Product Costing and Cost Accumulation

Product Costing Overview

• Product costs: used to value inventory and compute cost of goods sold.

• Importance in both financial and managerial accounting for decision making.

• Increased demand for product cost information from external organizations.

Cost Flow in Manufacturing

• Job-Order Costing:

  • For large, unique items produced to order.

  • Costs directly traced to each job.

  • Examples: job-shop and batch-production operations.

• Process Costing:

  • For small, identical items mass-produced continuously.

  • Costs cannot be directly traced to each unit.

  • Examples: petrochemical refinery, paint manufacturer, paper mill.

Cost Accumulation in Job-Order Costing

• Job-Cost Record: Primary document to track costs.

• Material Requisition Form: Authorizes use of materials for jobs.

• Direct Labor: Accumulated via work records/tickets.

• Manufacturing Overhead: Applied using a predetermined overhead rate based on direct labor hours.

  • Formula:

  • \text{Overhead applied} = \text{Rate} \times \text{Actual activity}

Document Flow in Job-Order Costing

• Job documents include:

  • Material Requisition: Charges direct materials to jobs.

  • Labor Time Records: Charges costs of direct and indirect labor.

Journal Entries in Costing

• Purchase of materials, use of direct and indirect materials, and service costs require journal entries.

• Key entries involve recording direct labor costs and applied manufacturing overhead.

Completion and Sale of Goods

• Cost of Goods Manufactured leads to Selling and Administrative costs.

• Finished goods transition to cost of goods sold upon sale.

Overapplied and Underapplied Overhead

• Actual overhead may differ from applied overhead; adjustments necessary at year-end for accuracy.