Chapter 4 Product costing systems Copyright ª 2006 McGraw­Hill Australia Pty Ltd 4­ 1 Product costing • Product costing systems – Accumulate product-related costs and use procedures to assign them to the final products – In some businesses, upstream and downstream costs are regarded as product related – Upstream costs—research and development, product design, supply – Downstream costs—marketing, distribution, customer service • Product costs are the input to the product costing system Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-2 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-3 Different product costs for different purposes • Product costs can include upstream, manufacturing and downstream costs • Inclusion of various costs depends on the timeframe and type of decision to be made • Managers’ needs for product cost information will vary depending on the type of decision to be made and managers’ personal preferences continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-4 Different product costs for different purposes • Cost for inventory valuation for external reporting must include only manufacturing costs • For long-term decisions about products, a wider definition may be used • Product costs are used to value inventory, for short-term decision making and strategic decision making, for planning and controlling costs, and for cost reimbursement continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-5 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-6 Different product costs for different purposes • Current or future product costs? – Current product costs are relevant for inventory valuation – Future product costs may be relevant for input into some decisions • Frequency of cost information? – Infrequently for long-term decisions, or even short-term decisions – More regularly for inventory valuation • In summary, product costs may differ over – The range of costs included – Current or future costs – Frequency of information required Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-7 Designing product costing systems • Identify the managers’ needs • All product cost information may not come from a single product costing system – Future product costs – Long-term product costs – Inventory valuation • Cost and benefits of providing various cost estimates must be assessed Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-8 Flow of costs in manufacturing businesses • For inventory valuation in external financial reports, manufacturing costs only are assigned to products. This is in line with Australian accounting standards • Manufacturing costs consist of: – Direct material – Direct labour – Manufacturing overhead continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-9 Flow of costs in manufacturing businesses • Manufacturing costs flow through several manufacturing ledger accounts – Raw materials inventory – Work in process inventory – Finished goods inventory – Cost of goods sold expense – Profit and loss account • Australian accounting standards require that upstream and downstream costs are expensed in the period in which they are incurred – May be included in product costs where relevant to managers’ decision making Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 4-10