Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-1 Outline Product costing Different costs for different purposes Designing product costing systems Flow of costs in manufacturing businesses Allocating overhead costs to products Accounting for manufacturing overhead Types of product costing systems Job costing Process costing Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-2 Product costing Product costing systems Accumulate product-related costs to assign to the organisations final products Product-related costs are called production costs Upstream costsresearch and development, product design, supply Downstream costsmarketing, distribution, customer service
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-4 Different product costs for different purposes Only production costs are included in product costs for external reporting purposes For managerial decisions, product costs may include upstream, manufacturing and downstream costs Current or future product costs Current product costs Estimates of future product costs (cont.)
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-5 Different product costs for different purposes (cont.) Types of costs to be included in product costs for managerial decisions depends on The type of managerial decision to be made Whether the decision has short-term or long-term implications Managers personal preferences
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-7 Different product costs for different purposes (cont.) Frequency of provision of product cost information Infrequently for long-term decisions More regularly for cost control and inventory valuation Product costs may differ over The range of costs included Current or future costs Frequency information is required Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-8 Designing product costing systems Identify the managers needs Identify where product cost information may come from Cost and benefits of providing various types of cost estimates Businesses sometimes use product costs developed for external reporting for managerial decision making Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-9 Flow of costs in manufacturing businesses For inventory valuation in external financial reports only manufacturing costs are assigned to products, as required by accounting standards Manufacturing costs consist of three components Direct material Direct labour Manufacturing overhead (cont.)
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-10 Flow of costs in manufacturing businesses (cont.) Manufacturing costs flow through several ledger accounts Accounting standards require that upstream and downstream costs are expensed in the period in which they are incurred May be included in product costs where relevant to managers decision making
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-12 Allocating overhead costs to products Estimating the cost of a product Some resources are consumed directly by products and are traced directly to each product Overhead costs are essential to production but as they have no observable relationship with the product they need to be allocated to products (cont.)
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-13 Allocating overhead costs to products (cont.) Aggregate overhead costs into cost pools Identify the overhead cost driver Calculate a predetermined (or budgeted) overhead rate per unit of cost driver Apply manufacturing overhead costs to products Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-14 Direct and indirect costs of products
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-15 Accounting for manufacturing overhead Two types of manufacturing overhead are recorded in an accounting system Actual manufacturing overhead Accumulated as they are incurred throughout the accounting period Applied manufacturing overhead Overheads applied to work in process inventory using a predetermined overhead rate (cont.)
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-16 Accounting for manufacturing overhead (cont.) At the end of an accounting period, total actual manufacturing overhead may not equal total applied manufacturing overhead Dispose of underapplied or overapplied overhead at the end of the accounting period
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-17 Types of product costing systems Conventional product costing systems range from job costing to process costing Job costing Manufacturing costs traced to individual jobs Products produced are significantly different and may be produced in distinct jobs/batches Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-18 Process costing Production costs traced to process/department and averaged across all units produced Mass production or repetitive processes environment Process costing involves Estimating the cost of production processes Calculating the average cost per unit Sequential processes Some product costing systems have features of both job costing and process costing Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-19 Continuum of conventional costing systems
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-21 Job costing Bill of materialslists all the materials required for a job Material requisition formauthorises the movement of raw materials from the warehouse to the production department Job cost sheetsummarises the costs of direct material, direct labour and manufacturing overhead for a (cont.) particular job Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-22 Job costing (cont.) Purchase of materials Raw material inventory xxxx Accounts payable xxxx Transferring direct material to jobs Work in process inventory xxxx Raw material inventory xxxx
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-23 Job costing (cont.) Use of indirect material in production Manufacturing overhead xxxx Manufacturing supplies inventoryxxxx Charging direct labour to jobs Work in process inventory xxxx Wages payable xxxx
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-25 Job costing (cont.) Application of manufacturing overhead Work in process inventory xxxx Manufacturing overhead xxxx Completion of production job Finished goods inventory xxxx Work in process inventory xxxx
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-27 Job costing (cont.) Underapplied overhead Cost of goods sold xxxx Manufacturing overhead xxxx Or the reverse entry if overhead is overapplied
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-29 Process costing The approach taken in process costing depends on The existence of work in process (WIP) inventory at the end of the accounting period The degree to which products are identical in their consumption of direct material and specific production processes Simple forms of process costing assume no WIP inventory Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-30 Production processes in the Mixing and Finishing Departments, Spritz
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-32 Summary Different measures of product costs are appropriate for different purposes Overhead costs are allocated to product costs according to their consumption of an overhead cost driver The choice of product costing system depends on the characteristics of the product and production environment may range from job costing to process costing Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 4-33