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PowerPoint Presentation by

Gail B. Wright�Professor Emeritus of Accounting�Bryant University

© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.�

MANAGEMENT ACCOUNTING

8^th EDITION

BY

HANSEN & MOWEN

6 PRODUCT & SERVICE COSTING

LEARNING OBJECTIVES

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LEARNING GOALS

After studying this chapter, you should be able to:

LEARNING OBJECTIVES

1. Describe basic characteristics of & differences between job-order & process costing; identify types of firms that would use each method.
2. Describe cost flows associated with job-order costing.
3. Describe cost flows associated with process costing.
4. Describe equivalent units & explain their role in process costing.

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Continued

LEARNING OBJECTIVES

5. Prepare departmental production report using weighted average method.
6. Explain how process costing is affected by nonuniform application of manufacturing inputs & existence of multiple processing departments.
7. Complete departmental production report using FIFO method (Appendix A).
8. Prepare journal entries associated with job-order & process costing (Appendix B).

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Click the button to skip Questions to Think About

QUESTIONS TO THINK ABOUT:�Healthblend Nutritional Supplements

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Why do you suppose that Brianna did not originally implement an accounting system that would give individual product costs?

QUESTIONS TO THINK ABOUT:�Healthblend Nutritional Supplements

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Using a separate work-in-process account for each producing department, describe the flow of costs through Healthblend’s plant.

QUESTIONS TO THINK ABOUT:�Healthblend Nutritional Supplements

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What types of managerial decisions would be facilitated by having unit product cost information?

QUESTIONS TO THINK ABOUT:�Healthblend Nutritional Supplements

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How would Delia’s cost accounting system differ from that of Healthblend?

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Describe basic characteristics of & differences between job-order & process costing; identify types of firms that would use each method.

LEARNING OBJECTIVE

JOB-ORDER COSTING: Definition

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An accounting system that assigns costs to products produced for individually specific jobs.

LO 1

JOB-ORDER COSTING

The key feature of job-order costing is that the cost of 1 job differs from that of another and must be tracked separately.

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LO 1

PROCESS COSTING: Definition

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An accounting system that assigns costs to products produced in a series of processes.

LO 1

JOB-ORDER COSTING

The key feature of process costing is that the products produced are homogeneous and therefore have the same cost.

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LO 1

JOB-ORDER: Product Costs

• Direct materials
• Direct labor
• Overhead applied at predetermined rate

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LO 1

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Describe cost flows associated with job-order costing.

LEARNING OBJECTIVE

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How do you calculate costs for a job-order cost system?

Combine direct materials + direct labor + overhead.

LO 2

SUPLISHAKE-001

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Materials cost $1,780

Direct labor $300 (20 hours x $15)

Overhead $240 (20 hours x $12)

LO 2

Job 001

Materials . . . . . . . . . . $1,780

Labor . . . . . . . . . . . . . 300

Overhead . . . . . . . . . . 240

Total . . . . . . . . . . . . . . $2,320

Unit cost ($2,320/200) $11.60

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What will be the selling price for SupliShake-001?

If the selling price is cost + 50%, PNP will sell SupliShake-001 for $3,480 ($2,320 + $1160).

LO 2

WORK-IN-PROCESS: Definition

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All incomplete work at the end of an accounting period.

LO 2

ACCOUNTING FOR OVERHEAD

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Annual overhead costs (depreciation, rent, utilities, insurance) are estimated to be $14,400

LO 2

Overhead rate

= $14,400 / 1,200 direct labor hours

= $12 per DLH

LIGASTRONG-001

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Materials cost $1,300

Direct labor $450 (30 hours x $15)

Overhead $360 (30 hours x $12)

LO 2

Job 001

Materials . . . . . . . . . . $1,780

Labor . . . . . . . . . . . . . 450

Overhead . . . . . . . . . . 360

WIP 50% complete . . $2,590

OVERHEAD

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Overhead is underapplied by $15 for month.

LO 2

Actual Overhead Costs

Rent . . . . . . . . . . . . . . . $ 400

Utilities . . . . . . . . . . . . . 50

Depreciation. . . . . . . . . 100

Insurance . . . . . . . . . . . 65

Total Overhead Cost . $ 615

COST OF GOODS SOLD

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EXHIBIT 6-10

LO 2

Underapplied overhead adjusts CGS.

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3

Describe cost flows associated with process costing.

LEARNING OBJECTIVE

HEALTHBLEND: 3 Processes

• Picking Department
• DL selects herbs, vitamins, minerals, inert materials
• Ingredients are combined
• Encapsulating Department
• Mixture loaded into gelatin capsule
• Bottling Department
• Capsules counted into bottles & labeled

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LO 3

OPERATION COSTING: Blending Systems

• Operation costing blends job-order and process costing
• Material costs accumulated by batch
• Job-order costing applies
• Labor, overhead costs accumulated by process

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LO 3

TYPES OF PROCESS MANUFACTURING

• Sequential processing
• Materials pass through different process sequentially
• Example:
• Bottling follows picking at Healthblend
• Parallel processing
• Different materials pass through different processes simultaneously

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LO 3

PRODUCTION REPORT: Definition

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Provides information about physical units processed in a department as well as manufacturing costs.

LO 3

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Describe equivalent units & explain their role in process costing.

LEARNING OBJECTIVE

QUANTIFYING WIP IN A PROCESS COST SYSTEM

• Problems counting WIP
• How to define a unit of production?
• Answer: Equivalent full units (EFU)
• How should beginning WIP be treated?
• Weighted average
• FIFO

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LO 4

EQUIVALENT FULL UNITS: Definition

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The complete units that could have been produced given the total amount of manufacturing effort expended for the period.

LO 4

DEFINING UNIT OF PRODUCTION: Concept

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LO 4

EXHIBIT 6-13

Equivalent full units (EFU) necessary to calculate unit cost.

BEGINNING WORK-IN-PROCESS

• 2 ways to cost beginning WIP
• Weighted average
• Combines beginning inventory costs with current period costs
• Costs are pooled into 1 average unit cost
• FIFO
• Separates beginning inventory costs from current period costs

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LO 4

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5

Prepare departmental production report using weighted average method.

LEARNING OBJECTIVE

5 STEPS TO PREPARE PRODUCTION REPORT

1. Physical units flow analysis
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation of inventories
1. Goods transferred out
2. Ending work in process
5. Cost reconciliation

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LO 5

HEALTHBLEND’S PICKING DEPT.: July Costs

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LO 5

CALCULATE EFU: Step 2

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LO 5

EXHIBIT 6-14

In Step 1, calculate units to be accounted for. Then calculate EFU.

COMPUTE UNIT COST: Steps 3 & 4

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LO 5

EXHIBIT 6-14

Unit cost = $13,625 / 52,500 = $0.26 per EFU

Transferred out ($0.26 x 50,000 = $13,000

EWIP ($0.26 x 2,500) = 650

Total cost assigned = $13,650

COST RECONCILIATION: Step 5

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LO 5

WEIGHTED AVERAGE: Evaluation

• Major benefit
• Simplicity
• Major disadvantage
• Accuracy in computing unit costs for current period & for beginning WIP

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LO 5

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Explain how process costing is affected by nonuniform application of manufacturing inputs & existence of multiple processing departments.

LEARNING OBJECTIVE

NONUNIFORM INPUTS: Definition

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Occurs, for example, when direct materials are completely added at the beginning of process rather than throughout process.

LO 6

NONUNIFORM INPUTS: Example

In the Bottling Department, filled capsules, bottles added at beginning but bottle caps, boxes added at end of process. Affects computation of EFU.

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LO 6

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Complete departmental production report using FIFO method (Appendix A).

LEARNING OBJECTIVE

HEALTHBLEND’S PICKING DEPT.: July Costs

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LO 7

Remember

COST RECONCILIATION: Step 5

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LO 7

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Prepare journal entries associated with job-order & process costing (Appendix B).

LEARNING OBJECTIVE

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How are transactions entered into the accounting system?

Transactions are entered into accounting system by making journal entries & posting to accounts.

LO 8

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THE END

CHAPTER 6