Chapter 4
Product costing systems
Copyright ª 2006 McGrawHill Australia Pty Ltd
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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
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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
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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
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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
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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
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