summary account A control account is a within a general ledger that accumulates the details of an account in a subsidiary ledger

Cost Accounting Systems Cost Accounting involves … Measuring, Recording and Reporting “product” costs. Depending on what is being manufactured use either: (1) job order cost system … (Chapter 16) (2) process cost system … (Chapter 17) (3) activity based cost system … (Chapter 18)

Costs assigned to dept / process for a specified period of time. Cost Accounting Systems Chapter 17 … Process Cost System Costs assigned to dept / process for a specified period of time. Used for large volume, similar products are produced. (cereal, gasoline, twinkies, ice cream). Costs accumulated for a time period – (week or month).

Costs assigned to each job / batch. Job Order Cost system Chapter 16 … Job Order Cost System Costs assigned to each job / batch. Key feature: Each job has distinguishing characteristics, custom or unique products (or groups of products). Measures costs for each job completed – not for set time periods.

Job Order Cost Flow Costs accumulate in “INVENTORY” (control accounts) that parallel the physical flow of the materials & labor. Material costs first go to Raw Materials Inventory Manufacturing costs assigned to Work in Process Inventory or Mfg Overhead Costs (by job) transferred to Finished Goods Inventory. When sold, cost is “expensed” to Cost of Goods Sold.

Job Order Cost Flow

Job Order Cost Flow Raw Material Costs Illustration: Company buys: 2,000 batteries (Stock #AA) at $5 each … $10,000 800 modules (Stock #Mod) at $40 each .. $32,000

Job Order Cost Flow Labor Costs Company issues workers paychecks: Machine operators $28,000 (direct labor) AND … Prod Supv & Janitor $ 4,000 (indirect labor). Costs AND … Marketing & Admin 5,000 (period cost) To the Income Statement

Job Order Cost Flow Period Cost vs Product Costs: (Mfg Overhead) Period Costs: Non-manufacturing (non-factory) costs are immediately expensed to the month or period. Product Costs: Costs related to mfg process are accumulated in Mfg (Factory) Overhead.

Job Order Cost Flow Manufacturing Overhead Costs Company accrues JAN property taxes: 2,000 taxes for Factory Building 1,000 taxes for Corporate Offices * (Note: taxes will be paid April 1) Product Cost Period Cost

Job Order Cost Flow Manufacturing Overhead Costs Ex: depreciation on factory machines is 10,000 while depreciation on corporate office machines is 3,000. Prepare the entry: (Refresher: ACC201 adjustment for depreciation is: debit DEPR EXP … credit ACC DEPR): Jan Factory Overhead (Product Cost) 10,000 Depreciation Expense (Period Cost) 3,000 Accum Deprec (Factory Machine) Accum Deprec (Corp Office Machines)

Job Order Cost Flow Manufacturing Overhead Costs Illustration: entry for manufacturing overhead in Company is: Jan Factory Overhead (Product Cost) 10,000 Depreciation Expense (Period Cost) 3,000 Accum Deprec (Factory Machine) Accum Deprec (Corp Office Machines)

Job Order Cost Flow

Raw Material Costs Prior Slide: – we previously bought the materials Illustration: Company buys: 2,000 batteries (Stock #AA) at $5 each … $10,000 800 modules (Stock #Mod) at $40 each .. $32,000

Job Order Cost Flow Ex: a source document to move materials (within factory) To: Work In Process Inventory (increase this asset) From: Materials Inventory (decrease this asset)

Job Order Cost Flow Ex: a source document to move materials (within factory) To: Mfg Overhead (increase this asset) From: Materials Inventory (decrease this asset)

Job Order Cost Flow To: Mfg Overhead (increase this asset) From: Materials Inventory (decrease this asset) Jan Work In Process Inventory 24,000 Manufacturing Overhead 6,000 Raw Materials Inventory 30,000 Direct materials Indirect materials

Job Order Cost Flow Direct Materials Indirect Materials

Labor Costs Prior Slide: – we previously paid the workers. Company issues workers paychecks: Machine operators $28,000 (direct labor) AND … Prod Supv & Janitor $ 4,000 (indirect labor). Costs AND … Marketing & Admin 5,000 (period cost) To the Income Statement

Job Order Cost Flow

Job Order Cost Flow Assigning Factory Labor Costs Direct Labor Ex: $32,000 total factory labor cost consists of $20,000 of direct labor and $8,000 of indirect labor, the entry is: Jan Work In Process Inventory 28,000 Manufacturing Overhead 4,000 Factory Labor 32,000 Direct Labor Indirect Labor

Job Order Cost Flow Direct Labor Indirect Labor

Prior Slide: - we previously increased Mfg Overhead. Company accrues JAN property taxes: 2,000 taxes for Factory Building 1,000 taxes for Corporate Offices * (Note: taxes will be paid April 1) Product Cost Period Cost

Manufacturing Overhead Costs Prior Slide: - we previously increased Mfg Overhead. Manufacturing Overhead Costs Illustration: entry for manufacturing overhead in Company is: Jan Factory Overhead (Product Cost) 10,000 Depreciation Expense (Period Cost) 3,000 Accum Deprec (Factory Machine) Accum Deprec (Corp Office Machines)

Job Order Cost Flow

Job Order Cost Flow Manufacturing Overhead Costs How do I transfer Factory (Manufacturing) Overhead amounts to Work-In-Process Inventory IF I do not know all of the actual amounts of overhead – yet ? (A “Job” may be completed and ready for delivery but all of the ACTUAL overhead costs are still not known like: last months electric bill, last weeks overtime, last months equipment repairs , last months building sanitizing)

Predetermined Overhead Rate Job Order Cost Flow Manufacturing Overhead Costs Companies creates an “estimate” of actual Factory Overhead called a … Predetermined Overhead Rate It uses this to “assign” an (estimated) amount of Overhead to Work-In-Process (to the specific jobs). The “estimate” will be close to the “actual” but it will NOT be exact. You will either be under-applied or over-applied.

Job Order Cost Flow Predetermined Overhead Rate Based on the relationship between estimated annual overhead costs and expected annual operating activity Expressed in terms of an activity base such as Direct labor costs Direct labor hours Machine hours

Job Order Cost Flow Predetermined Overhead Rate A “projection” (estimate) that is established at the beginning of the year. May use a single, company-wide predetermined rate. May use a different rate for each department and each department may have a different activity base. Formula is:

Job Order Cost Flow Manufacturing Overhead Costs Illustration: Using direct labor as activity base … assume that the company expects annual overhead costs to be $200,000 and direct labor costs for the year to be $200,000, compute overhead rate. $200,000 $200,000 = 100% This means that for every dollar of direct labor, company will ALSO assign __________ of manufacturing overhead to a job. So if Direct Labor = $45,000 how much ADDITIONAL cost will be added for manufacturing overhead … ANOTHER $45,000 … (DL + Mfg OH = 45,000 + 45,000 = 90,000) 1 dollar

Job Order Cost Flow Manufacturing Overhead Costs (Mfg OH) Illustration: Using direct labor as activity base … assume that the company expects annual overhead costs to be $450,000 and direct labor costs for the year to be $300,000, compute overhead rate. $450,000 $300,000 = 150% So if Direct Labor = $100,000 how much ADDITIONAL cost will be added for manufacturing overhead … ANOTHER $150,000 … Is the 150,000 OH ACTUAL or APPLIED (as in estimated)

Job Order Cost Flow Manufacturing Overhead Costs Illustration: Using direct labor as activity base … assume that the company expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, compute overhead rate. $280,000 $350,000 = 80% This means that for every dollar of direct labor, company will assign __________ of manufacturing overhead to a job. 80 cents

Job Order Cost Flow Manufacturing Overhead Costs Illustration: Company applies manufacturing overhead to work in process when it assigns direct labor costs. Calculate the amount of applied overhead assuming POR = 80% and direct labor = $28,000. $28,000 x 80% = $22,400 The following entry records this application. Jan Work In Process Inventory 22,400 Manufacturing Overhead

Job Order Cost Flow Manufacturing costs assigned to W-I-P with Debit … Work in Process Inventory Credits … Raw Materials Inventory … Factory Labor … Manufacturing Overhead

Job Order Cost Flow

Job Order Cost Flow Assigning Costs to Finished Goods Ex: When a job is finished, Company transfer its total cost to finished goods inventory. Jan Finished Goods Inventory 39,000 Work In Process Inventory

Job Order Cost Flow

Job Order Cost Flow Expense SALE

Subtract PERIOD costs (selling-admin) to get: Job Order Cost Flow Assigning Costs to Cost of Goods Sold Illustration: On January 31 company sells on account Job 101. The job cost $39,000, and it sold for $50,000. The entries are: Jan Accounts Receivable 50,000 Sales Revenue Cost of Goods Sold 39,000 Finished Goods Inventory Gross Profit: 50,000 – 39,000 = 11,000 Subtract PERIOD costs (selling-admin) to get: Net Profit

Job Order Cost Flow Summary Illustration 16-15 LO 5

Reporting Job Cost Data Under- or Overapplied Overhead A debit balance in manufacturing overhead means that overhead is underapplied. A credit balance in manufacturing overhead means that overhead is overapplied. Illustration 16-19

Reporting Job Cost Data Under- or Overapplied Overhead Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold. Underapplied overhead is debited to COGS Overapplied overhead is credited to COGS

Reporting Job Cost Data Under- or Overapplied Overhead Illustration: Wallace has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the over-applied overhead is: 2,500 Dec 31 Manufacturing Overhead Cost of Goods Sold 2,500