©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones3 - 1 Chapter 3 Determining Costs of Products

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones3 - 2 Learning Objective 1 Compare and contrast process costing with job order costing.

3 - 3©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Accumulating Product Cost – Cost Accounting The process of assigning manufacturing costs to manufactured products is called cost accounting. A cost object can be a unit of manufactured product.

3 - 4©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Product Costing Methods There are two basic systems used to assign costs to products: Job order costing Process costing

3 - 5©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Product Costing Methods In job order costing, costs are accumulated for each individual unit produced, or each separate order of products. In process costing, costs are accumulated for each production process.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones3 - 6 Learning Objective 2 Describe how process costing and job order costing work.

3 - 7©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Job Order Costing Basics Job order costing accumulates the cost of production for each job, each individual unit of production, each order, or each product.

3 - 8©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Job Order Costing Basics Perlmuter Printing Cost of Visit Florida Posters Direct material$ 400 Direct labor 600 Mfg. overhead 900 Total$1,900 Paper WorkersPrinting Press 20,000 Advertising Posters

3 - 9©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Job Order Costing Basics Job order costing would be used by a caterer, a mechanic’s garage, a helicopter manufacturer, and a construction crew.

3 - 10©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Process Costing Basics Process costing would be used by businesses such as glass container manufacturing, food processing, and oil and gasoline refining.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 3 Describe the documents used to help control the costs of manufacturing products.

3 - 12©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Documentation Relating to Job Order Costing Job cost sheets Purchase requisitions Labor time tickets

3 - 13©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Job Cost Sheet A job cost sheet organizes and summarizes the cost information for each job.

3 - 14©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Job Cost Sheet Example Total Date Completed: Manta Power Boats Job Cost Sheet Job Number: 97384Date Promised: Customer: Bill Hudik Date Started: Product Description: 28 Open Fisherman Direct Material Direct Labor OverheadTotal DateReq.#Amt.DateAmountAmt.BaseRate $$$ $$$ $

3 - 15©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Purchase Requisition Example Manta Power Boats Purchase Requisition Name: Carl BevansNumber: 1001 Name: Carl BevansNumber: 1001 Department: Production Material StoresDate: QuantityDescription 110 Gallons Signature: Carl Bevans Polyester Resin

3 - 16©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Purchase Order Example Manta Power Boats Purchase Order Vendor:Pitman Sales CompanyPO No.: Address:8650 SW 132 StreetOrder Date: Miami, FL 33156Delivery Date: Phone: Purchase Req. No.: 1001 Quantity Purchasing Agent Signature: Bob Pass Dept.: Prod. Mtl. Stores DescriptionUnitCostTotalCost $ $ Gallons Polyester Resin

3 - 17©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Receiving Report Example Manta Power Boats Receiving Report Vendor: Pitman Sales Company Number: 1234 Purchase Order No.: Date Received: QuantityDescription 110 Gallons Receiving Clerk Signature: Lauren Elsea Polyester Resin

3 - 18©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Materials Requisition Example Manta Power Boats Materials Requisition Job Number: 97384Number: Date: QuantityDescription 55 Gallons Issued By: Carl Bevans Issued By: Carl Bevans Received By: Kevin Dunn Polyester Resin UnitCostTotalCost $ $6.00

3 - 19©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Labor Time Ticket Example Manta Power Boats Labor Time Ticket Employee: Edward Clark Employee Number: 127Week Ending: Supervisor: Seth Levine Job No. MTWTSFSTotal Employee: Edward Clark

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 4 Describe how overhead costs are allocated to products.

3 - 21©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Manufacturing Overhead Manufacturing overhead must be allocated to the units produced based on some reasonable base of distribution. Overhead Cost Pool Units Units

3 - 22©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Manufacturing Overhead Assume that Manta Power Boats makes 5 boats and the manufacturing overhead is $75,000. What is the overhead per boat? $75,000 ÷ 5 = $15,000 per boat

3 - 23©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Manufacturing Overhead $15,000

3 - 24©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Manufacturing Overhead Allocating the overhead on the basis of units produced is not reasonable in a job order system. Jobs or units are unique, and probably deserve different cost amounts.

3 - 25©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Manufacturing Overhead The best allocation basis would be the one that causes the cost which is to be allocated. Direct labor hours Direct labor cost Machine hours

3 - 26©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Actual Cost System When actual product cost is calculated using actual amounts for direct material, direct labor, and manufacturing overhead, the system is called an actual cost system.

3 - 27©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Normal Cost System In a normal cost system, estimated annual amounts are used. The key to normal costing is the predetermined overhead rate.

3 - 28©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Normal Cost System Suppose that Manta’s estimated annual overhead is $1,000,000 and estimated annual direct labor cost is $1,250,000. What is the predetermined overhead rate? $1,000,000 ÷ $1,250,000 = 80% of direct labor cost.

3 - 29©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Normal Cost System The direct labor cost of Job Number was $12,000. How much is the overhead associated with this job? $12,000 × 80% = $9,600

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 5 Determine the cost of products using job order costing.

3 - 31©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Completed Job How much is the total cost of Job Number 97384? Direct material$15,000 Direct labor 12,000 Manufacturing overhead 9,600 Total$36,600

3 - 32©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Over or Under Applied Overhead Amount applied > Actual = Over applied Amount applied < Actual = Under applied If the amount is relatively small, close it to Cost of Goods Sold.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 6 Determine the cost of products using process costing.

3 - 34©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Process Costing 1. Number of equivalent units of production 2. Cost per equivalent units of production 3. Cost of ending work-in-process inventory 4. Cost of completed units

3 - 35©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Process Costing Atkinson Company has 10,000 completed units during the period. There are another 1,000 units in work-in-process inventory which are 40% complete. What are the equivalent units?

3 - 36©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Equivalent Units Units Completed10,000×100%=10,000 Ending WIP 1,000× 40%= 400 Total EU10,400 Number of Raw Units Percent Complete Equivalent Units

3 - 37©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Cost per Equivalent Unit Cost of beginning WIP$ 500 Cost of beginning WIP$ 500 Current month’s production cost 4,908 Current month’s production cost 4,908 Total production cost$5,408 Total production cost$5,408 $5,408 ÷ 10,400 = $0.52 per equivalent unit Total Production Cost Equivalent Units Cost per equivalent unit =

3 - 38©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Cost of Ending WIP and Completed Units 400 × $0.52 = $208 10,000 × $0.52 = $5,200 Cost of ending work-in-process inventory: Cost of completed units:

3 - 39©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Flow of Manufacturing Cost Cost of beginning WIP$ 500 Current month’s cost 4,908 Total cost$5,408 Cost of completed units: Cost of uncompleted units: Finished goods inventory: $5,200 Ending work-in-process inventory: $208

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 7 Prepare basic manufacturing journal entries.

3 - 41©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 1: On June 7, 2004, purchased $600 of raw material on account. Jun 2 Raw Materials Inventory600 Accounts Payable600 To record the purchase of raw material

3 - 42©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 2: On June 16, 2004, transferred $330 of direct material to production. Jun 2 Work-in-Process Inventory330 Raw Material Inventory330 To record the transfer of direct material to production for Job 97384

3 - 43©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 3: On June 15, paid $1,600 for direct labor incurred on Job Number Jun 15 Work-in-Process Inventory1,600 Cash 1,600 To record wages paid for direct labor

3 - 44©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 4: During June, factory overhead cost was $75,000 of which $8,000 was depreciation. Jun 30 Manufacturing Overhead Cost Incurred75,000 Cash67,000 Accumulated Depreciation 8,000

3 - 45©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 5: On July 11, $9,600 of manufacturing overhead was allocated to Job Number Jul 11 Work-in-Process Inventory9,600 Manufacturing Overhead Applied 9,600 To record the allocation of manufacturing overhead to production

3 - 46©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 6: On July 11, Job No was completed and transferred to finished goods. Jul 11 Finished Goods Inventory36,600 Work-in-Process Inventory 36,600 To transfer Job from work-in-process inventory to finished goods

3 - 47©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 7: On July 12, the 28 Open Fisherman boat, which cost $36,600, was sold for $50,000. Jul 12 Cash50,000 Sales50,000 Cost of Goods Sold36,600 Finished Goods36,600

3 - 48©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Transaction 8: On December 31, applied overhead was closed. Actual overhead was $1,091,000, and applied overhead was $1,072,000 ($19,000 under applied.) Dec 31 Manufacturing Overhead Applied1,072,000 Cost of Goods Sold 19,000 Manufacturing Overhead Incurred 1,091,000 To close manufacturing overhead incurred to cost of goods sold

3 - 49©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Recording Manufacturing Costs Work-in-ProcessInventory 1,072,000 OverheadApplied 1,072,000 OverheadIncurredVariousAccounts 1,091,0001,091,000 Cost of Goods Sold 19,0001,091,0001,072,000

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones End of Chapter 3