Chapter 15: Product Costing System in Manufacturing Operations- The process of determining and accumulating the costs of products and activities within a company is called cost accounting- Job order costing system- Process costing system- Activity based costingCommon elements of cost accounting systemso Three production inputs to the manufacture of a product Direct materials- + Raw Materials Inv, + Accts Pay/-Cash- - Raw Materials Inv, + Goods in Process- - Goods in Process, +Finished Goods- - Finished Goods, +COGS Direct labor- + Goods in Process, + Wages Payable Factory overhead- Indirect materialso + Raw Materials Inv, + Accts Pay/-Casho –Raw Materials Inv, +Factory Overhead- Indirect Laboro + Factory Overhead, +Wages Payableo Raw Materials Cost Include both direct and indirect materials Include cost of direct materials as one of the three manufacturing costs that make up the cost of the finished product Difficult to associate the cost of indirect materials with individual products, so companiesnormally include indirect materials as a part of factory overheado Labor Costs Direct labor people who work with the direct materials Include direct labor costs of the product Include additional payroll costs (payroll taxes, pensions, and other fringe benefits associated with these employees) as a part of factory overhead Indirect labor is part of factory overheado Factory overhead costs Cannot be traced directly to a specific unit Company includes total cost of factory overhead as one of three manufacturing costs Includes a large number and a wide variety of different manufacturing costs, companies normally treat these costs together a single costThe Structure of Cost Accounting Systemso The task of the cost accounting system is to classify the costs incurred according to activities performed and then to assign the costs to the product output of those activitieso The perpetual inventory system Most cost accounting systems use a perpetual inventory system to record the costs of the raw materials, goods in process, and finished goods inventories Keeps a continuous record of the balance in an inventory account Involves increasing the inventory account for the cost of the merchandise purchases and decreasing this account for the cost of the merchandise sold Increases Raw Materials Inventory account for the cost of the raw materials it purchases and decreases the account for the cost of the raw materials it uses in production Increases Goods in Process Inventory for the cost of the inputs it uses in production and decreases this account for the cost of the outputs (products it completes) Increases finished goods inventory for the cost of the products it completes and decreasesthe account for the cost of the product it sellso How costs flow through accounts Costs enter the system as the company incurs them, flowing into the foods in process inventory as the company uses direct materials, direct labor, and factory overhead to manufacture products. Once they are in foods in process inventory, the company assigns the costs to specific products as manufacturing operations take place Manufacturing costs become an expense only when the company sells the finished goods inventory Job order costing or process costing- Practical way for a manufacturing company to get timely information for the following five activities:o Planning the company’s manufacturing operationso Deciding which products to manufacture, what operations to use in their production, how many units of each to produce, and perhaps even what selling prices to chargeo Evaluating the performance of manufacturing operations, departments, and individual employeeso Maintaining control over manufacturing costs and discovering ways to reduce costs and improve efficiencyo Preparing financial statementsJob Order Costingo When a company manufactures one unit of a unique product or manufactures a unique group of products, it treats that unit or group as a job ordero A job order may require more than one manufacturing activityo Easy to determine where the job starts and endso Starts a job as a result of a “sales order”o Ends when job is completeo Production departments may perform manufacturing operations on hundreds of different jobs in a month’s timeo Individual jobs may require manufacturing operations in several production departmentso A company’s cost accounting system must determine how much of each department’s manufacturing costs to apply to each job on which that department worked.o A job order cost accounting system keeps track of the costs applied to each job order.- The Job Order Cost Sheeto Individual job is the key to product or service costingo Accumulates direct materials, direct labor, and factory overhead costs for each individual job as it manufactures the jobo Job order cost sheet has separate columns for the direct materials, direct labor, and factory overhead costs assigned to a job, and a place to summarize these costs after a job is finishedo Total goods in process inventory the sum of the total accumulated costs of each incomplete jobo When it completes a job, the company takes the total costs assigned to the job out of the Goods in Process inventory account and adds them to the Finished Goods Inventory accounto When the company sells products from the finished goods inventory, it takes the costs out of the Finished Goods Inventory account and adds the to the Cost of Goods Sold Inventory- How a Company Assigns Raw Material Costs to Jobso When a company purchases raw materials, places them in raw materials inventoryo Storekeeper, who is responsible for all raw materials kept in the storeroom at the company, must receive a written authorization form, known as raw materials requisition (or request), before issuing raw materials for use in the factoryo Company can use these forms to trace specific jobs the quantity and cost of direct materials it uses in the manufacturing process and to assign these costs directly to those jobs. Can also use the information on these forms to assign the total cost of indirect materials used Company will assign these indirect costs to jobs along with other indirect manufacturing costs form provides info company needs to decrease the Raw Materials Inventory account by the total cost of all raw materials issued and to decrease the individual raw materials records for the