CHAPTER 2
Measuring
Product Costs

PowerPoint Presentation by
LuAnn Bean
Professor of Accounting
Florida Institute of Technology
© 2012 Cengage Learning. All Rights Reserved. May
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Managerial Accounting 11E
Maher/Stickney/Weil

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☼

CHAPTER GOAL

☼

This chapter shows how the accounting system records
and reports the flow of costs in organizations to
answer questions such as these:
To determine product/service cost

To compare cost with management’s expectations

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LO 1

DIRECT
DIRECT MATERIALS:
MATERIALS: Definition
Definition

Can be easily traced
directly to a product.

3


LO 1

DIRECT
DIRECT LABOR:
LABOR: Definition
Definition

Is labor of workers who
transform materials into a
finished product.

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LO 1

MANUFACTURING
MANUFACTURING
OVERHEAD:
OVERHEAD: Definition
Definition
Includes all other costs of
transforming the materials
to a finished product.

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LO 1

How are materials, labor not
directly traceable to a product
categorized?

All costs, including materials and
labor, not directly traceable to a
product are categorized as
Manufacturing Overhead.

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LO 2

RESPONSIBILITY
RESPONSIBILITY CENTER:
CENTER:
Definition
Definition

Is any organizational unit
with its own manager or
managers.

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LO 2

Responsibility
center
(department)

Records costs &
assigns to products

Direct
materials

Direct
labor


Overhead

Management compares
costs to standards
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ACCOUNTING SYSTEM
PURPOSES

LO 3

1)
1) To
To record
record costs
costs by
by responsibility
responsibility for
for
performance
performance evaluation
evaluation and
and control.
control.
2)
2) To
To assign
assign manufacturing
manufacturing costs

costs to
to units
units
produced
produced for
for product
product costing.
costing.

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LO 3

BASIC COST FLOW EQUATION
Beginning + Transfers = Transfers + Ending
Balance
In
Out
Balance

BB + TI = TO + EB*
*Recall from financial accounting:
Beginning Balance + Additions - Withdrawals = Ending Balance

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COMPARING NORMAL and
ACTUAL COSTING


LO 4

 Normal costing advantages
Smoothes seasonal and other fluctuations that
don’t relate directly to activity levels
More timely than actual because of estimating
process

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LO 4

USING NORMAL COSTING
 Select a cost driver (allocation base) to apply
overhead
 Estimate dollar amount of overhead and level of
activity for period
 Compute predetermined (normal) overhead rate
 Apply overhead to production

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LO 4

EXAMPLE
Plantimum Builders manually assembles small modular
homes. Using prior year data, Plantimum estimated

variable manufacturing overhead at $100,000, 50,000
direct labor hours, and $50,000 fixed manufacturing
overhead.
What is Plantimum’s variable overhead rate?
$100,000 / 50,000 dlh = $2.00 per direct labor hour

What is Plantimum’s fixed overhead rate?
$ 50,000 / 50,000 dlh = $1.00 per direct labor hour
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LO 4

EXAMPLE
Actual direct labor hours for the month was 4,500.
How much variable overhead did Plantimum charge to
production for the month?
4,500 dlh X $2.00 per direct labor hour = $9,000

How much fixed overhead did Plantimum charge to
production for the month?
4,500 dlh X $1.00 per direct labor hour = $4,500
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LO 5

COST SYSTEMS
 An effective cost system must have
Decision focus: meets needs of decision makers

Different costs for different purposes
Variable costing for decision making
Full absorption for financial reporting

Cost-benefit test: benefits from cost system must
exceed its costs

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LO 5

COST SYSTEMS: Examples
 Job costing
 For custom production jobs
 Users: accounting and consulting firms, health care
organizations

 Process costing
 For standardized production
 Users: drink makers (e.g., Coca Cola, etc.)

 Operation costing
 A hybrid of job and process combined
 Users: Levi Strauss, Dell
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LO 6


PLANTIMUM PRODUCTION
Plantimum produced 3 modular homes during the
month. Plantimum wonders whether they
should use job order costing or process
costing? What do you think?

Continued
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LO 6

PLANTIMUM
PLANTIMUM PRODUCTION
PRODUCTION
COSTS:
COSTS: Using
Using Job
Job Order
Order
Jobs

Direct
Labor

Direct
Materials

Overhead
($3/dlh)


Total
Cost

Job #1001

$ 8,000

$20,800

$1,200

$30,000

Job #1002

6,000

18,100

900

25,000

Job #1003

5,000

11,250


750

17,000

$19,000

$50,150

$2,850

$72,000

Continued
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PLANTIMUM PRODUCT
COSTING: Using Process

LO 6

Unit costs =
Total manufacturing costs / Units produced
(DL + DM + Overhead) / 3
($19,000 + $50,150 + $2,850) / 3
Average unit cost is $24,000 per modular house
Continued
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LO 7

COMPARING
COMPARING COST
COST SYSTEMS
SYSTEMS
Nature of
Production
Heterogeneous Each Unit
Units
Large
Homogeneous Many
Continuous
Units
Small Units Process

Costing System
Used
Job Costing
Process Costing

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LO 8

FLOW OF COSTS: A Service
Company Example

An accounting or consulting service firm collects costs by job or client

and uses an accounting method similar to that used in manufacturing.
The flow of costs accounted for include:
Materials and overhead costs are transferred into Work-inProcess accounts for each job.
Work-in-Process costs are transferred to Cost of Services Billed.

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LO 8

FLOW OF COSTS REPORTING
The
The income
income statement
statement reports:
reports:
Revenue
Revenue
-- Cost
Cost of
of services
services billed
billed
== Gross
Gross Margin
Margin
-- Expenses
Expenses (e.g.,
(e.g., unbilled
unbilled direct

direct labor,
labor,
underapplied
underapplied overhead,
overhead, marketing
marketing expenses)
expenses)
== Operating
Operating Profit
Profit

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LO 10

CHARACTERISTICS OF JIT:

(Just-

in-Time Inventory)
JIT inventory methods attempt to obtain materials just
in time for production or sale
Reduces/eliminates inventory and carrying costs
Leads to immediate correction of defective units
Helps expose production problems
Relies on high-quality materials, production
Charges all costs directly to cost of goods sold

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LO 10

What happens to inventory
leftover after costs are charged
to cost of goods sold in a JIT
system?

Cost of leftover inventory is
“backflushed,” i.e., taken out of
cost of goods sold and put into
finished goods inventory.

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LO 11

What are equivalent
units?

Equivalent units (E.U.)
represent the translation of
partially completed work into
equivalent whole units.

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