Unit 6: Managerial Accounting: Module 8: Cost Flow Methods

Service Process Formula: Truck Example

$602,000/8,600,000 miles = $0.07 per mile

What is an important difference in the cost accounts of a merchandising company compared to a manufacturing company?

-A merchandising company has no raw materials inventory or work-in-process inventory.

Work-In-Process Services: Example

-Accountant: Audit in progress -Engineer: Blueprints -Banking: Loan in progress -Marketing: new ad campaign in development

What costs are included in manufacturing overhead?

-All manufacturing costs that are not classified as direct materials or direct labor

What is work-in-process inventory?

-All material on the factory floor that is not yet completed

Paradigm Toys is a manufacturing company that produces stuffed animals. In one step of the manufacturing process, raw materials such as fabric, thread, and polyester filling are moved from the warehouse to the production floor. What would be the effect of this event on the company's books?

-An increase in work-in-process inventory Explan When raw materials are moved to the production floor, they become work in process inventory.

Yoshida Company manufactures cell phones. Which item is a product cost for Yoshida Company?

-Bonuses paid to the phone assemblers who work on the production line Explan Period costs are incurred outside the factory. The only product cost in the list is the cost of the bonuses paid to the phone assemblers who work inside the factory.

A successful law firm called Kim and Lee provides legal services to large corporations and employs over 100 attorneys to represent clients. The firm does not purchase products to sell to its clients but focuses solely on providing legal counsel. Which line item must be absent from the firm's income statement?

-Cost of goods sold Explan A law firm is a service firm. A service firm that does not deal with any parts or merchandise does not require a cost of goods sold section on the income statement because the firm does not sell any goods.

Product Cost: Details (6)

-Cost of the raw materials used in production -Wages of factory employees who work on the factory floor -Salaries of the vice president of manufacturing and the plant manager -Utility bills to heat and light the factory building -Depreciation or rent on the factory building -Wages of maintenance personnel and custodians who work in the factory

3 Types of Product Cost Companies: Merchandising Company

-Costs incurred in purchasing goods from suppliers

3 Types of Product Cost Companies: Manufacturing Company

-Costs of manufacturing the product,including direct materials, direct labor, and manufacturing overhead

3 Types of Product Cost Companies: Service Company

-Costs of providing services,including direct labor and service overhead

Which product costs are substantial in both a service company and a manufacturing company?

-Direct labor and overhead

Which item is a product cost?

-Direct materials

Leilani and Diego are discussing different types of businesses. They agree that, in terms of cost flows, there are many similarities between a manufacturer of cars, such as General Motors, and a consulting company, such as McKinsey. However, they also agree that there is one very important difference in the costs being incurred by General Motors and McKinsey. What is the important difference in the costs of GM as compared to McKinsey?

-GM likely has relatively high materials costs, whereas the materials costs for a McKinsey are relatively low. Explan One important difference in costs between a manufacturer like GM and a service company like McKinsey is that manufacturers must also manage large amounts of raw materials costs, while the materials included in the services sold by service companies are typically limited to insignificant amounts of supplies used in the service process.

What type of cost are the wages paid to a factory supervisor?

-Manufacturing overhead Explan Manufacturing overhead includes all manufacturing costs that are not classified as direct materials or direct labor. This includes miscellaneous materials used in production, such as glue or nails; wages for the factory supervisor, controller, and custodians who work in the factory but not directly on products; and other manufacturing costs such as utilities, depreciation of manufacturing facilities, insurance, and property taxes.

What is the sequence of the flow of costs through a manufacturing operation?

-Purchase raw materials, transfer raw materials to production, add direct labor and manufacturing overhead costs, transfer the cost of completed goods to finished goods inventory, sell goods and transfer cost to cost of goods sold.

Merchandising Income Statement Steps (8)

-Sales -Cost of Goods Sold -begining inventory -add net purchases -Cost of goods available -less merchandise inventorym ending balance -cost of goods sold -subtract expenses

3 Types of Period Cost Company: Manufacturing

-Selling costs -Administrative costs

3 Types of Period Cost Company: Merchandising

-Selling costs -Administrative costs

3 Types of Period Cost Company: Service

-Selling costs -Administrative costs

Schedule: Cost of Goods Sold

-Start with amount beginning finished goods at beginning of period -add the cost of goods manufactured which is show on goods manufactured statement as $744, 000 -deduct ending amount of finished goods inventory available at end of period -determine cost of goods sold expense for the period, reported on standard financial accounting income statement immidiatly below total revenue or total sales -

Cost of Goods Manufactured Statement: Details (6)

-The amount of direct materials inventory available at the beginning and the end of the period, including the amount of direct materials used during the period -The amount of direct labor costs and the amount and details of the amount of manufacturing overhead costs incurred or added during the period to manufacturing -The total manufacturing costs incurred during the period (direct materials + direct labor + manufacturing overhead) -The change in work-in-process inventories during the period -The total cost of goods manufactured during the period -Wages of maintenance personnel and custodians who work in the factory

Which item is a period cost?

-Wages of secretarial staff

Baby Jude Company manufactures car seats. Your colleague works in the sales and marketing department, and is trying to understand the differences between a product and a period cost for Baby Jude Company including examples for both. Which item is a period cost for Baby Jude Company?

-Wages of the janitors in the executive office building Explan Product costs are costs associated with activities in the manufacturing facilities. Because the janitors in the executive office building do not work in the factory, their wages are not a product cost but a period cost.

Cost of Goods Manufactured Statement

-a schedule supporting the income statement that summarizes the total cost of goods manufactured and transferred out of work-in-process inventory account during a period -costs include direct materials, direct labor, and applied manufacturing overhead

Period Cost 2

-admin cost

Period Costs Example

-admin office outside factory

Period Costs

-all costs incurred by the company outside of the factory -costs expensed immediately on income statement, not in balance sheet -CEO Salary, admin costs

3 Product Costs: Manufacturing Business: Manufacturing Overhead

-all costs incurred in the manufacturing process other than direct materials and direct labor

Manufacuring Income Statement Steps

-begining goods inventory -add cost of goods manufactured -subtract cost of ending finished goods -subtract all other costs

Period Cost

-cost associated with activities that occur outside the production facility.

Product Cost

-cost associated with the production facility

Product Costs

-costs, all costs incurred inside of the factory to produce some type of product -costs inventoried as part of balance sheet -direct materials, direct labor, and manufacturing overhead

3 Product Costs: Manufacturing Business

-direct materials -direct labor -manufacturing overhead

What are product costs in a manufacturing business?

-direct materials -direct labor -manufacturing overhead

3 Components: Manufacuring Cost

-direct materials -direct labor -manufacuring overhead

3 Product Costs: Manufacturing Business: Manufacturing Overhead Utilities Example

-electric -water -heat -AC -taxes

Indirect Labor: Example

-factory supervisors -mantainence -security guards

Service Income Statement

-fees earned $25k -subtract all expenses -net income

Figure 6.2: The Flow of Manufacturing Costs 5 Step Process: Step 5: Finished goods sold

-finished goods removed from account

Indirect Materials: Example

-glue or nailes for a chair -custodial

Figure 6.2: The Flow of Manufacturing Costs 5 Step Process: Step 3: Finished Products moved to FGW

-goods moved to finished goods warehouse

Manufacturing Overhead

-includes all manufacturing costs that are not classified as direct materials or direct labor. This includes miscellaneous materials used in production, such as glue or nails; wages for the factory supervisor, controller, and custodians who work in the factory but not directly on products; and other manufacturing costs such as utilities, depreciation of manufacturing facilities, insurance, and property taxes.

How are product costs reported?

-income statement -(direct mats, labor, manufacturing) -cost to purchase product

Raw Materials Inventory

-inventory of raw materials that have not yet begun the production process

Figure 6.2: The Flow of Manufacturing Costs 5 Step Process: Step 4: Finished Goods Inventory

-inventory that has been completed the production process and is ready for sale to customers

Figure 6.2: The Flow of Manufacturing Costs 5 Step Process: Step 2: Work-in-Process Inventory

-inventory that is partly completed in production process, but not yet ready for sale to customers

3 Product Costs: Manufacturing Business: Direct Materials Computer Example

-keys -screen -wires

Indirect Labor

-labor that is necessary to a manufacturing or service business but is not directly related to the actual production of the product

Indirect Materials

-materials that are not necessary to manufacturing or service businesses but are not directly included in or are not a significant part of the actual product

3 Product Costs: Manufacturing Business: Direct Materials

-materials that become part of the product and are traceable to it

3 Types of Period Cost Company

-merchandising -service -manufacturing

3 Types of Product Cost Companies

-merchandising company -service company -manufacturing company

Costs outside the factory

-period costs

Property Tax(Factory) is part of

-product cost

2 Merchandising Costs

-product cost -period cost

All costs in a factory are

-product costs

Invenory Cost (product cost)

-purchase price and frieght

Figure 6.2: The Flow of Manufacturing Costs 5 Step Process: Step 1: Raw Materials

-raw materials inventory

How are period costs reported?

-recorded on income statement in the period incurred -non-manufacturing, admin, sales, marketing, research, development

Retailers

-second-tier merchants who typically purchase products from wholesale to distribute to end-user customers

Service Process: CPA Firm

-service overhead -direct labor -NO direct materials

Cost of Goods Statement

-statement that sums the cost of goods sold for an accounting period based on the cost of goods sold formula

Wholesalers

-top-tier merchants who typically deal directly with the original manufacturers to distribute products to retailers

3 Product Costs: Manufacturing Business: Direct Labor Employee Example

-wages paid to employee working with direct materials

3 Product Costs: Manufacturing Business: Direct Labor

-wages paid to those who physically work on direct materials to transform them into a finished product and are traceable to specific products

Manufacturing Product Cost Flow (4)

1. Manufacturing Overhead/Salaries, Wages Payable/Raw Materials Inventory 2. Work in Process Inventory 3. Finished Goods Inventory 4. Cost of Goods Sold

Merchant Product Cost Flow (2)

1. Merchandise Inventory 2. Cost of Goods Sold

Service Product Cost Flow (3)

1. Overhead/Salaries and Wages Payable/Supplies Inventory 2. Work-In-Process Services 3. Cost of Services

Service Process Formula

=(estimated overhead for the upcoming year)/(estimated activity level for the upcoming year)

Figure 6.2: The Flow of Manufacturing Costs 5 Step Process

Step 1: Raw Materials Step 2: RM to manufacturing floor Step 3: finished products inventory Step 4: FP documented stored Step 5: FP removed from account and sold