Chapter 3 Notes
Chapter 3 Notes MGMT 201
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This 2 page Class Notes was uploaded by boilermaker2016 on Wednesday March 2, 2016. The Class Notes belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 9 views. For similar materials see Managerial accounting in Business, management at Purdue University.
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Date Created: 03/02/16
Chapter 3 Product Costing and Cost Accumulation in a Batch Production Environment Product Costing • Switching gears from financial statement costs to operational costs Product Costing Systems • Accumulate the cost incurred in a production process and assigns the costs to the final products Types of Product Costing Systems Process Costing • Used for production of small, identical, low cost items • Mass produced in automated continuous production process • Costs cannot be directly traced to each unit of product • Typical process cost applications: o Paper mill o Oil refinery o Paint manufacturer Job-Order Costing • Used for production of large, unique high-cost items • Built to order rather than mass produced • Many costs can be directly traced to each job • 2 types: o Job shop operations – products manufactured one at a time or in very low volumes o Batch-production operations – Multiple products in batches of relatively small quantities Job Order Costing Typical job-order cost applications: • Special-order printing • Building construction Also used in the service industry • Hospitals • Law firms Accumulating Costs in a Job-Order Costing System • The primary document for tracking the costs associated with a given job is the Job Cost Record Predetermined Overhead Rate Timing • You don’t know the actual overhead costs until the year is over right • But jobs are completed (and sold) throughout the year = • Apply an estimate of overhead to jobs completed during the year so you can set the selling price correctly and make the journal entries along the way to account for the production process and product sales • POHR = Budgeted manufacturing overhead costs / Budgeted amount of cost driver • Overhead applied = POHR x Actual activity Walk Me Through It Please 1. Production Order for Job – Authorizes start of production process 2. Material Requisition – Indicates cost of direct material to charge to jobs and cost of indirect material to charge to overhead 3. Labor Time Record – Indicates cost of direct labor to charge to jobs and cost of indirect labor to charge to overhead 4. Application of Manufacturing Overhead – POHR x Actual activity Actual vs. Normal Costing • Most companies use normal costing, because using a total job costs sooner o Actual overhead for the period is not known until the end of the period A Little About Allocating A Little About Allocating Manufacturing Overhead • Allocating overhead to jobs is enhanced if multiple costing overhead to jobs is enhanced if multiple cost drivers are used that more closely align costs with activities • In this chapter we only used machine hours as the plant-wide overhead rate • But what if certain activities weren’t driven so much by machine hours, but rather, say, direct labor hours? o You end up with a misallocation of costs