Accounting 292: Chapter 3 Cost Flows and External Reporting

Recording Applied Manufacturing Overhead Costs T-Account

-If actual and applied manufacturing overhead are not equal, a year-end adjustment is required

Accounting for Nonmanufacturing Costs

-Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples: -Salary expense of employees in marketing and sales -Advertising expense

Example Problem of Overapplied or Underapplied Overhead

-PearCo's actual overhead for the year was $650,000 with a total of 170,000 direct labor-hours worked on jobs. -PearCo's predetermined overhead rate is $4.00 per direct labor-hour. Overhead Applied during the period: Applied Overhead = POHR × Actual Direct Labor-Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo has overapplied overhead for the year by $30,000 Assume: Ending Work in Process $68,000, Ending Finished Goods Inventory $204,000, and Cost of Goods Sold $408,000 -Ending Work in Process = $68,000 / $680,000 = 10% -Ending Finished Goods Inventory = $204,000 / $680,000 = 30% -Cost of Goods Sold = $408,000 / $680,000 = 60% -Ending Work in Process= 10% x 30,000 = $3,000 -Ending Finished Goods Inventory = 30% x 30,000 = $9,000 -Cost of Goods Sold = 60% x 30,000 = $18,000

Finished Goods

-consist of completed units of product that have not been sold to customers

Work in Process

-consists of units of production that are only partially complete and will require further work before they are ready for sale to customers.

Raw Materials

-include any materials that go into the final product.

Cost of Goods Manufactured

-includes the manufacturing costs associated with the goods that were finished during the period.

Manufacturing Overhead

-is a "clearing account" that always has a beginning and ending balance of zero -Difference between the actual overhead cost and the amount of overhead applied to production is the underapplied or overapplied overhead. Manufacturing Overhead is used to record: -All actual overhead costs -The amount of manufacturing overhead applied to production using the predetermined overhead rate

Normal Costing

-is a costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Job Order Costing

-is a costing system used in situations where many different products, jobs, or services are produced each period

Predetermined Overhead Rate (POHR)

-is a rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. Equation: POHR = (Estimated Total Manufacturing Cost) / (Estimated Total Amount of Activity Level)

Overhead Application

-is the process of assigning overhead costs to specific jobs Equation: Overhead Applied = (Predetermined Overhead Rate) x (Actual Amount of Activity Level)

What do you do with a remaining balance in the Manufacturing Overhead Account (whether overapplied or underapplied) ?

1. Close to Cost of Goods Sold 2.Allocate proportionally between Work in Process, Finished Goods, and Cost of Goods Sold

What are the 3 Types of Costs that the Schedules of Cost of Goods Manufactured and Cost of Goods Sold contain?

1.Direct materials 2.Direct labor 3.Manufacturing overhead

What do the Schedules of Cost of Goods Manufactured and Cost of Goods Sold calculate?

1.The cost of raw material and direct labor used in production 2.The amount of manufacturing overhead applied to production 3.The manufacturing costs associated with goods that were finished during the period

Transferring Finished Goods to the Cost of Goods Sold Journal Entry

Accounts Receivable (debt) Sales (credit) Cost of Goods Sold (debt) Finished Goods (credit)

Balance Sheet Equation

Assets =Liabilities + Stockholders' Equity

Concept Check 4 Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?

Beg. Finished Goods Inventory $130,000 + Cost of Goods Manufactured $760,000 = Cost of Goods Available $890,000 - Ending Finished Goods Inventory $150,000 = Cost of Goods Sold $740,000

Concept Check 1 Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

Beg. raw materials $ 32,000 + Raw materials purchased $276,000 = Raw materials available for use in production $ 308,000 - Ending raw materials inventory $28,000 = Raw materials used in production $ 280,000

Retained Earning Equation

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Cost of Goods Sold Schedule

Beginning finished goods inventory (+) Cost of goods manufactured (=) Cost of goods available for sale (-) Ending finished goods inventory (=) Unadjusted cost of goods sold (+) Underapplied or (-) Overapplied Overhead (=) Adjusted Cost of Goods Sold

Concept Check 4 Beginning work in process was $125,000. Manufacturing costs added to production for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?

Beginning work in process inventory $ 125,000 + Manufacturing costs incurred for the period $835,000 = Total work in process during the period $960,000 - Ending work in process inventory $200,000 = Cost of goods manufactured $760,000

Cost of Goods Manufactured Schedule

Direct Material: Beginning raw materials inventory (+) Purchases of raw materials = Total Raw materials available (-) Ending raw materials inventory = Raw materials used in production (-) Indirect materials included in manufacturing overhead (+) Direct Labor (+) Manufacturing Overhead applied to work in process = Total Manufacturing Costs (+) Beginning work in process inventory (-) Ending work in process inventory (=) Cost of Goods Manufactured

Concept Check 2 Direct materials used in production totaled $280,000. Direct labor was $375,000, and $180,000 of manufacturing overhead was added to production for the month. What were total manufacturing costs incurred for the month?

Direct Materials $280,000 + Direct Labor $375,000 + Mfg. Overhead Applied $180,000 = Mfg. Costs Incurred for the Month $835,000

Transferring Completed Jobs from Work in Process to Finished Goods Journal Entry

Finished Goods (debt) Work in Process (credit)

Product Cost Flows Part 5: Cost of Goods Sold

Finished Goods Equations: -Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale -Cost of goods available for sale - Ending finished goods inventory = Cost of goods sold

Product Cost Flows Part 2: Total Manufacturing Costs

Manufacturing Costs Equation: Direct materials + Direct labor + Manufacturing Overhead Applied = Total manufacturing costs

Recording Actual Manufacturing Overhead Costs Journal Entry

Manufacturing Overhead (debt) Accounts Payable (credit) Can also credit other accounts such as Cash

Disposition of Overapplied and Underapplied Overhead Journal Entries

Manufacturing Overhead (debt) Work in Process Inventory (credit) Finished Goods Inventory (credit) Cost of Goods Sold (credit) or Overapplied Manufacturing Overhead (debt) Cost of Goods Sold (credit) Underapplied Cost of Goods Sold (debt) Manufacturing Overhead (credit)

Purchase of Raw Materials Journal Entry

Raw Materials (debt) Account Payable (credit)

Product Cost Flows Part 1: Raw Materials

Raw Materials Equations: -Beginning raw materials inventory + Raw materials purchased = Raw materials available -Raw materials available - Ending raw materials inventory = Raw materials used in production Raw Materials used in production ---> Direct Materials

Nonmanufacturing Costs Journal Entry

Salaries Expense Journal Entry: Salaries Expense (debt) Salaries and Wages Payable (credit) Depreciation of Equipment Journal Entry: Depreciation Expense (debt) Accumulated Depreciation (credit) Advertising Expense Journal Entry: Advertising Expense (debt) Other Selling and Administrative Expense (debt) Accounts Payable or Cash (credit)

Disposition of Overapplied and Underapplied Overhead T-Account

Uses Example of PearCo's overapplied overhead of $30,000 ($280,000 - $250,000)

Recording Applied Manufacturing Overhead Costs Journal Entry

Work in Process (debt) Manufacturing Overhead (credit)

Issue of Direct and Indirect Materials Journal Entry

Work in Process (debt) Manufacturing Overhead (debt) Raw Materials (credit)

Product Cost Flows Part 3: Total Work in Process

Work in Process Equation: Beginning work in process inventory + Total manufacturing costs = Total Work in Process for the period

Product Cost Flows Part 4: Cost of Goods Manufactured

Work in Process Equation: Total work in process for the period - Ending work in process inventory = Cost of goods manufactured

Recording Labor Costs Journal Entry

Work in process (debt) Manufacturing Overhead Cost (debt) Salaries and Wages Payable (credit)

What is underapplied overhead?

__________ overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. -debt balance in manufacturing overhead -will cause net operating income to decrease

What is overapplied overhead?

___________ overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period. -credit balance in manufacturing overhead -will cause net operating income to increase

Transferring Completed Jobs from Work in Process to Finished Goods T-Account

cost of goods manufactured

Absorption Costing

is a costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

Job Cost Sheet

is a form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job.

Allocation Base

is a measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects.