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Actual Product Costing Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 30
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2 Inventory Accounts for Manufacturers Three inventory accounts Raw materials Materials to be used in production Direct and indirect Work in process Direct materials used in production Direct labor costs incurred to produce Manufacturing overhead costs identified as part of the cost of production Finished goods Goods completed and ready for sale Reported on the balance sheet
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Production Departments 3 Materials StoreroomFactory/Production Area Costs in departments correlate to inventory accounts. Raw Materials Work in Process Finished Goods Ready for Sale
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Actual Costing A method of assigning costs to products in a manufacturing company – Direct materials and direct labor Traced to (specifically identified with) a product or service provided Easy to determine which product/service to which the cost belongs because they are direct – Manufacturing overhead Consists of indirect costs Indirect costs cannot be easily identified with one specific product or service Actual overhead costs are assigned to products Appropriate for companies with a single product 4
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5 Acquiring Raw Materials The Purchasing Manager fills out an electronic purchase order to order materials from a supplier 1 When materials are received, the Materials Storeroom Clerk records and stocks the materials in the storeroom. 2 Materials Storeroom The Materials Storeroom Clerk sends the receiving report to Accounting for payment. 3
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6 Transactions to Acquire Materials Purchase Materials for Cash Debit/increase Raw Materials Credit/decrease Cash Purchase Materials on Account Debit/increase Raw Materials Credit/increase Accounts Payable Pay for materials previously purchased on account Debit/decrease Accounts Payable Credit/decrease Cash Credit/decrease Inventory for cash discount, if any
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Materials Requisition 7 The production supervisor fills out a materials requisition form. 1 2 The processed form is sent to Accounting. 3 Factory/Production Area A materials requisition form authorizes the use of materials on a product or job The materials storeroom clerk delivers the requested materials to the production area.
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8 Materials Requisition Form Why do we bother with a materials requisition form every time production needs materials for a job? Tracing material costs to particular products/ services To mitigate theft and waste, and prevent overstocking of unneeded inventory which can tie up cash Internal control of assets To determine the cost of products which is needed to set selling prices and make other management decisions
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9 Using Direct Materials Requisition of Direct Materials to Production Debit/Increase Work in Process Credit/decrease Raw Materials
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Direct Labor Costs in Production 10 Factory/Production Area 10 Employees fill out time tickets to record the time spent on each product/service
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Measuring and Tracking Labor 11 Obtain hours worked from time tickets Direct labor cost = gross wages + fringe benefits Gross wages = Wage rate × hours worked on each product Incur direct labor costs Debit/increase Work in Process Credit/decrease Cash, increase salaries payable, etc.
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12 Manufacturing Overhead Includes indirect materials, indirect labor, and factory (production facility) related costs Incur factory-related costs Debit/increase Work in Process Credit/decrease Cash Requisition Indirect Materials to Production Debit/increase Work in Process Credit/decrease Raw Materials Incur indirect labor costs Debit/increase Work in Process Credit/decrease Cash, increase salaries payable, etc.
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Completing Products The cost of completed goods is transferred out of Work in Process Debit/increase Finished Goods Credit/decrease Work in Process The cost transferred out is called Cost of Goods Manufactured 13
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Selling Products Transfer the cost of products sold out of Finished Goods Debit/increase Cost of Goods Sold Credit/decrease Finished Goods Recognize the sale Debit/increase Cash or AR Credit/increase Sales Revenue 14
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15 The End
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