Managerial Accounting Chapter Two Job Costs JMS

Cost Accounting Systems Cost accounting involves the: Measuring, Recording, and Reporting of product costs. Determines both the total cost and unit cost of each product. Accuracy is critical to company success. Helps determine 1) which product(s) to produce, 2) the amount to produce, and 3) price to charge. Improves effectiveness of employee performance evaluations.

Cost Accounting Systems Needed: Accounts for various manufacturing costs. Such accounts are fully integrated into the general ledger system. Requires: perpetual inventory system to provide immediate, up-to-date information on the cost of a product.

Cost Accounting Systems Two basic types of cost accounting systems: Job Order Cost Systems and Process Cost Systems Chapt 3

JOB ORDER COST SYSTEM Costs are assigned to each job or batch A job may be for a specific order A key feature: Each job or batch has its own distinguishing characteristics (each is identifiable) The objective: to compute the cost per job Measures costs for each job completed - not for set time periods

JOB ORDER COST FLOWS Cost flow parallels physical flow of the materials as they are manufactured. How? Manufacturing costs are assigned (debited) to Work in Process Inventory. Cost of completed jobs are transferred to Finished Goods Inventory. When units are sold, the cost is transferred to Cost of Goods Sold (expensed).

In Manufacturing Companies - Costs come from three main sources: Manufacturing Costs Selling Costs Administrative Costs

Manufacturing Costs are divided into two types: Direct Costs The Material and Labor needed to actually make the product(s) Indirect Costs - (Mfg Overhead) Other costs needed to support manufacturing Such as: Building Maintenance Equipment

The Problem is . . .

When do you recognize each type of cost? Manufacturing Costs Direct Costs Indirect Costs Selling Costs Administrative Costs

The Matching Principle requires: Costs must be expensed in the same period that the related revenues are recorded.

The Matching Principle requires: Costs must be expensed in the same period that the related revenues are recorded. As in a Merchandising Business . . . The cost of products sold must be recorded in the same period as the sale. Product Costs = the costs to manufacture products. These costs become part of the product and are expensed when it is sold.

These are the Product Costs Manufacturing Costs Direct Costs Indirect Costs The rest are period costs Selling Costs Administrative Costs

Keep your eye on the goal of Cost Accounting! + Direct Material Direct Labor What did the Finished Goods cost to make??? + Manufacturing Overheads =

These are the Product Costs Manufacturing Costs Direct Costs Indirect Costs Notice this: Direct Costs in a product are usually straight forward. They are measurable! Indirect costs to products is usually more difficult. They must be Allocated.

Manufacturing Overhead Costs Manufacturing Costs Indirect Costs How do you allocate manufacturing overheads to products or jobs?

To Allocate Manufacturing Overheads The first step is to ESTIMATE the total Manufacturing Overheads for the period. $ $ Utilities $ Supervisor’s Salary Maintenance Material and Labor $ $ Factory Rent Equip. Depreciation $ $

To Allocate Manufacturing Overheads The second step is to ESTIMATE the total units to be produced in the period.

By knowing expected O/H costs and production we can allocate O/H to Units. $ Estimated Overhead Costs $ Estimated Units to be Produced = Predetermined Overhead Rate

By knowing expected O/H costs and production we can allocate O/H to Units. If every item produced were identical we could allocate a fixed amount to each item. But . . . That is rarely the case. $ $

Allocating Overheads Therefore, we allocate (apply) overheads based on some measure of relative effort put into each item (activity base). Common activity bases include: Direct Labor Hours Direct Labor Dollars Machine Hours We’ll need a predetermined overhead rate for . . . say . . . Machine Hours So.

Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $615,000. The company incurred actual overhead costs totaling $630,000. The budgeted machine hours for the year totaled 20,000. How much is the predetermined overhead rate? a. $30.75 per machine hour b. $31.50 per machine hour c. $31.50 per job d. $0.75 per job

Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $615,000. The company incurred actual overhead costs totaling $630,000. The budgeted machine hours for the year totaled 20,000. How much is the predetermined overhead rate? a. $30.75 per machine hour b. $31.50 per machine hour c. $31.50 per job d. $0.75 per job

Vektek, Inc. used 1,000 hours of machine time to process Job No Vektek, Inc. used 1,000 hours of machine time to process Job No. B12 during the. How much manufacturing overhead should be applied to Job No. B12? a. $630 b. $30,750 c. $31,500 d. $615

Vektek, Inc. used 1,000 hours of machine time to process Job No Vektek, Inc. used 1,000 hours of machine time to process Job No. B12 during the. How much manufacturing overhead should be applied to Job No. B12? a. $630 b. $30,750 c. $31,500 d. $615

ASSIGNING MANUFACTURING COSTS TO WORK IN PROCESS Predetermined Overhead Rate 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. The formula for a predetermined overhead rate is

Allocating Overheads The concept of applying overheads to production based on some activity base is used for both Job Cost and Process Cost systems.

Let’s review job cost Journal Entries The entries are similar for Material Labor Manufacturing Overhead But they are NOT identical

Flow of Material Costs WIP Step 1 (Journal Entry ) Purchase Material Raw Material Direct Materials $85,000 Finished Goods

Journal Entries Raw Materials 85,000 Accounts Payable 85,000 Purchase Raw Materials 1

Flow of Material Costs Step 2 (Journal Entry ) WIP Raw material is issued to a job based on the job’s specific requirements. 2 WIP Direct Materials $80,000 Dr Raw Material Direct Materials $85,000 Direct Materials $80,000 Finished Goods Cr

Journal Entries Raw Materials 85,000 Accounts Payable 85,000 Purchase raw materials WIP 80,000 Raw Materials 80,000 Issued material to WIP 1 2

Flow of Material Costs Step 2 (Journal Entry ) WIP A related entry is to issue raw material for indirect production needs (grease, cleaning supplies). 2 WIP Direct Materials $80,000 Dr Raw Material Direct Materials $85,000 Direct Materials $80,000 Manufacturing O/H Cr Indirect Materials $2,000 Dr Cr

Journal Entries Material Raw Materials 85,000 Accounts Payable 85,000 Purchase raw materials WIP 80,000 Raw Materials 80,000 Issued material to WIP Manufacturing Overheads 2,000 Raw Materials 2,000 Issued indirect material 1 2 3 Labor is similar.

Journal Entries Labor Factory Labor Raw Materials 90,000 Accounts Payable 90,000 June mfg payroll WIP 85,000 Raw Materials 85,000 Dir. labor to WIP Manufacturing Overheads 5,000 Raw Materials 5,000 Indir. labor to O/H Factory Labor 1 Wages 2 Factory Labor 3 Factory Labor

Journal Entries Manufacturing O/H Accounts Payable 133,000 WIP 140,000 Manufacturing O/H 140,000 1 2

Flow of Manufacturing Costs Work-In Process Finished Goods Direct Materials $80,000 Finished Goods $250,000 Finished Goods $250,000 Direct Labor $85,000 Factory Overhead $140,000 Cost of Goods Sold Balance $45,000

Flow of Manufacturing Costs Work-In Process Finished Goods Direct Materials $80,000 Finished Goods $250,000 Finished Goods $250,000 Goods Sold $210,000 Prepare these 2 entries Direct Labor $85,000 Factory Overhead $140,000 Cost of Goods Sold Goods Sold $210,000 Balance $45,000

Flow of Manufacturing Costs Work-In Process Finished Goods Direct Materials $85,000 Finished Goods $250,000 Finished Goods $250,000 Goods Sold $210,000 Direct Labor $100,000 Balance $40,000 Factory Overhead $140,000 Cost of Goods Sold Goods Sold $210,000 Balance $75,000

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Income Statement Period Costs

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Purchases Direct Labor Factory Overhead Income Statement Period Costs

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Purchases Direct Labor Factory Overhead Income Statement Period Costs Selling and Administrative

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Purchases Raw Materials Inventory Direct Labor Factory Overhead Income Statement Period Costs Selling and Administrative

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Purchases Raw Materials Inventory Direct Labor Work in Process Inventory Factory Overhead Income Statement Period Costs Selling and Administrative

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Purchases Raw Materials Inventory Cost of Goods Manufactured Direct Labor Work in Process Inventory Factory Overhead Income Statement Finished Goods Inventory Period Costs Selling and Administrative

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Product costs flow through the balance sheet to the income statement Materials Purchases Materials Inventory Direct Labor Work in Process Inventory Factory Overhead Income Statement Finished Goods Inventory Cost of Goods Sold Period Costs Selling and Administrative

Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Purchases Raw Materials Inventory Period costs flow directly to the income statement Direct Labor Work in Process Inventory Factory Overhead Income Statement Finished Goods Inventory Cost of Goods Sold Period Costs Selling and Administrative Selling and Administrative

For the Month Ended January 31, 2010 Goodwell Printers Income Statement For the Month Ended January 31, 2010 Sales $400,000 Cost of goods sold 210,000 Gross profit $190,000 Operating expenses: Selling expenses $80,000 Administrative expenses 50,000 Total operating expenses 130,000 Net income $ 60,000

Resource Flows 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

Resource Flows 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

Resource Flows 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.

Resource Flows 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.

Resource Flows 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.

Resource Flows 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.

JOB ORDER COST FLOWS

ACCUMULATING RAW MATERIAL COSTS Raw Materials Inventory – a general ledger account a control account that summarizes the detailed data regarding specific inventory accounts in the subsidiary ledger.

ACCUMULATING RAW MATERIAL COSTS The subsidiary ledger consist of individual records for each item of raw materials. May be accounts or manually/mechanically prepared cards May be kept as computer data files

ACCUMULATING MANUFACTURING COSTS Manufacturing Overhead May be recognized daily For example, machinery repairs, indirect materials, and indirect labor. May also be recorded periodically through adjusting entries For example, property taxes, depreciation, and insurance. The summary entry for Wallace Manufacturing Company is:

ASSIGNING MANUFACTURING COSTS TO WORK IN PROCESS RM is assigned to a job when materials are issued. A materials requisition slip - the written authorization for issuing raw materials. May be either directly used on a job or may be indirect materials.

ASSIGNING MANUFACTURING COSTS TO WORK IN PROCESS Job cost sheet Used to record the costs of a specific job. Used to determine the total and unit costs of a completed job.

ASSIGNING MATERIAL COSTS TO WORK IN PROCESS The sum of the direct materials columns of the job cost sheets should equal the direct materials debited to Work in Process Inventory.

ASSIGNING MANUFACTURING O/H TO WORK IN PROCESS The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (i.e., applied) to Work in Process Inventory.

SUMMARY OF JOB ORDER COST FLOWS

At the End of Each Month The balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs.

FINISHED GOODS When a job is completed, the costs are summarized and the Journal Entry to transfer the product from WIP to FG is:

FINISHED GOODS Inventory remains in Finished Goods Inventory until it is sold. Cost of goods sold is recognized when a sale occurs. Example: On January 31 Wallace Manufacturing sells Job No. 101, costing $39,000, for $50,000. The entries are:

REPORTING JOB COST DATA The cost of goods manufactured schedule now shows manufacturing overhead applied rather than actual overhead costs. Applied overhead is added to direct materials and direct labor to determine total manufacturing costs

UNDER OR OVERAPPLIED MANUFACTURING OVERHEAD A debit balance in manufacturing overhead means that overhead is underapplied. Overhead assigned to work in process is less than overhead incurred. A credit balance in manufacturing overhead means that overhead is overapplied. Overhead assigned to work in process is greater than overhead incurred.

UNDER OR OVERAPPLIED MANUFACTURING OVERHEAD Any year-end balance in Manufacturing Overhead is eliminated by adjusting cost of goods sold. Underapplied overhead is debited to CGS Overapplied overhead is credited to CGS Example: Wallace Mfg. has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is

Test Yourself Harrell Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year the company estimated its total manufacturing overhead cost at $400,000 and its direct labor-hours at 100,000 hours. The actual overhead cost incurred during the year was $350,000 and the actual direct labor hours incurred on jobs during the year was 90,000 hours. The manufacturing overhead for the year would be:  $10,000 under applied. $10,000 over applied. $50,000 under applied. $50,000 over applied.

Test Yourself Harrell Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year the company estimated its total manufacturing overhead cost at $400,000 and its direct labor-hours at 100,000 hours. The actual overhead cost incurred during the year was $350,000 and the actual direct labor hours incurred on jobs during the year was 90,000 hours. The manufacturing overhead for the year would be:  $10,000 under applied. $10,000 over applied. $50,000 under applied. $50,000 over applied.

End of Chapter 2