1. 1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University MANAGERIAL ACCOUNTING 10 TH EDITION BY MAHER, STICKNEY & WEIL MEASURING PRODUCT COSTS CHAPTER 2 © Copyright 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.

2. Overview & Basic Concepts 2 CHAPTER GOAL This chapter shows how the accounting system records & reports the flow of costs in organizations to answer questions such as these:  To determine product/service cost  To compare cost with management’s expectations ☼☼

3. Overview & Basic Concepts 3 EXHIBIT 2.8 Where are we on the value chain in CHAPTER 2?

4. Overview & Basic Concepts 4 DIRECT MATERIALS: Definition Can be easily traced directly to a product. LO 1

5. Overview & Basic Concepts 5 DIRECT LABOR: Definition Is labor of workers who directly transform materials into a finished product. LO 1

6. Overview & Basic Concepts 6 How are materials & labor not directly traceable to a product categorized? All costs, including materials & labor, not directly traceable to a product are categorized as Manufacturing Overhead. LO 1

7. Overview & Basic Concepts 7 ACCOUNTING SYSTEM PURPOSES 1)To record costs by responsibility for performance evaluation & control. 2)To assign manufacturing costs to units produced for product costing. LO 3

8. Overview & Basic Concepts 8 BASIC COST FLOW EQUATION LO 3 Beginning + Transfers = Transfers + Ending Balance In Out Balance BB + TI = TO + EB* *Recall from financial accounting: Beginning Balance + Additions - Withdrawals = Ending Balance Click the button to skip Exercise 2.19

9. Overview & Basic Concepts 9 EXERCISE 19 Press “Enter” or click left mouse button for answer. Mark Landman’s accountant resigned & left the books in a mess. Mark is trying to compute unknown values in inventory accounts of 3 stores. Can you help him? LO 3 Midwest BB = MidwestNortheastSoutheast BB$ 60,000 TI$200,000200,000$160,000 TO180,000220,000150,000 EB60,00040,000 $40,000 ?

10. Overview & Basic Concepts 10 EXERCISE 19 Press “Enter” or click left mouse button for answer. Mark Landman’s accountant resigned & left the books in a mess. Mark is trying to compute unknown values in inventory accounts of 3 stores. Can you help him? LO 3 Northeast EB = MidwestNortheastSoutheast BB$ 60,000 TI$200,000200,000$160,000 TO180,000220,000150,000 EB60,00040,000 $40,000 ?

11. Overview & Basic Concepts 11 EXERCISE 19 Press “Enter” or click left mouse button for answer. Mark Landman’s accountant resigned & left the books in a mess. Mark is trying to compute unknown values in inventory accounts of 3 stores. Can you help him? LO 3 Southeast BB = MidwestNortheastSoutheast BB$ 60,000 TI$200,000200,000$160,000 TO180,000220,000150,000 EB60,00040,000 $30,000 ?

12. Overview & Basic Concepts 12 Name 2 approaches to determining overhead cost. 2 approaches to determining overhead cost are: (1) normal costing and (2) actual costing LO 4

13. Overview & Basic Concepts 13 COMPARING NORMAL & ACTUAL COSTING  Normal costing advantages  Smoothes seasonal & other fluctuations that don’t relate directly to activity levels  More timely than actual because of estimating process LO 4

14. Overview & Basic Concepts 14 USING NORMAL COSTING  Select a cost driver (allocation base) to apply overhead  Estimate dollar amount of overhead & level of activity for period  Compute predetermined (normal) overhead rate  Apply overhead to production LO 4 Click the button to skip Example

15. Overview & Basic Concepts 15 EXAMPLE Plantimum Builders manually assembles small modular homes. Using prior year data, Plantimum estimated variable manufacturing overhead at $100,000, 50,000 direct labor hours, and $50,000 fixed manufacturing overhead. What is Plantimum’s variable overhead rate? LO 4 $100,000 / 50,000 dlh = $2.00 per direct labor hour $ 50,000 / 50,000 dlh = $1.00 per direct labor hour What is Plantimum’s fixed overhead rate?

16. Overview & Basic Concepts 16 EXAMPLE Actual direct labor hours for the month was 4,500. How much variable overhead did Plantimum charge to production for the month? LO 4 4,500 dlh * $2.00 per direct labor hour = $9,000 4,500 dlh * $1.00 per direct labor hour = $4,500 How much fixed overhead did Plantimum charge to production for the month?

17. Overview & Basic Concepts 17 COST SYSTEMS: Examples  Job costing  For custom production jobs  Users: accounting & consulting firms, health care organizations  Process costing  For standardized production  Users: drink makers (e.g., Coca Cola, etc.)  Operation costing  A hybrid of job & process combined  Users: Levi Strauss, Dell LO 5

18. Overview & Basic Concepts 18 PLANTIMUM PRODUCTION Plantimum produced 3 modular homes during the month. Plantimum wonders whether they should use job order costing or process costing? What do you think? Continued LO 6

19. Overview & Basic Concepts 19 PLANTIMUM PRODUCTION COSTS: Using Job Order Jobs Direct Labor Direct Materials Overhead ($3/dlh) Total Cost Job #1001$ 8,000$20,800$1,200$30,000 Job #10026,00018,10090025,000 Job #10035,00011,25075017,000 $19,000$50,150$2,850$72,000 LO 6 Continued

20. Overview & Basic Concepts 20 PLANTIMUM PRODUCT COSTING: Using Process LO 6 Unit costs = Total manufacturing costs / Units produced (DL + DM + Overhead) / 3 ($19,000 + $50,150 + $2,850) / 3 Average unit cost is $24,000 per modular house Continued

21. Overview & Basic Concepts 21 Which costing method, job order or process costing, do you think Plantimum should use if record keeping costs for job order generally exceed record keeping costs for process? Is there a cost benefit? LO 6

22. Overview & Basic Concepts 22 COMPARING COST SYSTEMS Nature of Production Costing System Used Heterogeneous Units Each Unit Large Job Costing Homogeneous Units Many Small Units Continuous Process Process Costing LO 7

23. Overview & Basic Concepts 23 MISREPRESENTING COSTS Often costs are improperly assigned to jobs (or research, or defense contracts, etc.). Sometimes employees are encouraged to understate or misrepresent job costs. Because many of these events have been discovered, funding agencies & other payers now require audits of financial records. LO 9 E!!!

24. Overview & Basic Concepts 24 CHARACTERISTICS OF JIT: (Just- in-Time Inventory) JIT inventory methods attempt to obtain materials just in time for production or sale  Reduces/eliminates inventory & carrying costs  Leads to immediate correction of defective units  Helps expose production problems  Relies on high-quality materials, production  Charges all costs directly to cost of goods sold LO 10

25. Overview & Basic Concepts 25 What happens to inventory leftover after costs are charged to cost of goods sold in a JIT system? Cost of leftover inventory is “backflushed,” i.e., taken out of cost of goods sold and put into finished goods inventory. LO 10

26. Overview & Basic Concepts 26 How is spoilage treated in a JIT system? Normal spoilage is a cost of work done. Abnormal spoilage is expensed in the period. LO 10

27. Overview & Basic Concepts 27 CHAPTER 2 THE END