Review these three videos which discuss several themes the learning outcomes below address:
Manufacturers choose a costing method that allows them to accurately calculate the cost of goods manufactured and sold.
Review Differentiating Job Costing from Process Costing from Managerial Accounting. Table 2.1 Job Costing Versus Process Costing presents compares job order and process costing.
In job order costing, raw materials are requisitioned that will be used to produce goods.
Accountants use a job order cost sheet to record costs as they accumulate manufacturing costs for each job.
Review how manufacturers prepare job order cost sheets in How a Job Costing System Works from Managerial Accounting.
Review Figure 2.3 which presents an example of a job order cost sheet.
Figure 2.3 Job Cost Sheet for Custom Furniture Company
Accountants consider a predetermined overhead rate normal costing.
Review the benefits of normal costing in How a Job Costing System Works from Managerial Accounting.
Indirect materials, indirect labor, and all other manufacturing costs (that are not direct materials or direct labor), are recorded as manufacturing overhead.
Manufacturers use a predetermined manufacturing overhead rate to calculate their overhead costs.
For example, a manufacturer may estimate total manufacturing overhead costs for the year at $100,000. If they also estimate the number of direct labor hours for the year to be 10,000 hours, they can divide $100,000 by 10,000 hours to arrive at a predetermined manufacturing overhead rate of $10 per direct labor hour.
The company will multiply that rate by the number of actual direct labor hours worked and debit work in process with a credit to manufacturing overhead for the result.
Here is the standard equation for calculating predetermined manufacturing overhead:
Predetermined manufacturing overhead rate = Estimated total manufacturing costs / Estimated total activity base
Accountants debit the manufacturing overhead account for actual costs.
Accountants credit the manufacturing overhead account for costs that were calculated using the predetermined overhead rate.
Managers debit the manufacturing overhead account throughout the production process for actual costs. They credit this account whenever the accountant applies estimated overhead to the work-in-process account.
Consequently, the manufacturing overhead account will have a debit or credit balance at the end of production since it is nearly impossible to estimate all of the exact costs for production.
Service organizations use job order costing to track costs by customer.
Review the manufacturing overhead account in How a Job Costing System Works from Managerial Accounting.
Review Figure 2.7 which provides an example of journal entries for the job order costing method.
Figure 2.7 Custom Furniture Company’s Journal Entries for May
Companies use job order costing systems to track costs for individual job orders which are used to calculate the profitability of individual job orders.
Review Figure 2.10 which compares estimated with actual costs.
Figure 2.10 Job Cost Estimates Versus Actual Results for Custom Furniture Company
Accountants use a predetermined overhead rate to allocate overhead costs to make it easier to apply costs that are difficult to trace to the production of a single job order.
Review three reasons for using a predetermined overhead rate to allocate manufacturing overhead costs in Why Allocate Overhead Costs? from Managerial Accounting.
Cost pools are necessary to allocate costs using a plant-wide overhead rate, departmental overhead rate, and activity-based costing.
Review how to determine plant-wide and department rates in Approaches to Allocating Overhead Costs from Managerial Accounting.
Review how to determine cost pools for activity-based costing in Using Activity-Based Costing to Allocate Overhead Costs from Managerial Accounting.
Managers use activity-based costing to identify and trace costs related to specific production activities.
Activity-based costing includes five steps to assign product costs.
Review these definitions in How Does an Organization Use Activity-Based Costing to Allocate Overhead Costs? from Managerial Accounting.
Review the five-step process accountants use to determine and apply costs in activity-based costing in Using Activity-Based Costing to Allocate Overhead Costs from Managerial Accounting.
Review Figure 3.7 which compares activity-based costing to plant-wide costing.
Figure 3.7 Activity-Based Costing Versus Plant-wide Costing at SailRite Company
Review Figure 3.9 which reviews the three methods of applying overhead.
Figure 3.9 The Three Methods of Overhead Allocation
Managers conduct a three-step process for activity-based management to improve efficiency and profitability.
Review this three-step process in Using Activity-Based Management to Improve Operations from Managerial Accounting.
Service organizations benefit from using activity-based costing and management processes.
Review the five-step process in Using Activity-Based Costing (ABC) and Activity-Based Management (ABM) in Service Organizations from Managerial Accounting.
Managers use costing to track the costs of unique or individual costs for manufacturing job orders. They use process costing to track costs to manufacture batches of similar or identical products.
Review these definitions in Comparison of Job Costing with Process Costing from Managerial Accounting. Be sure to review Table 4.1 A Comparison of Process Costing and Job Costing.
Process costing records the costs of direct materials, direct labor, and overhead in a Work-in-Process account for each production department.
In addition to costs for direct materials, direct labor, and overhead, production departments move costs from one department to the next as products are transferred during the production process.
Review How Is Process Costing Used to Track Production Costs? from Managerial Accounting.
Review Figure 4.2 which illustrates the flow of costs in process costing with t-accounts.
Figure 4.2 Flow of Product Costs in a Process Costing System
As units in production are transferred between work-in-process departments, they have varying stages of completion with respect to direct materials, direct labor, and overhead.
Review the method of calculating equivalent units of production in Determining Equivalent Units from Managerial Accounting.
Accountants use costs per equivalent unit to assign costs to: 1. units left in work-in-process at the end of the period, and 2. completed units that were transferred out of work-in-process during the period.
Review The Weighted Average Method from Managerial Accounting.
"Costs are assigned to completed units transferred out and units in ending work-in-process inventory using a four-step process," states Managerial Accounting.
Step 1: Presents a summary of the physical flow of units and a computation of equivalent units for direct materials, direct labor, and overhead.
Step 1. Figure 4.4 Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department
Step 2: Presents a summary of the costs of production for direct materials, direct labor, and overhead for each department.
Step 2. Figure 4.5 Summary of Costs to Be Accounted for in Desk Products’ Assembly Department
Step 3: Presents a calculation of costs per equivalent unit.
Step 3. Figure 4.6 Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department
Step 4: Presents an assignment of costs.
Step 4. Figure Assigning Costs to Products in Desk Products’ Assembly Department
Review these four steps in The Four Key Steps of Assigning Costs from
A cost of production report presents a formal summary of the four steps performed to assign production costs to completed units transferred out, and partially completed units left in ending work-in-process inventory.