CHAPTER 3
Product Costing and Cost Accumulation in a Batch Production Environment

ANSWERS TO REVIEW QUESTIONS

3-1 (a) Use in financial accounting: In financial accounting, product costs are needed to determine the value of inventory on the balance sheet and to compute the cost-of-goods-sold expense on the income statement.

b) Use in managerial accounting: In managerial accounting, product costs are needed for planning, for cost control, and for decision making.

c) Use in cost management: In order to manage, control, or reduce the costs of manufacturing products or providing services, management needs a clear idea of what those costs are.

(d) Use in reporting to interested organizations: Product cost
3-13 a. Overhead cost distribution: Assignment of all manufacturing-overhead costs to department overhead centers.

b. Service department cost allocation: Allocation of service department costs to production departments on the basis of the relative proportion of each service department's output that is used by the various production departments.

c. Overhead application (or overhead absorption): The assignment of all manufacturing overhead costs accumulated in a production department to the jobs that the department has worked on.

These three processes are used in developing departmental overhead rates.

3-14 Job-order costing concepts are used in professional service firms. However, rather than referring to production “jobs,” such organizations use terminology that reflects their operations. For example, hospitals and law firms assign costs to “cases,” and governmental agencies often refer to “programs” or “missions.” It is important in such organizations to accumulate the costs of providing the services associated with a case, project, contract, or program. Such cost information is used for planning, cost control, and pricing, among other purposes.

3-15 A cost driver is a characteristic of an event or activity that results in the incurrence of costs by that event or activity. A volume-based cost driver is