1. Prepared by Diane Tanner University of North Florida Chapter 2 1 Normal Costing

2. Assigning Costs to Cost Objects Three methods – Actual costing – Normal costing – Standard costing Differ in how product costs are assigned to products or services 2

3. 3 Normal Vs. Actual Costing  Normal costing  Used effectively when there are multiple products  Allocates manufacturing overhead to individual products based on a ‘predetermined’ rate calculation  Based on estimates  Actual costing  Allocates manufacturing overhead to individual products based on an end of period rate calculation  Based on actual amounts Estimated MOH Estimated Activity Actual MOH Actual Activity

4. 4 How Costs Get Assigned to Products  Direct materials and direct labor  Traced to a product or service provided  Because it is easy to determine which product/service to which the cost belongs  By definition, direct costs are directly associated  Manufacturing overhead  Consists solely of indirect costs  Indirect costs cannot be easily identified with one specific product or service  Allocated to products and services in a normal costing system

5. 5 Acquisition of Raw Materials Materials Storeroom Factory/Production Area The Purchasing Manager fills out a purchase order to order materials from a supplier 1 2 When materials are received, the Materials Storeroom Clerk tracks and stocks the materials in the storeroom. The Materials Storeroom Clerk sends the receiving report to the Accounting Department for payment. 3

6. 6 Transactions to Acquire Materials Purchase Materials for Cash  Debit Raw Materials  Credit Cash Purchase Materials on Account  Debit Raw Materials  Credit Accounts Payable Pay for materials previously purchased on account  Debit Accounts Payable  Credit Cash  Credit Inventory for cash discount, if any

7. 7 Materials Requisition Process Materials Storeroom Factory/Production Area The production supervisor fills out a materials requisition form. Will E. Delite 1 The materials storeroom clerk delivers the requested materials to the production area. 2 Authorizes the use of materials on a job The requisition form is sent to Accounting. 3

8. 8 Accounting for Materials Used in Production Requisition of Direct Materials to Production  Debit Work in Process  Credit Raw Materials Requisition Indirect Materials to Production  Debit Manufacturing Expense  Credit Raw Materials

9. 9 Incurring Labor Costs Materials Storeroom Factory/Production Area Employees use time tickets to record the time spent on each job

10. Measuring and Tracking Direct Labor 10  Direct labor cost = [Hourly rate] × [Number of hours worked]  Fringe benefits  Normally included as part of the direct labor ‘rate’  Overtime premium (the extra ‘half’ time paid)  If the result of production problems, treat as manufacturing overhead  If the result of accepting a rush order, treat as direct labor  Idle time  Treat as overhead  Because it is not part of the cost to get inventory ready to sell

11. 11 Accounting for Labor Costs Used in Production Direct Labor Costs Incurred  Debit Work in Process  Credit Cash, salaries payable, etc. Indirect Labor Costs incurred  Debit MOH expense  Credit Cash, salaries payable, etc.

12. ‘Applying’ MOH under Normal Costing What is ‘applying overhead’? – The process of adding MOH cost to products based on an allocation rate Why is MOH applied using normal costing? – It is an indirect cost, which is impossible or impractical to trace to a particular product – Managers need to know job costs as production occurs, i.e., on a timely basis For making decisions such as pricing, product changes, etc. – Waiting until the end of the period when actual costs are known makes information untimely 12

13. 13 Accounting for MOH Using Normal Costing Incur MOH Costs  Debit Manufacturing Overhead (control account)  Credit Cash, salaries payable, etc Apply MOH to Products  Debit Work in Process  Credit Manufacturing Overhead Using a predetermined rate

14. 14 The End