Managerial Accounting Chapter 3

If: Estimated manufacturing overhead = $500,00 Estimated direct labor cost = $250,00 Actual manufacturing overhead = $720,000 Actual direct labor cost = $300,000 What is the predetermined overhead rate per direct labor dollar?

$2.00 Because 500,000/250,000 = 2

Jones Company uses a job-ordering costing system with a predetermined overhead rate of 120% of direct labor cost. The job cost sheet for Job #420 listed $4,000 in direct materials cost and $5,000 in direct labor cost to manufacture 7,500 units. The unit cost of Job #420 is:

$2.00 Because total cost of Job #420 = direct materials + direct labor + overhead (predetermined rate x direct labor cost) = 4,000 + 5,000 + 1.2 x 5,000 = 15,000 Unit product cost = 15,000 / 7,500 units = 2 per unit

3 categories that classify manufacturing costs

1. Direct materials 2. Direct labor 3. Manufacturing overhead

Difficulties with assigning manufacturing overhead to a specific job

1. Manufacturing overhead is an indirect cost. It is either impossible or difficult to trace these costs to a particular product or job. 2. Manufacturing overhead consists of many different types of costs ranging from the grease used in machines to the annual salary of the production manager. Some of these costs are variable overhead costs because they vary in direct proportion to changes in the level of production (ex. indirect materials, supplies, and power) and some are fixed overhead costs because they remain constant as the level of production fluctuates (ex. heat, light, taxes, insurance). 3. Because the fixed costs in manufacturing overhead, total manufacturing overhead costs tend to remain relatively constant from one period to the next even though the number of units produced can fluctuate widely. Consequently, the average cost per unit will vary from one period to the next.

The total cost of a job includes

1. direct materials cost 2. applied manufacturing overhead 3. direct labor cost

Absorption costing

All manufacturing costs, both fixed and variable, are assigned to units of product- units are said to fully absorb manufacturing costs.

The schedule of cost of goods sold

Also contains three elements of product costs- direct materials, direct labor, and manufacturing overhead- and it summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold.

The journal entry to record general selling and administrative costs debits:

An expense account and credit cash or a liability.

Unadjusted cost of goods sold =

Beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory

Direct materials

Can be directly traced to particular products. Example: airbags in Camrys

Finished goods

Consist of completed units of product that have not yet been sold to customers.

Direct labor

Consists of labor charges that are easily traced to a particular job.

Work in Process

Consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Notice that direct labor costs are added directly to Work in Process- they do not flow through Raw Materials inventory.

The schedule of cost of goods manufactured

Contains three elements of product costs- direct materials, direct labor, and manufacturing overhead- and it 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.

Total manufacturing costs =

Direct materials + direct labor + manufacturing overhead applied to work in process

Raw materials

Include any materials that go into the final product. When raw materials are used in production, their costs are transferred to the Work in Process inventory account as direct materials.

Materials requisition form

Is a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials.

Cost driver

Is a factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Allocation base

Is a measure such as direct labor-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services. The most widely used allocation bases in manufacturing are direct labor-hours, direct labor cost, machine-hours, and (where a company has only a single product) units of product.

Predetermined overhead rate

Is computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base.

What account is debited to record indirect labor costs?

Manufacturing overhead

The manufacturing overhead account contains

Many different kinds of indirect costs.

Manufacturing overhead costs are applied to Work in Process by

Multiplying the predetermined overhead rate by the actual quantity of the allocation base consumed by each job.

Equation for determining the amount of overhead cost to apple to a job

Overhead applied to a particular job = Predetermined overhead rate X amount of the allocation base incurred by the job

A journal entry that debits Raw Materials and credits Accounts Payable is recording the:

Purchase of materials

Job cost sheet

Records the materials, labor, and manufacturing overhead costs charged to that job.

The cost of goods manufactured

The amount transferred from Work in Process to Finished Goods. Includes the manufacturing costs associated with the goods that were finished during the period.

Overhead application

The process of assigning overhead cost to jobs.

Cost of goods manufactured =

Total manufacturing costs + beginning work in process inventory - ending work in process inventory

Job-order costing

Used in situations where many different products, each with individual and unique features, are produced each period.

The journal entry to record the issuance of direct materials into production debits

Work in process

A company incurred $10,000 in direct labor costs and $8,000 in indirect labor costs. The journal entry to record this transaction debits:

Work in process $10,000 and manufacturing overhead $8,000 and credits salaries and wages payable $18,000

Which of the following would not be a good allocation base for manufacturing overhead? a. accounting hours b. machine hours c. units of product d. direct labor hours

a. accounting hours

A journal entry that debits Work in process and credits Manufacturing overhead is recording the:

application of manufacturing overhead costs

Which of the following appears on job cost sheets and in the work in process account? a. budgeted manufacturing overhead b. actual manufacturing overhead c. applied manufacturing overhead

c. applied manufacturing overhead

Manufacturing overhead is an ________ cost

indirect