Introduction to Managerial Accounting Chapter M1

Financial Vs Managerial  Financial – public use of information –Accuracy and consistency are important  Managerial – internal use –Estimates are used

Managerial Characteristics  Provides estimates of future operations  Used by mgmt in conducting daily operations, planning, and developing strategies

Organizational Chart

Managerial Terms  Cost –A payment of cash or its equivalent or the commitment to pay cash in the future  Manufacturing –Converts materials into finished product

Materials  Direct – –cost of materials that are an integral part of the product  Indirect – –Cost of materials that are not a significant portion of the total product cost

Labor  Direct –Cost of wages of employees who are directly involved in the converting materials into the manufactured product  Indirect –Labor that do not enter directly into the manufacture of a product

Factory Overhead  Costs other than direct materials cost and direct labor costs –Manufacturing overhead –Factory burden –Depreciation –utilities

Costs  Product costs –Direct materials, direct labor, and factory overhead –Associated with the production of the product  Conversion costs –Costs of converting materials into finished products –Direct Labor plus factory overhead

Cost Accounting Systems  Job order cost –Provides separate record of the cost of each quantity of the product that passes through the factory  Process cost system –Costs are accumulated for each of the department or processes within the factory

Inventory Accounts  Materials inventory  Work in process inventory  Finished goods inventory

Purchase of Materials  Materials Inventory DR –Accts payable CR  Example 1: Purchased $8,000 of materials on account  Materials inventory 8,000  Accts payable 8,000

Requisition of Materials  Work in process DR (DM)  Factory overhead DR (indirect)  Materials inventory CR total

Example 2  Material usage Job #Materials 125$4, $4, $4, $3, $3,000 Indirect$2,000 TOTAL$21,250

Example 2  Record the usage of materials  WIP $19,250  FO 2,000  Material inventory $21,250

Factory Labor  Work in process DR (direct labor)  Factory overhead DR (indirect labor)  Wages payable CR

Example 3 Job #LaborDirect labor hours 125$5, $4, $4, $4, $3, Indirect$1,500 TOTAL$23,400830

Example 3  Record labor usage  Work in process $21,900  Factory overhead 1,500 – Wages payable $23,400

Factory Overhead Costs  Factory overhead DR  Utilities payable CR  record the factory overhead costs incurred.

Allocating Factory Overhead  Cost allocation – the process of assigning factory overhead costs to a cost object  Activity Base – measure used to allocate factory overhead  Predetermined factory overhead rate =  Estimated total FO  Estimated Activity Base

Examples  Example 4: The corporation estimates FO at $500,000 for the next period. The corporation uses direct labor hours as its activity base and estimates 50,000 total direct labor hours  Rate = $500,000/50,000  Rate = $10 per hour

Examples  FO costs at $500,000 for the next period. Factory overhead is determined as a % of direct labor costs. If direct labor costs is $750,000  Rate –500,000/750,000  Rate is 2/3 or 67%  Rate is 67% of direct labor costs

Applying Factory Overhead  Work in process DR  Factory overhead CR  Applied based on the predetermined overhead rate Example 6: Apply factory overhead at a rate of $50 per direct labor hour.

Example 6 Job #MtrlsLaborDL hrFO Indirect Totals

Example 6 Job #DLhrFO $50 X 230 = x 50 = x 50 = x 50 = x 50 = 5000 Indirect Totals

Example 6  Work in process 39,000  Factory overhead 39,000

Example 7  Apply factory overhead at the rate of 75% of direct labor costs.

Example 7 Job # LaborFactory 125$5000$5000 x 75% = $4900$4900 X 75% = $4500$4500 X 75% = $4000$4000 X 75% = $1500$1500 X 75% = 1125 TOTAL14925

Example7  Work in process $14,925  Factory overhead $14,925

Factory Overhead Debit Credit

Disposal of Factory Overhead  Cost of goods sold DR  Factory overhead CR  Example 8: The balance is FO is $50,000 and $60,000 is applied to WIP Balance applied 10,000 over applied Factory overhead

Disposal  Factory overhead 10,000  Cost of good sold 10,000

Transfer of Finished Goods  Finished goods DR  Work in process CR  Total cost of production  DM + DL + FO

Example 9: jobs 125, 126, & 127 are completed JobMtrlLaborFOTotal 125$4500$5000$6900$ $4250$4900$5250$ $000$4500 $13000 Total$43,800

Transfer to Finished Goods  Finished goods $43,800  Work in process $43,800

Transferred to COGS  Example 10: Job 125 sold for $75,000  Accts rec $75,000  Sales $75,000  We record the transfer at the COST not the sales price.  Cost of goods sold $16,400  Finished goods $16,400

Classroom Example Complete the Cycle

Record the materials  WIP $33070  FO 9100  Materials inventory  Record the labor  WIP  FO  Wages payable 32400

Factory overhead applied  120% of direct labor costs JobDLFO TOTAL25080

Factory overhead  WIP  FO  Completed jobs JobMtrlLaborFOTotal Total26509

Continuation  Finished goods  WIP  Sale of job 533  Accts rec  Sales  Cost of goods sold  Finished goods 10100

Period Costs  Are expenses that are use din generating revenue during the current period and not involved in the manufacturing process  Selling expenses  Administrative expenses

Homework  Exercises 1-11,-12,1-13,1-14