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Fundamentals of Productand Service Costing

Chapter 6

Copyright © 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e". McGraw-Hill#Irwin

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Reasons to Calculate Product

or Service Costs

• For decision making

• For deciding what to sell

• For setting prices

• For knowing the cost of goods sold

• For knowing the cost of inventory

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Cost Allocation and Product Costing

L.O. 2 Explain how cost allocation is usedin a cost management system.

Basic Cost Flow iagram

irectmaterials

irectlabor

!anufacturingoverhead

"lpha Beta

Costpools

Costobjects

Costallocation

rule

#ndirect

$allocated

by direct labor cost%irect

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Basic Cost Flow Model

L.O. 3 Explain how a basic product costing system works.

• &ow costs and units move through inventories'

• This is true for the following accounts' ( )aw !aterials $)!% ( *ork+in+rocess $*#% ( Finished -oods $F-%

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Costing with No or!"in"Process

#nventories

• Bater aint begins production on "pril /.

• #t starts and completes production of /00,000gallons of paint in "pril and has no ending

work+in+process inventory.

!aterials 1 200,000

3abor /00,000!anufacturing overhead 400,000

Total 1/,000,000

Cost of resources used in "pril'

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Costing with or!"in"Process

#nventories

Beginning inventory +0+6tarted in !ay //0,000

Total //0,0007nding *# $408 complete% 90,000Transferred out :0,000

roduction for Bater aint for !ay follows $gallons%'

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#nventories

FG

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#nventories

• &ow do we cost Bater;s 90,000 gallons of paint thatare only half finished5

• 90,000 gallons half finished is e<uivalent to /0,000gallons finished.

• :0,000 gallons transferred out plus /0,000 e<uivalent gallonsof finished paint e<uals /00,000 e<uivalent gallons of paint.

-allons of paint transferred out :0,0007<uivalent gallons of finished paint /0,000Total e<uivalent gallons of paint /00,000

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#nventories

irect material = irect labor = >verhead$1::0,000%

Finished goodsinventory1?:/,000

*ork+in+processinventory1::,000

7<uivalent gallons:0,000gallons$:08%

/0,000gallons$/08%

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Predetermined $verhead Rates

L.O. 4 Understand how overhead cost is allocated to products.

• #ndirect costs are allocated using a predetermined

overhead rate $>&)%.• >&) is the cost per unit of the allocation base used

to charge overhead to products.

>&) @ 1 A Base

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Multiple Allocation Bases

and %wo"Stage Systems

L.O. 5 Explain the operation of a two-stage allocation

system for product costing.

• *e can use two or more allocation bases to allocatemanufacturing overhead to products.

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!anufacturing overhead

!achine+relatedcosts irect labor+relatedcosts

C+9s C+90s

Costpool

Costobjects

Costallocation

rules

#ndirect costs #ndirect costs

$allocated in proportion

to machine hours%

$allocated in proportion

to direct labor costs%

6econdstage

First stage

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Costpool

Cost allocationrule

#ntermediatecost pools

>verhead1/?0,000

3abor+related1/0?,000

!achine+related19,000

irect labor costs

!achinehours

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Product Costing Systems

L.O. 6 Describe the three basic types of product costing

systems: job order process and operations.

• ob costing'

( "n accounting system that traces costs to individual unitsor to specific jobs, contracts, or batches of goods.$custom homes, movies, services%

• rocess costing' ( "n accounting system used when identical units are

produced through a series of uniform production steps.$cornflakes, facial tissues, paint%

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