ACC2200 · Introduction to Management Accounting
Cost Allocation Overview: Product Costing Systems
Product costing systems are the Week 4 core of ACC2200 Introduction to Management Accounting at Monash University — the machinery that accumulates product-related costs and attaches them to the units a firm actually makes. The key split is tracing direct costs (direct materials, direct labour) versus allocating indirect overhead through a cost pool and an allocation base. You choose job-order costing for unique jobs or batches and process costing for mass identical output, and under normal costing you apply overhead at a predetermined rate, which then produces an over- or under-applied balance to close at period-end.
What this chapter covers
- 011. Trace vs allocate — direct costs are traced to a unit; indirect overhead is pooled and allocated via a cost driver base
- 022. Cost object, cost pool, allocation base — the vocabulary that frames every allocation question
- 033. Job-order vs process costing — unique jobs and batches vs mass, homogeneous, repetitive output
- 044. Normal vs actual costing — normal uses actual DM + actual DL but a predetermined overhead rate
- 055. The predetermined overhead rate = budgeted manufacturing overhead ÷ budgeted level of the cost driver
- 066. Applied overhead = predetermined rate × the actual quantity of driver consumed
- 077. Over- vs under-applied overhead = applied − actual, and how to close the balance to COGS
- 088. Cost flow Raw Materials → WIP → Finished Goods → COGS and the three manufacturing-overhead journal entries
Predetermined rate, applied overhead, and the over-/under-applied balance
- +1Predetermined overhead rate = budgeted overhead ÷ budgeted driver = $480,000 ÷ 16,000 DLH = $30 per direct-labour hour. Set this before the period; it does not move when actual results arrive.
- +1Applied overhead = rate × actual driver used = $30 × 4,000 DLH = $120,000. Note the rate is budgeted but the hours are actual — that is what makes it normal costing.
- +1Compare applied with actual: applied $120,000 versus actual $128,000 incurred.
- +1Applied < actual ⇒ not enough overhead was charged into production ⇒ under-applied by $128,000 − $120,000 = $8,000. Manufacturing Overhead carries an $8,000 debit balance.
- +1Close the balance: Dr Cost of Goods Sold $8,000 · Cr Manufacturing Overhead $8,000. Under-applied means COGS rises by $8,000 (or the balance is prorated across WIP, FG and COGS if the question asks).
Key terms
- Cost object
- Anything you want to measure the cost of — here a product, a job or a batch that costs are accumulated against.
- Cost tracing vs allocation
- Direct costs are traced straight to a cost object; indirect (overhead) costs cannot be traced economically, so they are pooled and allocated using a base.
- Cost pool and allocation base
- A cost pool groups indirect costs (manufacturing overhead); the allocation base — a cost driver such as machine hours or direct-labour hours — spreads that pool onto products.
- Job-order costing
- Costs are accumulated on a job cost sheet for each unique job or batch; suits custom joinery, printing, construction, and audit or legal engagements.
- Process costing
- Costs are accumulated by department on a cost of production report and averaged across identical units; suits petrol, food, chemicals and cheque processing.
- Normal vs actual costing
- Both use actual direct materials and direct labour; normal costing applies overhead at a predetermined rate, while actual costing waits for the real overhead rate.
- Predetermined overhead rate
- Budgeted manufacturing overhead ÷ budgeted level of the cost driver, computed before the period so overhead can be charged to jobs on a timely, smoothed basis.
- Over-/under-applied overhead
- Applied overhead minus actual overhead. Applied > actual is over-applied (credit balance); applied < actual is under-applied (debit balance), closed to COGS or prorated.
Cost Allocation Overview: Product Costing Systems FAQ
What is a product costing system and why does ACC2200 emphasise it?
It is the mechanism that accumulates product-related costs and assigns them to units, so the firm can value inventory for reporting, cost a product line, quote a price, and control operations. Week 4 is a primary-emphasis exam topic and the skeleton behind Weeks 5 to 7, so it appears in both the calculation questions and the group case study.
When do I use job-order costing versus process costing?
Follow the nature of the output, not the industry label. Distinct, identifiable jobs or batches use job-order costing on job cost sheets; a continuous stream of identical units uses process costing with cost per equivalent unit. Custom cabinetry is job-order; petrol refining is process.
What is the difference between normal costing and actual costing?
Both use actual direct materials and actual direct labour. Normal costing applies overhead at a predetermined (budgeted) rate set before the period; actual costing waits for the real overhead total and driver volume, which is only known after period-end and is therefore too slow for timely pricing.
How do I know if overhead is over-applied or under-applied, and which way does COGS move?
Compare applied (rate × actual driver) with actual overhead incurred. Applied greater than actual is over-applied, so you credit COGS. Applied less than actual is under-applied, so you debit COGS and it rises. Manufacturing Overhead is touched three times: incurred, applied, then closed.
Why does the choice of allocation base matter so much?
Machine hours, direct-labour hours and direct-labour dollars each give a different rate and therefore a different overhead charge on every job. A labour-based rate over-costs labour-intensive jobs and under-costs machine-intensive ones when overhead is really driven by machines — which is the motivation for activity-based costing in Week 7. Always use the base the question mandates.
Can AI help me with product costing systems?
Yes — ask Sia to walk through any product costing systems problem or concept step by step, the way Monash University tests it.
Studying with AI? Sia — free AI accounting tutor works through ACC2200 step by step.
Exam move
Drill the six-step attack until it is automatic: name the system and base, compute the predetermined rate, apply overhead on the actual driver, walk the RM → WIP → FG → COGS journals (remembering all three overhead entries), reconcile the over-/under-applied balance, then be ready for the discussion marks. Because the final exam is closed-book and calculator-only with about 60% calculation and 40% discussion, showing your method banks marks even if a number slips. Practise stating the over-/under-applied direction in words first, and rehearse justifying a base choice or contrasting normal versus actual costing so you can earn the written marks too. For anything you get stuck on, ask Sia, an AI tutor that explains each journal entry and each step of the reasoning, so you build the method yourself rather than memorising one answer.
