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Actual Product Costing
Managerial Accounting
Prepared by Diane TannerUniversity of North Florida
Chapter 30
2
Inventory Accounts for Manufacturers
• Three inventory accounts– Raw materials
• Materials to be used in production– Direct and indirect
– Work in process• Direct materials used in production• Direct labor costs incurred to produce• Manufacturing overhead costs identified as part
of the cost of production– Finished goods
• Goods completed and ready for sale
Reported on the balance sheet
Production Departments3
Materials Storeroom Factory/Production Area
Costs in departments correlate to inventory
accounts.
Raw Materials
Work in Process
Finished Goods
Ready for
Sale
Actual Costing A method of assigning costs to products in a
manufacturing company– Direct materials and direct labor
• Traced to (specifically identified with) a product or service provided
• Easy to determine which product/service to which the cost belongs because they are direct
– Manufacturing overhead• Consists of indirect costs • Indirect costs cannot be easily identified with one
specific product or service• Actual overhead costs are assigned to products
• Appropriate for companies with a single product
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Acquiring Raw Materials
The Purchasing Manager fills out an electronic purchase order to order materials from a supplier
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When materials are received, the Materials Storeroom Clerk records and stocks the
materials in the storeroom.
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Materials Storeroom
The Materials Storeroom Clerk sends the receiving report to Accounting for
payment.
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Transactions to Acquire Materials
Purchase Materials for Cash• Debit/increase Raw Materials• Credit/decrease Cash Purchase Materials on Account• Debit/increase Raw Materials• Credit/increase Accounts Payable Pay for materials previously purchased on account• Debit/decrease Accounts Payable• Credit/decrease Cash• Credit/decrease Inventory for cash discount, if
any
Materials Requisition7
The production supervisor fills out a materials requisition form.
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2
The processed form is sent to Accounting.
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Factory/Production Area
PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date March 3Job No. A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
Authorized Signature
A materials requisition form authorizes the use of materials on
a product or job
The materials storeroom clerk delivers the requested materials
to the production area.
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Materials Requisition Form
Why do we bother with a materials requisition form every time production
needs materials for a job?Tracing material
costs to particular products/ services
To mitigate theft and waste, and prevent overstocking of unneeded inventory which
can tie up cash
Internal control of assets
To determine the cost of products which is needed to set selling prices and make
other management decisions
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Using Direct Materials
Requisition of Direct Materials to Production• Debit/Increase Work in Process • Credit/decrease Raw Materials
Direct Labor Costs in Production10
Factory/Production Area
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Employees fill out time tickets
to record the time spent on
each product/service
PearCo Employee Time Ticket
Time Ticket No. 36 Date March 4
Employee I. M. Skilled Station 42
Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143
Totals 8.00 11.00$ 88.00$ A-143
Supervisor C. M. Workman
Measuring and Tracking Labor11
• Obtain hours worked from time tickets• Direct labor cost = gross wages + fringe benefits
Gross wages = Wage rate × hours worked on each product
Incur direct labor costs Debit/increase Work in Process Credit/decrease Cash, increase salaries payable,
etc.
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Manufacturing Overhead
Includes indirect materials, indirect labor, and factory (production facility) related costs
Incur factory-related costs
• Debit/increase Work in Process
• Credit/decrease Cash
Requisition Indirect Materials to Production
• Debit/increase Work in Process
• Credit/decrease Raw Materials
Incur indirect labor costs
• Debit/increase Work in Process
• Credit/decrease Cash, increase salaries payable, etc.
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Completing Products
The cost of completed goods is transferred out of Work in Process
Debit/increase Finished Goods Credit/decrease Work in Process
The cost transferred out is called Cost of Goods Manufactured
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Selling Products Transfer the cost of products sold out of Finished
Goods Debit/increase Cost of Goods Sold Credit/decrease Finished Goods
Recognize the sale Debit/increase Cash or AR Credit/increase Sales Revenue
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The End