Conversion Process Master It When I started teaching this in 2006, one of the biggest challenges as I left my training, do I know this well enough to teach and can I make this interesting. During my MBA program I just finished Managerial Accounting and boy was it a snoozer to me. Six hours every Saturday morning!

Conversion Activities (Module 2 Recap) Schedule production Obtain raw materials Use labor and other manufacturing resources to make products Store finished goods until sold Here are the parts of the conversion process. Bring them to life the best you can for students. Very foreign topic to them.

Schedule Production Scheduling the use of machines and the arrival of materials is an important part of controlling and reducing costs. Not a simple problem!

Please take a look at this slide closely, does this look like a simple process to you?

Schedule Production A company with 800 production workers, each get paid $18 an hour, will lose $14,400 in labor costs alone for every hour that it has to stop production due to shortages of raw material.

The March 2011 Great Tohoku Earthquake and Tsunami Population centers closed due to leaking radiation Highways and railways closed Electricity shortages Ports were closed

The March 2011 Great Tohoku Earthquake and Tsunami Motor Vehicle has over 15,000 parts Lack of an essential component may halt the completion of vehicles or slowdown Japan is the 2nd largest vehicle producing nation behind China (Source: Congressional Research Service)

Schedule Production Machine Setups are adjustments made to machines to get them ready to manufacture the next type of product.

Fully flexible factories Common global components Schedule Production Fully flexible factories Common global components Standardized assembly procedures Collaborative supplier relationships GM and Ford took 24 hours to make one car, Honda and Toyota were at 19, GM and Ford had one plant per vehicle, Honda and Toyota had fully flexible factories.

GM and Ford took 24 hours to make one car, Honda and Toyota were at 19, GM and Ford had one plant per vehicle, Honda and Toyota had fully flexible factories. Oldsmobile Delta 88: 1988 bought with 92,000 miles, stolen at 163,000 miles

Production Floor Layout (Cell Locations) I am coming to your house, you are to put the following items out for the meal. You are going to put it on this hutch, what order will you put them in? Mathematical Models Used for Production Runs

Production Floor Layout (Cell Locations) I am coming to your house, you are to put the following items out for the meal. You are going to put it on this hutch, what order will you put them in? Mathematical Models Used for Production Runs

Obtain Direct Materials Direct Materials and other supplies used in the production process are acquired and stored.

Obtain Direct Materials

Use Labor and Other Manufacturing Resources to Make Products Direct Labor Direct Materials Manufacturing Overhead Rent on manufacturing facilities Insurance on the direct materials inventory Heat, light, and power used Engineering costs of designing products and scheduling the production process 70% or more of the costs of total production Indirect materials Indirect labor

Store Finished Goods Until Sold When manufacturing is complete, finished products move from the production floor to storage until a shipping order is received.

Chapter 3 Completed Understanding the conversion process

Chapter 9 Recording and Evaluating Conversion Process Activities Navs Corporate Tower The CEO The Associates Chapter 9 Recording and Evaluating Conversion Process Activities Sales -COGS Gross Margin -S & A Expenses INCOME STATEMENT Navs Manufacturing Facility

Chapter 9 Recording and Evaluating Conversion Process Activities BALANCE SHEET Inventory Navs Manufacturing Facility

Finished Goods Warehouse Inventory Focus Manufacturing Floor Materials Warehouse Finished Goods Warehouse There are three inventory accounts in the general ledger which reflects different aspects of the manufacturing process (control accounts).

Use Labor and Other Manufacturing Resources to Make Products Direct Materials get recorded in the Direct Materials Inventory Account Materials Warehouse Indirect Materials get recorded in the Supplies Account

Inventory Focus Manufacturing Floor When direct materials get requisitioned into the manufacturing process they move into Work-In-Process Inventory Account.

Finished Goods Warehouse Inventory Focus When Work-In-Process Inventory gets completed and stored in the finished goods warehouse it get recorded in Finished Goods Inventory. Finished Goods Warehouse

Work-In-Process Inventory Finished Goods Inventory Inventory Focus Manufacturing Floor Materials Warehouse Finished Goods Warehouse Direct Materials Inventory Work-In-Process Inventory Finished Goods Inventory

Inventory Focus Navs Manufacturing Facility Purchased $5,000 of direct materials on account Direct Materials Inventory $5,000 Accounts Payable $5,000 2) Requisitioned $2,000 of direct materials into production. Work-In-Process Inventory $2,000 Direct Materials Inventory $2,000 Completed jobs costing $1,500 Finished Goods $1,500 Work-In-Process Inventory $1,500

Navs Manufacturing Facility Direct Labor Focus Direct Labor is the cost of employees who actually work on the product. Manufacturing Floor Direct Labor costs are recorded to work-in-process

Indirect Labor Focus Indirect labor is the cost of employees who support manufacturing operations.

Manufacturing Overhead Manufacturing Overhead is a temporary account used to reflect the indirect manufacturing costs of the period. Rent on manufacturing facilities Insurance on the direct materials inventory Heat, light, and power used Engineering costs of designing products and scheduling the production process 70% or more of the costs of total production Indirect materials Indirect labor

Manufacturing Overhead Actual Applied The amount of overhead incurred during the accounting cycle. The amount of overhead allocated to the work-in-process during the accounting cycle.

Manufacturing Overhead When we apply MOH, we apply it to Work-In-Process Inventory. Use a predetermined rate to apply it to WIP using Activity Based Costing.

Selling Inventory This is why we are in business! COGS FG A/R Sales

Entries, Entries, Entries DMI Supplies AP Purchase direct and indirect materials on account Direct materials were issued into production Indirect materials were issued into production Applied overhead to production Paid the electricity bill Paid the direct labor Paid the indirect labor Completed jobs Sold inventory 2. WIP DMI 3. MOH Supplies 4. WIP MOH 5. MOH Cash 6. WIP Cash 7. MOH Cash 8. FG WIP 9. COGS FG

Problem One: Classifying Costs Navs Corporation makes pool tables. Each table consists of wood, felt, glue, screws, and metal.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 1. Cost of wood.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 2. Cost of Cost of shipping crates.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 3. Cost of glue.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 4. Depreciation on the factory equipment.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 5. Office workers’ salaries.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 6. Production supervisors’ salaries.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 7. Rent on finished goods warehouse.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 8. Rent on production facilities.

Classifying Costs Direct materials cost Direct labor cost Manufacturing overhead cost Selling and administrative cost 9. Wages of assembly workers.

Problem 2: Calculating Overhead Navs Corporation applies unit-related manufacturing overhead on the basis of machine hours. The following unit-related overhead data were accumulated by the accounting department: Estimated Actual Machine hours 500,000 400,000 Overhead costs $1,500,000 $1,300,000

Problem 2: Calculating Overhead Estimated Actual Machine hours 500,000 400,000 Overhead costs $1,500,000 $1,300,000 What is the predetermined rate? Estimated rate is always the estimate/estimate Always dollars divided by activity $1,500,000/500,000 = $3 per hour

Problem 2: Calculating Overhead Estimated Actual Machine hours 500,000 400,000 Overhead costs $1,500,000 $1,300,000 2. Journalize the applied manufacturing overhead. $3 x 400,000 = $1,200,000 WIP 1,200,000 MOH 1,200,000

Problem 2: Calculating Overhead Estimated Actual Machine hours 500,000 400,000 Overhead costs $1,500,000 $1,300,000 3. Was overhead over-or underapplied? Underapplied, $1,200,000 is less than $1,300,000

Problem 2: Calculating Overhead Estimated Actual Machine hours 500,000 400,000 Overhead costs $1,500,000 $1,300,000 4. What is the amount of over- or underapplied overhead? Underapplied $1,200,000 is less than $1,300,000, the amount is $100,000

Problem 2: Calculating Overhead Manufacturing Overhead 1,300,000 1,200,000 5. Close out MOH COGS 100,000 MOH 100,000

Problem 3: Conversion Entries 1. Direct material inventory 55,000 Supplies 45,000 Accounts payable 100,000 Answer: Purchased $55,000 of direct materials and $45,000 of indirect materials (supplies), both on account.

Problem 3: Conversion Entries 2. Work-in-process inventory 60,000 Direct materials inventory 60,000 Answer: Direct Materials of $60,000 were issued into production.

Problem 3: Conversion Entries 3. Manufacturing overhead 45,000 Manufacturing supplies 45,000 Answer: Indirect materials of $45,000 were issued into production.

Problem 3: Conversion Entries 4. Work-in-process inventory 17,000 Manufacturing overhead 14,000 Cash 31,000 Answer: Paid $31,000 in wages to employees: $17,000 was direct labor and $14,000 was indirect labor.

Problem 3: Conversion Entries 5. Manufacturing overhead 3,000 Cash 3,000 Answer: Paid the electricity bill for the factory when received, $3,000.

Problem 3: Conversion Entries 6. Work-in-process inventory 54,000 Manufacturing overhead 54,000 Answer: Manufacturing overhead of $54,000 was applied to production.

Problem 3: Conversion Entries 7. Work-in-process inventory 63,000 Manufacturing overhead 63,000 Answer: Manufacturing overhead of $63,000 was applied to production.

Problem 3: Conversion Entries 8. Finished goods 175,000 Work-in-process inventory 175,000 Answer: Completed jobs costing $175,000.

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