Managerial accounting: Chapter 02 IP 1,2,3 and class notes

Predetermined overhead rates

=Estimated total manufacturing overhead cost / Estimated total amount of the allocation base Computed at beginning of a period Estimated total manufacturing overhead cost -INCLUDES budgeting amounts for items like --depreciation --utilities --indirect labor --indirect materials. Allocation base -A measure such as direct labor-hours or machine-hours that is used to assign overhead costs to jobs. -A company should choose an allocation base that is common to all of its jobs and, ideally, it should choose an allocation base that actually causes the incurrence of overhead costs. In other words, the allocation base should be a cost driver that reflects how jobs consume overhead resources Cost Driver -a factor, such as machine-hours, beds occupied, computer time, or flight hours, that CAUSES overhead costs. EX: Vanilla bicycles are handcrafted, so it is likely that more overhead costs like utilities and indirect materials are incurred when more direct labor is used. Therefore, direct labor would be an appropriate cost driver.

Overhead applied to a single job

=POHR (predetermined overhead rate) * Amount of the allocation base incurred by the job EX: $12 per DLH (direct labor hour) * 150 Direct labor hours (for the job)= $1800 overhead applied

overhead rate: why do we predetermine instead of using previous ones

The overhead rate would go up in the fall and winter, and down in the spring and summer. The ACTUAL overhead rate may not be known until the end of the year, or in general long after the jobs have been completed. For these reasons, most companies use predetermined overhead rates rather than actual overhead rates in their cost accounting systems.

Overhead Application

The process of assigning overhead cost to jobs

manufacturing overhead in work in process

APPLIED overhead= POR X actual driver

Manufactering overhead

An account that is the ACTUAL manufactering overhead costs. At the end of the year

Flow of costs for a COST ORDER costing system

Costs are broken up into product costs and period costs RAW MATERIAL purchases -Directly recorded into raw material inventory When these raw materials are used in production, their costs are transferred to the Work in Process inventory account as direct materials. Work in Process consists of units of product that are only partially complete and will require further work before they are ready for sale. Direct labor costs and manufacturing overhead costs are added directly to Work in Process. When goods are completed, their costs are transferred from Work in Process to Finished Goods inventory. Finished goods consist of completed units of product that have not yet been sold to customers. The amount transferred from Work in Process to Finished Goods is referred to as the cost of goods manufactured. As goods are sold, their costs are transferred from Finished Goods to Cost of Goods Sold. At this point, the various costs required to make the product are finally recorded as an expense. Until that point, these costs are in the three inventory accounts on the balance sheet (Raw material inventory, work in process, or finished goods). INDIRECT MATERIALS do not go to work in process. only DIRECT materials do.

Computation of Unit Costs: Total Product cost and Unit Product Cost

Direct materials + Direct Labor + Manufacturing overhead = Total Product Cost Total product cost / # of units = Unit product cost Unit product cost information is used for valuing unsold units in ending inventory and for determining cost of goods sold.

Manufacturing overhead T account, over or under applieid

If remaining balance is under the "over" side (right side of the T account) it is over applied.

pre determined overhead rates: steps

Step 1: Estimate the total amount of the allocation base that is required for next period's estimated level of production (the denominator) Step 2: Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. Step 3: Use the cost formula Y = a + bX to estimate the total manufacturing overhead cost for the coming period (the numerator). In this equation, Y equals the estimated total manufacturing overhead cost. A equals the estimated total fixed manufacturing overhead cost, b equals the estimated variable manufacturing overhead cost per unit of the allocation base, and X equals the estimated total amount of the allocation base. 4: Compute the predetermined overhead rate by dividing the numerator by the denominator.

Selling and administrative expenses

These are Period costs and go directly to the income statement Ex: Debit salaries expense 1000 credit salaries and wages payable 1000 Debit Depreciation exp 1000 credit acc depreciation 1000 BE CAREFUL Depreciation of factory equipment goes into MOH EX: Debit MOH 20000 credit Acc Dep 20000 Deb adv. expense 15000 Deb other selling and administrative expense 5000 cred accounts payable 20000 All these selling and administrative expenses have no effect on product cost.

Finished goods

When a good is finished, the costs of work in process are transferred from the work in process account to the finished goods account The sum of all amounts transferred between these two accounts represents the cost of goods manufactured for the period increase finished goods and decrease work in process Debit finished goods 50000 credit work in process 50000

Job

job refers to a customized product or service output provided by a company each customer order is a "job"

Manufacturing overhead costs: NON direct materials and direct labor are manufacturing overhead

All manufacturing costs other than direct materials and direct labor are classified as manufacturing overhead costs. These costs are entered directly into the Manufacturing Overhead account as they are incurred. Only actual overhead costs go to manufacturing overhead account (I think). -but for WORK IN PROCESS, the predetermined overhead rate is used. Indirect materials INCREASE (Debit) manufacturing overhead, and credit the account they came from (salaries, etc.) using the Pre determined overhead rate increase, debit work in process decrease, credit MOH (manufacturing overhead) MOH T account -ACTUAL costs on the debit side -POR (predetermined overhead rate) on the credit side Because POR is only an estimate, the overhead cost applied will be more or less than the actual occurred. MOH account acts as a clearing account

Job-ordering costing systems

Companies use job-order costing systems to accumulate the costs incurred to produce these individual jobs. -Direct material and Direct labor can be directly linked to a specific job. -Manufacturing overhead cannot (which is why it is classified as such). They are indirect costs to the product.

Schedule of cost of goods manufactered

Contains direct materials, direct labor, and manufacturing overhead. summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods.

When goods are sold

Cost moves from finished goods account to cost of goods sold account BUT record the sale and revenue first. EX Deb accounts receivable 18000 cred sales 18000 THEN Deb cost of goods sold 10000 credit finished goods 10000 MUST USE per unit cost if the whole job isn't sold at once EX if each thing costs 100 per unit (Total finished good cost / total units produced I think) and you have a total of 200 units, if all the units sold at once you would deb finished goods and credit cost of goods sold for 20000, but if you only sold 100 units, then it would be 10000 (100 units * 100 price per unit)

the different overhead things

Estimated overhead rate -used to create POR -POR = est overhead / est allocation base (or driver) 2) Actual overhead -Debits to manufacturing overhead account used to compare to applied OH to determine over/under applied 3) applied overhead -OH cost that flows through inventory to cost of goods sold -Credit side of Manufacturing overhead T account -Applied OH = POR X actual allocation base (or driver) BIGGEST MISTAKE actual - applied is correct, estimated overhead (not the rate, but the actual estimated overhead overall) - actual is not correct. THINK apples to apples (A to A, Actual - Applied) 66% of first exam Journal entries and costs is a 58% ??? Schedule of cost of goods manufactured the credit side of work in process T account is cost of goods manufactured START with direct materials (all from info on worksheet we did in class a couple days ago) Direct materials Beg raw materials inv 20000 Add: Purchases 410000 Materials available for use 430000 Less: end raw materials inv. 50000 raw materials used in production 380000 less: indirect materials 20000 360000 (put total on same line) Direct labor 75000 manufacturing overhead (applied(will always be applied for this schedule)) 480000 total manufactuing cost (add direct material, direct labor, and manf. OH) 915000 Add: beg work in process inv 15000 Subtotal 930000 Less: ending work in process Inv 30000 Cost of goods manuf. 900000

Allocation base: choosing a base

Ideally, the allocation base in the predetermined overhead rate should drive the overhead cost. A cost driver is a factor, such as machine-hours, beds occupied, or flight-hours, that causes overhead costs. In the past, direct labor accounted for up to 60% of the cost of many products, with overhead cost making up only a portion of the remainder. This situation has changed for two reasons. -First, sophisticated automated equipment (charged to overhead) has taken over functions that used to be performed by direct labor workers. -Second, products are becoming more sophisticated and complex and are changed more frequently. This increases the need for highly skilled indirect workers such as engineers. As a result of these two trends, direct labor has decreased relative to overhead as a component of product costs.