1. Introduction to Managerial Accounting Chapter M1

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

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

4. Organizational Chart

5. 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

6. 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

7. 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

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

9. 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

10. 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

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

12. 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

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

14. Example 2  Material usage Job #Materials 125$4,500 126$4,250 127$4,000 128$3,500 129$3,000 Indirect$2,000 TOTAL$21,250

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

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

17. Example 3 Job #LaborDirect labor hours 125$5,000200 126$4,900175 127$4,500150 128$4,000125 129$3,500100 Indirect$1,500 TOTAL$23,400830

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

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

20. 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

21. 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

22. 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

23. 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.

24. Example 6 Job #MtrlsLaborDL hrFO 12545005000230 12642504900175 12740004500150 12835004000125 12930003500100 Indirect20001500 Totals2125 0 23400780

25. Example 6 Job #DLhrFO 125230$50 X 230 = 11500 126175175 x 50 = 8750 127150150 x 50 = 7500 128125125 x 50 = 6250 129100100 x 50 = 5000 Indirect Totals78039000

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

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

28. Example 7 Job # LaborFactory 125$5000$5000 x 75% = 3750 126$4900$4900 X 75% = 3675 127$4500$4500 X 75% = 3375 128$4000$4000 X 75% = 3000 129$1500$1500 X 75% = 1125 TOTAL14925

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

30. Factory Overhead Debit Credit

31. 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 5000060000 applied 10,000 over applied Factory overhead

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

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

34. Example 9: jobs 125, 126, & 127 are completed JobMtrlLaborFOTotal 125$4500$5000$6900$16400 126$4250$4900$5250$14400 127$000$4500 $13000 Total$43,800

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

36. 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

37. Classroom Example Complete the Cycle

38. Record the materials  WIP $33070  FO 9100  Materials inventory 42170  Record the labor  WIP 20900  FO 11500  Wages payable 32400

39. Factory overhead applied  120% of direct labor costs JobDLFO 53160007200 53259007080 53335004200 53430003600 53525003000 TOTAL25080

40. Factory overhead  WIP 25080  FO 25080  Completed jobs JobMtrlLaborFOTotal 53387093500420016409 53435003000360010100 Total26509

41. Continuation  Finished goods 26509  WIP 26509  Sale of job 533  Accts rec 100000  Sales 100000  Cost of goods sold 10100  Finished goods 10100

42. 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

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