Accounting Systems for Manufacturing Businesses Chapter 10

Nature of Manufacturing Businesses Service firms earn revenue from providing services. Merchandising firms earn revenue from selling merchandise inventory. Manufacturing firms- –Earn revenue from manufacturing and selling finished goods. –Have three inventories: materials, work in process, and finished goods. –Have manufacturing and non- manufacturing costs

The Product Direct Materials Direct Labor Manufacturing Overhead Manufacturing Costs

Prime and Conversion Costs Prime Costs: direct material, direct labor costs Conversion Costs: direct labor and factory overhead costs

Nonmanufacturing Costs Marketing and Selling Cost Costs necessary to get the order and deliver the product. Administrative Cost All executive, organizational, and clerical costs. R&D

Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs are not included in product costs. They are expensed on the income statement. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

Indicate whether each of the following costs of the Proctor & Gamble Company would be classified as direct materials cost, direct labor cost, or factory overhead cost: a.Depreciation on the St. Bernard (Cincinnati) soap plant. b.Wages paid to Packing Department employees. c.Maintenance supplies. d.Packaging materials. e.Plant manager salary of the Lima, Ohio, liquid soap plant. f.Pulp for towel and tissue products. g.Wages of Making Department employees. h.Scents and fragrances. i.Depreciation on disposable diaper converting machines. j.Salary of process engineers.

Which of the following items are properly classified as part of factory overhead for John Deere & Co.? a.Plant manager’s salary at Greeneville, Tennessee, turf care products plant. b.Depreciation on Moline, Illinois, headquarters building. c.Property taxes on Klemme, Iowa, components plant. d.Chief financial officer’s salary. e.Steel plate. f.Sales incentive fees to dealers. g.Amortization of patents on a new welding process. h.Interest expense on debt. i.Consultant fees for surveying production employee morale. j.Factory supplies used in the Kenersville, North Carolina, hydraulic excavator factory.

Classify the following costs for Ford Motor Company as either a product cost or a period cost: a.Advertising. b.Tires. c.Assembly employees wages. d.Salary of marketing executive. e.Depreciation of Dearborn, Michigan, executive building. f.CEO’s salary. g.Plant manager’s salary. h.Depreciation on Atlanta, Georgia, assembly plant. i.Maintenance supplies. j.Glass. k.Property taxes on Kansas City, Missouri, assembly plant. l.Shipping costs. m.Travel costs used by sales personnel. n.Utility costs used in executive building. o.Stamping Department employee wages. p.Steel.

Manufacturing Cost Flows Manufacturing Overhead Material Purchases Direct Labor Balance Sheet Costs Inventories Finished Goods Cost of Goods Sold Income Statement Expenses Selling and Administrative Period Expenses Work in Process Raw Material

Balance Sheet Merchandiser Current assets –Cash –Receivables –Prepaid expenses –Merchandise inventory Manufacturer Current Assets v Cash v Receivables v Prepaid Expenses v Inventories Raw Materials Work in Process Finished Goods

Pop Quiz Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A.$276,000 B.$272,000 C.$280,000 D.$ 2,000

Pop Quiz Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A.$555,000 B.$835,000 C.$655,000 D.Cannot be determined.

Pop Quiz Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A.$1,160,000 B.$ 910,000 C.$ 760,000 D.Cannot be determined.

Pop Quiz Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000.

Types of Product Costing Systems Process Costing Job-order Costing  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.

Types of Product Costing Systems Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Materials Requisition Form

Employee Time Ticket

Job Cost Sheet

Application of Overhead In a job-order costing system, the cost of a job consists of: 1.Actual direct material costs traced to the job. 2.Actual direct labor costs traced to the job. 3.Manufacturing overhead applied to the job using a predetermined overhead rate. Actual overhead costs are not assigned to jobs.

Predetermined Overhead Rate Formula The formula for computing a predetermined overhead rate is:

Predetermined Overhead Rate Formula The company in the preceding example applies overhead costs to jobs on the basis of direct labor-hours. In other words, direct labor- hours is the allocation base. At the beginning of the year the company estimated that it would incur $320,000 in manufacturing overhead costs and would work 40,000 direct labor-hours. The company’s predetermined overhead rate is:

Application of Overhead to Jobs The process of assigning overhead to jobs is known as applying overhead. In the preceding example, Job 2B47 required 27 direct labor-hours. Therefore, $216 of overhead cost was applied to the job as follows:

Job Order Costing in a Service Business John Meyer, CPA, does tax and audit work. He estimates his overhead costs for the current year will be: Wages paid to receptionist$17,000 Supplies 8,000 Depreciation on office equipment 2,000 Advertising 1,300 Rent and utilities 4,000 $32,300 John uses direct labor hours to allocate overhead costs to jobs performed for clients. He estimates that he will work 1,900 hours conducting audits and preparing tax returns this year. John uses $25 per hour for his wage rate when computing the cost of any work performed for a client. John spent 12 hours preparing a tax return for Sharon Ward. What was the cost to prepare Sharon’s return?

Activity-Based Costing (ABC) Uses multiple overhead rates to allocate factory overhead more accurately than using a single, plant-wide rate. Costs are initially accounted for in cost pools – each cost pool has its own rate.

ActivityCost/ Budget/ Estimated Activity= Rate Admitting$720,000/ 4,000 admissions=$ 180 Radiological testing$960,000/ 3,000 images=320 Operating room$1,600,000/ 8,000 hours=200 Pathological testing$600,000/ 5,000 specimens=120 Dietary and laundry$3,000,000/ 20,000 days=150

Cost Pools and Rates for Hopewell Hospital

MARY WILSON ActivityActivity- Base Usage  Activity Rate= Activity Cost Admitting1 admission  $180 per admission=$ 180 Radiological testing2 images  320 per image=640 Operating room4 hours  200 per hour=800 Pathological testing1 specimen  120 per specimen=120 Dietary and laundry7 days  150 per day=1,050 Total$2,790

10-30 HOPEWELL HOSPITAL Customer (Patient) Profitability Report For the Period Ending December 31, 2004 Adcock, Kim Birini, Brian Conway, Don Wilson, Mary Revenues$9,500$21,400$5,050$3,300 Less patient costs: Drugs and supplies$ 400$1,000 $ 300$ 200 Admitting180 Radiological testing1,2802,560 1, Operating room2,4006,4001, Pathological testing Dietary and laundry4,20014,7001,050 Total patient costs$8,700$25,440$4,530$2,990 Income from operations$ 800$(4,040)$ 520$ 310