Test 4 Ch 16-18
A predetermined overhead allocation rate is used to
Allocate estimated MOH to jobs
JE to adjust for overallocated overhead costs
Debit MOH credit COGS
journal entry for raw materials purchased on account
Debit Raw Materials Inventory Credit Accounts Payable This transaction increases assets (Raw Materials Inventory) and increases liabilities (Accts Payable)
A merchandising company calculates unit cost per item as:
Total Cost of Goods Sold / Total number of units sold
A service company calculates unit cost per service as:
Total Costs / Total number of services provided.
What happens when goods are transferred from WIP inventory to Finished Goods inventory
Total assets remain constant
allocated manufacturing overhead cost
predetermined overhead allocation rate x actual quantity of the allocation base used by each job
Indirect costs of service companies are allocated to jobs using the
predetermined overhead allocation rate.
The four steps in preparing a production cost report are:
1) summarize the flow of physical units, 2) compute the output in terms of equivalent units of production, 3) compute the cost per equivalent unit of production, and 4) assign costs to units completed and units in process.
Financial accounting and managerial accounting differ on the following 6 dimensions
1. primary users 2. purpose of information 3. focus and time dimension of the information 4. rules and restrictions 5. scope of information 6. behavioral
Job requires 500 in Dm 400 in DL 100 in MOH JE to record transfer of completed job?
1000 Deb to Fin Goods Inv Credit to WIP inv
2400 units are 50% complete in regards to DM, then the EUP for DM are
1200 units
Pred allocation rate is based on machine hours Comp has 120k overhead 1500 dl 10000 machine hours allocation rate?
120k/10000 12 per hour
JE to record 1500 DL 350 IL Debits?
1500 WIP 350 to MOH
DM = 30k DL = 70k MOH= 110k Beg wip = 20k End Wip = 25k COGM?
205k
Dm = 735k Line worker wages =510k Office rent = 26k Indirect materials =70k Period costs?
26k
Dm materials are 180k Wages paid to line workers are 145k Office rent is 33k Indirect Materials is 70k Product costs?
395k (180k+145k+70k)
If EUP for DM = 600 EUP for CC = 2000 DM = 6000 CC = 10000 What is the cost per EUP of DM and CC
6000/600 = 10 10000/2000 = 5
JE for issuance of 7k dm and 1k im from warehouse to production = debits to
7k to wip 1k to MOH
Business trends affecting Managerial accounting:
A) Shift toward a service economy B) Global competition - C) Time-based competition D) Total Quality Mgmt E) Triple Bottom Line
Job order costing
Accumulates costs by job - defined as production of single unit product or batch of unique products. Companies that manufacture unique products or provide specialized services (Accounting firms, music studios, health care providers, building contractors)
Process costing system
Accumulates costs of each process needed to complete the product over a period of time. Produce identical untis through series of steps - soft drink companies, medical equip manus
Not part of manufacturing overhead Indirect mat Indirect lab Property taxes on plant Advertising exp
Advertising exp
Org structure & manager roles
Board of directors = elected by stockholders - elect CEO CEO - responsible for developing a plan to meet the short term and long term strategic goals. +implementation of plans. Liaison between BOD and management VP's - responsible for specific area Either line or staff
Which company is most likely to use process costing?
Breakfast cereal company
The Income stmt for a Manufacturing business has
COGM with new components
Primary purpose of a cost accounting system
Calculate cogs for income stmt
What types of companies use job order costing systems:
Companies that manufacture batches of unique products or provide specialized services use job order costing systems. Some examples would be accounting firms, lawyers, building contractors, and custom furniture manufacturers.
What types of companies use process costing systems:
Companies that manufacture homogenous products, like soft drink bottlers, paint manufacturers, and gasoline refiners, use process costing systems.
Term used when DL and MOH are combined
Conversion cost
A manufacturing company calculates unit product cost as:
Cost of Goods Manufactured / Total number of units produced.
Explain the terms accumulate, assign, allocate, and adjust as they apply to job order costing.
Costs are accumulated in various accounts as they are incurred. Direct costs are assigned to individual jobs and recorded on the job cost records. Manufacturing overhead costs (indirect costs) are allocated to individual jobs based on a predetermined overhead allocation rate. The Manufacturing Overhead account is adjusted at the end of the period for the amount of underallocated or overallocated manufacturing overhead.
The cost of direct materials is transferred out of Raw Materials Inventory (credit) and is assigned to Work-in-Process Inventory (debit). The cost of indirect materials is transferred out of the Raw Materials Inventory account (credit) and is accumulated in the Manufacturing Overhead account (debit) - this will later be part of WIP inventory acct.
Deb WIP inv (Direct M) Deb MOG (Indirect M) Credit Raw mat inv
3 manufacturing costs used in job order costing
DL, DL, MOH
Job cost record includes
DM, DL, MOH
The journal entry for the completion of a job and impact on the Accounting Equation:
Deb Finished Goods Iv Credit Work-in-Process Inventory The effect on the accounting equation is that one asset (Finished Goods Inventory) is increased and another asset (Work-in-Process Inventory) is decreased.
journal entry for direct and indirect labor costs incurred.
Deb WIP inv (DL) Deb MOH (IL) Credit Wages Payable This transaction increases assets (Work-in-Process Inventory), increases liabilities (Wages Payable), and decreases equity (Manufacturing Overhead).
JE to record allocation of MOH to job =
Debit to WIP Credit to MOH
Beg DM +Purchases of DM +Freight In -Ending DM =
Direct Materials used
Direct vs indirect costs
Direct cost: cost that can be easily and cost-effectively traced to a cost object (anything which managers want a separate measurement of cost). Cost object can be a product, sales territory or dept. Direct costs = materials used like processor, screen and case. Indirect cost: cost that CANNOT be easily or cost-effectively traced to a cost object. Indirect costs = salary of production supervisor.
Three manufacturing costs for a manufacturing company
Direct materials: materials that become a physical part of a finished product and whose costs are easily traceable to the finished product. Direct labor: labor cost of employees who convert materials into finished goods. Manufacturing overhead (Factory overhead/indirect manufacturing costs: Includes all manufacturing costs (except for direct materials and direct labor) such as indirect materials, indirect labor, factory depreciation, factory rent, factory property taxes. Indirect costs/labor are used in production but cannot be easily traced. Ex: drops of glue used in the manufacturing process, factory janitor's salaries, maintenance workers, groundskeepers.
The flow of costs through a process costing system:
Each process is a separate department and each department has its own Work-in-Process Inventory account. Direct materials, direct labor, and manufacturing overhead are assigned to Work-in-Process Inventory for each process that uses them. The costs incurred in the first process are transferred to the second process. The costs incurred in the first and second processes are then transferred to the third process. This continues through all processes until the entire cost is transferred to Finished Goods Inventory.
Process costing requires the use of equivalent units of production
Equivalent units of production are used to measure the amount of materials added to or work done on partially completed units and are expressed in terms of fully completed units. (Consider that 3 individual gallon buckets that are full of water equals the same amount as 6 individual gallon buckets that are half full.)
If a predetermined overhead allocation rate is based on machine hours, the denominator to calculate the rate is
Estimated machine hours
Numb of equivalent units of production for DM and for conversion costs must always be equal
False
When items are sold, the JE to debit cogs and credit what acct?
Finished Goods Inv
The sale of a completed job requires two journal entries:
One journal entry is required to recognize the revenue earned (sales price) and another journal entry is required to remove the product from inventory when it is shipped to the customer and recognize the expense incurred (cost). Deb AR Credit Sales rev Deb COGS Credit Finished goods inv
The journal entry to adjust the Manufacturing Overhead account for overallocated overhead.
Overallocated means jobs were overcosted so JE decreases the COGS expense account: Deb MOH Credit COGS
Managerial accounting functions
Planning, directing, controlling Planning: choose goals and decide how to achieve them. Planning can be strategic (3-10years) or operational (short term actions day-to-day. Operational plans can be yearly, monthly, quarterly. Directing: running day-to-day ops of a biz like purchasing, manufacturing, manufacturing, selling and motivating employees. Controlling: process of monitoring ops and keeping company on track and includes comparing actual results to expected.
Prime vs. Conversion Costs
Prime costs: direct materials + direct labor. Primary costs for a labor-intensive manufacturing process (done by people, not machines) Conversion costs: direct labor + manufacturing overhead. Direct labor is both a prime and conversion cost. Conversion cost = more substantial for machine-intensive processes. Employees may only setup and oversee production, so managers may focus on costs of utilities and machine maintenance instead of separately tracking labor.
Product vs. Period Costs
Product: cost of purchasing or making a product. These costs are recorded as an asset and not expensed until the product is sold. Product costs include direct materials, direct labor, and manufacturing overhead. Product costs are recorded in inventory accounts on balance sheet when incurred. These costs become an expense on the Inc Stmt when the inventory is sold. That JE would be DR to COGM and CR to Finished Goods Inv Period costs: non-manufacturing costs that are expensed in the same accounting period in which they are incurred, whereas product costs are recorded as an asset and not expensed until the accounting period in which the product is sold. Examples: selling/admin exp; tax & interest exp; salary of accounting staff; rent on separate admin bldg. (not the factory itself)
3 inventory accounts used by manufacturing companies
Raw materials inventory: materials used to manufacture a product. Work in process inventory (WIP): goods that have been started in manufacturing process but incomplete. Finished goods: completed goods that haven't been sold.
The Balance Sheet has 3 new inventory accts:
Raw materials, WIP inventory and Finished Goods
Why would the manager of a service company need to use job order costing?
Service companies, like manufacturing companies, work on individual, unique jobs and need to know the cost of the jobs. Knowing the full cost of a job allows for better pricing decisions.
3 business classifications
Service companies: sell time, skills, knowledge. Merchandising companies: resell products they buy from suppliers. Keep inventory of products (Merch inv) and managers are accountable for the purchasing, storage and sale of products. Manufacturing companies: use labor, equipment, supplies and facilities to convert raw materials into new finished products. Requires tracking costs of 3 kinds of inventory.
What industry does not have a COGS account
Service industry
Calculating Costs of goods manufactured
Step 1: Calculate the direct materials used for an accounting period: +Beg Direct Materials + Purchases of DM (including Freight In) = DM Available for Use - Ending Direct materials = Direct Materials Used Step 2: To get Total Manufacturing Costs Incurred during the Year: +Direct Materials Used + Direct Labor + Manufacturing Overhead. STEP 3: Cost of Goods Manufactured is calculated as: Beginning Work-in-Process Inventory + Total Manufacturing Costs Incurred during the Year (DM + DL + MOH) = Total Manufacturing costs to account for (These units are either totally completed and moved to Finished Goods Inv or partially completed and left in WIP inventory account) - Ending Work-in-Process Inventory. (partially completed) = COGM
STEP 1 - Calculate the predetermined overhead allocation rate?
The predetermined overhead allocation rate is the estimated manufacturing overhead cost per unit of the allocation base, calculated at the beginning of the period.
The primary differences between job order costing systems and process costing systems:
The primary differences between job order costing and process costing are how and when costs are recorded in Work-in-Process Inventory. Job order costing has one Work-in-Process Inventory account, with a subsidiary ledger containing individual job cost records for each job. Costs are transferred to Finished Goods Inventory when the jobs are completed. Process costing has a separate Work-in-Process Inventory account for each process or department. Costs are transferred at the end of each period to the next department for further processing and once those products completed, they are then transferred to Finished Goods Inventory.
Gross profit =
Total net ales - COGS
Purpose of job cost record
Track flow of materials & labor through job order costing system. Job cost record is a doc that shows the direct materials, direct labor and manufacturing overhead for an individual job and allows company to keep track the costs of indiv jobs.
The journal entry to adjust the Manufacturing Overhead account for underallocated overhead.
Underallocated means jobs were undercosted so JE increases COGS expense to correct: Deb COGS Credit MOH
Step 3 - The difference between under allocated overhead and overallocated overhead is calculated and adjusted with a Journal Entry:
Underallocated overhead occurs when actual manufacturing overhead costs are more than allocated manufacturing overhead costs. Overallocated overhead occurs when actual manufacturing overhead costs are less than allocated manufacturing costs. This is caused by the fact that overhead is allocated using a predetermined overhead allocation rate that is based on estimates.
A completed job cost record shows the unit cost of the products. Calculated by:
Unit product cost = Cost of goods manufactured / Total units produced.
For process costing what isn't true
Uses only one WIP inv account
Difference between costs of goods manufactured and COGS
When a company finishes a job, it totals the costs and transfers them to Finished Goods Inventory, an asset account. These costs are called Cost of Goods Manufactured. When the job's units are sold, the costing system moves the costs from Finished Goods Inventory, an asset on the Balance Sheet, to Cost of Goods Sold, an expense on the Income Statement.
STEP 2 - To allocate manufacturing overhead during the year to a job
Work-in-Process Inventory is debited and Manufacturing Overhead is credited. Work-in-Process Inventory, an asset, is increased and Manufacturing Overhead is decreased, which increases equity.
SO how do Manufacturing Overhead costs flow through the job order costing system:
You don't know the actual total Manufacturing Overhead costs until year-end so you have to estimate it and allocate it somehow. 3 STEP process: 1) calculate the predetermined Overhead rate; 2) allocate Overhead during the year; 3) adjust Overhead at year-end
The allocation base
a denominator that links overhead costs to the products. Ideally, the allocation base is the primary cost driver of manufacturing overhead. Examples: direct labor hours, direct labor cost, machine hours. Cost driver is the primary factor that causes a cost to increase or decrease. Traditionally manufacturing companies have used: Either direct labor hours or direct labor costs for labor-intensive production or Machine hours for machine-intensive production Smart Touch is using only direct labor costs.
Process costing systems are similar to job costing systems in that both:
a) determine per unit costs to control costs and set prices b.) Transfer costs and calculate account balances for Work-in-Process Inventory, Finished Goods Inventory and Cost of Goods Sold c.) Track direct materials, direct labor, and manufacturing overhead costs.
Following are some examples of manufacturing overhead costs
a. Plant utilities b. Depreciation on manufacturing plant and equipment c. Plant insurance d. Plant property taxes e. Rent on the manufacturing plant They are considered indirect costs because they can't be easily traced to individual jobs BUT you can't manufacture the product without the plant.
raw materials subsidiary ledger
allows for better control of inventory as it helps track the quantity and cost of each type of material used in production. A subsidiary ledger contains the details of a general ledger account, and the sum of the accounts in the subsidiary ledger equals the balance in the general ledger account. (Example: batteries are a direct mat costs)
Normal debit balance accounts
assets, expenses, dividends
Most companies using process costing systems have to
calculate more than one EUP. EUP are calculated separately because the direct materials are usually added at the beginning of the process but the conversion costs are incurred throughout the process. They would have to calculate two EUPs per process; one for direct materials and one for conversion costs. EUP are also calculated for costs transferred in from a prior process/department.
The production cost report can be used by managers to make decisions for their company. This includes:
controlling costs - may need to consider reducing cost of direct materials by changing supplier evaluating performance: Determine if the manager met budgeted amounts pricing products - have to look at cost per unit to help determine sales price identifying the most profitable products - helps determine which products to promote to drive profits up preparing financial statements - provides Inventory account amounts for the Balance Sheet and COGS for the Income Statement
Anything a manager wants a separate measurement of cost for is a
cost object
The weighted-average method
for process costing systems determines the cost of equivalent units of production by combining beginning inventory costs with current period costs.
Other examples of Manufacturing overhead (MOH)
include costs of indirect materials, indirect labor, repair and maintenance in factory, factory utilities, factory rent, factory insurance, factory property taxes, manufacturing plant managers' salaries, and depreciation on manufacturing buildings and equipment.
Production Cost Report
is completed for each department for each month. It shows the calculations for the physical flows and the cost flows of the products. It has the equivalent units of production, production costs and the assignment of production costs to completed and incomplete units.
Primary purpose of managerial accounting
is for internal decision makers / to provide information to help managers plan, direct, control and make decisions.
Two systems to determine costs
job order costing and process costing Purpose: help managers plan, direct and control costs.
Diff between line and staff positions
line positions: directly involved in providing goods or services to customers Staff = support line positions
Why do managers need to know the cost of their product?
manager can plan for and control the cost of resources needed to create the product and deliver it to the customer.
Managerial accounting focuses on
planning, directing, controlling
Manufacturing overhead is allocated to jobs based on
predetermined overhead allocation rate. The rate should be based on the primary cost driver. Notice that the rate is based on Estimated numbers. Predetermined overhead allocation rate= Total Est overhead costs/total Est quantity of overhead Allocation base
3 inventory accounts
raw materials, work in process, finished goods
What's an MOH account?
temp equity acct, sort of like expenses under the initial accounting equation of: Assets = Liab + Equity and Equity consisted of Contributed Capital & Retained Earnings and RE was calc by - Dividends Paid + Revenue - Expenses
Conversion costs are
the combination of manufacturing overhead and direct labor costs; this represents the cost to convert direct materials into finished goods. Because these manufacturing processes are highly automated, direct labor is often a small part of the total manufacturing costs; so, to simplify the accounting, it is included with the manufacturing overhead to get conversion costs.
.To calculate the Cost per EUP for direct materials
the total direct material costs are divided by the equivalent units of production for direct materials. To calculate the Cost per EUP for conversion costs, the total conversion costs are divided by the equivalent units of production for conversion costs. The cost per equivalent unit of production is calculated for each input, meaning Direct Materials or Conversion Costs.
The calculation of equivalent units of production (EUP) is needed in a process costing system because
the unit cost of the completed units is more than the unit cost of the incomplete units. EUP allow businesses to measure the amount of materials added to or work done on a partially finished group of units during a period and to express it in terms of fully complete units of output.
Predetermined overhead allocation rate
total estimated overhead costs / total estimated quantity of the overhead allocation base
