PRODUCT COSTING AND COST ACCUMULATI

PRODUCT COSTING AND COST ACCUMULATION IN A BATCH PRODUCTION ENVIRONMENT

Product and service costing

A. product costing system accumulated the costs incurred in a production process and assigns those cost to the organization's final products. Product cost are needed for a variety of purpose in financial accounting, manajerial accounting, and cost management.

Use in Financial Accounting. In financial accounting, product cost are needed to value inventory on the balace sheet and to compute cost of goods sold expense on the income statement. Under generally accepted accounting principles, inventory is valued at its cost until it is sold. Then the cost of the victory becomes an expense of the period in which it is sold.

Use in Managerial Accounting. In Manajerial Accounting, product costs are needed to help manajers with planning and to provide them with data for decision making. Decisions about until it is sold. Then the cost of inventory becomes an expense of the period in which it is sold

Use in Cost Management. it is hard to imagine how management can control or reduce production cost if management does not have a clear idea of how much it cost to make it product. Thus, product cost provide crucial data for a variety of cost manajement purposes. Many of the cost management uses of product costing information will be covered throughout this book.

Use in Reporting to Interested Organizations. In addition to financial statement preparation and internal decision making, there is an ever growing need for product cost information in relationships berween firm and various outside organizations. Public untilities, such as electric and gas companies, record product cost to justify rate increases that must be approved by state reguratory agencies. Hospitals keep track of the cost of medical procedures that are reimbursed by insurance companies or by the federal government under the medicare program. Manufacturing firms often sign cost-plus contracts with the government, where the contract price depends on the cost of manufacturing the product.

Product Costing In Nonmanufacturing Firms
The need for product cost is not limited to manufakturing firm. Merchandising companies include the costs of buying and transporting merchandise in their product cost. Producers of inventoriable goods, such as mining products, petroleum, and agricultural product, also record the cost of producing their goods. The role of product cost in these companies is identical to that in manufacturing firms. For example, the pineapples grown and sold by Dole are inventoried at their product cost becomes cost of goods sold expense.

Flow of costs in manufacturing firm
Manufacturing costs consist of direct materia, direct labor, and manufacturing over head. The product-costing system used by manufacturing firm employ several manufacturing accounts. As production takes place, all manufacturing cost are added to the work in process inventory account . Work in process is partially completed inventory. A debit to the account increases the cost based valuation of the asset represented by the unfinish product . As soon as product are completed, their product cost are transferred from work in process inventory to finished Goods inventory. This is accomplished with a credit to work in process and a debit to finished Goods. During the time period when product are sold, the product cost of the inventory sold is removed from Finished Goods and added to cost od Goods Sold , which is an expenseof the period in which the sale occurred. A credit to finished Goods and a debit to Cost of Goods Sold completes this step. Cost Of Goods Sold is closed into the income summary account at the end of the accounting period, along with all other expense and revenue of the period. Exhibit 3-1 depicts the flow of cost through the manufacturing accounts.

Work In Process Inventory Finished Goods Inventory
Direct Marerial Cost
Direct Labor Cost Product cost transferred
Mnufacturing Overhead when product is finished




Cost Of Goods Sold Income Summary
Expense closed into
Income summary at end of
accounting period


*Cost of Goods sold is an expense. Although it is more descriptive, the term “ cost of goods sold expense ‘’ is not used as muchin practice as the simpler term “ cost of goods sold ’’

Example of manufacturing cost flows. Suppose that the Bradley paper company incurred the following manufacturing cost during 20x1.

Direct Material......................................................................................30.000
Direct Labor ..........................................................................................20.000
Manufacturing Overhead......................................................................40.000

During 20x1, products costing $ 60.000 were finished and products costing $25.000 were sold for $32.000. Exhibit 3-2 shows the flow of cost through the Bradley Paper
Work In Process Inventory Bradley Paper Company
Direct Marerial Cost 30.000 Partial Balance Sheet As
Direct Labor Cost 20.000 60.000 Desember 31, 20x1
Mnufacturing Overhead 40.000 Current Asset :
30.000 Cash.................................xxx
Account Recevaible.........xxx
Finished Goods Inventory Inventory :
60.000 25.000 Raw Material...................xxx
Work In Procces.....$ 30.000
35.000 Finished goods.......$ 35.000

Cost of Goods Sold
25.000
Bradley Paper Company
Sales Revenue Partial Income Statement
32.000 For the year 20x1
Sales Revenue............$32.000
Less:cost od goods sold25.000
Gross margin................7.000

Company’s manufacturing accouns and the effect of the firm’s product cost on its balance sheet and income statement.

Types Of Product – Costing System

The detailed accounting produres used in product-costing system depend on the type of Industry involved. Two basic sets of procedures are used : Job-Order costing and process costing.

Job Order Costing System

Job order costing is used by compsnies with job-shop operations or batch production operation. In a job shop environment , products are manufactured in very low volumes or one at a time.

Process costing systems
Process costing is used by companies that produce large number of identical units. Firms that produce chemicals, microchips, gasoline, beer, fertilizer, textiles, processed food, and electricy are among those using process costing.

Summary Of Alternative Product Costing System

The distinction between job order and process costing hinges on the type of production process involved. Job order costing systems assign costs to distinct production jobs that are significantly different . Then an average cost over a large number of identical ( or very similar ) units of product.

The remainder of this chapter examines the details of job order costing. The next chapter covers process costing.

Accumulating Cost in a Job Order Costing System

Job Cost Record

Job Number : F16 Description : 80 deluxe aluminium fishing boats
Date Started : Nov. 1, 20x1 date Completed : Nov. 22, 20x1

Direct Material
Date Requistion Number Qty Unit Price Cost
11/1 803 7200 sq ft $ 2.50 $ 18.000

Direct Labor
Date Time Card Number Hours Rate Cost
Various dates Various time card 600 $ 20 $ 12.000

Manufacturing Overhead
Date Cost Driver Qty Application Rate Cost
11/30 Machine hours 2000 $ 9.00 $ 18.000

Cost Summary
Cost Item Amount
Total direct material $ 18.000
Total direct labor $ 12.000
Total manufacturing overhead $ 18.000
Total Cost $ 48.000
Unit Cost $ 600

Shipping Summary
Date Units Shipped Units Remaining in Inventory Cost Balance
11/30 60 20 $ 12.000

The procedures used to accumulate the costs of direct material, direct labor, and manufacturing overhead for a job constitute the set of activity performed by the job order costing system. These procedures are discussed next.

Direct Material Cost

As raw material are needed for the production process, they are transferred from the warehouse to the production department. To authorize the release of material, the production department supervisor completes a material requisition form and present it to the warehouse supervisor. A copy of the material requisition form goes to the cost accounting department. There it is used as the basis for transferring the cost of