product cost flows and business organizations
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17. C H A P T E R. Product Cost Flows and Business Organizations. Learning Objective 1. Understand the difficulty, yet importance, of having accurate product cost information. Difficult to assign to products. Easily assigned to products. Easily assigned to products. - PowerPoint PPT PresentationTRANSCRIPT
Product Cost Flows and Business Organizations
Product Cost Flows and Business Organizations
C H A P T E R 17
Learning Objective 1
Understand the difficulty, yet importance, of having accurate product cost information.
Direct Labor Costs
Direct Labor Costs
Assignment of Product Costs
Product CostProduct Cost
Direct Materials
Costs
Direct Materials
Costs- Expenditure
and use usually match production.
- Expenditure and use usually match production.
Easily assigned to products.
Easily assigned to products.
Manufacturing Overhead
Costs
Manufacturing Overhead
Costs- Total costs not known
until the end of the period.
- Not usually assigned to specific products.
- “Lumped” costs don’t match production very well.
Difficult to assign to products.
Product Cost Systems
Why does management needs accurate product cost information?
Why does management needs accurate product cost information?
Product Cost Systems
What does accurate information allow management to do?
What does accurate information allow management to do?
Learning Objective 2
Explain the flow of goods and services in a manufacturing organization and follow the accumulation of product costs in its accounting system.
Review the Time Line of Business
To accurately measure product costs, accountants must:
Measuring Cost
Outline the Flow of Cost in a Manufacturing Process
Determining Cost
What are some difficulties in determining costs of manufactured products?
Direct materials
Costs of Manufacturing ProductsDiscuss the Nature of Raw Materials.
Example: Direct Materials Costs
Venus Vehicles purchased $2 million of steel for its new line of cars. What is the journal entry?
Half the new steel is requested from the warehouse for production. What is the journal entry?
Indirect materials ($250,000 of glue and bolts) are requisitioned from the storeroom. What is the journal entry?
Direct labor
Costs of Manufacturing ProductsDiscuss the Nature of Direct Labor.
Direct Labor Costs and Example
Time clocks, computer entries, time sheets—
- All allow production personnel to identify specific jobs worked on.
This information is revealed on the job cost sheet.
Labor costs can be direct or indirect.
Payroll records report direct labor of $50,000 and indirect labor of $50,000. Record the direct labor.
Record the indirect labor.
Manufacturing overhead
Costs of Manufacturing ProductsDiscuss the Nature of Factory Overhead.
Describe Characteristics of Manufacturing Overhead Costs
Describe the Two-Step Process to Apply Manufacturing Overhead to
Products
Step One
Step Two
Steel Works estimates annual variable manufacturing overhead costs of $10,000 and fixed manufacturing overhead of $20,000. What is the predetermined overhead rate if the company expects to use the machines 10,000 hours?
Determining Manufacturing Overhead Rate
Steel Works used 10 machine hours in the production of Job No. 12. Using the $3.00 predetermined overhead rate, what overhead costs will be applied to manufacturing overhead (MOH) for this job? What is the journal entry to apply this MOH to Job No. 12?
Determining Manufacturing Overhead Rate
Steel Works used $100 in direct materials in Job No. 12’s production as well as 10 hours of direct labor at $20 per hour. Using a job cost sheet, determine the job’s total cost. Now that the job is complete, prepare the entries for its transfer to Finished Goods and its sale.
Transferring Completed Products to Finished Goods Inventory & then
Selling the Products
Learning Objective 3
Understand the process of accounting for overhead.
Actual versus Applied Manufacturing Overhead
Actual Overhead Actual annual manufacturing overhead costs. Needed for accurate determination of income. Recorded as debit to Manufacturing
Overhead.Applied Overhead
Amount of overhead applied to products using the predetermined overhead rate.
Recorded as credit to Manufacturing Overhead.
Disposition of Over- and Underapplied MOH
Overapplied Manufacturing Overhead:
The excess of applied overhead costs over actual overhead costs for a period.
Manufacturing Overhead
Actual
10
Applied
20
Underapplied Manufacturing Overhead:
The excess of actual overhead costs over applied overhead costs for a period.
(Cost of job is overstated)
Manufacturing Overhead
Actual
20
Applied
10
(Cost of job is understated)
Treating Applied OverheadTwo methods for treating over- and underapplied MOH:
- Allocate over- or underapplied manufacturing overhead to Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold on the basis of the ending balances in these three accounts.
- More accurate; any difference is allocated proportionately.
- More complicated; requires detailed calculations.
- Close over- or underapplied overhead directly to Cost of Goods Sold.
- Easier and more commonly used, especially if amount is small.
- Debit MOH, Credit COGS.
Learning Objective 4
Create a Cost of Goods Manufactured schedule and understand how it is used to calculate cost of goods sold.
Discuss the Cost of Goods Manufactured Schedule
Example: Cost of Goods Manufactured ScheduleSatchel Manufacturing, Inc.
Cost of Goods Manufactured ScheduleFor the Year Ended December 31, 2006
Raw Materials: Beginning raw materials inv. $ 30,000 Add: Raw materials purchased 150,000 Total: raw materials available $180,000 Less: Ending raw materials inv. 20,000 Raw materials used in production $
160,000Direct labor
220,000Applied manufacturing overhead 330,000Total manufacturing costs $ 710,000
We will begin with the bottom line from the previous slide.
Total manufacturing cost $ 710,000
Add: Beginning work-in-process 25,000
Less: Ending work-in-process 35,000
Cost of goods manufactured $ 700,000
Example: Cost of Goods Manufactured Schedule
Learning Objective 5
Explain the flow of goods and services in a merchandising organization and follow the accumulation of product costs in its accounting system.
The Distribution Channel
The process of wholesalers purchasing from manufacturers and supplying retailers who sell to final customers.
A Typical Channel of Distribution
Manufacturer Brand A
Manufacturer Brand B
Manufacturer Brand C
Manufacturer Brand D
Manufacturer Brand E
Manufacturer Brand F
Wholesaler
Wholesaler
Wholesaler
Retailer
Brand A Customers
Brand B Customers
Brand C Customers
Brand D Customers
Brand E Customers
Brand F Customers
Describe What Wholesalers Do
Retailers – Define Risk and Stockturns
Often work with many wholesalers (and some manufacturers) to obtain inventory mix.
Risk
Stockturns
Second-tier merchants who typically purchase products from wholesalers to distribute to customers. Many will often bypass wholesalers to purchase inventory directly from the original manufacturers.
Second-tier merchants who typically purchase products from wholesalers to distribute to customers. Many will often bypass wholesalers to purchase inventory directly from the original manufacturers.
Describe Merchandise Cost Flows
Accounts Payable
xxx
xx
Merchandise Inventory
xxxx
x
xxCost of Goods
Sold
xx
xx x
Describe Accounting for Inventory
Prepare journal entry for when $465 inventory is sold.
Learning Objective 6
Explain the flow of goods and services in a service organization and follow the accumulation of product costs in its accounting system
Define a Service Company
What are the Effects of Deregulation?
List Similarities Between Service and Manufacturing Firms
List Differences Between Service and Manufacturing Firms
Work-in-Process Inventory
At period’s end, there may be situations where significant effort and resources have been invested in a service product that is not yet completed.
Revenue is not yet earned; therefore, costs should not be recognized yet as expenses. This work in process is an asset, referred to as Work-in-Process Services.
When service is completed and delivered, service costs (overhead costs and work-in-process services) are transferred to Cost of Services.
Learning Objective 7
Understand the impact of e-business on product costing.
What Impact Has e-business Had on Product Costs?
Expanded MaterialLearning Objective 7
Use the FIFO method to do process costing.
Process Costing
Process costing is appropriate if what two general conditions are met?
What are the 5 Steps in Process Costing?
1
2
3
4
5
Step 1: Compute Equivalent Units of Production
Physical Units (lbs) % Done
Equivalent Units % Done
Equivalent Units
Beginning work-in-process 4,000 0% - 80% 3,200 Started & completed 44,000 100% 44,000 100% 44,000
Ending work-in-process 2,000 100% 2,000 60% 1,200
Equivalent units of production 46,000 48,400
Transferred out 48,000
Direct Materials Costs Conversion Costs
Step 2: Compute Product Costs per Unit
Total Costs
Equivalent Units
Cost per Unit
Beginning work-in-process Direct materials costs 800$ 4,000 0.20$ Conversion costs 1,200 800 1.50
Total 2,000$ Total 1.70$ Current period Direct materials costs 9,660$ 46,000 0.21$ Conversion costs 70,180 48,400 1.45
Total 79,840$ Total 1.66$
Step 3: Compute the Costs Transferred Out
Cost per Unit
Equivalent Units
Beginning work-in-process Initial direct materials costs 800$ Initial conversions costs 1,200 Cost to complete materials 0.21$ - - Cost to complete conversion 1.45 3,200 4,640
Total 6,640$ Started and completed 1.66$ 44,000 73,040 Total costs transferred out 79,680$
Step 4: Compute Costs of Ending Work-in Process Inventory
Cost per Unit
Equivalent Units
Costs for direct materials 0.21$ 2,000 420$ Conversion costs 1.45 1,200 1,740
Cost of ending work-in-process 2,160$
Step 5: Prepare the Production Cost Report
The production cost report contains the information prepared and presented in steps 1 through 4.
This Completes Managerial Chapter 3