Chapter 4

|Accumulating and Assigning Costs to Products |[pic] |

QUESTIONS

4-1 The cost of the raw materials entered into production is moved from the raw materials account to the work-in-process inventory account. The cost of manufacturing labor and overhead items are assigned to production by adding them to the work-in-process inventory account. Overhead costs are assigned (or allocated or apportioned) as determined by the cost system. When manufacturing is completed, work is transferred to finished goods inventory, and costs are moved from the work-in-process inventory account to the finished goods inventory account. Finally, when goods are sold their costs are moved from the finished goods inventory account to cost of goods sold.

4-2 Manufacturing organizations face greater challenges in product costing, especially the assignment of overhead costs, than retail or service organizations do. The basic idea behind all manufacturing costing systems is to determine the costs that products accumulate as they consume organization resources during manufacturing, as described above in 4-1. In retail organizations, goods are purchased rather than manufactured; the cost of the goods purchased is entered into an account that accumulates the cost of merchandise inventory in the store. Stores incur various overhead costs such as labor, depreciation on the store, lighting, and heating. The primary focus in retail operations is the profitability of product lines or departments. Therefore, retail organizations, like manufacturing operations, face the issue of how to allocate various overhead costs to determine, for example, the cost of purchasing and selling products, or department costs.

Service organizations that undertake major projects, such as in a consultancy,