Managerial Accounting Concepts/Job Cost

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CHAPTER 18
MANAGERIAL ACCOUNTING CONCEPTS/JOB COSTING
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Compare Managerial and Financial Accounting

Managerial accounting provides information for
internal use.
Financial accounting provides information for
external use.
Creditors and investors
Managers
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Compare Managerial and Financial Accounting

• Financial Accounting
• Uses historical data
• Presents summary data
• Complies with GAAP (Generally AcceptedAccounting
  Principles)

• Managerial Accounting
• May use estimates of future (e.g., budgeting)
• More detailed data
• Flexible format, cost/benefit analysis
  determines proper level of information

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Ethical Issues
Confidentiality
Competence
Institute of Management AccountantsStandards of
Ethical Conduct
Integrity
Objectivity
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Manufacturing Cost Concepts
Cost is a financial measure of resourcesused or
given up to achieve an objective.
Product costs are the costs acompany assigns to
units produced. (i.e., costs which relate to or
attach to the product)
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Product Cost Components
Product Costs
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Product Cost Components

• Direct Materials
• Materials that are clearly and easily traced to a
  particular product
• Example Wood used to manufacture a high-quality
  dining room table

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Product Cost Components

• Direct Labor
• Labor cost of employees working to convert
  materials into finished goods
• Labor cost clearly traceable to, or readily
  identifiable with, the finished product
• Example Wages paid to carpenter

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Product Cost Components

• Manufacturing Overhead
• All manufacturing costs except direct material
  and direct labor
• Manufacturing costs that cannot be traced
  directly to specific units produced
• Example Indirect labor such as furniture designer

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Product Cost Components

• Manufacturing Overhead - other examples
• - Indirect labor Janitors, Supervisors,
  Materials
  
  
  
  storeroom personnel, Cost
  accountant
• - Indirect materials Oil, Nails, Glue
• - Other indirect costs
• Repairs and maintenance on factory buildings
  and equipment
• Payroll taxes and fringe benefits for
  manufacturing employees
• Depreciation on factory buildings and
  equipment
• Insurance and taxes on factory property and
  inventories
• Utilities for factory buildings

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Product Costs
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Period Costs

• Nonmanufacturing costs which relate to or
  attach to the period

• Can be classified as
• Selling costs
• Administrative costs

Period costs are expensed in theperiod incurred.
Period costs are never inventoriedwith the
product.
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Period Costs
Selling Costs Costs incurred to obtain customer
ordersand to deliver finished goods to
customers(e.g., advertising and shipping)
Administrative Costs Nonmanufacturing costs of
staff support andadministrative functions (e.g.,
accounting, dataprocessing, personnel, research
and development)
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Question

• The primary distinction between product and
  period costs is . . .
• a. Product costs are expensed in the period
  incurred.
• b. Product costs are directly traceable to
  product units.
• c. Product costs are inventoriable.
• d. Period costs are inventoriable.

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Question

• The primary distinction between product and
  period costs is . . .
• a. Product costs are expensed in the period
  incurred.
• b. Product costs are directly traceable to
  product units.
• c. Product costs are inventoriable.
• d. Period costs are inventoriable.

a.
b.
c.
d.
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Ways to Classify Costs
1 Product Costs Period Costs
2 Direct Materials Direct Labor Manufacturing
Overhead Selling Administrative
3 Manufacturing Costs Non-Manufacturing Costs
4 Either fixed or Variable Costs
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Financial Reporting by Manufacturing Companies
ManufacturingInventoryClassifications
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Financial Reporting by Manufacturing Companies
Work inProcess
RawMaterials
FinishedGoods
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Balance Sheet Presentation

• MERCHANDISER
• Current Assets
• Cash
• Receivables
• Prepaid Expenses
• Merchandise Inventory

• MANUFACTURER
• Current Assets
• Cash
• Receivables
• Prepaid Expenses
• Inventories
• Raw Materials
• Work in Process
• Finished Goods

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Question

• What type of account is the manufacturing work in
  process account?
• a. Income statement expense account.
• b. Balance sheet inventory account.
• c. Temporary clearing account for direct
  material and direct labor.
• d. Holding account for manufacturing
  overhead and direct labor.

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Question

• What type of account is the manufacturing work in
  process account?
• a. Income statement expense account.
• b. Balance sheet inventory account.
• c. Temporary clearing account for direct
  material and direct labor.
• d. Holding account for manufacturing
  overhead and direct labor.

a.
b.
c.
d.
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Manufacturing Cost Flows
Direct Material
Direct Labor
ManufacturingOverhead
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Cost of Goods Manufactured

• Cost of all goods completed during a period and
  transferred from work in process to finished
  goods

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Cost of Goods Manufactured

• Cost of all goods completed during a period and
  transferred from work in process to finished
  goods
• Direct Materials Used
• Direct Labor
• Manufacturing Overhead
• Cost to Manufacture
• Beginning Work in Process
• Ending Work in Process
• Cost of Goods Manufactured

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Cost of Goods Sold

• Cost of the items sold to customers during a
  period

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Cost of Goods Sold

• Cost of the items sold to customers during a
  period
• Beginning Finished Goods
• Cost of Goods Manufactured
• Cost of Goods Available for Sale
• Ending Finished Goods
• Cost of Goods Sold

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Income Statement Presentation

• Sales
• Cost of Goods Sold
• Gross Margin
• Operating Expenses
• Operating Income

p.688
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Types of Cost Systems

• Used for production of small, identical,
  low-cost items
• Mass produced in automated continuous
  production process
• Costs cannot be directly traced to each unit
  of product

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Types of Cost Systems

• Typical process cost applications
• Petrochemical refinery
• Paint manufacturer
• Paper mill

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Types of Cost Systems

• Used for production of large, unique,
  high-cost items
• Built to order rather than mass produced
• Many costs can be directly traced to each job

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Types of Cost Systems
ProcessCosting
JobCosting

• Typical job order cost applications
• Custom furniture manufacturing
• Building construction
• Also used in service industry
• Hospitals
• Accounting and law firms

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Job Order Costing
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Job Order Costing
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Job Order Costing
ManufacturingOverhead (OH) Applied to eachjob
based onactivity causingthe OH
Synonyms for Applied Overhead Assigned Distribut
ed Allocated Absorbed
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Job Order Costing
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Job Order Costing

• Typical Accounting Entries(pp. 690 - 693)
• To record purchase of materials
• Raw Materials Inventory (Debit)
• Accounts Payable (Credit)
• To record use of materials
• Work in Process Inventory (Debit)
• Manufacturing Overhead (Debit)
• Materials Inventory (Credit)

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Job Order Costing

• Payroll Accounting Entry
• (Not discussed in text)
• To record payment to employees
• Payroll Summary (Debit)
• Wages Payable (Credit)
• Various Taxes Withheld (Credit)

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Job Order Costing

• Typical Accounting Entries(pp. 690 - 693)
• To record labor costs
• Work in Process Inventory (Debit)
• Manufacturing Overhead (Debit)
• Payroll Summary (Credit)
• To apply overhead to jobs
• Work in Process Inventory (Debit)
• Manufacturing Overhead (Credit)

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Job Order Costing

• Typical Accounting Entries(pp. 690 - 693)
• To record completion of jobs
• Finished Goods Inventory (Debit)
• Work in Process Inventory (Credit)

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Job Order Costing

• Typical Accounting Entries(pp. 690 - 693)
• To record sales
• Accounts Receivable (Debit)
• Sales (Credit)
• To record cost of goods sold
• Cost of Goods Sold (Debit)
• Finished Goods Inventory (Credit)

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Job Cost Flows
WIP
Raw Materials
FG
Mfg. O/H
CGS
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Job Cost Flows
Work in Process
Raw Materials
Material Purchases
Mfg. Overhead
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Job Cost Flows
Work in Process
Raw Materials
DirectMaterial
DirectMaterial
Material Purchases
Mfg. Overhead
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Job Cost Flows
Work in Process
Raw Materials
DirectMaterialIndirect Material
DirectMaterial
Material Purchases
Mfg. Overhead
ActualOverheadCosts
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Job Cost Flows
Work in Process
Payroll Summary
DirectMaterial
Incurred
Mfg. Overhead
ActualOverheadCosts
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Job Cost Flows
Work in Process
Payroll Summary
DirectLabor
DirectMaterialDirectLabor
Incurred
Mfg. Overhead
ActualOverheadCosts
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Job Cost Flows
Work in Process
Payroll Summary
DirectLaborIndirect Labor
DirectMaterialDirectLabor
Incurred
Mfg. Overhead
ActualOverheadCosts
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Job Cost Flows
Work in Process
Payroll Summary
DirectLaborIndirect Labor
DirectMaterialDirectLaborOverhead
Incurred
Mfg. Overhead
ActualOverheadCosts
OverheadApplied to Work inProcess
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Job Cost Flows
Work in Process
Finished Goods
DirectMaterialDirectLaborOverhead
Cost of Goods Sold
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Job Cost Flows
Work in Process
Finished Goods
DirectMaterialDirectLaborOverhead
Cost ofGoodsMfg.
Cost ofGoodsMfg.
Cost of Goods Sold
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Job Cost Flows
Work in Process
Finished Goods
DirectMaterialDirectLaborOverhead
Cost ofGoodsMfg.
Cost ofGoodsMfg.
Cost ofGoodsSold
Cost of Goods Sold
Cost ofGoodsSold
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Applying Overhead
A predetermined overhead rate (POHR)is used to
apply costs to jobs.
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Applying Overhead
Establishedbefore theperiod begins
Based on estimated OH costand
estimatedactivity level
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Applying Overhead
Establishedbefore theperiod begins
Based on estimated OH costand
estimatedactivity level
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Applying Overhead
This activityis called thecost driver
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Applying Overhead
The cost driver is assumed to be a causal
factor in overhead incurrence. Examples Units
produced Direct labor hours Direct labor
cost Machine hours
This activityis called thecost driver
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Applying Overhead
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Applying Overhead
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Applying Overhead
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Applying Overhead Example
If FishCo budgets overhead at 200,000
andestimates its cost driver activity to be
25,000 direct labor hours for 1999, what is the
POHR per direct labor hour? a. 10.00 per
hour b. 6.00 per hour c. 8.00 per
hour d. 12.00 per hour
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Applying Overhead Example
If FishCo budgets overhead at 200,000
andestimates its cost driver activity to be
25,000 direct labor hours for 1999, what is the
POHR per direct labor hour? a. 10.00 per
hour b. 6.00 per hour c. 8.00 per
hour d. 12.00 per hour
Estimated Overhead Estimated Activity
200,000 25,000 hours
POHR 8.00 per hour
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Applying Overhead Example
If FishCo actually worked 24,000 direct labor
hours for 1999, what amount of overhead would be
applied to jobs in work in process? a.
200,000 b. 192,000 c. 208,000 d.
196,000
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Applying Overhead Example
If FishCo actually worked 24,000 direct labor
hours for 1999, what amount of overhead would be
applied to jobs in work in process? a.
200,000 b. 192,000 c. 208,000 d.
196,000
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Applying Overhead
Reasons for using apredetermined overhead rate
Overhead is notincurred uniformlyduring the
year.
Actual overhead ratemight vary from month to
month.
Predetermined ratemakes it possible toestimate
job costs sooner.
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Applying Overhead
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Applying Overhead
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Applying Overhead
Overhead is overapplied
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Applying Overhead
Overhead is underapplied
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Applying Overhead
Adjustments for underapplied or overapplied
overhead
Theoretically, we should adjust all accounts
affected by misapplied overhead
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Applying Overhead
Adjusting Cost of Goods Sold for underapplied or
overapplied overhead
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Applying Overhead
Manufacturing Overhead
ActualOverheadCostsIncurred
OverheadApplied toWork in Process
(Debit bal.) UnderappliedOverhead
(Credit bal.) OverappliedOverhead
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Applying Overhead
Manufacturing Overhead
Cost of Goods Sold
Actual
Applied
Underapplied Balance
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Applying Overhead
Manufacturing Overhead
Cost of Goods Sold
Actual
Applied
Underapplied Balance
Underapplied Balance
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Applying Overhead
Manufacturing Overhead
Cost of Goods Sold
Actual
Applied
Overapplied Balance
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Applying Overhead
Manufacturing Overhead
Cost of Goods Sold
Actual
Applied
Overapplied Balance
Overapplied Balance
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Applying Overhead Question
FishCo had actual manufacturing overhead costs of
180,000. FishCo applied 192,000 of
manufacturing overhead to jobs based on a POHR of
8.00 per direct labor hour. FishCos
manufacturing overhead is a. 12,000
overapplied. b. 12,000 underapplied. c.
96,000 overapplied. d. 96,000 underapplied.
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Applying Overhead Question
FishCo had actual manufacturing overhead costs of
180,000. FishCo applied 192,000 of
manufacturing overhead to jobs based on a POHR of
8.00 per direct labor hour. FishCos
manufacturing overhead is a. 12,000
overapplied. b. 12,000 underapplied. c.
96,000 overapplied. d. 96,000 underapplied.
a.
b.
c.
d.
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Applying Overhead Question
FishCo had actual manufacturing overhead costs of
180,000. FishCo applied 192,000 of
manufacturing overhead to jobs based on a POHR of
8.00 per direct labor hour. FishCos
manufacturing overhead is a. 12,000
overapplied. b. 12,000 underapplied. c.
96,000 overapplied. d. 96,000 underapplied.
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Applying Overhead Question

• Assume that FishCo's overhead was 10,000
  overapplied. This amount would result in an
  adjustment that would decrease cost of goods
  soldby 10,000.
• a. True
• b. False

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Applying Overhead Question

• Assume that FishCo's overhead was 10,000
  overapplied. This amount would result in an
  adjustment that would decrease cost of goods
  soldby 10,000.
• a. True
• b. False

a.
b.
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Applying Overhead Question
Assume that FishCo's overhead was 10,000
overapplied. This amount would result in an
adjustment that would decrease cost of goods
soldby 10,000. a. True b. False
If overhead is overapplied, cost of goods sold is
too high. The adjustment will decrease cost of
goods sold.
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Have a great spring break!
(One more slide)
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THE END