate overhead, the rate
is $12.

12-32

Calculated
Calculated Price
Price for
for Two
Two Jobs
Jobs
Using
Using One
One Rate
Rate
Direct labor hours
Materials hours
Direct labor cost ($10)
OH applied ($12)
Total cost
x 1.5
Price

Job AJob B
800200
$10,000$10,000
8,0002,000
9,600 2,400
$27,600$14,400
x 1.5
$41,400$21,600

12-33

Calculated
Calculated Price
Price for
for Two
Two Jobs
Jobs
Using
Using Activity-Based
Activity-Based Rates
Rates
Job AJob B
Direct labor hours
Materials hours
Direct labor cost ($10)
Overhead:
Labor-related ($8)
Setup-related ($200)
Total cost
x 1.5
Price

800200
$10,000$10,000
8,0002,000
6,4001,600
400 5,000
$24,800$18,600
x 1.5
$37,200$27,900

12-34

Chapter 12
The
The End
End

12-35