12-1 Introduction to Product Costing Prepared by Douglas Cloud Pepperdine University Prepared by...
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Transcript of 12-1 Introduction to Product Costing Prepared by Douglas Cloud Pepperdine University Prepared by...
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.
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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