Management Accounting

calculating cost per equivalent unit=

(cost of beginning tip + cost added during the period)/ (equivalent units of production)

Direct Labor

- salaries, wages, and fringe benefits for personnel that work DIRECTLY on manufactured product ex wages paid to automobile assembly workers

Direct Costs

-costs that can be easily and conveniently traced to a unit of product or other cost object ex: direct material and direct labor

Cost Classifications for Decision Making

-differential costs and revenues -opportunity costs -sunk costs

the 3 basic types of PRODUCT costs are

-direct material -direct labor -manufacturing overhead (these three costs form the product) GO ON BALANCE SHEET in inventory accounts

Manufacturing Overhead

-includes all manufacturing costs except direct material and direct labor. these cannot be easily traced to finished products -indirect materials -indirect labor -other manufacturing costs

Direct Materials

-raw material added to the production process -easily traced to the finished product ex a radio installed in an automobile

other manufacturing costs include

-utilities -insurance -property tax -depreciation of equipment

Transfer or product costs

-when direct materials are used in production, their costs are transferred from raw materials to work in process -direct labor and manufacturing overhead costs are added to work in process to convert directly to finished goods -once units of product are completed their costs are transferred from work in process to finished goods -when a manufacturer sells its finished goods to customers, the costs are transferred from finished goods go cost of goods sold

In a small manufacturing facility, one welder is needed for every 200 hours of machine-hours or fewer in a month. The welder is paid a monthly salary of $2,500. If the total monthly requirement is 1,300 machine-hours, the total salaried employee expense is

1,300/200=6.5 works but you can't have half a worker so 7 x 2500= 17500

a job order costing system is used when

1. many products are produced each period 2. products are manufactured to order 3. unique nature of each order requires tracing or allocating costs to each job ex; Boeing- manufacturing airplanes Bechtel- building large scale construction projects disney studios- producing films manufacturing overhead in allocated to all jobs rather than directly traced to one

For the current period Joe started 15,000 units and completed 10,000 units leaving 5000 (30% complete). How many equivalent units of production did Joe have

11500 10,000 + (5000x .3)= 11500

4. Beginning finished goods inventory was 130,000. the cost of goods manufactured was 760,000. and the ending finished goods inventory was 150,000. What was the cost of goods sold for the month?

130,000+760,000-150,000= 740,000

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

280,000+375,000+180,000= 835,000

1. beginning raw materials 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 was is the cost of direct material used?

32,000+276,000=308,000 308,000-28,000= 280,000

allocating Under or Over applied MOH ex. lets assume the overhead applied is 68,000, the ending balances in finished goods in 204,000, and cost of goods sold is 408,000, so the total value of those accounts is 680,000. calculate allocation %'s

68,000/680,000= 10% 204,00/680,000= 30% 408,000/680,000=60%

3. 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 WIP inventory at the end of the month. What was the cost of goods manufactured during the month?

835,000+125,000-200,000= 760,000 cost of goods manufactured

Cyber Devices manufactures PCTV products that enable people to watch television content on their computers. It sells its product to retailers for $50. A tuner component that goes into each of these devices costs $5 to acquire. The total variable cost at an activity level of 1,000 units equals

= $5,000 1,000x5 to get variable cost because what you sell the product for does not help determine cost

Absorption Costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.

Manufacturing overhead is applied based on the

ACTUAL level of activity (amount of driver) not estimated POHR * Actual Amt of driver

assume 750 of the 1,000 called medallions in Job A were shipped to customers by the end of the month for total sales revenue of 225,000. Because 1,000 units were produced and the total cost of the job from the job cost sheet was 158,000 the unit product cost was $158

AR-225,000 Sales-------225,000 Cost of goods sold- 118,500 finished goods-----118,500

administrative costs

All executive, organizational, and clerical costs. can be either direct or indirect

allocation base

An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. -difficult or impossible to trace overhead costs to certain job -consists of many different items -many types of manufacturing overhead costs are fixed even though output fluctuates during the period

raw material used=

Beg raw material + purchases of raw material= raw material available for use - ending raw material gives you raw material used

Two types of fixed costs

Committed- long term costs that cannot be reduced significantly in the short term (factory depreciation) discretionary- costs that may be altered in the short term by current managerial decisions (advertising or R&D)

Indirect costs

Costs that cannot be easily and accurately traced to a cost object. ex. manufacturing overhead

Conversion costs

Direct Labor + Manufacturing Overhead

Prime Costs

Direct Materials + Direct Labor

Which of the following statements about using a plantwide overhead rate based on direct labor is correct?

It is often overly simplistic and incorrect to assume that direct labor-hours is a company's only manufacturing overhead cost driver.

Job order costing vs process costing

JO - many jobs are worked on during the period (custom homes) - costs are accumulated by individual jobs - unit costs are computed by Job on the job cost sheet PC - a single product is produced either on a continuous basis or for long periods of time, all units of the product are IDENTICAL (coke) -costs are accumulated by department -unit costs are compute by department

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 recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.

POHR=760,000/20,000= 38 direct materials= 200 direct labor = ($15x10)=150 overhead=(38x10)=380 TC= 730

Contribution Margin

Sales - Variable Costs. note; cost of good sold is a variable cost

under/over applied overhead

The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period undersupplied overhead increases cost of goods sold and decreases net. operating income over applied overhead decreases cost of goods sold and increases net operating income

equivalent units of production always equals

Units completed and transferred + Equivalent units remaining in work in process notice; don't worry about beginning tip because it is included in started units

estimating manufacturing overhead

Y=a+bX y= estimated total manufacturing overhead cost a= estimated total fixed manufacturing overhead cost b= estimated Variable manufacturing overhead cost per unit of the allocation base X= estimated total amount of the allocation base

Hunter products computes its predetermined overhead rate annually on the basis of direct labor hours. at the beginning of the year its estimated that 28,000 direct labor hours would be required for the periods estimated level of production. The company also estimates 126,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturings of $6 per direct labor hour. Hunter actual manufacturing overhead for the year was 307800 and direct labor was 29,500 hours. What was the predetermined overhead rate?

Y=a+bX y=126,000+(6)(28,000)= 294,000 294,000/ 28000= 10.50 per direct labor hour

fixed costs

a fixed cost does NOT change in TOTAL as the level of activity changes within the relevant range so if activity increases by 20% TOTAL fixed costs still remain the same = NO CHANGE However the fixed costs per unit DOES CHANGE if expressed on a par unit basis, the average fixed cost per unit varies inversely with changes in activity (horizontal line graph) make more -> the cheaper per unit it costs

activity based (aka cost driver )

a measure of what causes the incurrence of a variable cost ex units produced, miles driven, machine hours, units produced

Predetermined Overhead Rate

a predetermined overhead rate is used to apply overhead to jobs, which is determined before the period begins POH=(estimated total manufacturing overhead cost)/ (estimated total activity in the allocation base) the denominator in this case is the price driver why do we use POHR? timing, because actual overhead isn't known until the end of the period

Garret uses a predetermined overhead rate of 42.45 per direct labor hour. This rate was based on a cost formula that estimated 7,216,500 of total manufacturing overhead for an estimated level of 170,000 direct labor hours. the actual total manufacturing overhead costs of 7,110,375 and 165,000 direct labor hours. determine the manufacturing overhead that would have been applied to all jobs during the period

actual direct labor hours 165000 x predetermined overhead rate 42.45= applied manufacturing overhead of 7,004,250

Activity Based Costing

allocation of overhead to MULTIPLE jobs based on their percentage of activities

processing department

are any unit in an organization where materials, labor, or overhead are added to the product (activities performed in a processing department are performed uniformly and the output of the processing department must be homogeneous)

differential cost (aka incremental costs)

are the difference in costs between any two alternatives a difference in revenue between two alternatives is called differential revenue both are always relevant to decisions differential costs can be either fixed or variable

raw materials purchases, direct labor, and manufacturing overhead all flow into

balance sheet accounts raw material -> raw materials inventory manufacturing overhead and direct labor -> work in process account all of these flow into the FINISHED GOOD INVENTORY which then flows to the INCOME STATEMENT into cost of goods sold

while job order costing systems can accurately trace direct materials and direct labor costs to jobs, they often fail to accurately allocate the manufacturing overhead costs used during the production process to their prospective jobs. Why?

because it uses the wrong allocation base that do not drive the overhead costs note: if more than one cost driver can be identified, job cost accuracy is. improved by using multiple predetermined overhead rates

Cost of goods sold= note: cost of goods manufactured needs to be done before you can do cost of goods sold

beg finished goods+ cost of goods manufactured= goods available for sale goods available for sale- ending finished goods= unadjusted cost of goods sold Unadjusted cost of goods sold + undersupplied OR - over applied= adjusted cost of goods sold

cost of goods sold=

beginning FG +COGS - ending FG

variable costs

changes un TOTAL in direct proportion to a change in the level of activity -1:1 change -so if activity increases by 20% then TOTAL variable costs increase by 20 as well However the VARIABLE costs per unit does NOT change ex 1 for 100 and 4 for 400 (cost per unit is 100 no matter what)

Weighted Average Method

combines together units and costs from the prior and current periods the equivalent units of production from a department are the number of units transferred to the next department (or finished goods) plus the equivalent units in the departments ending work in process inventory

there are two methods for performing the unit cost computations the weighted average and FIFO. We will use weighted average which is

combining costs and outputs from the current and prior periods

finished goods

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

Work in Process (WIP)

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

mixed costs

contains both variable and fixed cost elements ex. cell phone plan because you pay a certain amount but when you go over you pay more y=a + bx where y= the total mixed cost a= total fixed cost (vertical intercept) b= variable cost per unit of activity (slope of the line) x= the level of activity

direct labor + manufacturing overhead=

conversion cost s

the transfer from work in process to finished goods is called

cost of goods manufactured

Indirect Labor

cost of personnel who do not work directly on product but who's services are necessary ex janitor

selling costs

costs necessary to secure the order and deliver the product. can be either direct or indirect ex. sales commission

Sunk costs are

costs that have already been incurred and cannot be changed now or in the future as such, sunk costs are irrelevant costs, which should be ignored when making decisions

if you over apply you should

credit and if you under apply you should debit

ex continued from previous problem: if we are allocating 30,000 of overapplied overhead, to would be closed out of the MOH accounts

debit MOH and (credit WIP, finished goods inventory, and cost of goods sold)

Job a was completed during April so you need to transfer Work in process account to finished goods. How is this done? note if a job was not completed it would remain in WIP

debit finished goods for 158,00 credit work in process for 158,00

Record Depreciation on a FACTORY you should

debit manufacturing overhead and credit accumulated depreciation

if you over apply manufacturing overhead you should

debit manufacturing overhead and then allocate either acrossed all or credit cost of goods sold

manufacturing overhead of 225,000 was applied to production using the company's predetermined overhead rates. record this by

debit work in process and credit manufacturing overhead

if MOH is undersupplied gross margin

decreases and if MOH is over applied gross margin increases

total manufacturing cost=

direct material+direct labor+ MOH applied

debit expense, credit asset to INCREASE

expense accounts reside on the income statement

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

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 situation where many different products, jobs, or services of a unique nature are produced each period

job costing sheet

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

allocation based

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

Predetermined Overhead Rate

is rate used to apply manufacturing overhead to jobs that is determined in advance for each period POHR= estimated total manufacturing overhead cost/ estimated total amount of the allocation base

Overhead application

is the process of assigning overhead costs to specific jobs using the formula: POHR x (the actual amount of allocation base incurred by the job)

if something occurs on FACTORY EQUIPMENT it is

manufacturing overhead

Indirect Materials

materials required for production that do not become part of products ex: drill bits used to fabricate metal materials that are apart of final product but insignificant in cost ex. glue, nails, screw

property tax associated with a company facility is a

non manufacturing cost

equivalent completed units=

number of partially completed units x percentage completion

manufacturing cots

prime and conversion

Product Costs

product costs includes all the costs that are involved in acquiring or making a product TOUCH PRODUCT OR PART OF PRODUCT , or depreciation on FACTORY equipment "attach a unit of product as it is purchased or manufactured and they stay attached to each unit of product as ling as it remains in inventory awaiting sale"

there are 3 inventory accounts

raw material: which includes any materials that go into the final product working in progress: which consists of units of product that are only partially complete and will require further work before they are ready for sale to customer finished goods:which consists of the completed units of product that have not yet been sold to customers

accounting for non manufacturing costs aka Period costs

recall non manufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred (PERIOD COSTS) ex. advertising expenses salary and wages expense for employees who work in a marketing, selling, or administrative capacity

Non-manufacturing costs

selling costs and administrative costs

Period Costs

selling expenses (marketing, sales personnel, sales commission) Administrative expenses (office supplies, office personnel, office depreciation) note: matching principle says ARE IN PERIOD INCURRED

when goods are sold, they must be transferred out of Finished Goods (bs account) and into

the Cost of Goods sold (income stat account)

Period costs like selling and administrative flow straight into

the income statement in the selling and administrative expense category

opportunity cost

the potential benefit that is given up when one alternative is selected over another not usually found in records but must be considered ex: college you don't work

fixed costs and relevant range ex

the relevant range of an activity pertains to fixed cost as well as variable costs. For example assume office space is available at a rental rate of 30,000 per year in increments of 1000 square feet fixed costs would increase in a STEP fashion at a rate of 30,000 for each additional 1000 square feet

Cost of goods manufactured=

total manufacturing costs+beginning work in process inventory-ending work in process inventory

Income Statement formats

traditional and contribution (management uses this more) used for internal planning and decision making tool 59 min on first video

total cost / number of units

unit production cost

Cost Classifications for Predicting Cost Behavior

variable costs fixed costs mixed costs

assume that rugers corporation predetermined overhead rate is $6 per machine hour and that during April 10,000 machine hours were worked for job A and 5,000 hours for job B. so how much would be applied to Work in Process

work in process ---- 90,000 manufacturing OH---------------------------90,000