Product Costing:

Job and Process Operations

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 Inventories—Manufacturing Firms

▪ Materials Inventory
▪ Cost of materials purchased but not yet used

▪ Work in Process Inventory

▪ Cost of units started but not yet completed

▪ Finished Goods Inventory

▪ Cost of units completed but not yet sold

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 Inventories—
Merchandising and Service Firms

▪ Merchandising firms
▪ Merchandise inventory contains finished products that are available for sale

▪ Service firms
▪ Work in process inventory contains the costs related to a service firm’s partially
completed projects.

All inventory accounts are reported as

current assets on the Balance Sheet.

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Inventory Cost
in Various Organizations - Review
As inventories are
sold or used, they
are matched against
expenses.

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Product and Period Costs
All costs are broken into product costs or period costs for
product costing purposes.

Product Costs Period Costs

All production costs All costs other than

necessary to get product costs
products ready to sell

Costs are classified based on whether or not

they are related to the production process.

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Product Costs

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Period Costs

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 Direct Materials
▪ Costs of primary raw materials that are converted into finished goods
▪ Examples

▪ Iron ore to a steel mill

▪ Light fixtures for a builder
▪ Logs to a sawmill
▪ Cow’s milk to a dairy

A raw material of one company can be

a finished good of another company.

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Conversion Costs
▪ Costs of converting raw materials into finished goods
▪ Consist of direct labor cost and manufacturing
overhead

Direct Labor Manufacturing Overhead

Wages earned by All manufacturing costs
production employees other than direct materials
for the time they spend and direct labor
working on a product
Often called factory overhead

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Combined Costs

▪ Manufacturing cost categories are combined into

▪ Prime costs (direct materials and direct labor)
▪ Conversion costs (direct labor and manufacturing overhead)

▪ Elements necessary to convert the materials and components to the final finished
products
▪ Service companies also use prime and conversion cost categories
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Three Product Cost Components

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Product Cost Measurement Challenges
▪ Actual manufacturing overhead cost may not Possibly, the biggest
be known until after the end of the period, challenge in measuring
delaying the calculation of unit product cost. the cost of a product
is determining the
▪ Seasonal costs are not incurred each period amount of overhead
making actual product costs differ between incurred to produce it.
months.

▪ Costs assigned to products will vary from period to period when

the overall volume of activity varies.

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 Predetermined Overhead Rates
▪ Need to assign product costs during the period before total overhead can
be determined for the period.
▪ It is not feasible to wait until the end of the reporting period to determine
total product costs to bill customers for jobs completed during the period
▪ Therefore, assign manufacturing overhead costs to products during the
period based on estimates
1. Calculated at the beginning of each accounting period
2. Deal with production overhead – all costs other than direct material and
direct labor
3. Stated in terms of a rate

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 Calculation of the
Predetermined Overhead Rate

▪ Calculating the predetermined manufacturing overhead rate

Predetermined Manufacturing Estimated Overhead Cost
=
Overhead Rate Estimated Application Base
▪ Estimated overhead cost
▪ Dollar amount
▪ Estimated application base – volume/activity measures already being recorded
(also referred to as the cost driver most closely related to the accumulation of
overhead costs)
▪ Direct labor hours, direct labor cost, or machine hours
▪ Using the predetermine manufacturing overhead rate
Applied Manufacturing Overhead = Predetermined Rate x Actual Application Base
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 The Production Environment - Cost Accounting Systems
▪ Job Order Costing
▪ Customized products and services
▪ Product costs accumulated by job
▪ Example: Construction company

▪ Process Costing
▪ Homogeneous products or identical units produced on a continuous basis
▪ Can be one product or a set of closely related products

▪ Product costs accumulated by production department

▪ Example: Paint manufacturer

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 Explain the operation
of a job costing system.

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Basic Production Cost Flows

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Materials Cost Flows
Raw Materials Purchases
Recorded as a debit to Raw Materials with a credit to Cash or
Accounts Payable.

Manufacturing Supplies Purchases

Recorded as a debit to Manufacturing Supplies with a credit
to Cash or Accounts Payable.

Materials Requisitions
As requisitioned to the factory, direct materials are
transferred from Raw Materials as a credit to Work-in-Process
with a debit.
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Labor and Overhead Cost Flows
Direct Labor Costs Incurred
Assigned to Work-in-Process as a debit with a credit to Wages
Payable.

Other Production Labor Costs Incurred

Assigned to Manufacturing Overhead as a debit with a credit
to Cash or other payable.

Other Production Costs Incurred

Assigned to Manufacturing Overhead as a debit with a credit
to Cash or other payable.

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 Applying Overhead Costs
& Completing Products
Applying Manufacturing Overhead to Products:
Applied to Work-in-Process as a debit based on a predetermined overhead rate
as the predetermined activity occurs, such as direct labor hours, machine hours,
with a credit to Manufacturing Overhead.
Completing Products:
Accumulated production costs are totaled on a job cost sheet and
the total cost is transferred from Work-in-Process as a credit to
Finished Goods Inventory as a debit.

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Selling Completed Products
When Products are Sold:
Costs of products sold are transferred from Finished Goods
Inventory with a credit to Cost of Goods Sold with a debit.

Finished Goods Cost of

Inventory Goods Sold

The selling price increases Sales Revenue with a credit

and increases Cash or Accounts Receivable with a debit.

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Job Costing Example
Purchase Materials and Supplies
Haskell Builders began the year with $14,000 of Raw Materials
Inventory, $18,000 of Work-in-Process Inventory, $15,000 of
Finished Goods Inventory, and $1,200 of manufacturing supplies.

1. Raw materials totaling $45,000 and manufacturing

supplies costing $800 are purchased on account.
Raw Materials Accounts Payable
Beg.bal. 14,000 45,800 (1)

(1) 45,000

Manufacturing Supplies
Beg.bal. 1,200
(1) 800
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Job Costing Example
Materials Requisitioned
2. Materials totaling $34,000 are requisitioned for
production during the month.

Raw Materials Inventory Work-in-Process Inventory

Beg.bal. 14,000 Beg. Bal. 18,000
(1) 45,000 34,000 (2) (2) 34,000

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Job Costing Example
Labor Costs Incurred
3. Employees worked during the month at a cost of
$19,500 including $2,100 for indirect labor and $17,400
for direct labor.

Work-in-Process Inventory Manufacturing Overhead

Beg.bal. 18,000 Beg. Bal. 15,000
(2) 34,000 (3) 2,100
(3) 17,400

Wages Payable
19,500 (3)

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Job Costing Example
Manufacturing Costs Incurred
4. Additional overhead costs were incurred:
Manufacturing supplies used $ 600
Depreciation on factory assets 2,300
Miscellaneous (other payables) 4,200
Manufacturing Supplies Manufacturing Overhead
Beg. bal. 1,200 Beg. bal. 15,000
(1) 800 600 (4) (3) 2,100
(4) 600
Accumulated Depreciation (4) 2,300
2,300 (4) (4) 4,200

Other Payables
4,200 (4)

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Job Costing Example
Manufacturing Overhead Applied to Jobs
5. Manufacturing overhead is applied to jobs at the rate of
$17.00 per direct labor hour. Direct labor incurred is
1,450 at $12 per hour.

Applied = $17 x 1,450 = $24,650

Manufacturing Overhead Work-in-Process Inventory

Beg. bal. 15,000 24,650 (5) Beg. bal 18,000
(3) 2,100 (2) 34,000
(4) 600 (3) 17,400
(4) 2,300 (5) 24,650
(4) 4,200

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Job Costing Example
Completion of Jobs
6. Jobs 64, 66, 67, and 68 are completed with costs of
$81,050.

Work-in-Process Inventory Finished Goods Inventory

Beg. bal. 18,000 81,050 (6) Beg. bal 15,000
(2) 34,000 (6) 81,050
(3) 17,400
(5) 24,650

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Job Costing Example
Sale of Jobs
7. Jobs 64, 66, and 67, with a cost totaling $63,370, are
sold and delivered to customers for a sales price of
$148,000.
Finished Goods Inventory Cost of Goods Sold
Beg. bal. 15,000 63,370 (7) (7) 63,370
(6) 81,050

Accounts Receivable Sales Revenue

(7) 148,000 148,000 (7)

Gross profit = Sales revenue – Cost of goods sold

= $148,000 – $63,370 = $84,630
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Posting Job Costs Example
Job 64, $3,500 Job 67, $7,670
Direct materials requisitioned Job 65, $3,430 Job 68, $11,300
were for the following jobs: Job 66, $8,100

Job 64, $1,200 Job 67, $7,800

Direct labor incurred was on Job 65, $3,960 Job 68, $2,640
the following jobs: Job 66, $1,800

Job 64, $1,700 Job 67, $11,050

Overhead applied was on the Job 65, $5,610 Job 68, $3,740
following jobs: Job 66, $2,550

Job 64 Job 65 Job 66 Job 67 Job 68 Total

Beginning balance $18,000. $18,000.
Direct materials 3,500. $3,430. $8,100. $ 7,670. $11,300. 34,000.
Direct labor 1,200. 3,960. 1,800. 7,800. 2,640. 17,400.
Overhead applied 1,700. 5,610. 2,550. 11,050. 3,740. 24,650.
Completed jobs (24,400) (12,450) (26,520) (17,680) (81,050)
Ending work in process - $13,000. - - - $13,000.

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General Ledger Inventory
& Cost of Goods Sold Accounts
Raw Materials Inventory Work-in-Process Inventory
Beg. bal. 14,000 Beg. bal. 18,000 81,050 (6)

(1) 45,000 34,000 (2) (2) 34,000

25,000 (3) 17,400
(5) 24,650
13,000

Finished Goods Inventory Cost of Goods Sold

Beg. bal. 15,000 63,370 (7) (7) 63,370
(6) 81,050
32,680

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Job Order Costing
▪ Job order cost sheets for completed jobs provide the
cost of each job

▪ Allow management to properly cost and price the job

▪ Job order cost sheets for incomplete jobs should sum

to the ending balance in the Work-in-Process Inventory
account

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Income Statement for a merchandizing
organization – calculating Cost of Good Sold

Inventory

Beg. B
Purchases COGS

End. B
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Cost of Goods Manufactured
▪ For internal reporting purposes

▪ Summarizes the cost of goods completed for the period

Current manufacturing costs

Cost 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.

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Income Statement
▪ One line item differs on the income statement for a
manufacturing company as compared to a
merchandiser
Assume
▪ Manufacturers have no purchase of selling and
finished goods inventory administrative
▪ Manufacturers add cost of goods costs are
manufactured instead of purchases $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.
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 Over- and Under-Applied Overhead

▪ Exists because the amount of overhead applied is likely not the same
amount as the overhead incurred

▪ Balance in Manufacturing Overhead at end of period is the over- or

under-applied amount

▪ Must be eliminated at year end

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 Disposition of
Under- and Over-applied Overhead

1. Was overhead under-applied or over-applied to

production?
▪ Under-applied → Actual overhead > Applied overhead
▪ Over-applied → Actual overhead < Applied overhead

2. Is the amount of the under- or over-applied amount

insignificant?
1. Insignificant → Close to COGS
2. Significant → Close to Work in Process, Finished Goods,
and COGS

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Over- and Under-Applied Overhead
Example
The cost flow example used earlier has an ending credit
balance of $450 in Manufacturing Overhead.

Manufacturing Overhead
Beg. bal 15,000 24,650 (5)
More overhead
(3) 2,100
was applied than
actually incurred, so
(4) 600
Cost of Goods Sold
(4) 2,300
must be decreased
(4) 4,200
by $450.
450

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 YOUR TURN!

QUESTION:
After the overhead account is closed, what should be the balance in the
account?

ANSWER:
$0

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 Job Order Costing Summary
Job Order Costing is used when products are built to a customer's
specifications or services are provided to meet a customer’s unique needs.

▪ Product costs are accumulated for each job in a separate work in process inventory
account.
▪ When a job is finished, the product costs are moved from Work in Process Inventory to
Finished Goods Inventory.
▪ When a job is sold, the product costs are moved from Finished Goods Inventory to Cost of
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Goods Sold.
Process Costing

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 Process Costing
▪ Process costing is used when large volumes of identical (homogeneous)
products are manufactured in a continuous-flow operation.

▪ Production of fuels, chemicals, small appliances, building materials, electricity

▪ Product costs are accumulated for each processing department, not by
job/product.

▪ Very common in manufacturing setting

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 Characteristics of Process Costing

▪ Product costs are accumulated for each department in a separate, Work in Process inventory
account.
▪ When units are finished in a department, the related product costs are moved from the
department’s Work in Process Inventory to either another department’s Work in Process
Inventory, or Finished Goods Inventory.
▪ When units are sold, the related product costs are moved from Finished Goods Inventory to
Cost of Goods Sold.

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 Process Costing Steps – determining unit costs

Five step process:

1. Visualize the physical flow of units
2. Calculate the equivalent units
3. Determine the per unit cost
4. Calculate Cost of Goods Manufactured
5. Calculate the Ending Work in Process Inventory

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 Big G Division of General Mills
General Mills uses process costing to account for its cereal production. The
following results were noted for January in the Big G division:

▪ Our calculations on the following slides will assume:

▪ All materials are added at the beginning of the production process
▪ Conversion costs (i.e., labor and overhead) are added evenly throughout the production process

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 Step 1
Visualize the Physical Flow of Units
▪ The goal in Step 1 is to determine how many physical units were
completed during the period and how many physical units remain in
inventory at the end of the period for a particular production department.
▪ Assume that the beginning inventory is completed first

▪ Step 1 can be approached in one of two ways:

▪ Through the use of T-accounts

▪ By asking a series of questions

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 Step 1
Visualize the Physical Flow of Units
Big G Division of General Mills
Assume that all of the
beginning inventory is
completed first.
58,500 units started this
month:
55,000 are complete by the
end of the month and
3,500 remain partially
complete.

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 Step 2
Calculate the Equivalent Units
Problem: at any point in
time, units are at various
stages of completion.
Difficult to determine the
number of units to use in
an average cost per unit
calculation
Equivalent units –
equivalent number of
whole units completed
during the period
To calculate equivalent units:
1. Actual quantity of products
2. Average amount of work completed
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Step 2
Calculate the Equivalent Units, Big G Division of General Mills
▪ Big G uses the weighted average method to calculate equivalent units.
▪ What % of work was completed by the end of the period (i.e., inventory layers
are mixed).

▪ Big G separately calculates equivalent units for direct material and

conversion.

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 Step 3
Determine the Per-Unit Cost

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 Step 3
Determine the Per-Unit Cost
Big G Division of General Mills

▪ The average direct material cost per unit is $317.78.

▪ The average conversion cost per unit is $218.04.
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 Step 4
Calculate the Cost of Goods
Manufactured
▪ Cost of goods manufactured is the cost assigned to units completed
during a period.

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 Step 4
Calculate the Cost of Goods Manufactured
Big G Division of General Mills

▪ The total cost of goods manufactured for the period

was $30,863,311.

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 Step 5
Calculate Ending Work in Process Inventory
▪ The ending work in process inventory is the cost assigned to goods
remaining in inventory at the end of the period.

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 Step 5
Calculate Ending Work in Process Inventory
Big G Division of General Mills

▪ The total cost of ending work in process inventory is

$1,417,489.

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The Product Cost Report summarizes all the
steps in the total cost allocation process

• Summary of units in process

• Equivalent units in process
• Total costs to be accounted for and cost per
equivalent unit
• Accounting for total cost
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Appendix:
Review/Summary of Product Cost Flows

Prepare schedules of cost of

goods manufactured and cost
of goods sold
Schedules of Cost of Goods Manufactured and
Cost of Goods Sold
The schedules contains three types of costs:
1. direct materials
2. direct labor
3. manufacturing overhead

The schedules calculate:

1. the cost of raw material and direct labor used in
production and the amount of manufacturing
overhead applied to production.
2. the manufacturing costs associated with goods
that were finished during the period.
Product Cost Flows – Part 1
Raw material purchases made during the period are added to
beginning raw materials inventory. The ending raw materials inventory
is deducted to arrive at the raw materials used in production.

As items are removed from raw materials inventory and placed into
the production process, they are called direct materials.
Product Cost Flows – Part 2
Direct labor used in production and manufacturing
overhead applied to production are added to direct
materials to arrive at total manufacturing costs.
Product Cost Flows – Part 3
Total manufacturing costs are added to the
beginning work in process to arrive at total work in
process.
Product Cost Flows – Part 4
The ending work in process inventory is deducted
from the total work in process for the period to
arrive at the cost of goods manufactured.
Product Cost Flows – Part 5
The cost of goods manufactured is added to the beginning finished goods
inventory to arrive at cost of goods available for sale. The ending finished
goods inventory is deducted from this figure to arrive at cost of goods sold.