Product Costs
All production costs necessary to get products ready to sell
Period Costs
All costs other than product costs
Costs are classified based on whether or not they are related to the production process.
Cost drivers are used to assign overhead costs Overhead cost per unit flaws
Units requiring extensive manufacturing activity have too little cost assigned Units requiring little manufacturing activity have too much cost assigned
Use an overhead application cost driver other than number of units of production.
Added to product costs as direct labor hours are incurred Actual direct labor hours
Predicted manufacturing overhead rate per direct labor hour
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 Purchases Total available Raw materials, end of month Direct labor Manufacturing overhead applied Work in process, beginning of month Total costs in process Work in process, end of month Cost of goods manufactured $14,000. 45,000. 59,000. (25,000)
Income Statement
One line item differs on the income statement for a manufacturing company as compared to a merchandiser
Manufacturers have no purchases of finished goods inventory Manufacturers add cost of goods manufactured instead of purchases
Sales revenue Cost of goods sold Finished goods inventory, beginning of month Cost of goods manufactured Total goods available for sale Finished goods inventory, end of month Gross profit Selling and administrative expenses Net income
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 underapplied amount Must be eliminated at year end Transfer to cost of goods sold
Allow Because most of the manufacturing overhead should already be in cost of goods sold
Overapplied
More overhead was applied than actually incurred, so Cost of Goods Sold must be decreased by $450.
Service Costing
The assignment of costs to services performed Uses job costing concepts Many companies regard service costs as expenses rather than product costs No formal procedures for reporting service costs on financial statements
Process Costing
Used when products are produced in a continuous manufacturing environment Production has no distinct beginning and end Determining the cost of a single unit
Equal to total product costs assigned to a process or department during a period divided by the number of units produced during the period
Examples
Coca-Cola 12 ounce cans Boxes of Cheerios
Key document in organizing and accounting for costs in a process costing environment
A cost of production report contains
Summary of units in process Equivalent units in process Total costs to be accounted for
Refers to the number of completed units that is equal, in terms of production effort, to a given number of partially completed units Example: Assume 90 units in the ending inventory are 40 percent complete. Equivalent units = 90 units in ending inventory x 0.40 = 36
If all efforts were put forth to starting and completing units, 36 full units could have been completed instead of 90 partial units.
Production Costs
Work-in-process, beginning materials cost beginning conversion costs Current manufacturing costs: Raw materials transferred to processing Direct labor for the period Overhead applied for the period $22,400 10,080
Material is incurred primarily at beginning of process. Conversion costs are incurred throughout the process.
Equivalent units for conversion costs: 3,200 30% = 960
Equivalent units in process Units completed Plus equivalent units in ending inventory Equivalent units in process Materials Conversion 25,400 25,400 3,200 960 28,600 26,360
Materials Conversion $22,400 $10,080 32,000 10,700 54,400 20,780 28,600 26,360 $ 1.90 $ 0.79
6,838 $75,164