Chapter 4
Product costing systems
Copyright
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An
Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton
Slides prepared by Kim Langfield-Smith
Product costing systems
Product costing systems
accumulate product-related costs and use
procedures to assign them to the final
products
In some businesses upstream and
downstream costs are regarded as
product-related
Product costs are the input to the
product costing system
Copyright 2003 McGraw-Hill Australia Pty
Copyright 2003 McGraw-Hill Australia Pty
Different product costs for
different purposes
Product costs can include upstream,
manufacturing and downstream costs
Inclusion of various costs depends on
the time frame and type of decision to
be made
Managers needs for product cost
information will vary depending on the
type of decision to be made and
managers personal preferences
continued
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Different product costs for
different purposes
Cost for inventory valuation for eternal
reporting must include only
manufacturing costs
For long-term decision about products a
wider definition may be used
Product costs are used to value
inventory, for short-term and strategic
decision making, for planning and
controlling costs and for cost
reimbursement
continued
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Copyright 2003 McGraw-Hill Australia Pty
Different product costs for
different purposes
Current or future product costs?
Current product costs are relevant for
inventory valuation
Future product costs may be relevant for
input into some decisions
Frequency of cost information?
Infrequently for long-term decisions, or
even short-term decisions
More regularly for inventory valuation
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Designing product costing
systems
Identify the managers needs
All product cost information may not
come from a single product costing
system
Cost and benefits of various
alternative systems must be assessed
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Flow of costs in
manufacturing businesses
When used for inventory valuation,
manufacturing costs only are
assigned to products, in line with
Australian accounting standards
Manufacturing costs consist of
Direct material
Direct labour
Manufacturing overhead
continued
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Flow of costs in
manufacturing businesses
Several manufacturing ledger
accounts
Raw materials inventory,
Work in process inventory,
Finished goods inventory,
Cost of goods sold expense, and
Profit and loss account
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Allocating overhead costs
to
products
To estimate the cost of a product we
need to identify the cost of resources
used to produce the product
Some resources are consumed directly,
and are traced directly to each product
Overhead costs are essential to
production, but have no observable
relationships to the product need to
be allocated
continued
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Allocating overhead costs
to products
Identify the overhead cost driver
Calculate a predetermined (or
budgeted) overhead rate per unit of
cost driver
Apply manufacturing overhead costs
to products at the budgeted (or
predetermined) overhead rate,
multiplied by the quantity of cost
driver consumed by the product
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Accounting for
manufacturing overhead
Actual manufacturing overhead
Manufacturing overhead costs incurred in
production
Charged to the manufacturing overhead
account
Applied manufacturing overhead
Estimate of the overhead resources used
to manufacture a product
Applied to products using a
predetermined overhead rate
continued
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Accounting for
manufacturing overhead
Disposing of underapplied or
overapplied overhead at the end of
the accounting period
Close the underapplied or overapplied to
cost of goods sold, or
Prorate to cost of goods sold, work in
process inventory and finished goods
inventory
continued
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Accounting for
manufacturing overhead
Most firms close underapplied or
overapplied overhead at the end of
the year only
Do not close monthly as monthly
fluctuations will average out over a
year
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Types of product costing
systems
Job costing
Manufacturing costs traced to individual
jobs
Products are produced in distinct
jobs/batches which are significantly
different
Printers, furniture manufacturers,
machinery manufacturers
Many service firmslawyers, accountants,
consulting engineers
continued
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Types of product costing
systems
Process costing
Production costs traced to
process/department, and averaged across
all units produced
Mass production or repetitive environment
Petrol production, processed food,
chemical and plastics manufacturers
Repetitive services routine processing of
cheques by banks, handling of license
applications by government departments
continued
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Types of product costing
systems
Process costing involves
Estimate the cost of production processes,
and
Calculate the average cost per unit by
dividing the cost of the process by the
number of units produced
The costs of products that are produced in
one department are transferred into the next
department
Some product costing systems have
features of both job costing and process
costing
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Job costing
Bill of materials: lists all the materials
required for a job
Material requisition forms - authorise the
movement of raw materials from the
warehouse to the production
department
Job cost sheet - summarises the costs of
direct material, direct labour and
manufacturing overhead for a particular
job
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Job costing
Purchase of materials
Raw material inventory
Account payable
xxxx
xxxx
Transferring direct material to jobs
Work in process inventory
xxxx
Raw material inventory
xxxx
continued
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Job costing
Use of indirect material
Manufacturing overhead
xxxx
Manufacturing supplies inventory xxxx
Charging direct labour to jobs
Work in process inventory
Wages payable
xxxx
xxxx
continued
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Job costing
Accounting for indirect labour
Manufacturing overhead xxxx
Wages payable
xxxx
Accounting for manufacturing expenses
Manufacturing overhead xxxx
Prepaid rent xxxx
Depreciation on equipment xxxx
etc
continued
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Job costing
Application of manufacturing overhead
Work in process inventory
xxxx
Manufacturing overhead
xxxx
Completion of production job
Finished goods inventory xxxx
Work in process inventory xxxx
continued
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Job costing
Sale of goods
Accounts receivable
Sales revenue
xxxx
Cost of goods sold
Finished goods inventory
xxxx
xxxx
xxxx
continued
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Job costing
Underapplied and overapplied overhead
Manufacturing overhead xxxx
Indirect material xxxx
Indirect labour
xxxx
Depreciation on equipment xxxx
etc
Cost of goods sold xxxx
Manufacturing overhead
xxxx
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Process costing
The approach taken in process costing
depends on
The existence of WIP inventory at the end
of the accounting period
Their degree to which products are
identical in their consumption of direct
material and specific production processes
Simple forms of process costing
assume no WIP inventory
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