ACC 202 Ch 1-4

Estimating POHR

1. estimate the total amount of the allocation base that will be required for next periods estimated level production 2. estimate the total fixed manufacturing overhead cost for the coming period and the variable MO cost per unit of the allocation base 3. use the cost formula to estimate the total MO cost 4. compute the POHR

complications of assigning manufacturing overhead

1. manufacturing overhead is an indirect cost. 2. consists of many different types of costs ranging from the grease used in machines to the annual salary of the production manager. 3. many companies have large amounts of fixed MO

schedule of costs of goods manufactured

3 elements of product costs- direct materials, DL, and MO- and it summarizes the portions of those costs that remain in ending WIP inventory and that are transferred out of WIP into finished goods

normal cost system

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

overapplied overhead

A situation in which overhead assigned to work in process is greater than the overhead incurred. adjustment decreases COGS and increases net operating income

underapplied overhead

A situation in which overhead assigned to work in process is less than the overhead incurred. adjustment increases COGS and decreases net operating income

indirect cost. -

a cost that cannot be easily and conveniently traced to a specified cost object. *producing canned soup- factory managers salary is a indirect cost of the chicken noodle soup

fixed cost -

a cost that does not change, no matter how much of a good is produced

Absorption Costing

all manufacturing costs, both fixed and variable, are assigned to units of product-units are said to fully absorb manufacturing costs. direct materials, direct labor, and both variable and fixed manufacturing overhead

what methods can be used to dispose of undersupplied or over applied manufacturing overhead?

allocating it among work in process, finished goods, and cost of goods sold. & closing it out to COGS

cost of goods manufactured

amount transferred from work in progress to finished goods

when a job is completed

debit finished goods

direct materials costs are recorded on the job cost sheet when the:

materials are issued to the job

what do you need to calculate in process costing for financial reporting purposes?

the cost of its ending work in process inventory and the cost of its completed units that were transferred to the next stage of the production process. UNIT COSTS

Compute cost per equivalent unit (WA)

(cost of beginning work in process inventory + cost added during period) / equivalent units of production

calculating equivalent units of production using weighted average

(ending WIP units * %) + transferred completed units

process costing

1. A single product is produced either on a continuous basis or for long periods of time. All units of product are identical. 2. Costs are accumulated by department. 3. Unit costs are computed by department. materials, labor, and overhead can be added in any department a separate work in process account is maintained

Need for POHR

1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period 2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers

purposes of cost classification

1. Assigning costs to cost objects 2. Accounting for costs in manufacturing companies 3. Preparing financial statements 4. Predicting cost behavior in response to changes in activity 5. Making decisions

Bill of Materials

A document that shows the quantity of each type of direct material required to make a unit of a product.

materials requisition form

A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials. used for controlling the flow of materials into production and making journal entries in accounting records

cost driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs. Also called allocation base

operation costing

A hybrid costing system used when products have some common characteristics and some individual characteristics.

allocation base

A measure of activity such as direct labor-hours or machine-hours (also units of product and direct labor cost) that is used to assign costs to cost objects. must be common to all the company's products and services a cost driver that causes overhead

schedule of cost of goods sold

A schedule that contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and that 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.

total MO cost formula

Y= the est total MO cost a= est total fixed MO cost b= est variable MO cost per unit of the allocation base x= the est total amount of the allocation base

y=a+bx -

Y= total mixed cost a= total fixed cost b= variable cost per unit X= level of activity

direct cost -

a cost that can be easily and conveniently traced to a specified cost object * printing company made 10000 brochures- cost of paper is a direct cost of that customer

Common cost -

a cost that is incurred to support a number of cost objects but that cannot be traced to them individually - a type of indirect cost - factory manager's salary in respect to Campbell soup production

differential cost

a difference in cost between two alternatives. always relevant costs

activity base -

a measure of whatever causes the incurrence of a variable cost

Weighted average method

a process costing method that blends together units and costs from both the current and prior periods, assumes the units will be completed in the current period.

plantwide overhead rate

a single predetermined overhead rate that is used throughout a plant

calculate adjusted cost of goods sold

add undersupplied overhead or subtract over applied overhead to unadjusted costs

administrative costs -

all costs associated with the general management of an organization rather than with manufacturing or selling *executive compensation, general accounting, PR can be direct or indirect non-manufacturing costs

selling costs -

all costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer *advertising, shipping *non-manufacturing cost can be direct or indirect costs

incremental cost

an increase in cost between two alternatives

cost object -

anything for which cost data are desired - including products, customers, jobs, and organizational subunits

the total cost of a job is calculated by adding the total of direct labor cost, direct materials cost, and

applied manufacturing overhead

variable costs per unit -

are constant meaning they do not change when the volume of activity changes

summary of overhead concepts

at the beginning of the period: est total MO cost / est total amount of allocation base during the period: POHR x actual total amount of the allocation base incurred during the period at the end: actual total MO cost-total MO applied

finding COGS in finished goods

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

Cost of direct materials

beginning inventory + purchases - indirect materials - ending inventory

finding total work in process for the period

beginning work in process inventory + total manufacturing costs

finding costs of goods manufactured

beginning work in process inventory + total manufacturing costs (DL, DM, MO) -ending work in process inventory

costs per equivalent unit are used to value

both units in ending inventory and units transferred to the next department

mixed cost

both variable and fixed cost elements

allocation bases that do not drive overhead costs

can cause product costs to be distorted

finished goods

consist of completed units of production that have not been sold to customers DR cost of goods manufactured CR cost of goods sold

work in progress

consists of partially completed units of production that will require further work before they are ready for sale to customers DR direct material, direct labor, applied manufacturing overhead CR cost of goods manufactured

To be traced to a cost object such as a particular product, the cost must be caused by the ________. -

cost object

variable costs -

costs that vary directly with the level of activity direct mats, direct labor, variable elements of MO

unit cost for job

direct labor + direct material + overhead (POHR x direct labor cost). then total divided by units

transforming direct materials into complete jobs

direct labor cost is added to WORK IN PROGRESS and MO cost is applied to WORK IN PROGRESS by multiplying the POHR by the actual quantity of the allocation base consumed by each job

total cost of a job

direct materials + direct labor + POHR (actual machine hours)

calculate total manufacturing costs

direct materials + direct labor + applied manufacturing overhead

variable manufacturing cost -

direct materials + direct labor + variable manufacturing overhead

schedules of cost of goods manufactured and COGS

direct materials, direct labor, and manufacturing overhead. the schedules calculate- the cost of raw materials and direct labor used in production and the amount of manufacturing overhead APPLIED to production, and the manufacturing costs associated with goods that were finished DURING THE PERIOD

a journal entry that includes MO and COGS is recorded to

dispose of underapplied or over applied overhead

units started into production

ending work in process inventory + units completed and transferred out - beginning work in process inventory

equivalent units of production under the weighted average method equal

equivalent units in ending work in process plus units transferred out = units in beginning work in process inventory + units completed and transferred out. partially completed beginning work in process inventory is ignored

finding the amount of over applied or under applied

est MO/ est direct labor hours * actual direct labor hours = applied. actual overhead compared to applied

how to find amount of overhead allocated to a job that used ____ direct labor hours

est. manu overhead/ est direct labor hours x actual direct labor hours

when jobs are sold their costs are transferred out of

finished goods

total fixed cost -

fixed manufacturing overhead + fixed selling expense + fixed administrative expense

differential revenue

future revenue that differs between any two alternatives

cost behavior -

how a cost reacts to changes in the level of activity

bill of materials

quantity and type of each direct material needed to complete a unit of product

direct materials -

raw materials that become an integral part of the product and that can be conveniently traced directly to it *the seats a bus purchases, doors on refrigerators manufacturing cost

job cost sheet

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

committed fixed costs

represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes

the POHR is multiplied by the actual allocation base incurred by a job to find:

overhead applied to the job

characteristics of operation costing

products are processed in batches, costs are accumulated by department. jewelry, clothing, shoes

Overhead Allocation

Accounting procedure used to assign indirect costs to various products

product costs -

All costs that are involved in acquiring or making a product. inventoriable costs direct materials + direct labor + manufacturing overhead recorded as expenses in which the related products are sold

contribution approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes.

processing departments

Any unit in an organization where materials, labor, or overhead are added to the product. performed uniformly and output must be homogeneous

similarities between job-order and process costing

Both systems assign material, labor, and overhead costs to products and they provide a mechanism for computing unit product costs. Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods. The flow of costs through the manufacturing accounts is basically the same in both systems.

COGS equation

COGS = BI + P - EI

Conversion Cost -

Direct Labor + Manufacturing Overhead these costs are incurred to convert direct materials into finish product

conversion costs

Direct Labor + Manufacturing Overhead. MO is a bigger number

prime costs -

Direct Materials + Direct Labor

POHR formula

Estimated total manufacturing overhead cost for the coming period / Estimated total units in the allocation base for the coming period

the period ends

MO is closed

overhead is applied to work in process

MO is credited, WIP is debited

actual overhead is incurred

MO is debited

applying overhead to a specific job

POHR x Amount of allocation base incurred by job

applied overhead

POHR x actual direct labor hours. credit side of manufacturing overhead

indirect materials -

Raw materials that do not physically become part of the finished product or for which it is impractical to trace to the finished product because their physical association with the finished product is too small. *glue manufacturing cost

Contribution Margin -

The amount remaining from sales revenues after all variable expenses have been deducted.

Indirect Labor -

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. manufacturing cost

relevant range -

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Manufacturing Overhead -

includes all manufacturing costs except direct materials and direct labor indirect costs associated with operating the factory *depreciation of equipment, property taxes

Labor costs charged to Manufacturing Overhead represent:

indirect labor costs

direct labor -

labor costs that can be easily traced to individual units of product *assembly line workers manufacturing cost

Factory labor charges that cannot be easily traced to a job are treated as:

manufacturing overhead

raw materials

materials that go into the final product manufacturing cost DR purchases (direct or indirect) CR direct materials and indirect materials beginning raw materials inventory + raw materials purchases -ending raw materials inventory = raw materials used in production

compared to a plant wide overhead rate system, a multiple POHR system is:

more complex, but more accurate

essential quality of an overhead allocation base

must be common to all the company's products and services

nonmanufacturing costs

not assigned to individual jobs, rather they are expensed in the period incurred -salary expense of employees who work in a marketing, selling, or administrative capacity are expensed in the period incurred -advertising expenses are expensed in the period incurred

challenges in chapter 4

not being able to accurately take inventory because of unfinished goods at different points in the cycle

equivalent units

number of partially completed units x percentage completion

Period Costs -

selling + administrative expenses expensed on income statement in the period in which they are incurred using the usual rules of accrual accounting all nonmanufacturing costs

cost structure -

the relative proportion of fixed, variable, and mixed costs in an organization

direct labor cost in a service firm that uses job-order costing

the salary of a surgeon at a hospital, wages of technicians at an auto repair shop, the salary of an attorney at a law firm

the unit product cost is the same as

total job cost/ number of units avg product cost per unit

finding adjusted cost of goods sold/ compute over/underapplied overhead

unadjusted cost of goods sold+underapplied MO - over applied MO

Units transferred to the next department

units in beginning work in process + units started into production - units in ending work in process

job order costing

used in situations where many different products, each with individual and unique features, are produced each period *Levi jeans making many different types for both men and women

Job Order Costing -

used in situations where many different products, each with individual and unique features, are produced each period, costs are accumulated by individual jobs, unit costs are computed by job on the job cost sheet

discretionary fixed costs

usually arise from annual decisions by management to spend on certain fixed cost items