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Actual Product Costing

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 30

2

Inventory Accounts for Manufacturers

• Three inventory accounts– Raw materials

• Materials to be used in production– Direct and indirect

– Work in process• Direct materials used in production• Direct labor costs incurred to produce• Manufacturing overhead costs identified as part

of the cost of production– Finished goods

• Goods completed and ready for sale

Reported on the balance sheet

Production Departments3

Materials Storeroom Factory/Production Area

Costs in departments correlate to inventory

accounts.

Raw Materials

Work in Process

Finished Goods

Ready for

Sale

Actual Costing A method of assigning costs to products in a

manufacturing company– Direct materials and direct labor

• Traced to (specifically identified with) a product or service provided

• Easy to determine which product/service to which the cost belongs because they are direct

– Manufacturing overhead• Consists of indirect costs • Indirect costs cannot be easily identified with one

specific product or service• Actual overhead costs are assigned to products

• Appropriate for companies with a single product

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5

Acquiring Raw Materials

The Purchasing Manager fills out an electronic purchase order to order materials from a supplier

1

When materials are received, the Materials Storeroom Clerk records and stocks the

materials in the storeroom.

2

Materials Storeroom

The Materials Storeroom Clerk sends the receiving report to Accounting for

payment.

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6

Transactions to Acquire Materials

Purchase Materials for Cash• Debit/increase Raw Materials• Credit/decrease Cash Purchase Materials on Account• Debit/increase Raw Materials• Credit/increase Accounts Payable Pay for materials previously purchased on account• Debit/decrease Accounts Payable• Credit/decrease Cash• Credit/decrease Inventory for cash discount, if

any

Materials Requisition7

The production supervisor fills out a materials requisition form.

1

2

The processed form is sent to Accounting.

3

Factory/Production Area

PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date March 3Job No. A - 143Department B3

Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00

116.00$

Authorized Signature

A materials requisition form authorizes the use of materials on

a product or job

The materials storeroom clerk delivers the requested materials

to the production area.

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Materials Requisition Form

Why do we bother with a materials requisition form every time production

needs materials for a job?Tracing material

costs to particular products/ services

To mitigate theft and waste, and prevent overstocking of unneeded inventory which

can tie up cash

Internal control of assets

To determine the cost of products which is needed to set selling prices and make

other management decisions

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Using Direct Materials

Requisition of Direct Materials to Production• Debit/Increase Work in Process • Credit/decrease Raw Materials

Direct Labor Costs in Production10

Factory/Production Area

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Employees fill out time tickets

to record the time spent on

each product/service

PearCo Employee Time Ticket

Time Ticket No. 36 Date March 4

Employee I. M. Skilled Station 42

Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143

Totals 8.00 11.00$ 88.00$ A-143

Supervisor C. M. Workman

Measuring and Tracking Labor11

• Obtain hours worked from time tickets• Direct labor cost = gross wages + fringe benefits

Gross wages = Wage rate × hours worked on each product

Incur direct labor costs Debit/increase Work in Process Credit/decrease Cash, increase salaries payable,

etc.

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Manufacturing Overhead

Includes indirect materials, indirect labor, and factory (production facility) related costs

Incur factory-related costs

• Debit/increase Work in Process

• Credit/decrease Cash

Requisition Indirect Materials to Production

• Debit/increase Work in Process

• Credit/decrease Raw Materials

Incur indirect labor costs

• Debit/increase Work in Process

• Credit/decrease Cash, increase salaries payable, etc.

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Completing Products

The cost of completed goods is transferred out of Work in Process

Debit/increase Finished Goods Credit/decrease Work in Process

The cost transferred out is called Cost of Goods Manufactured

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Selling Products Transfer the cost of products sold out of Finished

Goods Debit/increase Cost of Goods Sold Credit/decrease Finished Goods

Recognize the sale Debit/increase Cash or AR Credit/increase Sales Revenue

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The End