12-1

Introduction Introduction to Product to Product

CostingCostingPrepared by

Douglas Cloud Pepperdine University

1122

12-2

Describe the flow of costs for manufacturers and service providers.

Describe three types of manufacturing processing and their related costing requirements.

Describe and illustrate job-order costing. Determine product costs using actual and

normal costing systems.

ObjectivesObjectives

After reading this After reading this chapter, you should chapter, you should

be able to:be able to:

ContinuedContinued

12-3

Analyze misapplied overhead into budget and volume variances.

Develop ABC overhead rates and apply them to job-order costing companies.

Discuss the role of overhead application in pursuing strategies.

ObjectivesObjectives

12-4

Absorption 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 versus Period CostsProduct versus Period Costs

Product costs are manufacturing costs that are

expensed (cost of goods sold) when

the product is sold.

12-6

Period costs are the selling and

administrative costs which are expensed in

the period incurred.

Product versus Period CostsProduct versus Period Costs

12-7

Three Types of Inventory in a Three Types of Inventory in a Manufacturing FirmManufacturing Firm

Materials and purchased parts/components—consisting

of the various materials and components that go into a

finished product, but have not been put into production.

12-8

Three Types of Inventory in a Three Types of Inventory in a Manufacturing FirmManufacturing 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 Types of Inventory in a Three Types of Inventory in a Manufacturing FirmManufacturing Firm

Finished goods inventory,

consisting of units ready for sale.

This inventory is equivalent to a merchandiser’s

inventory.

12-10

Flow of Costs in a Manufacturer

Materials Inventory

Purchase materials

Direct Labor

Pay direct

laborers

Manufacturing Overhead

Incur overhead

costs

Cost Collected Action Initially Cost Flow To and Through

Work in Work in Process Process

InventoryInventory

Finished Finished Goods Goods

InventoryInventory

Cost of Cost of Goods Goods SoldSold

12-11

Cost per Unit of ProductCost per Unit of 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 CostingJob-Order 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

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.

Actual CostingActual Costing

12-14

Overhead rate =Total manufacturing overhead

Total manufacturing activity

Overhead rate =$105,000

10,500

Overhead rate = $10 per machine hour

Actual CostingActual Costing

12-15

Overhead $30,000 $50,000 $25,000Direct materials 20,000 15,000 10,000Direct labor 10,000 20,000 15,000Total cost of job $60,000 $85,000 $50,000

Job Number J-1 J-2 J-3

Actual CostingActual Costing

12-16

May DecemberTotal overhead costs:

$50,000 + (10,000 x $4) $90,000$55,000 + (5,000 x $4) $75,000

Machine hours 10,000 5,000Overhead rate per machine hour $9 $15

ZyCo

Actual CostingActual Costing

12-17

Actual CostingActual Costing

ZyCoZyCo 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 DecemberMaterials $ 300 $ 300Direct labor 500 500Overhead, 100 hours at $9 and $15 900 1,500Totals $1,700 $2,300

12-18

Normal Costing

Predetermined overhead rate

Budgeted manufacturing overhead for year

Budgeted production activity for year

Overhead rate =$1,080,000

120,000

Overhead rate = $9 per machine hour

=

12-19

Normal Costing

Budget allowance

Fixed costs

= +

Variable cost per unit of activity

xAmount

of activity

Predetermined overhead rate =$600,000 + $4 x 120,000

120,000

= $9

12-20

Normal Costing

Overhead $27,000 $45,000 $22,500Direct materials 20,000 15,000 10,000Direct labor 10,000 20,000 15,000Total cost of job $57,000 $80,000 $47,500

Job Number J-1 J-2 J-3

12-21

Normal Costing

Overhead assigned to job =

Actual hours worked on

job

Total actual overhead

Total actual hours

x

Under actual costing

Overhead assigned to job =

Actual hours worked on

job

Total budgeted overhead

Total budgeted hours

x

Under normal costing

12-22

Misapplied OverheadMisapplied Overhead

Job J-1 $ 30,000$27,000Job J-2 50,00045,000Job J-3 25,000 22,500Total $105,000$94,500

Overhead Applied to Jobs Using

Actual Costing Normal Costing

12-23

Overhead VariancesOverhead Variances

The budget formula for annual overhead cost is $600,000 fixed costs ($50,000 per month) plus $4 per machine hour variable. July’s flexible budget

based on 10,500 hours is as follows:

ZyCo’s July Results

Actual costs, fixed and variable $105,000Budgeted costs [$50,000 + ($4 x 10,500 hours) 92,000Budget variance, unfavorable $ 13,000

12-24

Overhead VariancesOverhead Variances

ZyCo’s 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) $92,000Applied overhead ($9 x 10,500 hours) 94,500Volume variance, favorable $ 2,500

12-25

Overhead VariancesOverhead Variances

ZyCo’s July ResultsVariable Portion Fixed Portion

Budgeted cost (10,500x $4) $42,000 $50,000

Applied cost:10,500 x $4 42,00010,500 x $5 52,500

Volume variance (500 hours x $5) ---- $ 2,500

12-26

Overhead VariancesOverhead Variances

Volume variance =

Total budgeted manufacturing

overhead–

Total applied manufacturing

overhead

Volume variance =

Total budgeted fixed

manufacturing overhead

–Total applied fixed

manufacturing overhead

Volume variance =

Predetermined overhead rate for fixed costs

xBudgeted

production activity

Actual production

activity–

12-27

13,000 U

Budget variance Volume variance

$2,500 F

$10,500 UTotal underapplied

overhead

Actual

Overhead

Budgeted

Overhead

Applied

Overhead

$105,000 $92,000 $94,500

$50,000 + ($4 x 10,500) $9 x 10,500

Overhead VariancesOverhead Variances

12-28

Income Statements, Actual Income Statements, Actual and Normal Costingand Normal Costing

Sales $110,000$110,000Normal cost of sales $57,000Plus underapplied overhead 10,500Cost of sales 67,500 60,000Gross profit $ 42,500$ 50,000Selling and administrative 30,000 30,000Profit $ 12,500$ 20,000

Normal Costing

Actual Costing

ZyCo Income Statements for July

12-29

Activity-Based Overhead RatesActivity-Based Overhead RatesCool pools might consist of costs of departments or costs related to

such activities as material use, number of setups, cycle time, or

engineering changes.

12-30

Income Statements, Actual Income Statements, Actual and Normal Costingand Normal Costing

Sales $110,000Normal cost of sales 57,000Normal gross profit $ 53,000Variances:

Unfavorable budget variance $13,000Favorable volume variance 2,500 10,500

Gross profit $ 42,500Selling and administrative expenses 30,000Profit $ 12,500

ZyCo Normal Costing Income Statements for July

12-31

Activity-Based Costing Example

Direct LaborSetups TotalBudgeted overhead costs $800,000$400,000$1,200,000Budgeted direct labor hours 100,000Budgeted number of setups 2,000

Rates $8.00$200.00 per dlhper setup

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

Tricomm Company

12-32

Calculated Price for Two JobsCalculated Price for Two JobsUsing One RateUsing One Rate

Job AJob BDirect labor hours 800200Materials hours $10,000$10,000Direct labor cost ($10) 8,0002,000OH applied ($12) 9,600 2,400 Total cost $27,600$14,400

x 1.5 x 1.5Price $41,400$21,600

Tricomm Company

12-33

Calculated Price for Two Jobs Calculated Price for Two Jobs Using Activity-Based RatesUsing Activity-Based Rates

Job AJob BDirect labor hours 800200Materials hours $10,000$10,000Direct labor cost ($10) 8,0002,000Overhead:

Labor-related ($8) 6,4001,600Setup-related ($200) 400 5,000

Total cost $24,800$18,600 x 1.5 x 1.5

Price $37,200$27,900

12-34

The End

Chapter 12Chapter 12

12-35