Product Costing

By: Ronna Rica L. Co

Cost
- cash amount (or the cash equivalent) given up for an asset.
- includes all costs necessary to get an asset in place and
ready for use.

Types of Cost
I. As to type
1. Product Cost
- inventoriable cost
- necessary to production
- assetable
2.

Period Cost
- not necessary to production
- expensed as incurred

II. As to function
1. Manufacturing Cost
a. Direct Materials
b. Direct Labor
c. Factory Overhead
2. Non-manufacturing Cost
a. Research and Development
b. Marketing Cost
c. Selling Cost
d. Administrative Expense

III. As to behavior
1. Variable Cost
a. Total amount varies
directly to change in
activity level or cost driver
b. Per unit constant
2. Fixed Cost
a. Total amount constant
b. Per unit varies inversely

Types of Product Costing System

Absorption Costing
- Conventional or Full Costing
- cost are classified according to function
- GAAP format
- includes all manufacturing cost in the cost of a unit of product
- acceptable in financial reporting and tax purposes
Variable Costing
- Direct Costing
- cost are classified according to behavior
- not in accordance with GAAP
- includes only variable manufacturing cost in the cost of a unit
of product
- violates matching principle
- acceptable only for internal use of management
Throughput Costing
- only direct materials are treated as product cost

Formulas:
Absorption Costing
Sales
xx
Cost of Sales
(xx) - based on units sold
Gross Margin
xx
S&A Expense
(xx)
NIBT
xx
Variable Costing
Sales
xx
Variable Cost
(xx) based on units sold
Contribution Margin xx
Fixed Cost
(xx) - total
NIBT
xx
Throughput Costing
Sales
xx
Direct Materials
Throughput Margin
Direct Labor
V-Overhead
F-Overhead
V-S&A Expense
F-S&A Expense
NIBT
xx

(xx) based on units sold

xx
(xx) based on units produced
(xx) - based on units produced
(xx) - total
(xx) based on units sold
(xx) - total

Reconciliation
P=S
E=B
A=V

P>S
E>B
A>V

P<S
E<B
A<V

Net Income AC
xx
+ BI x FOH per unit xx
- EI x FOH per unit (xx)
Net Income VC
xx
Net Income AC
xx
+ Sales x FOH per unit xx
- Production x FOH per u (xx)
Net Income VC
xx
Change in Income = Change in Inventory x FOH per unit

Example:
Clover Company produces hats. In May 2016, the company manufactured
20,000 hats. May sales were 18,400 hats, sold at P12 per unit. The cost
per unit for the 20,000 hats produced was:
Direct Materials
P3.00
Direct Labor
P2.00
Variable Overhead P1.00
Fixed Overhead
P1.50
Total
P7.50
There was no beginning inventory for May. Variable selling expense
amounted to P2.50 per unit, and fixed selling and administrative expense
totaled P15,000 during the month.
Required: For the month of May,
a. Compute the product cost per unit under absorption costing, variable
costing and throughput costing.
b. Income under three costing methods.

Solution:
Prod : 20,000 hats
Sold : 18,400 hats @ P12
EI :
1,600 hats
FOH : P1.5 x 20,000 = P30,000
Variable SA : P2.5 per unit
Fixed SA : P15,000
Unit Cost:
AC
DM
3
DL
2
VOH
1
FOH
1.5
Unit Cost

Absorption Costing
Sales(18,400 x 12)
220,800
COS(18,400 x 7.5)
(138,000)
Gross Margin
82,800
VSA (18,400 x 2.5)
(46,000)
FSA
(15,000)
NIBT
21,800

Variable Costing
VC
3
2
1
7.5

TC
3
6

Throughput Costing
Sales (18,400 x 12)
220,800
DM (18,400 x 3)
(55,200)
Throughput Margin
165,600
DL (20,000 x 2)
(40,000)
VOH (20,000 x 1)
(20,000)
FOH
(30,000)
VSA (18,400 x 2.5)
(46,000)
FSA
(15,000)
NIBT
14,600

Sales(18,400 x 12)
220,800
VOH(18,400 x 6)
(110,400)
Manufacturing Margin 110,400
VSA(18,400 x 2.5)
(46,000)
Contribution Margin 64,400
FOH
(30,000)
FSA
(15,000)
NIBT
19,400
Reconciliation:
NI-AC
21,800
BI (0 x 1.5)
0
EI (1,600 x 1.5)
(2,400)
NI-VC
19,400