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Prepared byDiane TannerUniversity of North Florida

Chapter 30

Actual Product Costing

Methods of Costing Products

 Actual

CostingNormal Costing

Standard Costing

Direct Materials Actual Actual Budgeted

Direct Labor Actual Actual Budgeted

Manufacturing Overhead Actual Budgeted Budgeted*

Three methods Actual costing Normal costing Standard costing

How they differ Whether actual or budgeted costs are used to

determine the ‘cost’ of products or services

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How Costs Get Assigned to Products

• 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– For a single product, assigned to that product by

default

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Inventory Accounts for Manufacturers

• Three inventory accounts–Raw materials

• Materials to be used in production–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

Production Departments5

Materials StoreroomFactory/Production Area

Ready for Sale

Costs in departments correlate to inventory

accounts.

Raw Materials

Work in Process Finished

Goods

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Acquiring Raw Materials

Materials Storeroom Factory/Production Area

The Purchasing Manager fills out a purchase order to order materials from a

supplier

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

The Materials Storeroom Clerk sends the receiving report to Accounting for payment.

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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 Requisition8

Materials Storeroom Factory/Production Area

The production supervisor fills out a materials requisition form.

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 Will E.

Delite

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The materials storeroom clerk delivers the

requested materials to the production area.

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Authorizes the use of

materials on a job

The processed form is sent to Accounting.

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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

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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 to set selling prices and make other management decisions

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Actual Costing

• Used when there is only one product or one services

• Cost of inventory is – Actual direct materials– Actual direct labor– Actual manufacturing overhead

• All inventory costs are added (debited) directly to work in process

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Using Materials (Actual Costing)

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

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Time Tickets

Materials Storeroom

Factory/Production Area

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 Direct Labor13

• Multiply each employee’s wage rate by the number of hours that each employee works on each product• Gross wages • Add fringe benefits

• Overtime premium (the extra ‘half’ time paid) when employees work over 40 hours• If the result of production problems or

idle time, treat as overhead• If the result of accepting a rush order,

treat as direct labor

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Incurring Labor

Incur Direct Labor Costs• Debit/Increase Work in Process• Credit/decrease Cash, increase salaries payable,

etc.Incur Indirect 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 Indirect Labor or Factory Related Costs• Debit/Increase Work in Process• Credit/decrease CashIncur Indirect Material Costs• Debit/Increase Work in Process• Credit/decrease Raw Materials

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The End