CHAPTER 7 Example of Underlying Operational Process

PROCESS COSTING

CHARACTERISTICS OF PROCESS COSTING

Product Flow
1. SEQUENTIAL PRODUCT FLOW
Sequential Product Flow – indicates that only
the homogenous products will be moved from
one department to another department.
2. SELECTIVE PRODUCT FLOW

Underlying Operational Process System

• Means that a large number of
homogenous products pass through a
series of processes, where each process
is responsible for one or more Methods of Costing as Used in Process Cost
operations that will bring a product a System
step closer to its completion until the • FIFO (First-in, first-out). This is based
product is fully completed. on the premise that the units, which are
• A process is a series of activities that placed first in the process, will be the
are linked to perform a specific first ones to be completed. Those that
objective. are first completed are first transferred
out.
Procedures of Process Costing • Average method. This means that
department costs like the initial work in
process (WIP) inventory and other costs
added in the department are merged.

Methods of Application of the Elements of

Cost to the Products Processed
• Even. This means that the cost of
materials, labor and factory overhead
are evenly applied to the products
being processed.
• Uneven. This means that the
application of the cost of the products
varies at any stage of the process.
Cost of Production Report

Cost of production report has two parts:

1. Quantity schedule
2. Cost schedule

Quantity schedule
Quantity schedule is composed of the following:
1. Units to be accounted for
2. Units as accounted for
3. Computation of the equivalent units

Cost of Production Report Template

Chapter 7.1

Design Cost and Management Accounting System

Learning Objectives
• Explain why unit cost is important in the management process;
• Analyze the similarities and differences of job order cost accounting system and process cost
accounting system;
• Compute the cost as it is accumulated through job order cost accounting system;
• Compute the cost as it is accumulated through process cost accounting system
• Prepare the quantity schedule using weighted average and first-in-first-out method; and
• Analyze how each system designs works for managerial decision-making and how it affects the
financial statements.

Why cost information is important in the management process

In the planning stage, managers use cost information to:

➢ Develop budgets
➢ Establish prices
➢ Set sales goals.
➢ Plan production volume
➢ Estimate product or service
➢ unit costs
➢ Determine human resource
➢ needs

Why cost is important in the management process

• During the year, managers use cost information to
– Make decisions about controlling costs.
– Manage the company’s volume of activity.
– Ensure the quality of products or services.
– Negotiate prices
• When evaluating performance, managers use cost information to
– Evaluate actual and planned performance.
– Adjust planning and decision-making strategies.

• When communicating in reports, managers use cost information to

– Determine inventory balances and the cost of goods or services sold for the financial
statements.
– Prepare internal reports that compare actual unit costs and targeted costs.
Product Costing Systems
Similarities and Differences of Job Order Cost System& Process Cost System

Table 1: Characteristics of Job Order Costing and Process Costing Systems

Product Costing Systems

• To track product costs throughout the management process, an organization may use a job
order costing system, a process costing system, or a hybrid version of the two.
• The type of product costing system an organization uses depends on the nature of its
production process.
• Organizations whose units of output are quite different—that is, they make custom, unique, or
special-order products—typically use job order costing.
• A job order costing system traces the costs of direct materials, direct labor, and
overhead to a specific batch of products or a specific job order.
• A job order is a customer order for a specific number of specially designed,
made-to-order products.
• Organizations whose units of output are quite different—that is, they make custom, unique, or
special-order products—typically use job order costing.
• A job order costing system traces the costs of direct materials, direct labor, and
overhead to a specific batch of products or a specific job order. (cont.)
• A job order cost card is the document on which all costs incurred in the
production of a particular job order are recorded.
 • Organizations that produce large amounts of similar products or liquids or that have a
continuous flow of identical products typically use process costing.
• Examples of products whose production flow makes them suitable for process costing
include bricks, beverages, paint, and paper.
• Organizations that produce large amounts of similar products or liquids or that have a
continuous flow of identical products typically use process costing.
• A process costing system first traces the costs of direct materials, direct labor, and
overhead to processes, departments, or work cells and then assigns an average cost per
unit to the products produced by those processes, departments, or work cells.

Job Order Costing in a Manufacturing Company

OBJECTIVE 3: Explain the cost flow in a manufacturer’s job order costing system

Exhibit 1: The Job Order Costing System—Augusta, Inc.

Exhibit 1: The Job Order Costing System—Augusta, Inc.

Job Order Costing in a Manufacturing Company

• Cost flows in a manufacturer’s job order costing system are recorded as follows:
– The costs of materials are first charged to the Materials Inventory account and are
recorded in the corresponding accounts in the Materials Inventory account’s subsidiary
ledger.

– Labor costs are first accumulated in the Factory Payroll account.

-The various overhead costs (including indirect labor costs and indirect materials) are first charged to the
Overhead account.
• As products are manufactured, the costs of direct materials and direct labor are transferred to
the Work in Process Inventory account and are recorded in a subsidiary ledger of job order cost
cards that supports the Work in Process Inventory account.

• Overhead costs applied at a predetermined overhead rate are charged to the Work in Process
Inventory account and are recorded in that account’s subsidiary ledger. These charges are used
to reduce the balance in the Overhead account

-When products and jobs are completed, the costs assigned to them are transferred to the Finished
Goods Inventory account and are recorded in that account’s subsidiary ledger

-When the products are sold and shipped, their costs are transferred to the Cost of Goods Sold account.

-Any balance in the Overhead account at the end of the period is closed to Cost of Goods Sold.
• Underapplied overhead

• Overapplied overhead
A Job Order Cost Card and the Computation of Unit Cost
OBJECTIVE 4: Prepare a job order cost card, and compute a job order’s product or service unit cost.

Figure 1: Job Order Cost Card for a Manufacturing Company

Figure 2: Job Order Cost Card for a Service Organization

A Job Order Cost Card and the Computation of Unit Cost

• In a job order costing system, all the costs of a particular job’s direct materials, direct labor, and
overhead are accumulated on a job order cost card.
– Because all manufacturing costs are accumulated in one Work in Process Inventory
account, a subsidiary ledger made up of job order cost cards is needed to trace the costs
of specific jobs.
• Product unit cost in a job order costing system is calculated as follows:
– Total all manufacturing costs recorded on a particular job order cost card.
– Divide total manufacturing costs by the number of units produced for that job
• Service organizations use job order cost cards to record the costs of labor, materials and
supplies, and overhead incurred in performing a particular job and to determine selling prices in
cost-plus contracts.

3,500 2,800 6,300

2,300 1,600 3,900
1,150 800 1,950
12,150 / 5 custom built cabinets =2,430