you mcan't...manufacturing overhead costs. for example: direct labor hours is a commonly used...

Manufacturing Product Costs

The Importance of Understanding a Company's Product Costs

Establish product sales price.Understand why the company is profitable or not.Determine which of a variety of products to emphasize in marketing.Consider ways to reduce costs.

A.B.C.

D.

Financial Reporting Purposes: Product costs are reflected as an asset (inventory) rather than an expense until the inventory is sold.

Managerial Purposes: Managers need to know and understand their company's product costs to intelligently-

1.

2.

How can you intelligently operate a business without knowing the cost of your product?

You Can't !!!!

Manufacturing Product Cost Accumulation Methods

Process Costing: A method that is commonly used by companies that manufacture large numbers of standardized product(s).

Manufacturing Costs:Direct MaterialsDirect LaborManufacturing Overhead Total

$ xxxxxxxxx

$ xxx # of boxes produced

cheerios cheerios GeneralMills

General Mills

Cost Per Box

Job Order Costing:A method that is commonly used by companies that make a variety of differing products where a simple averaging of total manufacturing costs of a factory or work center over the number of units produced would not distinguish the unique costs of the different products.

Manufacturing costs are accumulated by separate product orders, runs or batches ("job orders") and averaged only over the number of common units produced within that job.

-

-

Identify for each of the following kinds of manufacturing businesses whether they would use a process or job order cost system for determining the cost of their products.

Home construction companyOil refineryCustom jewelry manufacturerPeach farmAuto manufacturerOriental rug manufacturerDoor manufacturer

a.b.c.d.e.f.g.

Financial vs. Managerial Accounting

Problem: Process vs. Job Order Costing

of 2

Identify for each of the following kinds of manufacturing businesses whether they would use a process or job order cost system for determining the cost of their products.

Home construction companyOil refineryCustom jewelry manufacturerPeach farmAuto manufacturerOriental rug manufacturerDoor manufacturer

a.b.c.d.e.f.g.

Job order costProcess costJob order costProcess costProcess costJob order costIt depends

Financial vs. Managerial AccountingSolution: Process vs. Job Order Costing

of 2

Date Started: 01/01/X1Date Completed:

Job Cost RecordJob Order: # 351Product Description: 4' x 8' Oak Tables Product Code: # O4811 #of Units: 5

Amount

Direct Materials:

Direct Labor:

Manufacturing Overhead:

Cost Per Unit: ÷ =

RequisitionNumber Amount

Time CardNumber Hours Rate

Amount Labor HoursRate

$

Date

Date

Date

5(total cost)$Total Cost

The Flow of Costs

Materials purchased Direct materials put into production

Direct labor cost incurredManufacturing overhead costs applied Production completed

Products sold

Inventory-RM

xxxxxxxxx

xxx

xxxxxx

xxxxxx

xxx

Inventory-WIP

Inventory-FG

Cost of Goods Sold

Job Cost Record # 351DMDLMO

xxxxxxxxx


xxxxxxxxx


xxxxxxxxx


xxxxxxxxx


xxxxxxxxx

Inventory-WIPDMDLMO

xxxxxxxxx

xxx

xxx

xxx

xxx

xxx

xxx

General Ledger

Subsidiary Ledger

Total

Total

Total

Total

Total

Example: Norm's Furniture manufactures a variety of furniture products and styles and therefore uses a job order cost system to account for its various product costs. For each of the following events prepare the journal entry to record the event and update the job cost sheet where appropriate.

Raw materials totaling $50,000 are purchased on account (direct materials of $40,000 and indirect materials of $10,000) and are placed in the raw materials inventory storage department.

Raw Materials InventoryAccounts Payable

50,000

1.

50,000

Production of Job #351 to build 5 oak tables begins on 1/1/X1 and the employee assigned to build the tables takes an authorized materials requisition form (form #10025) to the raw materials storage department to obtain the required direct materials (lumber, etc.). The cost of these direct materials requisitioned specifically for Job #351 totals $1,500.

2.

WIP InventoryRaw Materials Inventory

1,5001,500



Amount

Direct Materials:

Direct Labor:


Cost Per Unit: ÷ =




$

Date

Date

Date

Total Cost

01/01/X1 005,1 $52001

Job Order Costing

Page 1 of 2

The employee constructing the 5 oak tables completes the work on 1/15/X1 and submits to the accounting department his semi-monthly time card (#3358) which shows all 80 hours of labor devoted to completion of the tables (Job #351). The employee is paid semi-monthly at a rate of $20 per hour.

3.

WIP InventoryCash (Wage Payable)

1,6001,600



Amount

Direct Materials:

Direct Labor:


Cost Per Unit: ÷ =




$

Date

Date

Date

01/15/X1

01/01/X1 005,1 $52001

3358 80 $ 20 $ 1,600

During production of Job #351, the employee also requisitioned (form #10047) from the raw materials storage department various additional direct materials (tube of glue, nails) costing a total of $50to be used in the construction of the 5 oak tables plus other jobs over the next month.

5.

Raw Materials Inventory50

50

Theoretically correct entry:

WIP Inventory


50

Actual entry:

Manufacturing Overhead

During production of Job #351, the employee also requisitioned (form #10042) from the raw materials storage department various indirect materials (sandpaper, etc) costing a total of $150 to be used in the construction of the 5 oak tables plus other jobs over the next month.

Theoretically correct entry:

Problem: How much of this cost of indirect materials should be allocated to Job #351's Job Cost Sheet?

4.


150150


150Manufacturing Overhead

Actual entry:

xxxManufacturing Overhead CashSalary PayableAccumulated Depreciation

Other manufacturing overhead costs indirectly incurred in the production of Job #351 and all other jobs in process during the month might include the production supervisor's salary, manufacturing utility costs, depreciation of manufacturing equipment, etc. These costs would likewise be included temporarily in this holding account called "Manufacturing Overhead" until we can come up with a method of allocation or application of these costs to the individual jobs.

6.

xxxxxxxxx

Job Order Costing

Page 2 of 2

Applying Manufacturing Overhead to WIP Inventory


Indirect Mtls.Indirect Labor Other Overhead

xxxxxxxxx

Direct Mtls.Direct Labor Applied Overhead

WIP

Application of a portion of manufacturing overhead to each individual job and its Job Cost Sheet is done based on an estimated basis using a "Predetermined Overhead Rate".

xxxxxxxxx

xxx

(Actual Costs)

(Applications to WIP, and Job Cost Sheets)

Step 1: Management must first identify some activity which can be separately measured job by job and bears some correlation with (or drives) manufacturing overhead costs.

For example: Direct labor hours is a commonly used activity in the application of manufacturing overhead because it can be measured by job through time cards and often correlates with overhead costs.

How is an Overhead Rate predetermined and then used?

Jan Feb Mar Apr May Jun Jul

$600,000

$300,00040,000 Hrs.

30,000 Hrs.

20,000 Hrs.

ManufacturingOverhead Costs

Direct LaborHours

$360,000

$600,000

$300,000

24,000 Hrs.

40,000 Hrs.

20,000 Hrs.

Jan. $360,000 ÷ 24,000 hrs. = $15/hr.Apr. $600,000 ÷ 40,000 hrs. = $15/hr.

Correlating Relationship:

ManufacturingOverhead Costs

Direct LaborHours



Amount

Direct Materials:

Direct Labor:


Cost Per Unit: ÷ =




$

Date

Date

Date

$Total Cost

01/07/X1 005,1$52001

01/15/X1 3358 80 $20 $1,600

01/15/X1 612,1$0802.51$

4,316$4,316 5 863.20

Budgeted Mfg. Overhead Costsfor the next month

Budgeted Direct Labor Hoursfor the next month

$402,80026,500 hr. = $15.20/hr.

80 hrs. × $15.20 = $1,216

× Direct LaborHours

OverheadRate

daehrevOApplied=

Step 2: Calculate an overhead rate for the future based on prospective or budgeted overhead costs and budgeted direct labor hours.

Step 3: This "Predetermined Manufacturing Overhead Rate" of $15.20per direct labor hour is then used to apply overhead to each job in production based on the actual direct labor hours incurred per job as reported in the employee time cards.

1,216

Application of Manufacturing Overhead to Job #351

WIP InventoryManufacturing Overhead 1,216

7.

Applying Overhead

Page 1 of 2

Cost of Goods Sold Finished Goods Inventory

Gross Margin = $1,400 - 863.20 = $536.80

Finished Goods InventoryWIP Inventory

Accounts ReceivableSales Revenues

Production is completed on Job #351 and the tables are transferred to the finished goods inventory storage area:

One of the oak chairs from Job #351 is sold to a customer on account for $1,400.

8.

9.

4,3164,316

1,4001,400

863.20863.20



xxxxxxxxx

xxx

(Actual Costs)

(Applications to WIP based on $15.20 per direct labor hour)

Under-applied xxxxxx Adjustment

0Adjustment of manufacturing overhead at year end:

Cost of Goods SoldFinished Goods InventoryWIP Inventory


xxxxxxxxx

xxx

Cost of Goods SoldManufacturing Overhead

xxxxxx

or just



xxxxxxxxx

(Actual Costs)

Adjustment of manufacturing overhead at year end:

Adjustment xxx0

Manufacturing OverheadCost of Goods Sold

xxxxxx

xxx (Applications to WIP based on $15.20 per direct labor hour)

xxx Over-applied

Applying Overhead

Page 2 of 2

Use the following diagram, and fill in the blanks to identify the flow of product costs in a manufacturing business.

Direct Material Costs Manufacturing Overhead Raw Materials Inventory

xxxxxx xx

xxxx

xxxx

WIP Inventoryxxxxxx xx

Finished Goods Inventoryxx xx

Costs of Goods Soldxx

(A) (B)

(C)Indirect Labor

(D) (E)(F)

Use the following diagram, and fill in the blanks to identify the flow of product costs in a manufacturing business.

Direct Material CostsIndirect Material Costs

Manufacturing Overhead Raw Materials Inventory

xxxxxx xx

xxxx

xxxx

WIP Inventoryxxxxxx xx

Finished Goods Inventoryxx xx

Costs of Goods Soldxx

(A) (B)

(C)

Indirect Material CostsIndirect LaborOther Mfg. Overhead

(D) Direct Material Costs(E) Manufacturing Overhead(F) Direct Labor Costs

In a job order cost system, explain how the following costs are typically determined for each separate manufacturing job:

Direct material costsDirect labor costsManufacturing overhead costs

A.B.C.

Practice Problems: Job Order Costing

In a job order cost system, explain how the following costs are typically determined for each separate manufacturing job:

Direct material costsMaterial requisition forms noting the amount and cost of raw materials released to each job.

Direct labor costsEmployee time cards noting the number of hours direct laborers worked on each specific job.

Manufacturing overhead costsManufacturing overhead is applied on an estimated basis using a predetermined overhead rate on some activity (direct labor hours, material costs, machine hours) that is measured for each specific job.

A.

B.

C.

Given the following historical data over the last three years, identify the measurable activity that best correlates with manufacturing overhead costs and would therefore serve as the best basis upon which to calculate a predetermined overhead application rate for the upcoming year:

If next year's budgeted manufacturing overhead costs and machine hours are projected at $625,000 and 77,000 hours, respectively, determine the predetermined overhead rate to be used in applying overhead to jobs in work in process for the upcoming year.

If job order #4444 actually utilizes 25 machine hours to be completed, how much manufacturing overhead cost should be applied to the job using the data previously provided in this problem.

A.

B.

C.

Manufacturing Overhead CostsDirect Labor HoursMachine HoursDirect Material Costs

$250,000 76,000 hrs. 30,000 hrs.

$750,000

$300,000 65,000 hrs. 38,000 hrs.

$760,000

$500,000 30,000 hrs. 62,000 hrs.

$800,000

20X2 20X3 20X4

Given the following historical data over the last three years, identify the measurable activity that best correlates with manufacturing overhead costs and would therefore serve as the best basis upon which to calculate a predetermined overhead application rate for the upcoming year:

A.

20X2 20X3 20X4Manufacturing Overhead

Per Direct Labor HoursPer Machine HoursPer Direct Material Costs

$3.29$8.33$ .33

$4.62$7.90$ .39

$16.67$ 8.07$ .63

Manufacturing Overhead CostsDirect Labor HoursMachine HoursDirect Material Costs

20X2 20X3 20X4

Machine hours seem to have the best correlating relationship with manufacturing overhead costs and should therefore be used as the activity basis in determining a predetermined overhead rate.

$250,000 76,000 hrs. 30,000 hrs.

$750,000

$300,000 65,000 hrs. 38,000 hrs.

$760,000

$500,000 30,000 hrs. 62,000 hrs.

$800,000

Problem: Job Cost Terms

Problem: Overhead Rate Solution: Overhead Rate

Solution: Job Cost Terms

Solution: Cost flows

Page 1 of 5

= $8.12 per hour= $625,000 77,000

Budgeting Manufacturing Overhead Costs Budgeted Machine Hours

(25 machine hrs. x $8.12 per hour) = $203 of manufacturing overhead costs applied to WIP job #4444

If next year's budgeted manufacturing overhead costs and machine hours are projected at $625,000 and 77,000 hours, respectively, determine the predetermined overhead rate to be used in applying overhead to jobs in work in process for the upcoming year.

If job order #4444 actually utilizes 25 machine hours to be completed, how much manufacturing overhead cost should be applied to the job using the data previously provided in this problem.

B.

C.

Jones Custom Furniture Manufacturing, Inc. made the following estimates at the beginning of the year, 20X7:

Jones applies manufacturing overhead to specific job orders on the basis of direct labor hours.

20X7 Budgeted Direct Labor Costs20X7 Budgeted Direct Labor Hours20X7 Budgeted Manufacturing Overhead

$300,000 20,000 hrs.$520,000

A.

B.

Calculate Jones' predetermined manufacturing overhead rate for the year 20X7.

Prepare general journal entries for the events noted below.

During the month of January, the following events transpired for Job #345, an order for 10 custom oak chairs which were manufactured in the first week of January 20X7:

$876 worth of direct materials (lumber, fabric, paint) were requisitioned (requisition #11042) and put into production on Job #345.$154 worth of indirect materials (glue, staples, sandpaper, and equipment grease) were requisitioned (#11045) for use in manufacturing the 10 chairs for job order #345 and other subsequent jobs.Time card #6655 was processed by payroll for Employee #214indicating that 25 direct labor hours were attributable to the 10oak chairs (Job #345). Employee #214's wage rate is $15 per hour.Manufacturing overhead at the predetermined rate is applied to the 10 oak chairs (Job #345) based on the actual direct labor hours for the job.The manufacturing supervisor's weekly salary of $1,000 is processed by payroll. This salary is considered indirect labor because the supervisor oversees not only Employee #214 but all jobs in process and does not account for his time on a job by job basis.

1/3/X7:

1/3/X7:

1/7/X7:

1/7/X7:

1/7/X7:

Create a job cost sheet form, and record the accumulation of costs for Job #345 determining the total cost of manufacturing the 10 oak chairs.

Prepare journal entries to record the following two additional events/transactions

The 10 oak chairs (Job #345) were completed and transferred to the Finished Goods stock room to await shipment to the customer.

The 10 oak chairs (Job #345) were shipped to the customer. The sales invoice reflects sales prices of $3,000 on account.

Determine the gross margin earned on the 10 oak chairs.

C.

D.

E.

1/7/X7:

1/9/X7:

In addition to Job #345, Jones completed 47 other orders in January with 7 others in process at month end. The following information summarizes the manufacturing transactions for Jones for the month of January in addition to those previously noted above relating to Job #345. Prepare the summarized journal entries for Jones for the January events noted below.

Raw materials purchased on account amounted to $102,675.Raw materials requisitioned to specific job orders amounted to $90,430 with 80% representing direct materials and the remainder representing indirect materials not directly attributable to any one specific job.Total direct labor hours for the month totaled 1,640 hours. At an average of $15 per hour, the direct labor wages incurred and paid amounted to $24,600.Manufacturing overhead is applied at the predetermined rate to all jobs in progress on the basis of the actual direct labor hours incurred by job.

F.

a.b.

c.

d.

Supervisory salaries incurred and paid along with other indirect manufacturing labor (i.e. maintenance labor) amounted to $7,000.The following costs associated with the manufacturing process and facility were incurred and paid:

Depreciation of manufacturing equipment for the month amounted to $5,500.The cost of the 47 jobs completed during the month as summarized by their individual job cost sheets amounted to $125,446.All completed jobs were shipped to customers by month end at a total sales price of $200,714 on account.All selling and administrative costs incurred and paid (i.e. admin. salaries, sales commissions, office supplies, office rent, etc.) amounted to $46,514.

e.

f.

g.

h.

i.

j.

Factory RentFactory UtilitiesInsuranceOther Miscellaneous

$ 7,600$ 2,700$ 1,200$ 1,900$13,400

Practice Problems: Job Order CostingSolution: Overhead Rate Problem: Comprehensive Problem

Problem: Comprehensive Problem Problem: Comprehensive Problem

Problem: Comprehensive ProblemProblem: Comprehensive Problem

Page 2 of 5

Close the manufacturing overhead account to cost of goods sold (include all entries noted above for Job #345 and all events in part F). What accounts would be debited/credited if manufacturing overhead had been over applied?

G. Jones Custom Furniture Manufacturing, Inc. made the following estimates at the beginning of the year, 20X7:

Jones applies manufacturing overhead to specific job orders on the basis of direct labor hours.

20X7 Budgeted Direct Labor Costs20X7 Budgeted Direct Labor Hours20X7 Budgeted Manufacturing Overhead

$300,000 20,000 hrs.$520,000

A. Calculate Jones' predetermined manufacturing overhead rate for the year 20X7.

= $26.00 per direct labor hour$520,00020,000 hrs.

B. Prepare general journal entries for the events noted below.

During the month of January, the following events transpired for Job #345, an order for 10 custom oak chairs which were manufactured in the first week of January 20X7:


876876

Manufacturing OverheadRaw Materials Inventory

154154

1/3/X7: $876 worth of direct materials (lumber, fabric, paint) were requisitioned (requisition #11042) and put into production on Job #345.

1/3/X7: $154 worth of indirect materials (glue, staples, sandpaper, and equipment grease) were requisitioned (#11045)for use in manufacturing the 10 chairs for job order #345 and other subsequent jobs.

Problem: Comprehensive Problem Solution: Comprehensive Problem

Solution: Comprehensive Problem Solution: Comprehensive Problem

Direct Materials:Date

1/3/X7Requisition #

11042Amount

$876

Emp. #214

Time Card #6655

Hours25

Rate$15

Amount$375

Direct Labor:Date

1/7/X7

25 $375

$876Total

Totals

Job Cost Sheet Job Order # 345Date Completed: 1/7/X7Description: 10 oak chairs

Date started: 1/3/X7

Overhead Rate26.00

Amount$650

Manufacturing Overhead:Labor Hours

25

Total Job Cost = $1,901 Cost per Unit = $190.10



1/7/X7: Time card #6655 was processed by payroll for Employee #214indicating that 25 direct labor hours were attributable to the 10 oak chairs (Job #345). Employee #214's wage rate is $15 per hour.

1/7/X7: Manufacturing overhead at the predetermined rate is applied to the 10 oak chairs (Job #345) based on the actual direct labor hours for the job. ($26 x 25 direct labor hours = $650)

1/7/X7: The manufacturing supervisor's weekly salary of $1,000 is processed by payroll. This salary is considered indirect labor because the supervisor oversees not only Employee #214 but all jobs in process and does not account for his time on a job by job basis.

WIP InventoryWage Payable

375375

WIP InventoryManufacturing Overhead

650650

Manufacturing OverheadSalary Payable

1,0001,000

Create a job cost sheet form, and record the accumulation of costs for Job #345 determining the total cost of manufacturing the 10 oak chairs.

C.

Total direct labor hours for the month totaled 1,640 hours. At an

.

c.

Page 3 of 5

Prepare journal entries to record the following two additional events/transactions

1/7/X7: The 10 oak chairs (Job #345) were completed and transferred to the Finished Goods stock room to await shipment to the customer.

1/9/X7: The 10 oak chairs (Job #345) were shipped to the customer. The sales invoice reflects sales prices of $3,000 on account.

D.


1,9011,901

Account ReceivableSales Revenues

Cost of Goods SoldFinished Goods Inventory

3,000

1,9013,000

1,901

Sales RevenuesLess: Cost of Goods SoldGross Margin

$3,0001,901

$1,099

Determine the gross margin earned on the 10 oak chairs.E.

In addition to Job #345, Jones completed 47 other orders in January with 7 others in process at month end. The following information summarizes the manufacturing transactions for Jones for the month of January in addition to those previously noted above relating to Job #345. Prepare the summarized journal entries for Jones for the January events noted below.

Raw materials purchased on account amounted to $102,675.

Raw materials requisitioned to specific job orders amounted to $90,430 with 80% representing direct materials and the remainder representing indirect materials not directly attributable to any one specific job.

F.

a.

b.

Raw Materials InventoryAccounts Payable

102,675102,675


Raw Materials Inventory

72,34418,086

90,430



Depreciation of manufacturing equipment for the month amounted to $5,500.

The cost of the 47 jobs completed during the month as summarized by their individual job cost sheets amounted to$125,446.

All completed jobs were shipped to customers by month end at a total sales price of $200,714 on account.

g.

h.

i.

Manufacturing OverheadAccum. Depreciation

5,5005,500


125,446125,446

Accounts ReceivableSales Revenues

Cost of Goods SoldFinished Goods Inventory

200,174

125,446200,174

125,446



Total direct labor hours for the month totaled 1,640 hours. At an average of $15 per hour, the direct labor wages incurred and paid amounted to $24,600.

Manufacturing overhead is applied at the predetermined rate to all jobs in progress on the basis of the actual direct labor hours incurred by job.

c.

d.

WIP InventoryCash

24,60024,600


(1,640 x $26/hour = 42,640)

42,64042,640

Supervisory salaries incurred and paid along with other indirect manufacturing labor (i.e. maintenance labor) amounted to$7,000.

The following costs associated with the manufacturing process and facility were incurred and paid:

e.

f.

Factory RentFactory UtilitiesInsuranceOther Miscellaneous

$ 7,600$ 2,700$ 1,200$ 1,900$13,400

Manufacturing OverheadCash

7,0007,000

Manufacturing OverheadCash

13,40013,400

Page 4 of 5

All selling and administrative costs incurred and paid (i.e. admin. salaries, sales commissions, office supplies, office rent, etc.) amounted to $46,514.

j.

Selling and Admin. ExpensesCash

46,51446,514

Close the manufacturing overhead account to cost of goods sold (include all entries noted above for Job #345 and all events in part F).

G.

Cost of Goods SoldManufacturing Overhead

1,8501,850

Manufacturing Overhead154

1,00018,086

7,00013,400

5,5001,850

under applied

650

42,640

Practice Problems: Job Order CostingSolution: Comprehensive Problem Solution: Comprehensive Problem

Page 5 of 5

you mcan't...manufacturing overhead costs. for example: direct labor hours is a commonly used...

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