# Chapter 3: Product Costing & Cost Accumulation (Batch Production)

Product Costs

Used in Financial Accounting to value inventory and compute Cost of Goods Sold (COGS).

Managerial Accounting

Uses product costs for planning, controlling, directing, and decision-making.

External Organizations

Need product cost information for taxation, investment decisions, competitive analysis, and government oversight.

Flow of Costs

Costs flow into Work in Progress (WIP) as direct materials, direct labor, and manufacturing overhead.

Finished Goods Transfer

Costs transfer from Work in Progress to Finished Goods Inventory upon product completion.

Cost of Goods Sold (COGS) Recognition

COGS is recognized as an expense in the period the sale occurs.

Job Order Costing

Used for low-volume, unique, high-cost, built-to-order products.

Job Shop Operations

Very low-volume production, often one unit at a time, like film production or aircraft manufacturing.

Batch Production Operations

Production of multiple products in small batches, such as furniture and printing.

Process Costing

Used for mass production of small, identical, low-cost items.

Unable to Directly Trace Costs

In process costing, costs cannot be traced due to identical units produced continuously.

Industries Using Process Costing

Oil refineries, paint manufacturers, paper mills, beverage companies.

Main Product Costs in Job-Order Costing

Direct materials, direct labor, manufacturing overhead.

Material Requisition Form

Document authorizing transfer of materials from raw materials to production.

Records Tracking Direct Labor

Time tickets or labor time records.

Manufacturing Overhead

Pool of indirect production costs, including indirect labor and materials.

Predetermined Overhead Rate (POHR) Formula

POHR = Budgeted Manufacturing Overhead ÷ Budgeted Activity Level.

Overhead Application to Jobs

Overhead Applied = POHR × Actual Activity.

Purpose of Using POHR

Managers need immediate cost estimates and cannot wait for actual totals.

Underapplied Overhead

When actual overhead is greater than applied overhead.

Overapplied Overhead

When applied overhead is greater than actual overhead.

Effect of Underapplied Overhead

Cost of Goods Sold is increased (debited).

Causes of Overapplied Overhead

Overestimating overhead costs or underestimating activity.

Schedule of Cost of Goods Manufactured (COGM)

Shows total manufacturing cost of goods completed during the period.

Last Line of COGM Schedule

Cost of Goods Manufactured.

Actual Costing

Involves recording direct materials, direct labor, and overhead at actual amounts.

Normal Costing

Direct materials and labor are actual, but overhead is applied using POHR.

Stage One of Cost Allocation

Overhead costs are assigned to departments (cost pools).

Stage Two of Cost Allocation

Departmental overhead is allocated to jobs using cost drivers.

Purpose of Individual POHR for Departments

Departments use different cost drivers, hence each has its own POHR.

Direct Labor

Considered a product cost.

Indirect Labor

Considered manufacturing overhead.

Journal Entry for Purchasing Raw Materials

Debit Raw Materials Inventory, Credit Accounts Payable.

Entry to Transfer Direct Materials to WIP

Debit WIP, Credit Raw Materials.

Job-Order Costing Outside Manufacturing

Applicable in sectors such as law firms, hospitals, consulting, contracts, and programs.

Importance of Cost Accumulation

To determine profitability, compare efficiency across jobs, and estimate future job costs.