Product Costing

1
ACTG 321Agenda for Lecture 6

• Product Costing
• Break
• Normal Costing

2
Cost Flows for a Manufacturing Firm
Raw Mat.s
Direct Labor
W.I.P.
F/G Inv.
COGS
Mfg O/H
Income Statement Account
Balance Sheet account
expense account
3
Overview of Job Costing for Manufacturing
Companies
Indirect Cost Pool Cost Allocation Base the Job
Direct Costs
Manufacturing Overhead
Machine Hours
Indirect Costs
Direct Costs
Direct Labor
Direct Materials
4
Five Step Approach To Job Costing

• Identify the cost object.
• Identify the direct cost categories for the job.
• Identify the indirect cost pools associated with
  the job.
• Select the cost allocation base for each indirect
  cost pool.
• Calculate the rate per unit of the allocation
  base to allocate indirect costs.

5
Calculation Of Overhead Rates
Over- total costs in the cost pool head
total quantity of the cost Rate
allocation base
6
The Levi Strauss factory in Albuquerque makes
jeans and Dockers. Each product line has its own
production line on the factory floor. Budgeted
and actual overhead costs for the entire factory
for 2003 were 1,200,000 and 1,100,000,
respectively. Budgeted production for each
product line was 500,000 units for the year (one
million units for the factory in total). Actual
production of jeans was equal to budget. However,
actual production of Dockers was curtailed to
400,000 units, due to increased competition in
the casual slacks market.
7
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers.
Calculate the overhead allocation rate per pair
of pants, using actual overhead dollars and
production.
8
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers.
Calculate the overhead allocation rate per pair
of pants, using actual overhead dollars and
production.
1,100,000 ? (500,000 400,000) 1.22 per unit
9
Budgeted O/H 1.2 million Actual O/H 1.1
million. Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that 500,000 direct labor hours
were used in production in 2003, 200,000 for
jeans, and 300,000 for Dockers. Calculate the
overhead rate using direct labor hours as the
allocation base, and using actual costs and
actual labor hours.
Using the allocation rate above, how much
overhead would be allocated to jeans in 2003?
10
Budgeted O/H 1.2 million Actual O/H 1.1
million. Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that 500,000 direct labor hours
were used in production in 2003, 200,000 for
jeans, and 300,000 for Dockers. Calculate the
overhead rate using direct labor hours as the
allocation base, and using actual costs and
actual labor hours.
1,100,000 ? 500,000 2.20 per direct labor hour
Using the allocation rate above, how much
overhead would be allocated to jeans in 2003?
11
Budgeted O/H 1.2 million Actual O/H 1.1
million. Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that 500,000 direct labor hours
were used in production in 2003, 200,000 for
jeans, and 300,000 for Dockers. Calculate the
overhead rate using direct labor hours as the
allocation base, and using actual costs and
actual labor hours.
1,100,000 ? 500,000 2.20 per direct labor hour
Using the allocation rate above, how much
overhead would be allocated to jeans in 2003?
2.20 per direct labor hour x 200,000 direct
labor hours 440,000 which is 0.88 per pair
of jeans.
12
ACTG 321Agenda for Lecture 6

• Product Costing
• Break
• Normal Costing

13
Normal Costing

• There is nothing Normal about Normal Costing

14
Actual versus Budgeted Amounts

• Actual or budgeted rates for overhead.
• Actual or budgeted prices/rates of direct inputs.
• Actual quantities of direct inputs, or standard
  quantities based on actual production.
• Actual quantity of overhead, or standard quantity
  based on actual production.

15
Why Use Budgeted Amounts?

• Actual costs may not be known on a timely basis.
• Actual costs may be subject to short-run
  fluctuations.
• When actual O/H rates are used, production volume
  for one product affects the reported costs of
  other products.
• A system using budgeted numbers may be more
  economical.

16
The Levi Strauss factory in Albuquerque makes
jeans and Dockers. Each product line has its own
production line on the factory floor. Budgeted
and actual overhead costs for the entire factory
for 1997 were 1,200,000 and 1,100,000,
respectively. Budgeted production for each
product line was 500,000 units for the year (one
million units for the factory in total). Actual
production of jeans was equal to budget.
However, actual production of Dockers was
curtailed to 400,000 units, due to increased
competition in the casual slacks market.
17
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers. Calculate the overhead
allocation rate per pair of pants, using budgeted
overhead dollars and production.
Calculate the overhead allocation rate per pair
of pants, using actual overhead dollars and
production.
18
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers. Calculate the overhead
allocation rate per pair of pants, using budgeted
overhead dollars and production.
1,200,000 ? (500,000 500,000) 1.20 per unit
Calculate the overhead allocation rate per pair
of pants, using actual overhead dollars and
production.
1,100,000 ? (500,000 400,000) 1.22 per unit
19
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers. Calculate the overhead
allocation rate per pair of pants, using budgeted
overhead dollars and production.
1,200,000 ? (500,000 500,000) 1.20 per unit
Calculate the misapplied overhead
20
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers. Calculate the overhead
allocation rate per pair of pants, using budgeted
overhead dollars and production.
1,200,000 ? (500,000 500,000) 1.20 per unit
Calculate the misapplied overhead
1.20 per unit x 900,000 units 1,080,000
applied
1,080,000 applied - 1,100,000 actual 20,000
underapplied.
21
Misapplied Overhead

• The use of budgeted overhead rates usually
  results in underallocated or overallocated
  overhead.
• Possible disposition of these variances include
  
  1) Restate to actual cost
  
  
  
  2) Write off to COGS
  3) Prorate between
  COGS inventory
  4) Treat as a
  period cost

22
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers. Calculate the overhead
allocation rate per pair of pants, using actual
overhead dollars and production.
1,100,000 ? (500,000 400,000) 1.22 per unit
Calculate the misapplied overhead
23
Budgeted Overhead 1.2 million Actual
Overhead 1.1 million Budgeted production 500K
jeans, 500K Dockers. Actual production 500K
jeans, 400K Dockers. Calculate the overhead
allocation rate per pair of pants, using actual
overhead dollars and production.
1,100,000 ? (500,000 400,000) 1.22 per unit
Calculate the misapplied overhead
1.22 per unit x 900,000 units 1,100,000
applied
1,100,000 applied - 1,100,000 actual 0
misapplied.
24
Misapplied Overhead

• Restatement using actual overhead rates is
  preferred conceptually, but is not necessarily
  the most conservative.
• Restatement can result in higher net income and
  ending inventory than write-off to COGS when
  variances are unfavorable.
• Is there justification for treating unfavorable
  variances as a period cost?

25
Budgeted O/H 1.2 million Actual O/H 1.1
million Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that the budgeted overhead of
1,200,000 consisted of 800,000 budgeted for
variable overhead and 400,000 for fixed
overhead. Also assume that the factory has the
capacity to produce 1.5 million pairs of pants,
and that the fixed overhead rate is calculated
using capacity in the denominator. Calculate
the budgeted overhead rates for fixed overhead
and for variable overhead.
26
Budgeted O/H 1.2 million Actual O/H 1.1
million Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that the budgeted overhead of
1,200,000 consisted of 800,000 budgeted for
variable overhead and 400,000 for fixed
overhead. Also assume that the factory has the
capacity to produce 1.5 million pairs of pants,
and that the fixed overhead rate is calculated
using capacity in the denominator. Calculate
the budgeted overhead rates for fixed overhead
and for variable overhead.
Variable O/H rate 800K ? 1,000,000 .80 per
unit Fixed O/H rate 400,000 ? 1,500,000
.27 per unit Total 1.07 per unit
27
Budgeted O/H 1.2 million Actual O/H 1.1
million. Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that 500,000 direct labor hours
were used in production in 1997, 200,000 for
jeans, and 300,000 for Dockers. Calculate the
overhead rate (one rate for both fixed and
variable overhead) using direct labor hours as
the allocation base, and using actual costs and
actual labor hours.
Using the allocation rate above, how much
overhead would be allocated to jeans in 1997?
28
Budgeted O/H 1.2 million Actual O/H 1.1
million. Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that 500,000 direct labor hours
were used in production in 1997, 200,000 for
jeans, and 300,000 for Dockers. Calculate the
overhead rate (one rate for both fixed and
variable overhead) using direct labor hours as
the allocation base, and using actual costs and
actual labor hours.
1,100,000 ? 500,000 2.20 per direct labor hour
Using the allocation rate above, how much
overhead would be allocated to jeans in 1997?
29
Budgeted O/H 1.2 million Actual O/H 1.1
million. Budgeted production 500K jeans, 500K
Dockers. Actual production 500K jeans, 400K
Dockers. Assume that 500,000 direct labor hours
were used in production in 1997, 200,000 for
jeans, and 300,000 for Dockers. Calculate the
overhead rate (one rate for both fixed and
variable overhead) using direct labor hours as
the allocation base, and using actual costs and
actual labor hours.
1,100,000 ? 500,000 2.20 per direct labor hour
Using the allocation rate above, how much
overhead would be allocated to jeans in 1997?
2.20 per direct labor hour x 200,000 direct
labor hours 440,000 which is 0.88 per pair
of jeans.