Accounting Ch.3

Extended Producer Responsibility (EPR) laws goal

("take-back" laws) goal is to reduce the amount of potentially dangerous e-waste (electronic waste) in landfills by shifting the end-of-life disposal cost back to the manufacturer

how do manufacturers treat non manufacturing costs?

- GAAP: only inventoriable product costs added to the cost of asset (inventory) -INTERNAL DECISION MAKING: management wants to know the total cost of the product across the value chain

job costing at a service firm

- similar to job costing at a manufacturer -main difference is that company is allocated indirect period costs to each client rather than manufacturing costs - b/c there is no inventory, no journal entries necessary

two solutions for underallocated or overallocated manufacturing overhead

-adjust cost of goods sold OR -prorate among COGS, WIP inventory, Finished Goods Inventory

examples of job costing

-hospitals -custom home builders -advertising agencies -law firms, accounting firms, and marketing firms -working in trades such as mechanics, plumbers, and electricians

process costing

-mass production -similar items (homogeneous) -total costs are averaged over all units

underallocated (undecosted)

-not enough allocated to jobs -too little expense

examples of process costing

-paint manufacturers -oil refineries -cereal manufacturers -service companies such as banks -merchandisers, such as granaries

purchasing process?

-purchasing determines ordering needs -purchasing issues purchase order -shipping and receiving prepares receiving report -accounting matches invoice with purchase order -accounting pays the invoice

overallocated (overcosted)

-too much allocated to jobs -too much expense

job costing

-unique, custom products or small batches -total costs are accumulated by job

steps in allocating indirect costs at a service firm

1. estimate total indirect costs for the coming year 2. choose an allocation base (labor hrs) and estimate the total amount that will be used during the year 3. compute the predetermined indirect cost allocation rate 4. allocate indirect costs to client jobs using the predetermined rate

4 steps in calculating the predetermined manufacturing overhead rate

1. estimate total manufacturing overhead costs 2. select an allocation base (cost driver) 3. calculate the predetermined MOH rate (PMOHR) 4.allocate manufacturing overhead to individual jobs

reasons why management needs product cost

1. reduce future job costs 2. assess and compare profitability of models 3. pricing decisions 4. discounts on high-volume sales 5. bids for custom orders 6. financial statement preparation

manufacturing overhead allocated to specific jobs is...

CREDITED to the account

which of the following is an example of an industry that would use a process costing- rather than a job costing- system?

Coca- Cola

overhead allocation example

FedCorp's actual overhead $190,000 FedCorp's allocated overhead $220,000 difference $30,000 "Target" was $190,000 Actually allocated $220,000 OVERALLOCATED by $30,000

the __ substantiates the total of the raw materials inventory account shown on the company's balance sheet

Raw Materials Records

T/F: MOH contains Indirect materials

True

T/F: WIP contains DM

True

materials requisition

a form itemizing the raw materials currently needed from the storeroom; typically electronic forms that authorize material use

Actual manufacturing overhead costs are...

accumulated in the account through DEBITS

job cost (amt to bill client)

direct costs + indirect costs

example of amt to bill client

direct costs of $700 + indirect costs of $420 = total cost of $ 1,120. company desires 25% markup; to apply markup, take the total cost of $1,120 and multiply by 25%. amt to bill client = 1,120 + (25% x 1,120) = $1,400

how is the cost of each unit calculated?

divide the total job cost by the number of units

the difference b/w the sales price and the job cost is...

gross profit

production schedule

indicates the quantity and types of inventory that are scheduled to be manufactured during the period

Work in Process (WIP)

inventory consists of all products that are partially through the production process. As soon as the manufacturing process is complete, the products are moved out of the factory and into a finished goods (FG) inventory storage area, or warehouse

Finished Goods (FG)

inventory placed in a storage area, or warehouse, where they will await sale and shipment to a customer

amount to bill client

job cost + markup for profit

bill of materials

like a recipe card: it simply lists all of the raw materials needed to manufacture the job

examples of a cost driver

machine hours, direct labor hours, units produced, or direct labor dollars

raw materials (RM)

maintained in a storeroom near the factory until the materials are needed in production. As soon as these materials are transferred to the factory floor, they're no longer considered raw materials b/c they've become part of the WIP in the factory

dealing with pricing pressures from competitors (Step 3)

management can also use this information to determine how it will deal with pricing pressure

bidding for custom orders

management can use the job cost records from past treadmill jobs to get a good idea of how much it will cost to complete the custom order

assess and compare profitability of models

managers will compare the gross profit on each model to the gross profit ratio of all models to determine which products to emphasize selling

if overhead is underallocated, how is the account closed?

manufacturing overhead would be credited to zero it out, and cost of goods sold would be debited

if overhead is overallocated, how is the account closed?

manufacturing overhead would be debited to zero it out; and cost of goods sold would be credited to reduce it as a result

discounts on high-volume sales

often, customers will expect discounts for high-volume sales

MOH allocated to a job

predetermined MOH rate x ACTUAL amount of allocation base used by the job

a(n) __ is an estimated manufacturing overhead rate computed during the year

predetermined manufacturing overhead rate

stock inventory

products sold on a regular basis

flow of inventory through a manufacturing system

raw materials (storeroom) --> work in process (production department)--> finished goods (ready for sale)--> cost of goods sold (sold)

a job costing system can be used by which types of companies?

service, manufacturing, and merchandising businesses

labor time record

simply records the time spent by each employee on each job he or she worked on throughout the day

how is the total cost job found?

sum up DM, DL, and MOH

financial statement preparation

the job cost information is used to figure out the total cost of goods sold shown on the income statement, as well as the work in process and finished goods inventory accounts shown on the balance sheet

where are direct costs charged to?

the job cost record

all costs at a service company are treated as period costs, meaning...

they are immediately recorded as operating expenses when they are incurred (i.e. salaries expense, rent expense, telephone expense, supplies expense etc.)

markup profit =

total cost x percent markup

predetermined indirect cost allocation rate

total estimated indirect costs / total estimated amount of the allocation base

predetermined MOH rate =

total estimated mfg overhead costs / total estimated amount of allocation base

job cost report

used to accumulate all of the DM and DL used on the job, as well as the MOH allocated to the job

when is the predetermined manufacturing overhead rate computed?

before the period starts

reducing future jon costs

by examining the exact costs traced to the job, management might be able to determine ways of reducing the cost of similar jobs produced in the future

how can gross profit be determined?

by subtracting the COGS from the sales revenue

assigning manufacturing overhead costs and other indirect costs is called

cost allocation

in the basic flow of inventory through a manufacturing system, which of the following occurs last in the job costing system?

cost of goods sold

Cost of Goods Sold (COGS)

when the products are shipped to customers, the cost of manufacturing those products becomes the COGS shown on the company's income statement