Chapter 3

example of process costing

Ex: pace salsa cleaning and chopping the veggies. This includes the cost of the actual veggies $.50 + mixing and bottling the salsa $.25 = manufacturing cost $.75 Each jar should be identical so each jar will carry the same average cost to make. In order to make a profit, Pace will have to charge enough to cover the $.75 per jar and whatever operating costs they have.

What will companies do if the amount of over- or underallocation is fairly large and some of the jobs are still in WIP or FG inventory?

The company will prorate the total amount of under-or overallocation among WIP and FG inventory

Which two documents are updated when the materials are picked

The costs are posted on the req form The individual raw material records are updated And the raw materials requisitioned for the job are posted to the job cost record.

Will the same amount of MOH be allocated to jobs when a different allocation base is used?

There is no right or wrong allocation, but the most accurate is when the company uses the MOH cost driver.

To find the total cost of a job, not just the GAAP-defined product cost, what would managers need to do?

They add the non-manufacturing costs to the production-related job costs to build the total cost of the product across the entire value chain. They want to know the total cost of the product across the whole value chain.

What must the purchasing department consider when determining the quantity of materials to purchase?

They must make sure all necessary raw materials are on hand by the date of scheduled production

When MOH has been overallocated, it means that

too much MOH was assigned to jobs during the period as a result jobs were overcosted Assuming most of the jobs produced during the period have been sold, should be decreased to adjust the error

Why bother assigning MOH to individual jobs?

These costs are necessary, so in order to remain fair, each job get an equal portion of the MOH

What is the purpose of a materials requisition?

They use the document to request that certain materials be sent from the storeroom into the factory, in order for them to be there in time for use in production

revenues and liabilities are increased through

a credit and decreased through a credit .

When making journal entries, asset and expense accounts are increased through

a debit and decreased through a debit

What are three of the most common allocation bases?

DL hrs , DL cost , and Machine hrs

When is manufacturing overhead allocated to jobs?

Depends on the sophistication of the company's computer system. Some are allocated to a job each time some of the allocation base is posed to the job cost record. In others MOH is allocated only once, as soon as the job is complete and the total amount of the allocation base used by the job is known. If the balance sheet time rolls around before the job is done, the company will need to allocate some of the MOH based on the number of direct hours used on the job thus far.

What information does the Raw Materials Record contain?

Detailed information about each item in stock, including the number received, the number of units used, and the running balance currently in stock

What is the general idea behind process costing?

Each unit is identical, in theory, and each should cost the same to make. Process costing averages manufacturing costs across all units produced so that each identical unit bears the same cost.

the order in which inventory flows through the manufacturing system.

raw materials inv >>>> work in process inv. >>>> finished goods inv. >>>> COGS

When raw materials are purchased on account,

raw materials inventory and AP (accounts) should both be increased .

In general, what does allocation mean?

The action of splitting something up, dividing it.

What often-used term is synonymous with "allocating"?

applying

Give two examples of environmental and/or social information that could be included on the job cost record to give management a more encompassing view of the resources used in making the product.

-% of material and packaging inputs that are post-consumer-use or recycled -% of materials sourced from local suppliers vs. those sourced from geographically distant suppliers -Amount of materials that will become waste as a result of the production process -% of the end-of-life product and packaging that can be recycled by the consumer. -The % of labor force paid at a rate greater than minimum wage as defined by law -The % of labor force receiving health-care benefits -The diversity of labor force used on the job

Why is job costing more appropriate for these types of business environments?

-The job cost is used as a basis for charging the client -Their products or services vary in terms of materials needed, time to complete the job and/or the complexity of the production process. -Because the jobs are so different, it wouldn't be reasonable to charge the same thing for all of them

What is the end goal of any product costing system?

-There are two, process and job -The end goal for both is to find the cost of manufacturings one unit of the product.

To determine the profit margins on its products, what does Life Fitness first need to ascertain?

-They first figure out how much it costs to manufacture a batch of each model. -Each batch is called a "job" -They add up the cost of the direct materials, the direct labor and the manufacturing overhead assigned to each job.

What does the company use job costing information for?

-They then use the info to make vital business decisions.

How do companies arrive at the Work in Process Inventory figure shown on the balance sheet at a particular date?

Adding the cost records for all the incomplete jobs

What information the job cost record contain?

All the direct materials, direct labor and the manufacturing overhead allocated to the job. Also the number of units produces on the job, as well as the cost per unit.

Why will MOH be under- or overallocated during the period? In other words, what is the root cause of this issue?

Because the MOH is allocated to jobs using a predetermined rate which is calculated using estimates of the total annual MOH, by the end of the period, there will likely be a difference with the ACTUAL amount.

Why is e-waste an issue?

Because there is sooo much of it. And it's not made out ot a natural material, so it won't break down.

How do companies arrive at the Raw Materials Inventory figure shown on the balance sheet at a particular date?

By adding together the balances on the individual raw materials records It then shows up as an asset on the balance sheet

When bidding on custom jobs, how is the price often established?

Cost-plus pricing, taking the cost of the job and adding a markup to help coving operating expenses and generate a profit. The cost of the job is either the actual cost of the job, recorded, or and estimate.

What is the goal of EPR laws? How do they work?

Extended Producer Responsibility More commonly known as "take-back" laws Create future costs associated with the production of electronic devices and other problem waste, such as mattresses, paint and batteries They work by having retailers such as Best Buy and Staples, collect unused electronics from consumers free of charge, and then partnering with responsible recyclers to ensure that the e-waste is dismantled and recycled rather than dumped in landfills or exported to developing nations.

What two figures are compared to determine the amount by which MOH has been overallocated or underallocated?

I. the predetermined MOH rate Ii. the actual amount of allocation base used on all the jobs

What "cost driver" mean?

Ideally the basis of allocation should be a cost driver A cost driver is the primary factor that causes/drives a cost. Ex: many companies MOH costs rise up and down with production, their cost driver is either the direct labor hours or the direct labor costs. For companies with more machines than people, the machine hours may be more telling than labor hours.

Why do companies use a predetermined rate rather than the actual rate?

In order to get actual data, the company would have to wait until the end of the year to set its MOH rate. & by then the info is too late for them to make decisions related to individual jobs. They are willing to sacrifice some accuracy, in order to get some timely info.

List four possible uses of job-related sustainability information

It can be used by management to identify areas of weakness so that the company can move toward a more sustainable business model It can be used to provide info to potential customers, as part of their supply chain assessment. It can be used for marketing and labeling It can be used to assess the risk of future environmental costs associated with each job.

What information does the Bill of Materials contain?

It's like a recipe card. It lists all the raw materials needed to manufacture a job.

Why is the production schedule important?

Its very important in helping management determine the direct labor and direct materials needed during the period To complete it all on time they need to make sure that they have the right amount of raw materials and skilled labor available to get it done.

What is mass customization? What type of costing system would be used?

Large-scale production that allows manufacturers to meet a variety of consumer desires, while at the same time achieving the efficiencies of mass productions that drive down unit cost. A system would include some elements of a process costing system

Before paying the bill (otherwise known as an invoice ), what three documents must match? Why?

Matching the purchase order, receiving report and invoice This helps to ensure that they are only paying for materials/supplies that they know that they ordered and received.

List several ways in which managers use the information on job cost records.

Reducing future job costs, assessing and comparing the profitability of each model, dealing with pricing pressure from competitors, allowing discounts on high-volume sales, bidding for custom orders, preparing the financial statements.

What is the first step in allocating MOH? When is this step done?

The Company estimates its total manufacturing overhead costs for the coming year The total pie is being allocated.

How do companies arrive at the Finished Goods Inventory figure shown on the balance sheet at a particular date?

The balance of unsold units from completed job cost records add up to the total finished goods inventory.

What is the fourth step? How is it performed?

The company allocates some manufacturing overhead to each individual job as follows: MOH allocated to a job = PreD MOH rate * actual amount of allocation used by the job

What is the third step in allocating MOH? How and when is this done?

The company calculates its predetermined manufacturing overhead (MOH) rate using the info estimated from steps 1 and 2. Predetermined MOH = total estimated manufacturing costs / total estimated amount of allocation base EX: = 1,000,000 / 62,500 DL hours = $16 per direct labor hour

What is the second step in allocating MOH? When is this step done?

The company selects an allocation base and estimates the total amount that will be used during the year. The basis or qualifications that the company has chosen to allocate the time by.

Labor time records

are the documents used to trace direct labor to specific jobs.

Process costing is used by companies that

produce extremely large numbers of identical units through a series of uniform production steps or process

Job costing is used by companies that

produce unique, custom-ordered products, or relatively small batches of different products . It's also used by law firms, accounting firms, consulting firms, and marketing firms, traders, plumbers, and electricians to determine the costs of serving each client