11-1 Fundamental Managerial Accounting Concepts Thomas P. Edmonds Bor-Yi Tsay Philip R. Olds Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Fifth Edition

11-2 CHAPTER 11 Product Costing in Service and Manufacturing Entities

11-3 Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. Managerial Accounting Product costs are used for planning, control, directing, and management decision making. Chapter Opening

11-4 Learning Objective LO1 Describe the nature and treatment of product cost information for manufacturing and service companies.

11-5 Cost of Purchases Balance Sheet Income Statement Raw Materials Work-in- Process Finished Goods Materials Used Labor Overhead Ending Inventory Total Mfg. Costs Incurred Ending Inventory Cost of Goods Mfd. Ending Inventory Cost of Goods Sold Cost Flow in Manufacturing Companies

11-6 Service companies do not have work-in-process and finished goods inventory accounts where costs are stored before being transferred to a cost of goods sold account. Cost Flow in Service Companies

11-7 Learning Objective LO2 Demonstrate the flow of materials and labor costs for a manufacturing company.

11-8 The Product Manufacturing Overhead Direct Labor Direct Material Manufacturing Cost Flow

11-9 Cost of wages and fringe benefits for personnel who work directly on manufactured products. Direct Labor Example: Wages paid to an automobile assembly worker. Example: Wages paid to an automobile assembly worker.

11-10 Direct Material Example: Steel used to manufacture the automobile. Example: Steel used to manufacture the automobile. Raw material that is used to make, and can be conveniently traced, to the finished product.

11-11 All other manufacturing costs Manufacturing Overhead Materials used to support the production process. Examples: Lubricants and cleaning supplies used in an automobile assembly plant. Indirect Labor Indirect Material Other Costs Cost of personnel who do not work directly on the product. Examples: Maintenance workers, janitors and security guards. Examples: Depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.

11-12 Let’s examine the cost flows in a manufacturing company. We will use T-accounts and start with materials. Manufacturing Cost Flow

11-13 Work-in-Process Raw Materials Mfg. Overhead Material Purchases Direct Material Indirect Material Manufacturing Cost Flow

11-14 Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me? Manufacturing Cost Flow

11-15 Direct Labor Indirect Material Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later. Indirect Labor Direct Labor Overhead Applied Indirect Labor Wages Payable Work-in-Process Mfg. Overhead Direct Material Manufacturing Cost Flow

11-16 Now let’s complete the goods and sell them. Still with me? Manufacturing Cost Flow

11-17 Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Work-in-Process Direct Material Direct Labor Overhead Applied Manufacturing Cost Flow

11-18 Let’s look at the January transactions of Ventra Manufacturing Company. Manufacturing Cost Flow

11-19 Manufacturing Cost Flow

11-20  Ventra pays $26,500 cash to purchase raw materials.  26,500 Cash Bal. 64,500  26,500 Raw Materials Bal. 500 Manufacturing Cost Flow

11-21  Ventra places $1,100 of raw materials into production in the process of making jewelry boxes.  1,100 Work-in-Process Bal. 0 Raw Materials  26,500 Bal. 500  1,100 Manufacturing Cost Flow

11-22  Ventra pays $2,000 cash to purchase production supplies. Production Supplies Cash  26,500 Bal. 64,500  2,000 Manufacturing Cost Flow

11-23  Ventra pays production workers $1,400 cash.  26,500 Cash Bal. 64,500  2,000  1,100 Work-in-Process Bal. 0  1,400 Manufacturing Cost Flow

11-24 Learning Objective LO3 Assign estimated overhead costs to inventory and cost of goods sold.

11-25 Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. $ Flow of Overhead Costs

11-26 Estimated total manufacturing overhead cost for the period Estimated total units in the allocation base for the period POHR = A predetermined overhead rate (POHR), used to apply overhead to products, is determined before the period begins. Flow of Overhead Costs $40,320 12,000 jewelry boxes POHR = = $3.36 per box

11-27 Overhead applied = POHR × Actual activity Actual amount of the allocation base such as units produced, direct labor hours, or machine hours. Based on estimates, and determined before the period begins. Flow of Overhead Costs

11-28  Ventra applies $1,680 of estimated manufacturing overhead costs at the end of January. Applied Manufacturing Overhead Actual  1,680  1,100 Work-in-Process  1,400 Bal. 0 Applied overhead = 500 boxes × $3.36 per box = $1,680 Manufacturing Cost Flow

11-29 Learning Objective LO4 Account for completion and sale of products.

11-30  Ventra transfers the total cost of 500 jewelry boxes from work-in-process to finished goods.  1,100 Work-in-Process  1,400  1,680 Bal. 0  4,180 Finished Goods Bal $8.36 Unit cost = $4,180 ÷ 500 boxes = $8.36 per box Manufacturing Cost Flow

11-31  Ventra recognizes cost of goods sold for 400 jewelry boxes sold to customers. Finished Goods  4,180 Bal. 836 Cost of Goods Sold  3, $8.36 per box = $3,344 Manufacturing Cost Flow

11-32  Ventra recognizes $5,600 of sales revenue for the cash sale of 400 boxes. Revenue  5, $14.00 per box = $5,600  26,500 Cash Bal. 64,500  2,000  1,400  5,600 Manufacturing Cost Flow

11-33  Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc. Cash  26,500 Bal. 64,500  2,000  1,400  5,600 Applied Manufacturing Overhead Actual  1,680  1,200 Manufacturing Cost Flow

11-34  Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc. Manufacturing overhead is $480 overapplied at the end of January. Any difference between actual and applied overhead remaining at year end will be closed to cost of goods sold. Applied Manufacturing Overhead Actual  1,680  1,200 Manufacturing Cost Flow

11-35 Manufacturing Cost Flow

11-36 Supplies: $2,000 purchased, $1,700 used. See Cost of Goods Manufactured and Sold Schedule Manufacturing Cost Flow

11-37 Explanation of Manufacturing Overhead balance follows. Manufacturing Cost Flow

11-38 Applied Manufacturing Overhead Actual 39,64843,400 3,752 Manufacturing overhead is $3,752 underapplied. 11,800 boxes manufactured × $3.36 POHR Analyzing Underapplied Overhead

11-39 Applied Manufacturing Overhead Actual 39,64843,400 3,752 Manufacturing overhead is $3,752 underapplied. Cost of Goods Sold 83,600 10,000 $8.36 3,752 Underapplied overhead is closed to Cost of Goods Sold leaving a zero balance in the overhead account. 87,352 Analyzing Underapplied Overhead

11-40 Spending variance $3,080 unfavorable Volume variance $672 unfavorable $43,400$40,320$39,648 Actual Overhead Overhead Overhead Incurred Budget Applied Total variance is $3,752 unfavorable, the amount of underapplied overhead. Analyzing Underapplied Overhead

11-41 Learning Objective LO5 Prepare a schedule of cost of goods manufactured and sold.

11-42 Schedule of Cost of Goods Manufactured and Sold

11-43 Schedule of Cost of Goods Manufactured and Sold

11-44 Schedule of Cost of Goods Manufactured and Sold

11-45 Schedule of Cost of Goods Manufactured and Sold Reported in the current assets section of the balance sheet.

11-46 Learning Objective LO6 Prepare financial statements for a manufacturing company.

11-47 Financial Statements

11-48 Financial Statements

11-49 Learning Objective LO7 Distinguish between absorption and variable costing.

11-50 Hokai Company incurs the following costs to produce 2,000 units of inventory: Let’s see what happens to costs if Hokai increases production. Motive to Overproduce Absorption Costing

11-51 Now let’s compute income at the three levels of production if Hokai sells 2,000 units. Motive to Overproduce Absorption Costing

11-52 Internally, many companies use variable costing to motivate managers to increase profitability without motivating them to overproduce. Motive to Overproduce Absorption Costing

11-53 Variable Costing Net income is not affected by production increases.

11-54 End of Chapter 11