Chapter Two

1
Chapter Two
2
Objectives

• Distinguish between manufacturing and
  non-manufacturing costs and between product and
  period costs.
• Discuss the three inventory accounts of a
  manufacturing firm.
• Describe the flow of product costs in a
  manufacturing firm's accounts.
• Discuss the types of product costing systems.

3
Objectives (continued)

• Describe how direct material, direct labor, and
  manufacturing overhead are assigned to jobs.
• Explain the role of a predetermined overhead rate
  in applying overhead to jobs.

4
Objectives (continued)

• Explain why the difference between actual
  overhead and overhead allocated to jobs using a
  predetermined rate is closed to Cost of Goods
  Sold or apportioned among Work in Process
  Inventory, Finished Goods Inventory, and Cost of
  Goods Sold.

5
Objectives (continued)

• Explain why the difference between actual
  overhead and overhead allocated to jobs using a
  predetermined rate is closed to Cost of Goods
  Sold or apportioned among Work in Process
  Inventory, Finished Goods Inventory, and Cost of
  Goods Sold.
• Discuss modern manufacturing practices and how
  they affect product costing.

6
Cost Classifications for Manufacturing Firms
Manufacturing Costs (product costs) all costs
associated with the production of goods.

• Direct Material primary materials directly
  traceable to the final product (the wood in a
  table)
• Direct Labor- labor costs directly traceable to
  the product (line workers)

7
Cost Classifications for Manufacturing Firms

• 3. Manufacturing Overhead-all other production
  costs including
• A. Indirect materials and supplies
• B. Indirect labor
• C. Depreciation on plant and factory equipment
• D. Factory utilities.

8
Cost Classifications for Manufacturing Firms
9
Non-manufacturing Costs
Non-manufacturing Costs (period costs) all costs
not associated with the production of goods.

• Selling Costs
• General and Administrative Costs

10
Product and Period Costs

• Product Costs and Period Costs are Synonymous
  with Manufacturing and Nonmanufacturing costs,
  respectively.

11
Product Cost Information in Financial Reporting
and Decision Making

• GAAP (Generally Accepted Accounting Principles)
  requires that inventory on balance sheets and
  cost of goods sold on income statements be
  disclosed (reported) using Full Cost information.

12
Balance Sheet Presentation of Product Costs

• Raw Materials Inventory.- account contains direct
  and indirect materials
• Work in Process Inventory.- account contains
  costs incurred on those jobs not finished at the
  end of the reporting period
• Finished Goods Inventory.account includes costs
  for completed products not yet sold.

13
Flow of Product Costs in Accounts
Product costs flow from the Direct Materials,
Direct Labor and Manufacturing Overhead through
Work in Process to Finished Goods Inventory and
finally to Cost of Goods Sold.
14
Flow of Product Costs in Accounts
15
Income Statement Presentation of Product Costs
When finished goods are sold they are moved from
Finished Goods to Cost of Goods Sold.
16
Cost of Goods Manufactured

• Cost of Goods Manufactured includes all costs of
  goods completed during the period.

17
Cost of Goods Sold
Cost of Goods Sold
18
Types of Costing Systems
Companies use product costing systems to measure
and record the cost of manufactured products. Two
types

• Job-Order Costing System. used when a firm
  manufactures goods to a customers unique
  requirements. (Construction Co., Printing Co.)
• Process Costing System.- firm manufactures large
  quantities of a homogeneous product. Costs are
  accumulated by process (dept.) and unit costs are
  derived by dividing total costs by total units
  produced. (Chemical Co., Paint Co.

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Overview of Job Costs and Financial Statement
Accounts
In a Job-Order Costing System, the three product
costs (materials, labor and overhead) are related
to specific jobs.
20
Relating Product Costs to Jobs
21
Job Costs and Financial Statement Accounts
22
Flow of Costs in a Job-Order Costing System
23
Job-Order Costing System
In Job-Order Costing Systems the primary document
(likely electronic) is called a Job-Cost Sheet.
It is used to accumulate or capture the following
costs

• Direct Material Cost.
• Direct Labor Cost.
• Manufacturing Overhead.

24
Direct Materials
A Materials Requisition Form is used to request
the release of materials from stores inventory
into production.
25
Direct Materials
26
Direct Labor
Time Tickets are used to associate Direct Labor
with specific Jobs.
27
Direct Labor
28
Manufacturing Overhead
Unlike Direct Costs (Direct Materials and Direct
Labor) Manufacturing Overhead is indirectly
traced (allocated) to jobs using an Overhead
Allocation Rate.
29
Manufacturing Overhead
30
Assigning Costs to Jobs A Summary
31
Relation Between the Costs of Jobs and the Flow
of Costs
32
Allocating Overhead to Jobs A Closer Look

• Overhead Allocation Rates
• Overhead Allocation Base
• Activity Based Costing (ABC) and Multiple
  Overhead Rates

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Overhead Allocation Rate
Overhead Allocation Rate Overhead
Cost Allocation Base
34
Overhead Allocation Base

• Alternative bases include
• Direct labor hours
• Direct labor cost
• Machine hours
• Direct material cost.

35
Activity-Based Costing (ABC) and Multiple
Overhead Rates

• ABC is a method of assigning overhead based on a
  number of different allocation bases (rather than
  just one). ABC groups overhead costs into Cost
  Pools.

36
Predetermined Overhead Rates

• Predetermined Overhead Rate
• Estimate Total Overhead Cost
• Estimated Level of Allocation Base

37
Eliminating Overapplied or Underapplied Overhead

• Actual costs are accumulated in the Manufacturing
  Overhead Account and
• Overhead is applied to production based on the
  Predetermined Overhead Rate.

38
Eliminating Overapplied or Underapplied Overhead
(continued)

• Unless estimates are perfect, there will be
  either a debit or credit balance in the
  Manufacturing Overhead account.
• If actual gt applied, a debit balance, results,
  thus under-applied overhead.
• If actual lt applied a credit balance, results,
  thus over-applied overhead.

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Eliminating Overapplied or Underapplied Overhead
(continued)

• Manufacturing Overhead should have a zero balance
  at year-end
• Often closed it out to Cost of Goods Sold.
• Theoretically it should be allocated between Work
  in Process, Finished Goods and Cost of Goods Sold.

40
Job-Order Costing for Service Companies

• Job-Order Costing is also used by service
  companies.
• Examples include hospitals (patients) and
  automobile repair firms.

41
Modern Manufacturing Practices and Product
Costing Systems

• Just-in-Time (JIT) Production.
• Computer-Controlled Manufacturing.
• Total Quality Management (TQM).

42
Quick Review Question 1

• Which of the following is a period cost?
• Raw materials costs.
• Manufacturing plant maintenance.
• Wages for production line workers.
• Salary for the vice president of finance.

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Quick Review Answer 1

• Which of the following is a period cost?
• Raw materials costs.
• Manufacturing plant maintenance.
• Wages for production line workers.
• Salary for the vice president of finance.

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Quick Review Question 2

• Which of the following is a direct materials
  cost?
• Steel for a ship builder.
• Production supervisor salary for an auto
  manufacturer.
• Factory rent.
• Pocket protector for company accountant.

45
Quick Review Answer 2

• Which of the following is a direct materials
  cost?
• Steel for a ship builder.
• Production supervisor salary for an auto
  manufacturer.
• Factory rent.
• Pocket protector for company accountant.

46
Quick Review Question 3

• Beginning work-in-process plus total
  manufacturing costs minus ending work-in-process
  equals
• Cost of materials used.
• Finished goods inventory.
• Cost of goods sold.
• Cost of goods manufactured.

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Quick Review Answer 3

• Beginning work-in-process plus total
  manufacturing costs minus ending work-in-process
  equals
• Cost of materials used.
• Finished goods inventory.
• Cost of goods sold.
• Cost of goods manufactured.

48
Quick Review Question 4

• Cost of Goods Sold is 200,000, beginning
  Finished Goods is 50,000, ending Finished Goods
  is 100,000 and ending Work in Process is
  10,000. What is the Cost of Goods Manufactured?
• 100,000
• 250,000
• 50,000
• 150,000

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Cost of Goods Sold
Cost of Goods Sold
50
Quick Review Answer 4

• Cost of Goods Sold is 200,000, beginning
  Finished Goods is 50,000, ending Finished Goods
  is 100,000 and ending Work in Process is
  10,000. What is the Cost of Goods Manufactured?
• 100,000
• 250,000
• 50,000
• 150,000