Product costing and cost accumulation in a batch production environment Essay

As production takes place, manufacturing be ar tracked in the Work-in-Process Inventory account. Every product is make up of three speak to components count materials, orchestrate labor, and manufacturing bang. After products ar realised, the corresponding woo leaves the Work-in-Process account and is debited to the Finished-Goods account. (A merchandising firm buys its goods already completed and channelisely debits the items follow to Merchandise Inventory.)When units are sold, the Finished-Goods Inventory account is attribute and Cost of Goods Sold is debited.A product-costing system must(prenominal) be adequate to match the environment in which it operates.A chore-order costing system is turn in in an industry where products are made individually, or in relatively belittled batches, and one product or batch is readily decided from the other.Candidates for job-costing systems would be custom homebuilding, custom printing, custom furniture construction, legal cases, aesculapian cases, audits, and research projects.A process-costing system is employed in an environment at the other end of the continuum the mass production of like units. rehearsers might allow in manufacturers of chemicals, gasoline, and microchips. This topic is discussed fully in Chapter 4.4.ACCUMULATING COSTS IN A JOB-ORDER be SYSTEMA job-cost go in is workout to accumulate the unquestionable run materials, actual direct labor, and utilise manufacturing command processing command processing smash-up cost for each job. The preserve of costs on this record and in the general ledger is triggered by various source documents.Material requisition forms authorize the transfer of direct materials from the warehouse to production. In many an(prenominal) firms, the requisitions are based on a bill of materials that lists all of the materials (e.g., parts) motivatinged.Supply chainthe flow of all goods, services, and info into and out of the organization. The supply chain often has ramifications for materials, as manufacturers maneuver with vendors to come through improved delivery schedules and reductions in material cost.Time records are used to gather the amount of direct labor worked on a ad hoc job.Manufacturing operating cost is entered on the job-cost record in the form of applied (i.e., estimated) bang. reservoir documents, such as invoices for factory insurance and schedules for factory depreciation, trigger a general-ledger entry that debits the Manufacturing command processing overhead account.5.OVERHEAD exerciseOverhead accountancy involves a routine of steps. Chapter 3 focuses on the final step the application of overhead to jobs and products.Although overhead cannot be directly traced to the product, the use of an application rate should allocate an straightforward amount of cost to each job (known as overhead application). feel 1 Set a predetermined overhead rate at the bug outning of the accountancy period. This is done by dividing the periods estimated (budgeted) overhead by the periods estimated 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 known, it is multiplied by the predetermined overhead rate.Actual overhead costs incurred during the year 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 between actual and applied amounts is known as over-or underapplied overhead. This get word is adjusted in the process of closing the Manufacturing Overhead account to zero by allCharging or crediting the amount to cost of goods sold. This approach is acceptable if the over- or underapplication is small or if most of the products made during the period have been sold.Prorating the amount among work in process, finished goods, and cost of goods sold. breeding Tip Emphasize that under- and overapplied overhead is the difference between actual and applied overhead, not actual and budgeted overhead. The budgeted figure is used solely in the determination of the predetermined rate.6. EXTENDED case 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 sale requires deuce journal entries one to record the gross sales revenue and another 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 details that ensue the flow of goods (and costs) from work in process, to finished goods, to cost of goods sold.7.FINANCIAL SCHEDULES FOR MANAGERSThe schedule of cost of goods manufactured details the action mec hanism in the Work-in-Process account (beginning balance, direct materials used, direct labor, applied overhead, and ending 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 monetary accounting courses for merchandising companies, except the purchases amount is replaced with cost of goods manufactured.8.FURTHER ASPECTS OF OVERHEAD APPLICATIONActual and normal costingAccountants prefer predetermined application rates, which are used in a normal-costing system. Such rates help to brush up 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 knowledge to management is therefore delayed.Choosing an appropriate cost driver draw labor has been a very common and appropriate cost driver. prehistoric processes were labor in tensive, and products incurring more labor often produced higher amounts of manufacturing overhead.Today, many processes are automated and less dependent on labor. Thus, firms now use machine hours, process time, throughput (cycle) time (the average amount of time to vary raw materials into finished goods), and other measures as cost drivers.Single vs. ternary 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 accurate information.A single overhead rate is commonly known as a plantwide rate multiple rates are often known as departmental rates.Two-stage cost allocation breaker point one Overhead is first accumulated in production departments. This ofttimes requires the allocation of service department costs to production departments.Stage two As a final step, production department costs are assigned to individual jobs and products via overhead application.9.PROJECT COSTINGProject costing refers to job costing in a nonmanufacturing environment. Jobs in this case refer to cases, contracts, and/or programs.Costing involves tracking the direct, easily traceable costs and subdividing them by project. Overhead is then applied by use a predetermined rate, with a possible application base being a projects direct professional labor cost.Technology such as stymie 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 also making use ofElectronic data interchange (EDI), which involves the electronic transfer of information from one organization to another by using a computer-to-computer interface.Extensible 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 so-called text system to any real-world company, because cost systems must be designed to meet a firms grotesque needs. However, the two traditional system models, job order and process costing, concede users the ability to build-in various modifications for use in actual situations.The major obstruction that students encounter in job costing is the concept of manufacturing overhead. The first empyrean needing clarification is terminology, namelyEstimated = budgetedApplied = allocatedIncurred = actualThe second area in need of clarification is the sequence 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 liberal predetermined overhead rate when I have all the only correct, actual data in the next paragraph? It is helpful to be on the lookout 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 chiefly for undergraduates with limited work experience.)Based on many eld of teaching, I also find that students struggle with the journal entries required to come up to 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 possess some creativity, creating a new account entitled Profit on Sale. Be sure to spend a few extra proceedings with this issue.After the preceding issues have been handled, students generally are quite fire in job-costing concepts, particularly those who have worked in a family business or who plan to start their own business. Students are also interested in job costing in a service ente rprise (discuss something as basic as the activities of a sports agent who represents clients across the country) and the impact of ever-changing manufacturing techniques (such as the acquisition of new, state-of-the-art production technology) on product-costing procedures.I propose Exercise 3-35 (manufacturing overhead) and Problem 3-46 (job costing and journal entries) as lecture reflection problems.