McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 Recording and Evaluating Conversion Process Activities

9-2 What are the Primary Activities in the Conversion Process? Schedule production Obtain raw materials (internal transfer) Use labor and manufacturing resources to convert raw materials into finished goods Store finished goods until sold (internal transfer)

9-3 Which of the Conversion Process Activities are Accounting Events? Obtain raw materials Increase work-in-process inventory Decrease direct materials inventory Use labor and overhead Increase work-in-process inventory Store finished goods Increase finished goods inventory Decrease work-in-process inventory

9-4 What is the Basic Flow of Information in the Conversion Process? Customer places an order and production is scheduled Raw materials are requisitioned and recorded Labor is used and recorded Cost record prepared and goods are manufactured Goods are finished and recorded

9-5 What are the Manufacturing Inventory Accounts? Direct materials inventory Current asset (similar to Merchandise Inventory for a merchandising company): Cost of direct materials on hand Increases when purchases of direct materials are made (Chapter 8) Decreases when direct materials are requisitioned into production

9-6 Inventories Continued Work-in-process inventory Current asset: Cost of products that have been started but not completed Increases when direct materials are requisitioned into production Increases when direct labor is used in production Increases when manufacturing overhead is applied to production Decreases when products are finished

9-7 Inventories Continued Finished goods inventory Current asset: Cost of products that have been finished but not sold Increases when products are finished Decreases when products are sold (Chapter 10)

9-8 How do Costs Flow through the Inventory Accounts? Beginning direct materials inventory + Purchases of direct materials = Cost of direct materials available for use -Direct materials issued into production = Ending direct materials inventory

9-9 Cost Flows Continued Beginning work-in-process inventory + Direct materials issued into production + Direct labor used in production + Applied manufacturing overhead = Cost of goods in process -Cost of goods manufactured = Ending work-in-process inventory

9-10 Cost Flows Continued Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale -Cost of goods sold = Ending finished goods inventory

9-11 How does the Manufacturing Overhead Application Process Work? Beginning of period Estimate overhead for each cost pool Unit-related Batch-related Product-sustaining Facility-sustaining Estimate cost drivers for each cost pool Divide estimated overhead by estimated cost driver = predetermined overhead rate

9-12 Overhead Application Continued During period Apply overhead to production as the cost driver is used Record actual overhead as incurred End of period Compare total applied overhead to total actual overhead Close the overhead account to Cost of Goods Sold (difference between applied and actual)

9-13 What are Variances? Difference between the standards and the actual prices or quantities Direct labor variances Direct labor price variance Direct labor usage variance Direct material variances Direct material price variance Direct material usage variance Direct material inventory variance

9-14 How are Direct Labor Variances Calculated? Direct labor price variance (SP – AP) * AH Tells us whether we paid more or less for labor than anticipated (budgeted) Direct labor usage variance (AH – SHa) * SP Tells us whether we worked more or less hours than planned given the number of units produced

9-15 How are Direct Material Variances Calculated? Direct materials price variance (AP – SP) * AQp Tells us whether we paid more or less for direct materials than anticipated (budgeted) Direct materials usage variance (AQu – SQa) * SP Tells us whether we used more or less direct materials than planned given the number of units produced

9-16 Direct Material Variances Continued Direct materials inventory variance (AQp – AQu) * SP Tells us whether inventory levels are increasing or decreasing