How to Use Cost Accounting Systems to Determine Product Costs
Companies calculate gross profit by subtracting the cost of goods sold from sales revenue. Accountants must know the product cost to calculate the cost of goods sold. Cost accounting systems simplify the process of calculating product costs by accumulating various amounts and adding them together.
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Instructions
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Enter material requirements and material cost in the cost accounting system. The production process requires a specific number of units for each material to create each batch. Enter the number of units produced in each batch along with the required units of each material. The cost accounting system will calculate the quantity of material necessary for one unit and extend it by the unit cost to calculate the material cost for one unit of finished goods.
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Enter machine specifications. Each batch of finished goods requires a predetermined amount of machine time to process. Enter the time required for the machine to finish one batch.
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Enter the number of direct labor employees and the labor rates. The cost accounting system will calculate the direct labor cost based on the number of employees, the wage rate for those employees and the number of hours the employees will work on the machine to produce one batch of finished goods. The cost accounting system will divide this cost by the number of units in one batch to determine the direct labor cost for one unit.
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Determine overhead allocation rates and enter them into the system. Add up the overhead expenses from the manufacturing budget. Divide these expenses by the annual budgeted production to determine a cost per unit.
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Run a product cost sheet and review the information presented. The product cost sheet lists the direct material, direct labor and overhead costs applicable for one unit of product. Compare this information on the cost sheet to expected cost data. Investigate any discrepancies. Verify that data have been entered correctly.
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Tips & Warnings
Maintain a manual product cost sheet until the cost accounting system has been operational for several months. Implementing a new phase of any accounting system requires a diligent review of all data entered. Human error entering data can lead to potential miscalculations.
