MBA 6011 Product Costing Highlights Mod 17

7/22/2019 MBA 6011 Product Costing Highlights Mod 17

1/21

Module 17Highlights relating

to Product Costing


2/21

Inventory Costs in Various

Organizations

Asinventories

are soldor used,they arematchedagainst

expenses.


3/21

Product and Period Costs

All costs are broken into product costs or period

costs for product costing purposes.

Product Costs Period Costs

All production costsnecessary to get

products ready to sell

All costs other thanproduct costs

Costs are classified based on whether or notthey are related to the production process.


4/21

Three Product Cost Components


5/21

Selecting a Cost Driver

Cost drivers are used to assign overhead costs

Overhead cost per unit flaws Units requiring extensive manufacturing activity

have too little cost assigned Units requiring little manufacturing activity have too

much cost assigned

Use an overhead application cost driverother than number of units of production.


6/21

Using Predetermined

Overhead Rates

Established at beginning of year

Can use different cost drivers Predicted total direct labor hours

Predicted total machine hours Calculating the predetermined rate using direct

labor hours

Predictedtotal manufacturing overhead cost for the year

Predictedtotal direct labor hours for the year

The predetermined overhead rate uses predicted

amounts as actual amounts are unknown.


7/21

Using Predetermined

Overhead Rates

Applying overhead to productsAdded to product costs as direct labor hours are

incurred

Predictedmanufacturingoverhead rate

per directlabor hour

Actual

direct

laborhours

Manufacturingoverhead

assigned toWork-in-Process

inventory

=


8/21

Predetermined Overhead Rate

Example

Harmonic predicted a 2011 activity level of 40,000

direct labor hours with manufacturing overhead

totaling $128,000.

Predicted total manufacturing overhead cost for the year

Predicted total direct labor hours for the year

Predetermined overhead rate =

$128,00040,000 direct labor hours

=$3.20 per direct

labor hour=


9/21

Applying Overhead Example

If Harmonic uses 2,200 direct labor hours in January,how much is applied overhead?

= 2,200 $3.20 per direct labor hour = $7,040

Predicted

manufacturingoverhead rateper directlabor hour

Actual

directlaborhours

Manufacturing

overheadassigned toWork-in-Process

inventory

=

The monthly variations between actual and applied

overhead will likely occur.


10/21

Basic Production Cost Flows


11/21

Cost of Goods Manufactured

Current manufacturing costsCost of materials placed in production

Raw materials, beginning of month $14,000.

Purchases 45,000.

Total available 59,000.

Raw materials, end of month (25,000) $34,000.

Direct labor 17,400.

Manufacturing overhead applied 24,650. $76,050.

Work in process, beginning of month 18,000.

Total costs in process 94,050.

Work in process, end of month (13,000)

Cost of goods manufactured $81,050.

For internal reporting purposes Summarizes the cost of goods completed for the

period


12/21

Income Statement One line item differs on the income

statement for a manufacturing company ascompared to a merchandiser

Manufacturers have no purchases of finishedgoods inventory

Manufacturers add cost of goods manufacturedinstead of purchases

Assume selling

and

administrative

costs are

$43,000.

Sales revenue $148,000.

Cost of goods sold

Finished goods inventory, beginning of month $15,000.Cost of goods manufactured 81,050.

Total goods available for sale 96,050.

Finished goods inventory, end of month (32,680) 63,370.

Gross profit 84,630.

Selling and administrative expenses (43,000)

Net income $ 41,630.


13/21

Over and Under Applied Overhead

Exists because the amount of overhead appliedis likely not the same amount as the overhead

incurred

Balance in Manufacturing Overhead at end ofperiod is the over or underapplied amount

Must be eliminated at year end

Transfer to cost of goods soldAllow Because most of the manufacturing overhead

should already be in cost of goods sold


14/21

Over and Under Applied Overhead

Example

The cost flow example

used earlier has an ending

credit balance of $450 in

Manufacturing Overhead.

Manufacturing OverheadBeg.bal 15,000 24,650 (5)

(3) 2,100(4) 600(4) 2,300(4) 4,200

450

Overapplied

More overhead was applied than actually incurred, soCost of Goods Sold must be decreased by $450.


15/21

Service Costing

The assignment of costs to services performed

Uses job costing concepts

Many companies regard service costs asexpenses rather than product costs

No formal procedures for reporting service

costs on financial statements


16/21

Process Costing

Used when products are produced in acontinuous manufacturing environment

Production has no distinct beginning and end

Determining the cost of a single unit Equal to total product costs assigned to a process

or departmentduring a period divided by the

number of units produced during the period

Examples Coca-Cola 12 ounce cans

Boxes of Cheerios


17/21

Cost of Production Report

Key document in organizing and accounting forcosts in a process costing environment

Summary of units in process Equivalent units in process Total costs to be accounted for

and cost per equivalent unit Accounting for total cost

A cost of production report contains


18/21

Equivalent Completed Units

Refers to the number of completed units that is

equal, in terms of production effort, to a given

number of partially completed units

Example: Assume 90 units in the ending

inventory are 40 percent complete. Equivalentunits =

90 units in ending inventory x 0.40 = 36

Ifall efforts were put forth to starting andcompleting units, 36 full units could have been

completed instead of 90 partial units.

C f P d i R


19/21

Cost of Production Report

Example

Dog Divine manufactures bags of dog food using processcosting. The following information is supplied:

Units in process, beginning of period (80% converted) 5,600

Units started 23,000

Completed and transferred to finished goods 25,400

Units in process, end of period (30% converted) 3,200

Work-in-process, beginning materials cost $22,400beginning conversion costs 10,080

Current manufacturing costs:

Raw materials transferred to processing 32,000

Direct labor for the period 6,500

Overhead applied for the period 4,200

Units

Production Costs


20/21

Cost of Production Report ExampleSummary of Units in Process Section

Summary of units in process

Beginning 5,600.

Units started 23,000.

In process 28,600.

Completed (25,400)

Ending 3,200.

Of the total units in process,

25,400 were completed, while

the remaining 3,200 were still in

process at month end.

Material is incurred primarily at beginning of process.Conversion costs are incurred throughout the process.

Equivalent units for conversion costs: 3,200 30% = 960

Equivalent units in process Materials Conversion

Units completed 25,400 25,400

Plus equivalent units in ending inventory 3,200 960

Equivalent units in process 28,600 26,360


21/21

Cost of Production Report Example

Total Cost to Be Accounted For Materials Conversion Total

Beginning work in process $22,400 $10,080 $32,480Current cost 32,000 10,700 42,700

Total cost in process 54,400 20,780 $75,180

Equivalent units in process 28,600 26,360

Cost per equivalent unit in process $ 1.90 $ 0.79 $ 2.69

Accounting for total costsTransferred out (25,400 $2.69) $68,326

Ending work-in-process

Materials (3,200 $1.90) $6,080

Conversion (960 $0.79) 758 6,838

Total cost accounted for * $75,164

Calculations of the disposition of the total costs in process

during the period divided between units completed and units

still in process at month end

*Difference due to rounding

MBA 6011 Product Costing Highlights Mod 17

Documents

Transcript of MBA 6011 Product Costing Highlights Mod 17