1. 16-1

2. 16-2 A control account is a summary account within a general ledger that accumulates the details of an account in a subsidiary ledger

3. 16-3

4. 16-4 Cost Accounting involves: Measure, Record, Report … product costs.  Two basic types: Job order cost … costs assigned to each “job” or “batch” (Chapter 16)  Process cost … cost assigned to “dept” or “process” over a time period (month). (Chapter 17) Cost Accounting Systems

5. 16-5

6. 16-6 Work In Process Inventory Job #1Job #5 Job #2Job #6 Job #3Job #7 Job #4Job #8 Finished Goods Inventory Job #2 Job #7 Cost of Goods Sold Cost Flows … Job Order Cost (Chapter 16) Raw Materials Inventory

7. 16-7 Job Order Cost Flow Expense Assets

8. 16-8 Raw Material Costs Illustration: Company buys: 2,000 batteries (Stock #AA) at $5 each … $10,000 800 modules (Stock #Mod) at $40 each.. $32,000 Job Order Cost Flow Jan 04 Raw Materials Inventory42,000 Cash or Accts Payable 42,000

9. 16-9 Illustration: Company incurs $32,000 of factory labor costs (includes BOTH direct labor wages (machine operators) AND … indirect labor wages (factory janitor and factory manager). Job Order Cost Flow Factory Labor Costs Jan Factory Labor32,000 Jan Office Salaries Expense 2,500 Cash (or Wages Payable) 34,500

10. 16-10 Manufacturing Overhead Costs Illustration: entry for manufacturing overhead in Company is: Job Order Cost Flow JanManufacturing Overhead13,600 Accum Deprec (Factory Machines)3,000 Factory Utilities10,000 Factory Property Taxes600 Note that this debit is for ACTUAL overhead

11. 16-11 Jan Mfg Overhead (FACTORY Rent) 2,000 Office Rent Expense1,000 Company paid JAN rent of: Period Cost Product Cost Cash3,000 $ 2,000 for Factory Building $ 1,000 for Corporate Offices Note that this debit is for ACTUAL overhead

12. 16-12

13. 16-13 Assigning Manufacturing Costs to: Work-In-Process Inventory (W-I-P) Job Order Cost Flow

14. 16-14 Job Order Cost Flow Some Type of “Source Document” or Computer Control

15. 16-15 Assigning Raw Material Costs Ex: Company uses $24,000 ($4,000 to Job #83, $20,000 to Job #101) of direct materials and $6,000 of indirect materials in JAN, the entry is: LO 3 Work In Process Inv (Job #101) 20,000 Manufacturing Overhead6,000 Raw Materials Inventory30,000 JanWork In Process Inv (Job #83) 4,000 Note that this debit is for ACTUAL overhead

16. 16-16 Some Type of “Source Document” or Computer Control Job Order Cost Flow

17. 16-17 Ex: $32,000 total factory labor cost consists of $28,000 of direct labor (8,000 to Job #83 and 20,000 to Job #101) and $4,000 of indirect labor: Assigning Factory Labor Costs W-I-P Inv (Job #101) 20000 Mfg OH4,000 Factory Labor32,000 W-I-P Inv (Job #83) 8,000 Note that this debit is for ACTUAL overhead

18. 16-18

19. 16-19  No “source documents” for specific jobs.  Do not know the actual costs until after job completed or shipped therefore the actual costs cannot be assigned to specific jobs.  Companies assign to work in process and to specific jobs on an estimated basis through the use of a … Predetermined Overhead Rate Manufacturing Overhead Costs

20. 16-20  Based on the relationship between estimated annual overhead costs (an educated guess) and expected annual operating activity (another educated guess).  Expressed in terms of an activity base such as ► Direct labor costs ► Direct labor hours ► Machine hours Manufacturing Overhead Costs Predetermined Overhead Rate = (an estimate)

21. 16-21  Established at the beginning of the year.  Could be a single, company-wide predetermined rate.  Could use a different rate for each department. Manufacturing Overhead Costs Predetermined Overhead Rate Guess-timated

22. 16-22 This means that for every dollar of direct labor, company will ADD __________ of manufacturing overhead to a job. Ex: if Direct Labor = $45,000 how much should be added for estimated manufacturing overhead: DL + Mfg OH = 45,000 + 90,000 = 135,000 Ex: Using direct labor as activity base … assume annual overhead costs of $400,000 and annual direct labor costs be $200,000 … compute overhead rate. $400,000 $200,000 = 200% 2 dollars Manufacturing Overhead Costs

23. 16-23 Ex: if Direct Labor = $100,000 how much manufacturing overhead cost should be “applied” (added) ? $150,000 You APPLY estimated overhead. Ex: Using direct labor as activity base … company expects annual overhead costs of $450,000 and annual direct labor of $300,000. compute overhead rate. $450,000 $300,000 = 150% Manufacturing Overhead Costs

24. 16-24 For every dollar of direct labor, company will apply (add) __________ of manufacturing overhead to a job. Ex: Assume estimated annual overhead costs of $280,000 and annual direct labor costs of: compute overhead rate. $280,000 $350,000 = 80% 80 cents Manufacturing Overhead Costs

25. 16-25 Ex: Company applies manufacturing overhead to W-I-P when it assigns direct labor costs. Assuming POR of 80% (previous slide) the amount of applied overhead assuming direct labor costs of $28,000. $28,000 x 80% = $22,400 Manufacturing Overhead Costs JanWork In Process Inventory22,400 Manufacturing Overhead22,400 Debit increases this asset account Credit decreases this asset account

26. 16-26 Actual $ overhead is debited Estimated $ (POR applied) overhead is credited

27. 16-27 Ex: When the job completed, you transfer its total cost to the Finished Goods Inventory. Transferring Costs to Finished Goods JanFinished Goods Inventory39,000 Work In Process Inventory39,000 Asset on Balance Sheet

28. 16-28 Ex: on Jan 31 company sells, on account, Job 101. Job #101 cost $39,000, and it sold for $50,000. The TWO entries are: Sale results in transferring costs to “Expense” account called: Cost of Goods Sold Records the sale Records the transfer of asset cost to an expense Cost of Goods Sold39,000 Finished Goods Inventory39,000 Jan 31 Accounts Receivable50,000 Sales Revenue50,000

29. 16-29 Job Order Cost Flow Summary Illustration 16-15

30. 16-30  A debit balance in manufacturing overhead means that overhead is underapplied.  A credit balance in manufacturing overhead means that overhead is overapplied. Under or Over-applied (estimated) Overhead

31. 16-31 Ex: Company has a $2,500 credit balance in Manufacturing Overhead at Dec 31. Adjusting entry for over-applied overhead is: Dec. 31 Manufacturing Overhead 2,500 Cost of Good Sold 2,500 Under or Over – Applied Overhead