1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University MANAGERIAL ACCOUNTING 10 TH EDITION BY MAHER, STICKNEY & WEIL MEASURING PRODUCT COSTS STUDENT CHAPTER 2 © Copyright 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.

Overview & Basic Concepts 2 1.Understand the nature of manufacturing costs. 2.Explain the need for recording costs by department & assigning costs to products. 3.Understand how Work-in-Process account both describes transformation of inputs into outputs & accounts for costs incurred. 4.Compare & contrast normal & actual costing. 5.Know various production methods & different accounting systems each requires. LEARNING OBJECTIVES Continued

Overview & Basic Concepts 3 6.Compare & contrast job & process costing. 7.Compare & contrast product costing in service organizations to manufacturing companies. 8.Understand concepts of customer costing & profitability analysis. 9.Identify ethical issues in job costing. 10.Recognize components of just-in-time (JIT) production methods & understand how accountants adapt costing systems to them. LEARNING OBJECTIVES Continued

Overview & Basic Concepts 4 11.Know how to compute end-of-period inventory book value using equivalent units of production (Appendix 2.1). LEARNING OBJECTIVES

Overview & Basic Concepts 5 CHAPTER GOAL This chapter shows how the accounting system records & reports the flow of costs in organizations to answer questions such as these:  To determine product/service cost  To compare cost with management’s expectations ☼☼

Overview & Basic Concepts 6 EXHIBIT 2.8 Where are we on the value chain in CHAPTER 2?

Overview & Basic Concepts 7 DIRECT MATERIALS: Definition Can be easily traced directly to a product. LO 1

Overview & Basic Concepts 8 DIRECT LABOR: Definition Is labor of workers who transform materials into a finished product. LO 1

Overview & Basic Concepts 9 How are materials, labor not directly traceable to a product categorized? All costs, including materials & labor, not directly traceable to a product are categorized as Manufacturing Overhead. LO 1

Overview & Basic Concepts 10 RESPONSIBILITY CENTER: Definition Is any organizational unit with its own manager or managers. LO 2

Overview & Basic Concepts 11 Responsibility center (department) Records costs & assigns to products Direct materials Direct labor Overhead Management compares costs to standards LO 2

Overview & Basic Concepts 12 ACCOUNTING SYSTEM PURPOSES 1)To record costs by responsibility for performance evaluation & control. 2)To assign manufacturing costs to units produced for product costing. LO 3

Overview & Basic Concepts 13 BASIC COST FLOW EQUATION LO 3 Beginning + Transfers = Transfers + Ending Balance In Out Balance BB + TI = TO + EB* *Recall from financial accounting: Beginning Balance + Additions - Withdrawals = Ending Balance

Overview & Basic Concepts 14 How did the Gravins Division manager commit fraud? The manager overstated ending inventory to improve his profit. LO 3 MANAGERIAL APPLICATION

Overview & Basic Concepts 15 How did top management catch the fraud? Top management caught the fraud when they realized that recorded inventory had outgrown the freezer where it was stored. LO 3 MANAGERIAL APPLICATION

Overview & Basic Concepts 16 Name 2 approaches to determining overhead cost. 2 approaches to determining overhead cost are: (1) normal costing and (2) actual costing LO 4

Overview & Basic Concepts 17 COMPARING NORMAL & ACTUAL COSTING  Normal costing advantages  Smoothes seasonal & other fluctuations that don’t relate directly to activity levels  More timely than actual because of estimating process LO 4

Overview & Basic Concepts 18 USING NORMAL COSTING  Select a cost driver (allocation base) to apply overhead  Estimate dollar amount of overhead & level of activity for period  Compute predetermined (normal) overhead rate  Apply overhead to production LO 4

Overview & Basic Concepts 19 COST SYSTEMS: Examples  Job costing  For custom production jobs  Users: accounting & consulting firms, health care organizations  Process costing  For standardized production  Users: drink makers (e.g., Coca Cola, etc.)  Operation costing  A hybrid of job & process combined  Users: Levi Strauss, Dell LO 5

Overview & Basic Concepts 20 COMPARING COST SYSTEMS Nature of Production Costing System Used Heterogeneous Units Each Unit Large Job Costing Homogeneous Units Many Small Units Continuous Process Process Costing LO 7

Overview & Basic Concepts 21 FLOW OF COSTS REPORTING The income statement reports: Revenue -Cost of services billed = Gross Margin -Expenses (e.g., unbilled direct labor, underapplied overhead, marketing expenses) = Operating Profit LO 8

Overview & Basic Concepts 22 MISREPRESENTING COSTS Often costs are improperly assigned to jobs (or research, or defense contracts, etc.). Sometimes employees are encouraged to understate or misrepresent job costs. Because many of these events have been discovered, funding agencies & other payers now require audits of financial records. LO 9 E!!!

Overview & Basic Concepts 23 CHARACTERISTICS OF JIT: (Just- in-Time Inventory) JIT inventory methods attempt to obtain materials just in time for production or sale  Reduces/eliminates inventory & carrying costs  Leads to immediate correction of defective units  Helps expose production problems  Relies on high-quality materials, production  Charges all costs directly to cost of goods sold LO 10

Overview & Basic Concepts 24 What happens to inventory leftover after costs are charged to cost of goods sold in a JIT system? Cost of leftover inventory is “backflushed,” i.e., taken out of cost of goods sold and put into finished goods inventory. LO 10

Overview & Basic Concepts 25 How is spoilage treated in a JIT system? Normal spoilage is a cost of work done. Abnormal spoilage is expensed in the period. LO 10

Overview & Basic Concepts 26 CHAPTER 2 THE END