This document provides an overview of managerial accounting concepts including the role of managerial accountants, cost classification, product costing systems, and income statement preparation. Key points include: - Managerial accountants play an important role in decision making, planning, controlling activities, and assessing performance. Their role has changed considerably over the past decade. - Costs are classified as direct, indirect, variable, fixed, and mixed for purposes of decision making, cost prediction, and cost control. Product costs include direct materials, direct labor, and manufacturing overhead. - Product costing systems like job order and process costing are used to assign costs to products and calculate unit product costs. Income statements can be prepared

1. CH1: INTRODUCTION
Which of the following statements about managerial accountants is false?
A. Managerial accountants more and more are considered "business partners.“
B. Managerial accountants often are part of cross-functional teams.
C. An increasing number of organizations are segregating managerial accountants in separate
managerial-accounting departments.
D. In a number of companies, managerial accountants make significant business decisions and
resolve operating problems.
E. The role of managerial accountants has changed considerably over the past decade.
Role of managerial accounting in dynamic business environment
Managing resources, activities, and peopleà An Organization
Acquires Resources & Hire People à Organized set of activities à1) Planning 2) Controlling
3) Decision Making 4) Evaluating
How managerial accounting adds value to the organization?
ü Providing information for decision making and planning.
ü Assisting managers in directing and controlling activities.
ü Motivating managers and other employees towards organization’s goals.
ü Measuring performance of subunits, activities, managers, and other employees.
ü Assessing the organization’s competitive position.
PROCESS MANAGEMENTàA business process is a series of steps that are followed in order to carry
out some task in a business.
THE VALUE CHAIN = Design à Develop à Produce à Market à deliver à Service
A value chain consists of the major business functions that add value to a company’s products
and services.
In order for a company to achieve a sustainable competitive advantage, it must:
A. perform one or more activities in the value chain at the same quality level as its competitors.
B. perform all activities in the value chain at the same quality level as its competitors.
C. perform its value chain activities at a higher quality level than one of its competitors.
D. two of the answers are correct.
Which if the following would not be part of a value chain for a fast food restaurant?
A. All of the answers are a part of the value chain.
B. Buying produce.
C. Mopping the floor.
D. Refilling the napkin dispensers.
E. Hiring new cooks.
A restaurant's value chain includes:
A. only the restaurant.
B. only upstream contributors.
C. only downstream contributors.
D. all of the other answers.
E. both up and downstream contributors.
Cost management systems tend to focus on an organization's:
A. machines.
B. employees.
C. activities.
D. customers.
E. rules and regulations.
Managerial accounting in the value chain analysis à LEAN PRODUCTION & JUST IN TIME (JIT)
1) Pull/Lean ProductionàLean thinking can be used to improve business processes that link
companies together. àThe term supply chain management refers to the coordination of business
processes across companies to better serve end consumers.
TRADITIONAL MANUFACTURING= Produce goods in anticipationà Store Inventoryà Make Sales
from Finished Goods Inventory
Traditional “Push” Manufacturing Companyà Large Inventoryà 1st) Raw Material (Materials
waiting to be processed.)à 2nd) Work in Process (Partially completed products requiring more work
before they are ready for sale.)à 3rd) Finished goods (Completed products awaiting sale.)
2) JIT/Lean Operationsà Good production systems require that managers address three issues that
are pervasive and fundamental to operations management: eliminate waste, remove variability, and
improve throughput
LEAN PRODUCTION= Customer places an orderà Create Production orderà Generate component
requirementsà Components are orderedà Production begins as parts arriveà Goods delivered when
needed (Lean Production is often called Just-In-Time (JIT) production.)
The lean thinking model is a five-step approach. 1) Identify value in specific products/services.
2) Identify the business process that delivers value 3) Organize work arrangements around the flow of
the business process. 4) Create a pull system that responds to customer orders. 5) Continuously pursue
perfection in the business process.
1. ELIMINATE WASTEà Ohno’s Seven Wastesà 1) Overproduction 2) Queues 3)Transportation
4) Inventory 5) Motion 6) Overprocessing 7) Defective products
• Sort/segregate – when in doubt, throw it out
• Simplify/straighten – methods analysis tools
• Shine/sweep – clean daily
• Standardize – remove variations from processes
• Sustain/self-discipline – review work and recognize progress
2. REMOVE VARIABILITYà Sources of Variability= 1) Incomplete or inaccurate drawings or
specifications 2) Poor production processes resulting in incorrect quantities, late, or non-conforming
units 3) Unknown customer demands
3. IMPROVE THROUGHPUT
Advantages of JIT Disadvantages of JIT
• High quality
• Flexibility
• Reduced setup times
• Reduced need for indirect labor
• Less waste
• Low warehouse cost
• Synchronization between production
scheduling and working hour
• Time consuming
• No spare product to meet unexpected order
• Supply Shock : If products do not reach on
time
• High risk factor
CH2: Cost concept
Direct Costs = Costs that can be easily and
conveniently traced to a product or department.
Indirect Costs = Costs that must be
allocated in order to be assigned to a
product or department.
Indirect Material = Materials used to support the
production process.
Indirect labor = Cost of personnel who do
not work directly on the product.
Other cost = Examples: depreciation on plant
and equipment, property taxes, insurance,
utilities, overtime premium, and unavoidable idle
time.
Selling costs =Includes all costs necessary
to secure customer orders and get the
finished product into the hands of the
customer. Selling costs can be either direct
or indirect costs.
Administrative costs = Includes all costs
associated with the general management of an
organization. Administrative costs can be either
direct or indirect costs.
Variable cost = A cost that varies, in total,
in direct proportion to changes in the level of
activity. However, variable cost per unit is
constant.
Fixed cost = A cost that remains constant, in
total, regardless of changes in the level of the
activity. However, if expressed on a per unit
basis, the average fixed cost per unit varies
inversely with changes in activity.
Committed=Long-term, cant be significantly
reduced in the short-term=real estate taxes
Discretionary= May be altered in the short
term by current managerial decision-
advertising ,research and development
Mixed costs = mix both variable(b) and fixed(a)
element Y = a+bX, X= level of activity
Opportunity cost = aren’t usually entered
into the accounting records of an Org., but
must be explicitly considered in all decisions
Ex. If you were not attending colledge, you
could be earning 30,000/year=Oppo cost
Sunk Costs = Sunk costs have already been
incurred and cannot be changed now or in the
future. These costs should be ignored when
making decisions. Ex. Suppose you had
purchased gold for $1,100 an ounce, but now it
is selling for $950 an ounce. Should you wait for
the gold to reach $1,100 an ounce before selling
it? You may say, “Yes” even though the $1,100
purchase is a sunk cost.
Differential Cost = Cost that differ bet.
Alternatives ex. You can earn $1,500 per
month in your hometown or $2,000 per
month in a nearby city. Your commuting
costs are $50 per month in your hometown
and $300 per month to the city. 300-50
Cost Classification
For cost Objects 1) Direct cost, 2) Indirect cost
For manufacturing companies 1) Mfg. cost, 2) non-Mfg. cost
For predicting cost behavior 1) cost driver, 2) Variable&fixed, 3) Mixed
For decision making 1) Opportunity cost 2) Sunk costs
CH3: Product-Cost systems- an application of costing
Direct & Indirect Cost
Direct Indirect
Cost Cost Object Cost Cost
The salary of the head chef The hotel’s restaurant
The salary of the head chef A particular restaurant customer
Room cleaning supplies A particular hotel guest
Flowers for the reception desk A particular hotel guest
The wages of the doorman A particular hotel guest
Room cleaning supplies The housecleaning department
Fire insurance on the hotel building The hotel’s gym
Towels used in the gym The hotel’s gym
Product cost
Name of the Cost Varia
cost
Fixed
cost
Product cost
DM DL Mfg.
OH
Direct materials cost, $40 per unit
Supervisor’s salary, $2,500 per month
Direct labor cost, $18 per unit
Rental cost of warehouse, $1,000 per month
Rental cost of equipment, $3,000 per month
Depreciation of the building, $10,000 per year
Advertising cost, $50,000 per year
Shipping cost, $10 per unit
Electrical costs, $2 per unit
Calculating Total Product Cost
• The total product cost equals the sum of direct materials, direct labor, and manufacturing
overhead:
- Total product post = Direct materials cost + Direct labor cost + Manufacturing overhead cost
• •The unit product cost equals total product cost divided by the number of units produced:
- Per-unit Cost = Total Product Cost ÷ Number of Units Produced
Exercise 2-1: Information:
BlueDenim Company makes blue jeans. Last week, direct materials (denim, thread, zippers, and rivets)
costing $48,000 were put into production. Direct labor of $30,000 (50 workers x 40 hours x $15 per
hour) was incurred Overhead equaled $72,000. By the end of the week, BlueDenim had manufactured
$30,000 pairs of jeans.
Require: 1. Claculate the total product cost for last week.
Direct materials $ 48,000
Direct labor 30,000
Manufacturing overhead 72,000
Total product costs $150,000
2.Calculate the cost of one pair of jeans that was produced last week
à per unit product cost= $150,000/30,000= $5
• Product costs of direct materials, direct labor, and manufacturing overhead are sometimes grouped
into prime cost and conversion cost:
– Prime cost is the sum of direct materials cost and direct labor cost.
Prime cost = Direct materials + Direct labor
– Conversion cost is the sum of direct labor cost and manufacturing overhead cost.
Conversion cost = Direct labor + Manufacturing Overhead
Exercise 2-2:
• Calculate the total prime cost for last week.
Direct materials $ 48,000
Direct labor 30,000
Total prime costs $78,000
• Calculate the per-unit prime cost. = 78000/30000= $2.6
• Calculate the total conversion cost for last week.
Direct labor $30,000
Manufacturing overhead 72,000
Total conversion costs $102,000
• Calculate the per-unit conversion cost. = 102,000/30,000 = $3.4
Product Costs V.S. Period Costs
Product costs include direct materials, direct labor, and manufacturing overhead.
Period costs are not included in product costs. They are expensed on the income statement.
Which of the following costs would be considered a period rather than a product cost in a manufacturing
company?
A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters.
C. Direct materials costs. D. Electrical costs to light the production facility.
E. Sales commissions.
1. Depreciation on salespersons’ cars (Period cost)
2. Rent on equipment used in the factory (Product cost)
3. Lubricants used for machine maintenance (Product cost)
4. Salaries of personnel who work in the finished goods warehouse (Period cost)
5. Soap and paper towels used by factory workers at the end of a shift (Product cost)
6. Factory supervisors’ salaries (Product cost)
7. Heat, water, and power consumed in the factory (Product cost)
8. Materials used for boxing products for shipment overseas (units are not normally boxed)(Period cost)
9. Advertising costs (Period cost)
10. Workers’ compensation insurance for factory employees (Product cost)
11. Depreciation on chairs and tables in the factory lunchroom (Product cost)
12. The wages of the receptionist in the administrative offices (Period cost) X
13. Cost of leasing the corporate jet used by the company's executives (Period cost) X
14. The cost of renting rooms at a Florida resort for the annual sales conference (Period cost) X
15. The cost of packaging the company’s product (Product cost) X
If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month,
and sold $300 during the month, what would be the balance at the end of the month?
A. $1,000. B. $ 800. C. $1,200. D. $ 200. è 1000+100=1100, 1100-300=800
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was
purchased. A count at the end of the month revealed that $28,000 of raw material was still present.
What is the cost of direct material used?
A. $276,000 B. $272,000 C. $280,000 D. $ 2,000
When analyzing costs for decisions, you should use unit fixed costs very carefully.
Variable manufacturing costs per unit.................................................................................................................................$ 1.5
Fixed manufacturing costs:
Unit cost =
!"#!" !"#$%"&'$()#* !"#$ !"# !"#$%
!"#$% !"#$%&'$ !"# !"#$%
=
!"#,!!!
!"",!!!
= 1.30
Total unit cost used as the inventory value for
External financial reporting........................................................................................................................................$2.80
• Many managers fail to realize that they are valid at only one volume. When fixed costs are allocated
to each unit, accounting records often make the costs appear as though they are variable.
• For example, allocating some of factory rent to each unit of product results in including rent as part
of the “unit cost” even though the total rent does not change with the manufacture of another unit of
product.
• Cost data that include allocated common costs therefore may be misleading if used incorrectly.
• Jackson Gears received a special order for 10,000 parts at $2.75 each. These units could be produced
with currently idle capacity. Marketing, administrative, and the total fixed manufacturing costs of
$130,000 would not be affected by accepting the order, nor would accepting this special order affect the
regular market for this part.
Revenue from special order (10,000 x 2.75) $ 27,500
Variable costs of making special order (10,000 x 1.50) 15,000
Contribution of special order to operating profit $12,500
Gross Margin vs Contribution Margin Income Statements
Cherokee Inc.
Traditional Income Statement
Sales ($30 per unit × 20,000 units) ...................................................................................................................................................................................................................$600,000
Cost of goods sold
($24,000 + $180,000 – $44,000)..............................................................................................................................................................................................................160,000
Gross margin ...................................................................................................................................................................................................................................................440,000
Selling and administrative expenses:
Selling expenses
(($4 per unit × 20,000 units) + $40,000) .........................................................................................................................................................................................120,000
Administrative expenses
(($2 per unit × 20,000 units) + $30,000) .........................................................................................................................................................................................70,000 190,000
Net operating income.........................................................................................................................................................................................................................................$250,000
Cherokee Inc.
Traditional Income Statement
Sales ($30 per unit × 20,000 units) ...................................................................................................................................................................................................................$600,000
Variable expenses:
Cost of goods sold
($24,000 + $180,000 – $44,000)..............................................................................................................................................................................................................160000
Selling expenses ( 4 per uint x 20,000 units)..................................................................................................................................................................................................80,000
Administrative expenses: 40,000 280,000
(2 per unit x 20,000 units) .........................................................................................................................................
Contribution margin..........................................................................................................................................................320,000
Fixed expenses:
Selling expenses........................................................................................................................................................40,000
Administrative expenses............................................................................................................................................30,000 70,000
Net operating income ..........................................................................................................................................................$250,000
Preparing Income Statements: Cost of Goods Manufactured
• The cost of goods manufactured represents the total product cost of goods completed during the
current period and transferred to finished goods inventory.
• The cost of direct materials used in production can be derived using the following formula:
Beginning inventory of material + Purchases – Direct materials used in production = EI of material
• The direct materials used is then used to calculate the cost of goods manufactured as follows:
Cost of goods manufactured = Direct materials used in production + Direct labor used in production
+ Manufacturing overhead costs used in production + Beginning WIP inventory - Ending WIP
inventory
Calculating Direct Materials used in production
BlueDenim Company makes blue jeans. On May 1, BlueDenim had $68,000 of materials in inventory.
During the month of May, BlueDenum purchased $210,000 of materials. On May 31, materials inventory
equaled $22,000. à Calculate the cost of direct materials used in production for the month of May.
Materials inventory, May 1 $ 68,000
Purchase 21000
Materials inventory, May 1 (22,000)
Direct materials used in production $256,000
Calculating Cost of goods Manufactued
BlueDenim Company makes blue jeans. During the month of May, BleDenim purchased $210,000 of
materials and incurred direct labor cost $135,000 and manufacturing overhead of $150,000. On May 31,
materials inventory equaled $22,000. Inventory information is as follows:
May 1 May 31
Materials $68,000 $22,000
Work in process 50,000 16,000
Solution:
Direct materials used in production* $256,000
Direct labor 135,000
Manufacturing overhead 150,000
Total manufacturing cost for May $541,000
WIP, May 1 50,000
WIP, May 31 (16,000)
Cost of goods manufactured $575,000
*Direct materials = 68,000 + 210,000 – 22,000 = 256,000
Cost of Goods Sold
• To meet external reporting requirements, costs must be classified into three categories: –
Production – Selling – Administration
• Cost of goods sold represents the cost of goods that were sold during the period and, therefore,
transferred from finished goods inventory on the balance sheet to cost of goods sold on the income
statement (i.e., as an inventory expense). Cost of goods sold is calculated as:
Cost of goods sold = Beginning finished goods inventory + Cost of goods manufactured - Ending
finished goods inventory
Ch4: Product costing system: Job Order costing
TYPES OF PRODUCTION PROCESSES
Type of Production Process Description of Process Example of
Manufacturer
Job Shop Low volume, Little standardization
Unique product
Disney
Batch Multiple products, Low volume Caterpillar
Assembly line A few major products, High volume Ford
Continuous Flow High volume, Highly standardize
commonly products
Exxon
Job-Order Costingà A job-order costing system is used in an industry where products are made
individually, or in relatively small batches, and one product or batch is readily distinguishable from the
other.
Process Costingà A process-costing system is employed in an environment at the other end of the
continuum: the mass production of like units. Users might include manufacturers of chemicals, gasoline,
and microchips.
Cost accounting involves the measuring, recording, and reporting of:
A. Product costs. B. Future costs. C. Manufacturing processes. D. Managerial accounting decisions.
Job Order Cost Flows - Accumulating Manufacturing Cost
Raw Materials Costs à Raw Materials are debited to Raw Materials Inventory when purchased.
àAt this point, the costs of materials are not assigned to specific jobs or orders.
Example:
On January 4, Wallace Manufacturing Company purchases 2,000 handles at $5 per unit ($10,000) and
800 modules at $40 per unit ($32,000) for a total cost of $42,000.
Jan. 4 Raw Materials Inventory 42,000
Accounts Payable 42,000
(Purchase of raw materials on account
Factory Labor Costs àConsists of: Gross earnings of factory workers, Employer payroll taxes on
such earnings, and Fringe benefits incurred by the employer. àCompanies debit labor costs to Factory
Labor as they incur these costs.
Example:
Wallace Manufacturing incurs $32,000 of factory labor costs, of which $27,000 relates to wages payable
and $5,000 relates to payroll taxes payable in January.
Jan. 31 Factory Labor 32,000
Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000
(To record factory labor costs)
Manufacturing Overhead Costs à Many types of overhead costs :For example, machinery repairs,
indirect materials, and indirect labor. àDebit to Manufacturing Overhead: Daily as incurred
or Periodically through adjusting entries.

2. Example:
The following is a summary entry to record the totals from multiple transactions that occurred during
January for the Wallace Manufacturing Company.
Jan. 31 Manufacturing Overhead 13.800
Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repair) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400
(To record overhead costs)
When incurred, factory labor costs are debited to:
A. Work in Process. B. Factory Wages Expense. C. Factory Labor. D. Factory Wages Payable.
Job Order Cost Flows - Accumulating Manufacturing Cost
• Manufacturing costs are assigned to work in process with:
DEBITS TO à Work in Process Inventory
CREDITS TO à Raw materials Inventory, Factor Labor, Manufacturing Overhead
• An essential accounting record in assigning costs to jobs is a job cost sheet
Assigning Raw Materials Cost
• May use any of the inventory costing methods (FIFO, LIFO, Average Cost) in costing the
requisitions to the job cost sheets.
• Posted daily to individual job cost sheets and periodically journalized.
Example:
Assume that $24,000 of direct materials and $6,000 of indirect materials are used by Wallace
Manufacturing in January.
Jan. 31 Work in process Inventory 24,000
Manufacturing Overhead 6,000
Raw Materials Inventory 30,000
(To assign materials to jobs and overhead)
Exercise:
a. Raw Materials.................................................................................................................................80,000
Accounts Payable........................................................................................................80,000
b. Work in Process..............................................................................................................................62,000
Manufacturing Overhead ................................................................................................................9,000
Raw Materials..............................................................................................................71,000
c. Work in Process..............................................................................................................................101,000
Manufacturing Overhead ................................................................................................................11,000
Wages Payable............................................................................................................112,000
d. Manufacturing Overhead ................................................................................................................175,000
Various Accounts.........................................................................................................175,000
Exercise
Cash Raw Materials
(a) 94,000 (a) 94,000 (b) 89,000
(c) 132,000 Bal. 5,000
(d) 143,000
Work in process Finished Goods
(b) 78,000 (f) 342,000 (f) 342,000
(c) 112,000 Bal. 0
(e) 152,000 (f) 342,000
Manufacturing Overhead Cost of Goods Sold
(b) 11,000 (e) 152,000 (f) 342,000
(c) 20,000 (g) 22,000
(d) 143,000 (g) 22,000 Bal. 364,000
Bal. 0
The Purchase and Issue of raw Material: T-Account Form
Raw Materials Work in process (job cost sheet)
Material
Purchase
Direct
materials
Direct
materials
Indirect
materials
Manufacturing overhead
Actual
Indirect
materials
Applied
The recording of Labor Costs
Salaries and Wages Payable Work in process (job cost sheet)
Direct
Labor
Direct
materials
Indirect
Labor
Direct
Labor
Manufacturing overhead
Actual
Indirect
materials
Indirect
Labor
Applied
Applying Manufacturing Overhead
Salaries and Wages Payable Work in process (job cost sheet)
Direct
Labor
Direct
materials
Indirect
Labor
Direct Labor
Overhead
Applied to
work in
process
Manufacturing overhead
Actual
Indirect
materials
Indirect
Labor
Other Overhead
Applied
Overhead
Applied to
work in
process
Transferring completed Units
Work in process (job cost sheet) Finished Goods
Direct
materials
Cost of
goods Mfg
Cost of
goods Mfg
Direct
Labor
Overhead
Applied
Transferring Units Sold
Work in process (job cost sheet) Finished Goods
Direct
materials
Cost of
goods Mfg
Cost of
goods Mfg
Cost of
Goods Sold
Direct
Labor
Overhea
d Applied
Cost of Goods Sold
Cost of
Goods
Sold
Overhead Application Example
Actual Overhead costs for the year: $5,050,000
Actual direct labor hours worked for the year: 170,000
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 170,000 DLH = $5,100,000
Applied overhead exceeds actual overhead by $50,000 =This difference is called overapplied overhead.
Under- or Overapplied Manufacturing Overhead
A debit balance in manufacturing overhead means that overhead is underapplied.
Overhead assigned to work in process is less than overhead incurred.
A credit balance in manufacturing overhead means that overhead is overapplied.
Overhead assigned to work in process is greater than overhead incurred
Any year end balance in manufacturing overhead is eliminated by adjusting cost of goods sold.
Underapplied overhead is debited to CGS. Overapplied overhead is credited to CGS.
Example:
Wallace Manufacturing Company has a $2,500 credit balance in Manufacturing Overhead at December
31. The adjusting entry for the overapplied overhead is:
Dec 31 Manufacturing Overhead 2,500
Cost of Goods Sold 2,500
(To transfer overapplied overhead to CGS)
Overapplied and Underapplied Manufacturing Overhead
AFB’s CGS for the year AFB’s Mfg. Overhead for the year
Unadjusted
Balance
$50,000 Actual
overhead
Cost
$5,050,000
Overhead
Applied to
job
$5,100,000
Adjusted
Balance
$50,000 $50,000
Overapplied
If manufacturing Overhead
is…
Alternative 1
Allocation
Alternative 2
Close to CGS
UNDERAPPLIED
(Applied OH is less than
actual OH)
ICREASE
Work in Process
Finished Goods
Cost of Goods Sold
INCREASE
Cost of Goods Sold
OVERAPPLIED
(Applied OH is greater than
actual OH)
DECEASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was
purchased. A count at the end of the month revealed that $28,000 of raw material was still present.
What is the cost of direct material used?
a. $276,000 b. $272,000 c. $280,000 d. $2,000
Solution
Beg. Raw materials $ 32,000
+Raw materials purchased 276,000
=Raw materials available for use in production $ 308,000
-Ending raw materials inventory 28,000
=Raw materials used in production $280,000
Chapter 5: Product-costing systems, Process costing
Process costing is used for products that are:
A. Different and produced continuously. B. Similar and produced continuously.
C. Individual units produced to customer specifications. D. Purchased from vendors.
Which of the following companies would be most likely to use a process costing system?
A. a shipbuilder B. a furniture manufacturer
C. a law firm D. a utility producing natural gas
For which situation(s) below would an organization be more likely to use a process costing system of
rather than a job-order costing system?
A. a paper mill that processes wood pulp into large rolls of paper
B. a shop that restores old cars to "showroom" quality
C. a framing shop that builds picture frames to order for individual customers
D. a masonry company that builds brick walls, bulkheads, and walkways designed by architects
Differences Between Job-Order and Process Costing
Process costing Job Order costing
• is used when a single product is produced on a
continuing basis or for a long period of time.
• accumulate costs by department.
• compute unit costs by department.
• is used when many different jobs having
different production requirements are
worked on each period.
• accumulated costs by individual jobs.
• compute unit costs by job on the job cost
sheet.
Zhang Corporation uses process costing. A number of transactions that occurred in June are listed
below.
(1) Raw materials that cost $41,700 are withdrawn from the storeroom for use in the Mixing Department.
All of these raw materials are classified as direct materials.
(2) Direct labor costs of $47,700 are incurred, but not yet paid, in the Mixing Department.
(3) Manufacturing overhead of $56,900 is applied in the Mixing Department using the department's
predetermined overhead rate.
(4) Units with a carrying cost of $128,300 finish processing in the Mixing Department and are transferred
to the Drying Department for further processing.
(5) Units with a carrying cost of $133,800 finish processing in the Drying Department, the final step in
the production process, and are transferred to the finished goods warehouse.
(6) Finished goods with a carrying cost of $129,200 are sold.
1) Work in process-Mixing department $41,700
Raw Material $41,700
2) Work in process-mixing Department 47,700
Salaries and wages Payable 47,700
Equivalent units can be calculated 2 ways:
1.) The First-In, First-Out Method – FIFO is covered in the appendix to this chapter.
2.) The Weighted-Average Method – This method will be covered in the main portion of the chapter.
Weighted-Avg.-An Example
Smith Company reported the following activity in the assembly Department for the month of June:
Percentage Completed
Units Material Conversion
Work in process, June1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out of Department
a during June
5,400
Work in process, June 30 900 60% 30%
The second step is to identify the equivalent units of production in ending work in process with respect
to materials for the month (540 units) and adding this to the 5,400 units from step one.
Materials Conversion
Units completed and transferred out of the department in June 5,400 5,400
Work in process, June 30:
900 units x 60% 540
900 units x 30% 270
Equivalent units of production in Department during June 5,940 5,670
Compute and Apply Costs
The formula for computing the cost per equivalent unit is:
Cost per equivalent unit =C Cost of beginning work in process inventory+cost added during the period
Equivalent units of production
Here is a schedule with the cost and equivalent unit information
Total
units
Material Conversion
Cost to be accounted for:
Work in process, June 1
Cost added in Assembly
Total cost
10,039
199,751
209,790
6,119
118,621
124,740
3920
81,130
85,050
Equivalent units 5,940 5,670
Cost per equivalent unit
Cost per equivalent unit = 21+15 = 36
21.00 15.00