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Product Cost Analysis

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Mary Collins

on 18 December 2013

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Transcript of Product Cost Analysis

Product costs are all the costs included to manufacture a product. These costs include direct materials, direct labor, and manufacturing overhead. Product costs are only those costs that can be directly related to the manufacturing process.

The term used for costs that are not directly related to the manufacture of a product is “Period Costs” Period costs are those costs incurred to sell the finished product and the costs incurred to have management run the company. Period costs are referred to as non-value added costs because they do not increase the sales value of the end product.

This document is designed to show the process from start to finish in assigning product costs to jobs.

Journal Entries
Example Problem
Blackburn Manufacturing uses a job order cost system and applies overhead to production on the bases of direct labor cost. At the beginning of the fiscal year on February 1, 2014, Job 2897 was the only job in process.
Types of Journal Entries
There are three types of journal entries dealing with the manufacture of a product.

Actual Cost –The actual price paid during the process.
Applied Cost –The estimated cost applied to the job cost sheets during the process of manufacturing.
Product cost –which are the cost of the finished product that is transferred to the finished goods inventory at the end of the process.
Beginning Work in Process
The cost incurred prior to the beginning of the fiscal year for Job 2897 were as follows;
Product Cost Analysis
Other Beginning Balances of Accounts
• Finished Goods balance of $ 5,300 consisting of Job 2896.
• Raw Materials balance of 5,000

2014 Manufacturing Activities
During 2014, Blackburn Manufacturing began Jobs 2898 and 2899, and they completed Jobs 2897 and 2898. Jobs 2896 and 2897 were also sold on account during the year for $8,000 and 9,000 respectively.
2014 Actual Costs Incurred
1. Purchased additional raw materials of $4,500 on Account.
2. Incurred factory labor costs of $2,900. Of this amount $900
related to employer payroll taxes.
3. Incurred manufacturing overhead costs as follows: indirect
materials $1,200; indirect labor $500; depreciation expense
$2,000; and various other manufacturing overhead cost on
account of $1,000.

Assigned Cost to jobs
1. Calculate the predetermined overhead rate for 2014, assuming Blackburn Manufacturing estimates total manufacturing overhead costs of $4,500, direct labor costs of $3,000, and direct labor hours of 1,500 for the year.

2. Open job cost sheets for Jobs 2898 and 2899. Enter the beginning balance on the job cost sheet for Job 2897.

3. Prepare the journal entries to record 2014 actual cost incurred.

4. Prepare the journal entries to record 2014 applied cost.

5. Total the job cost sheets for any job(s) completed during the year.

6. Prepare the journal entries to record the completion of any job(s) during the year.

7. Prepare the journal entries to the sale of any job(s) during the year.

8. What is the balance in the Finished Goods Inventory account at the end of the year? What does the balance represent?

9. What is the amount of Over or under applied overhead?

Estimated Overhead divided estimated labor cost equals Predetermined Overhead rate.
4,500 ÷ 3,000 = 1.50 X 100 = 150%
(2 & 5)
Manufacturing Overhead Calculation
Direct Labor cost X Predetermined Overhead rate
600 X 1.50 = 900
(2 & 5)
Manufacturing Overhead Calculation
Direct Labor cost X Predetermined Overhead rate
1,350 X 1.50 = 2,025
(2 & 5)
Job 2899 is not totaled because it has not been finished.
Manufacturing Overhead Calculation
Direct Labor cost X Predetermined Overhead rate
900 X 1.50 = 1,350
Types of Product Cost
Direct Materials (material used during manufacturing of a product)
Direct Labor (Labor of individuals working on the product)
Manufacturing Overhead (factory depreciation, factory supervisor’s salary, Indirect materials, Indirect labor, accounts payable)

Journal Entries to record actual product cost during the year
Journal Entries to record applied product cost during the year
Calculations for journal entries
Manufacturing Overhead Calculation
(Direct Labor cost X Predetermined Overhead rate)
Transfer of jobs to finish goods and the sale of jobs 2896 & 2897
(6 & 7)
Balance in Finished Goods Inventory
Ending Balance represents the cost of Job 2898, which was transferred to finished goods but has not yet been sold.
Manufacturing Overhead Account
Under-applied Overhead of $425
Debit balance = Under-applied
Credit balance = Over-applied
(6 & 7)
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