class 2 optional product costs and job-order costing
DESCRIPTION
job costingTRANSCRIPT
Manufacturing Business
Product Costs
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Direct MaterialsThe material out of which the product is made. Wood for a bookcase, metal for an oven.
Manufacturing OverheadThe infrastructure needed to support the skilled craftspeople. Supervisors, maintenance people, machines, rent, electricity, etc.
Direct LaborThe wages paid to the skilled craftspeople who form the direct materials into the final product.
Manufacturing Business
Cost Flows
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Manufacturing Business
Cost Flows
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Step 1. Raw materials are purchased and stored in the raw materials inventory warehouse.
Step 2. Raw materials are moved to the factory floor. All material on the factory floor is referred to as work-in-process inventory.
Step 3. On the factory floor, employees combine materials with their labor to produce finished products. This work is supported by the infrastructure, or overhead, of the factory.
Step 4. The finished products are moved to the finished goods inventory warehouse and stored until sold.
Manufacturing Business
Cost Flows
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Raw Materials Inventory ------------------------------------------------------------------ Purchases IN | to WIP OUT ------------------------------------------------------------------ |
Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Finished Goods Inventory ------------------------------------------------------------------ from WIP IN | Cost of | Goods Sold | OUT ------------------------------------------------------------------ |
Product and Period Costs
Product CostsCosts incurred INSIDE the production facility
Period CostsCosts incurred OUTSIDE the production facility
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Product and Period Costs
The Factory
ProductPeriod
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Examples
Product Costs
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• Cost of the raw materials used in production• Wages of factory employees• Salaries of the vice president of manufacturing and
the plant manager• Utility bills to heat and light the factory building• Depreciation or rent on the factory building• Wages of maintenance personnel and custodians
who work in the factory
Examples
Period Costs
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• Wages and salaries of individuals working in the administrative offices
• Costs of electricity, heat, and other expenses for the administrative offices
• Advertising costs• Salaries and commissions paid to salespeople• Interest expense
Question: How about PROPERTY TAXES … product cost or period cost?
Job-Order Costing
Step 1. Identify a specific product or project
Step 2. Specifically trace the costs of direct materials and direct labor to the product or project.
Step 3. Allocate an appropriate amount of overhead costs to the product or project.
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Job #117
Job-Order CostingAccounting Cost Flows for Job #117
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Raw Materials Inventory ------------------------------------------------------------------ Purchases IN | to WIP OUT ------------------------------------------------------------------ |
Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Finished Goods Inventory ------------------------------------------------------------------ from WIP IN | Cost of | Goods Sold | OUT ------------------------------------------------------------------ |
Manufacturing Overhead Rate
QUESTION: We just paid $6,450 rent for the factory building this month. How much of that should be assigned to the cost of production of Job #117?
Oh, and how much of the cost of the plant manager salary should be assigned to Job #117?
And how about the wages of the maintenance people for the month?
And the depreciation on the tools?
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Manufacturing Overhead Rate
SIMPLE INSIGHT: More overhead costs are created by jobs that involve• more direct labor work time and/or• more machine hour time.
So, assign (or apply) overhead costs based on• direct labor hours and/or• machine hours.
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Manufacturing Overhead Rate
Overhead Applied to Job #117
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One Mahogany Table
Job Cost Sheet
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Manufacturing Cost Journal Entries
Purchase of Raw Materials
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Raw Materials Inventory ------------------------------------------------------------------ Purchases IN | to WIP OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal Entries
Use of DIRECT Materials
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Raw Materials Inventory ------------------------------------------------------------------ Purchases IN | to WIP OUT ------------------------------------------------------------------ |
Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal Entries
Use of INDIRECT Materials
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Raw Materials Inventory ------------------------------------------------------------------ Purchases IN | to WIP OUT ------------------------------------------------------------------ |
Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal Entries
Use of DIRECT Labor
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Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal Entries
Use of INDIRECT Labor
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Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal Entries
ACTUAL Manufacturing Overhead
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Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal EntriesAPPLIED Manufacturing Overhead
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Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal Entries
Transfer of Goods Completed
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Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Finished Goods Inventory ------------------------------------------------------------------ from WIP IN | Cost of | Goods Sold | OUT ------------------------------------------------------------------ |
Manufacturing Cost Journal Entries
Sale of Goods to Customer
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Finished Goods Inventory ------------------------------------------------------------------ from WIP IN | Cost of | Goods Sold | OUT ------------------------------------------------------------------ |
Job-Order Costing
Accounting Cost Flows
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Raw Materials Inventory ------------------------------------------------------------------ Purchases IN | to WIP OUT ------------------------------------------------------------------ |
Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Finished Goods Inventory ------------------------------------------------------------------ from WIP IN | Cost of | Goods Sold | OUT ------------------------------------------------------------------ |
Accounting for
Manufacturing Overhead
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Step 1. Before the year begins, estimate• manufacturing overhead for the year, • allocation activity level for the year (labor or machine hours), and• compute the predetermined overhead rate.
Step 2. During the year, record actual manufacturing overhead as debits to the manufacturing overhead account.
Step 3. During the year, record applied manufacturing overhead as credits to the manufacturing overhead account and debits to the work-in-process account.
Step 4. At the end of the year, compare actual and applied overhead balances; close out the difference.
Accounting for
Manufacturing Overhead
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Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ ?Under-applied? |?Over-applied?
Accounting for
Manufacturing Overhead
Why does the Overhead Rateneed to be estimated
at the start of the year?
On January 1, customers appear (hopefully), and you need to give them cost quotes immediately … or else they will go to your competitors.
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PREDETERMINEDOverhead Rate
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PREDETERMINEDOverhead Rate
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Manufacturing Cost Journal Entries
ACTUAL Manufacturing Overhead
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Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Manufacturing Overhead Account
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Question: What kind of account is the Manufacturing Overhead account … asset, liability, revenue, or expense?
Answer: None of the above. It is a TEMPORARY HOLDING TANK for overhead costs.
Manufacturing Cost Journal EntriesAPPLIED Manufacturing Overhead
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Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Manufacturing Overhead Account
UNDER-Applied
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Two questions• What business problem is caused by this $750 UNDER-applied
overhead?• What do we do with the Manufacturing Overhead account, in terms of
debits and credits, at the end of the year?
Manufacturing Overhead ---------------------------------------- ACTUAL |APPLIED | 15,224 | 20,800 26,376 | 10,450 | 9,600 ---------------------------------------- 41,600 | 40,850 ---------------------------------------- Ending Balance 750 | (UNDER-applied)
Manufacturing Overhead Account
UNDER-Applied
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Business Problem• We didn’t apply enough overhead to each job during the year.• Our computed costs were too low; perhaps the prices we
charged our customers were too low.• If our customers don’t pay for the overhead, then WE have to
pay for the overhead.
Closing Journal Entry
Cost of Goods Sold 750Manufacturing Overhead 750
Manufacturing Overhead Account
OVER-Applied
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Two questions• What business problem is caused by this $1,250 OVER-applied
overhead?• What do we do with the Manufacturing Overhead account, in terms of
debits and credits, at the end of the year?
Manufacturing Overhead ---------------------------------------- ACTUAL |APPLIED | 15,224 | 20,800 26,376 | 10,450 | 11,600 ---------------------------------------- 41,600 | 42,850 ---------------------------------------- Ending Balance | 1,250 (OVER-applied)
Manufacturing Overhead Account
OVER-Applied
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Business Problem• We applied TOO MUCH overhead to each job during the year.• Our computed costs were too high; perhaps the prices we quoted
to our customers were too high.• We have driven away some customers with our high prices.
Closing Journal Entry
Manufacturing Overhead 1,250Cost of Goods Sold 1,250
Accounting for
Manufacturing Overhead
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Step 1. Before the year begins, estimate• manufacturing overhead for the year, • allocation activity level for the year (labor or machine hours), and• compute the predetermined overhead rate.
Step 2. During the year, record actual manufacturing overhead as debits to the manufacturing overhead account.
Step 3. During the year, record applied manufacturing overhead as credits to the manufacturing overhead account and debits to the work-in-process account.
Step 4. At the end of the year, compare actual and applied overhead balances; close out the difference.
Manufacturing Business
Cost Flows
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Raw Materials Inventory ------------------------------------------------------------------ Purchases IN | to WIP OUT ------------------------------------------------------------------ |
Manufacturing Overhead ------------------------------------------------------------------ Actual IN | Applied OUT ------------------------------------------------------------------ |
Work-in-Process Inventory ------------------------------------------------------------------ Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT ------------------------------------------------------------------ |
Finished Goods Inventory ------------------------------------------------------------------ from WIP IN | Cost of | Goods Sold | OUT ------------------------------------------------------------------ |
T-Account
Work-in-Process Inventory
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Work-in-Process Inventory ------------------------------------------------------------------ Beginning Inventory | Direct materials | Cost of Goods Direct labor | Manufactured Manufacturing Overhead | OUT (applied!!!) | ------------------------------------------------------------------ Ending Inventory |
Cost of Goods Manufactured
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Cost of Goods Manufactured• The aggregate lifetime cost of the inventory
completed this period.• WARNING: Some of these costs were incurred in
prior periods.
Cost of Goods Manufacturedis NOT the amount ofcost occurred in the factorythis period.
Schedule ofCost of Goods Manufactured
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T-Account Detective Work
Raw Materials Inventory
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T-Account Detective WorkWork-in-Process
Inventory
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T-Account Detective WorkFinished Goods
Inventory
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Cost of Goods Sold Adjustment
Under- or Over-Applied Overhead
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Closing Journal EntryManufacturing Overhead 6,000
Cost of Goods Sold 6,000
Manufacturing Overhead ---------------------------------------- ACTUAL |APPLIED | 168,000 | 174,000 ---------------------------------------- Ending Balance | 6,000 (OVER-applied)
Under- or Over-Applied Overhead
ADJUSTED Cost of Goods Sold
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Closing Journal Entry
Manufacturing Overhead 6,000Cost of Goods Sold 6,000
Schedule of
ADJUSTED Cost of Goods Sold
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Cost of Goods Manufactured
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ADJUSTED Cost of Goods Sold
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