Accounting
Stan Kaiser is confused about the source documents used in assigning materials and labor costs. Identify the documents.
A material requisiton slip is used by the factory manager to request that materials be moved from the store room to the factory—the requisitions are typically made by job. Time cards track the total hours worked each shift by employees; time tickets track the amount of hours each shift worked on specific jobs. There really is no source document to assign overhead costs—it is assigned based on the pre-determined overhead rate times the actual activity used on a particular job.
Sam Bowden believes actual manufacturing overhead should be charged to jobs. Do you agree? Why or why not?
In an ideal world, that would be true; however, using actual costs can lead to two issues: (1) no overhead costs can be assigned to any units of production until all of the actual overhead costs have been recorded (2) if costs are not incurred evenly throughout the year, or if production is cyclical during the year, the actual overhead rates can vary widely from period to period. Normal costing can solve these two issues by using a pre-determined annualized overhead rate.
What type of industry is likely to use a job order cost system? Give some examples.
Industries likely to use job order cost systems are those in which the "job" or units produced have unique distinguishing characteristics (that is, each unit is not necessarily the same). Specific examples include defense contracting, custom home building, custom furniture manufacturers, etc.
What type of industry is likely to use a process cost system? Give some examples.
Industries likely to use process cost systems are those in which the units produced are identical. In addition, the units are not distinguishable from each other while they are in process. Specific examples include liquid processing, cereal production, mass production of automobiles, etc.
How are manufacturing costs classified?
Manufacturing costs are classified as Direct Materials, Direct Labor, and Factory (or Manufacturing) Overhead
"At the end of the year, under- or overapplied overhead is closed to Income Summary." Is this correct? If not, indicate the customary treatment of this amount
No—at the end of the year, any balance in the Factory Overhead account represents a budget variance. Because the budgeted amount was used to cost the inventory, on the annual financial statements, the inventory accounts must be adjusted back to actual. We are going to assume the variance is not material and will distribute the entire amount to Cost of Goods Sold—so the balance of the Factory Overhead account is closed to Cost of Goods Sold Expense.
Mel Finney claims that the distinction between direct and indirect materials is based entirely on physical association with the product. Is Mel correct? Why or why not?
No—the distinction also depends upon the convenience of accounting for the cost as direct or indirect. The cost will still be traced to individual units of inventory, but in a different way.
Matt Litkee is confused about under- and overapplied manufacturing overhead. Define the terms for Matt, and indicate the balance in the manufacturing overhead account applicable to each term.
Over or under-applied overhead is computed as the difference between the actual overhead costs incurred and the applied overhead (based on the predetermined overhead rate). If the actual overhead costs > applied overhead costs, the overhead has been under-applied and the Factory Overhead account would have a debit balance. If the actual overhead costs < applied overhead costs, the overhead has been over-applied and the Factory Overhead account would have a credit balance.
Tina Burke is confused about the differences between a product cost and a period cost. Explain the differences to Tina
Product costs are those costs necessary that directly is related to the production of the units of inventory Period costs are those costs which related to either selling the units of inventory or with administering the activities of the business organization. (The distinction is critical, because product costs are recorded as INVENTORY costs—inventory costs do not become expenses until the related units of inventory are sold.)
What relationships are involved in computing a predetermined overhead rate?
The annual budgeted overhead costs are divided by the annual budgeted measure of production activity.
How can the agreement of Work in Process Inventory and job cost sheets be verified?
The job order cost sheets represent a subsidiary to the Work In Process Inventory account in the general ledger. Therefore, the total of the job cost sheets of any unfinished jobs at the end of a period should match the balance of the WIP Inventory.
Jerry Lang is unclear as to the difference between the balance sheets of a merchandising company and a manufacturing company. Explain the difference to Jerry
The merchandiser has just one Merchandise Inventory account listed as a current asset. The manufacturer has three inventory accounts listed as current assets: Raw Materials Inventory, Work in Process Inventory Finished Goods Inventory
Identify the differences in the cost of goods sold section of an income statement between a merchandising company and a manufacturing company.
The merchandiser purchases the product it sells from others and will add Cost of Goods PURCHASED to beginning inventory to determine cost of goods available for sale. The manufacturer makes the product it sells and will add Cost of Goods MANUFACTURED to beginning FINISHED GOODS inventory to determine cost of goods available for sale
What is the purpose of a job cost sheet?
The purpose of the job cost sheet is to record the direct material costs, the direct labor costs, and the overhead assignable to a specific job/unit, such that the total cost of the job can be determined upon its completion.