ACCT 2102 - Ch. 3

Product Cost Flows: Work in Process

Beginning Work in Process Inventory + Total Manufacturing Costs = Total Work in Process for the period - Ending Work in Process Inventory = Cost of Goods Manufactured

Job Costing vs. Process Costing: Process Costing

A single product is produced either on a or for long periods of time All units are identical Costs are accumulated by department The departmental production report is the key document showing the accumulation and disposition of costs Unit cost are computed by department on production reports

Overhead Actual vs. Applied

Actual (left/debit), Applied (right/credit) Underapplied (left), Overapplied (right)

Job Order vs. Process Costing: An Elmer's glue factory

Process

Job Order vs. Process Costing: An Exxon oil refinery

Process

Underapplied Overhead

exists when the amount of overhead applied to hobs during the period using the predetermined overhead rate is LESS than the total amount of overhead actually incurred during the period. Increase COGS or WIP, Finished Goods, COGS

Overapplied 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. Decrease COGS or WIP, Finished Goods, COGS

Job Order vs. Process Costing: A custom home builder

Job

Job Order vs. Process Costing: A law office

Job

Job Order vs. Process Costing: A shop that customizes vans

Job

Job Order vs. Process Costing: A textbook publisher

Job

Job Order vs. Process Costing: An advertising agency

Job

Job Order vs. Process Costing: An auto repair shop

Job

Cost Flow Journal Entries: During the month the company incurred the following actual overhead costs: 1. Utilities (heat, water, and power) $1700 2. Depreciation of factory equipment $2900 3. Property taxes payable on factory $1000

Manufacturing Overhead $5600 Utilities Payable $1700 Accumulated Depreciation $2900 Property Tax Payable $1000

Job-Order Costing Allocation Base (Cost Drive)

Manufacturing overhead is applied to job that are in process. An allocation base, such as direct labor hours, direct materials, or machine hours, is used to assign manufacturing overhead to individual jobs.

Job Costing vs. Process Costing: Job Costing

Many different jobs are worked on during each period, with each continuous basis having different production requirements Costs are accumulated by job The job cost sheet is the key document for accumulating costs Unit costs are computed by job on the job cost sheet

Flow of Costs: Costs

Material Purchased, Direct Labor, Manufacturing Overhead, Selling & Administrative (period)

Job Order vs. Process Costing: A Firestone tire manufacturing plant

Process

Job Order vs. Process Costing: A Scott paper mill

Process

Job Order vs. Process Costing: A facility that processes orange juice

Process

Job Order vs. Process Costing: A manufacturer of chemicals

Process

Cost Flow Journal Entries: On October 1, Smith Corporation has $5000 in raw materials on hand. During the month, the company purchased $45,000 in raw materials

Raw Materials 45,000 Accounts Payable 45,000

Flow of Costs: Balance Sheet Inventories

Raw Materials, Work in Process, Finished Goods

Cost Flow Journal Entries: During the mont, Smith incurred by has not paid sales salaries of $2000 and advertising expense of $750

Salaries Expense 2000 Advertising Expense 750 Salaries Payable 2000 Accounts Payable 750

Flow of Documents in a Job-Order Costing System

Sales Order --> Production Order -> Materials Requisition OR Direct Labor Time Ticket OR Predetermined Overhead Rate --> Job Cost Sheet

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? a. $20,000 b. $740,000 c. $780,000 d. $760,000

b. $740,000 --- 130,000+760,000-150,000 = 740,000

Direct Materials used in production totaled $280,00. 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? a. $555,000 b. $835,000 c. $655,000 d. Cannot be determined

b. $835,000 --- 280,000+375,000+180,000 = $835,000

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. a. $276,000 b. $272,000 c. $280,000 d. $2,000

c. $280,000 --- 32,000+276,000-28,000 = 280,000

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? a. $1,160,000 b. $910,000 c. $760,000 d. Cannot be determined

c. $760,000 --- 125,000+835,000-200,000 = 760,000

Raw Materials

include any materials that go into the final product

Cost of Good Manufactured

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

Predetermined Overhead Rate (POHR)

is used to apply overhead to jobs is determined before the period begins. POHR = (estimated total manufacturing overhead cots for the coming period)/(estimated total units in the allocation base for the coming period)

Examples of companies that would use job-order costing include:

1. Boeing 2. Bechtel International 3. Walt Disney Studios

Examples of companies that would use process costing include:

1. Coca Cola 2. Exxon Mobil 3. Intel

We use allocation base because:

1. It is impossible or difficult to trace overhead costs to particular jobs. 2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager's salary . 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Flow of Costs: Income Statement Expenses

Cost of Goods Sold, Selling & Administrative (period)

Product Cost Flows: Manufacturing Costs

Direct Materials (Raw materials used in production) + Direct Labor + Manufacturing Overhead (applied) = Total Manufacturing Costs

True or False: Job-Order costing is used in manufacturing companies and process costing is used in service companies

FALSE

Cost Flow Journal Entries: During the period, Smith completed jobs with a total cost of $27000

Finished Goods 27000 Work in Process 27000

The need for a POHR

Using a predetermined rate makes it possible to estimate total job costs sooner Actual overhead for the period is not known until the end of the period. Overhead consists of costs that are either difficult or impossible to trace to particular jobs

Cost Flow Journal Entries: On October 3, Smith had $43,000 in raw materials requisitioned from the storeroom for use in production. These raw materials included $40,000 of direct and $3000 of indirect materials

Work in Process $40,000 Manufacturing Overhead $3,000 Raw Materials $43,000

Cost Flow Journal Entries: Smith uses a predetermined overhead rate of $3.50 per machine-hour. During the month, 5000 machine hours were worked on jobs

Work in Process 17,500 Manufacturing Overhead 17,500

Finished goods

consist of complete units of product that have not been sold to customers.

Computing Predetermined Overhead Rates

1. Estimate total amount of the allocation base (the demoniator) that will be required for next perio'd estimated level of production. 2. Estimate the total fixed manufcturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation. 3. Use the following equation to estimate the total amount of manufacturing overhead: Y = a + bX Y-total manufacturing overhead a-the estimated total fixed manufacturing overhead b-the estimated variable manufacturing overhead cost per unit of the allocation base X-the estimated total amount of the allocation base 4. Compute the POHR

Job-order costing systems are used when:

1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Cost Flow Journal Entries: Smith sold the $27000 in Finished Goods Inventory to customers for $43500 on account

Accounts Receivable 43,500 Sales 43,500 Cost of Goods Sold 27000 Finished Goods 27000

Product Cost Flows: Finished Goods

Beginning Finished Goods Inventory + Cost of Goods Manufactured = Cost of Goods Available for Sale - Ending Finished Goods Inventory = Cost of Goods Sold

Product Cost Flows: Raw Materials

Beginning Raw Materials Inventory + Raw Materials Purchased = Raw Materials Available for use in Production - Ending Raw MAterials Inventory = Raw Materials used in Production

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

Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be the recorded cost of job WR53? a. $200 b. $350 c. $380 d. $730

d. $730 ---- POHR = $760,000/20000 = $38 Direct Materials = $200 Direct Labor = $150 (15*$10) MOH = $380 ($38*10) Total Cost = $730