Management Accounting
calculating cost per equivalent unit=
(cost of beginning tip + cost added during the period)/ (equivalent units of production)
Direct Labor
- salaries, wages, and fringe benefits for personnel that work DIRECTLY on manufactured product ex wages paid to automobile assembly workers
Direct Costs
-costs that can be easily and conveniently traced to a unit of product or other cost object ex: direct material and direct labor
Cost Classifications for Decision Making
-differential costs and revenues -opportunity costs -sunk costs
the 3 basic types of PRODUCT costs are
-direct material -direct labor -manufacturing overhead (these three costs form the product) GO ON BALANCE SHEET in inventory accounts
Manufacturing Overhead
-includes all manufacturing costs except direct material and direct labor. these cannot be easily traced to finished products -indirect materials -indirect labor -other manufacturing costs
Direct Materials
-raw material added to the production process -easily traced to the finished product ex a radio installed in an automobile
other manufacturing costs include
-utilities -insurance -property tax -depreciation of equipment
Transfer or product costs
-when direct materials are used in production, their costs are transferred from raw materials to work in process -direct labor and manufacturing overhead costs are added to work in process to convert directly to finished goods -once units of product are completed their costs are transferred from work in process to finished goods -when a manufacturer sells its finished goods to customers, the costs are transferred from finished goods go cost of goods sold
In a small manufacturing facility, one welder is needed for every 200 hours of machine-hours or fewer in a month. The welder is paid a monthly salary of $2,500. If the total monthly requirement is 1,300 machine-hours, the total salaried employee expense is
1,300/200=6.5 works but you can't have half a worker so 7 x 2500= 17500
a job order costing system is used when
1. many products are produced each period 2. products are manufactured to order 3. unique nature of each order requires tracing or allocating costs to each job ex; Boeing- manufacturing airplanes Bechtel- building large scale construction projects disney studios- producing films manufacturing overhead in allocated to all jobs rather than directly traced to one
For the current period Joe started 15,000 units and completed 10,000 units leaving 5000 (30% complete). How many equivalent units of production did Joe have
11500 10,000 + (5000x .3)= 11500
4. Beginning finished goods inventory was 130,000. the cost of goods manufactured was 760,000. and the ending finished goods inventory was 150,000. What was the cost of goods sold for the month?
130,000+760,000-150,000= 740,000
2. direct materials used in production was 280,000. Direct labor was 375,000 and manufacturing overhead was 180,000 was added to production for the month. What were total manufacturing costs incurred for the month?
280,000+375,000+180,000= 835,000
1. beginning raw materials was 32,000. During the month 276,000 of raw material was purchased. A count at the end of the month revealed that 28,000 of raw material was still present. What was is the cost of direct material used?
32,000+276,000=308,000 308,000-28,000= 280,000
allocating Under or Over applied MOH ex. lets assume the overhead applied is 68,000, the ending balances in finished goods in 204,000, and cost of goods sold is 408,000, so the total value of those accounts is 680,000. calculate allocation %'s
68,000/680,000= 10% 204,00/680,000= 30% 408,000/680,000=60%
3. beginning work in process was 125,000. manufacturing costs added to production for the month were 835,000. There were 200,000 of partially finished goods remaining in WIP inventory at the end of the month. What was the cost of goods manufactured during the month?
835,000+125,000-200,000= 760,000 cost of goods manufactured
Cyber Devices manufactures PCTV products that enable people to watch television content on their computers. It sells its product to retailers for $50. A tuner component that goes into each of these devices costs $5 to acquire. The total variable cost at an activity level of 1,000 units equals
= $5,000 1,000x5 to get variable cost because what you sell the product for does not help determine cost
Absorption Costing
A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.
Manufacturing overhead is applied based on the
ACTUAL level of activity (amount of driver) not estimated POHR * Actual Amt of driver
assume 750 of the 1,000 called medallions in Job A were shipped to customers by the end of the month for total sales revenue of 225,000. Because 1,000 units were produced and the total cost of the job from the job cost sheet was 158,000 the unit product cost was $158
AR-225,000 Sales-------225,000 Cost of goods sold- 118,500 finished goods-----118,500
administrative costs
All executive, organizational, and clerical costs. can be either direct or indirect
allocation base
An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. -difficult or impossible to trace overhead costs to certain job -consists of many different items -many types of manufacturing overhead costs are fixed even though output fluctuates during the period
raw material used=
Beg raw material + purchases of raw material= raw material available for use - ending raw material gives you raw material used
Two types of fixed costs
Committed- long term costs that cannot be reduced significantly in the short term (factory depreciation) discretionary- costs that may be altered in the short term by current managerial decisions (advertising or R&D)
Indirect costs
Costs that cannot be easily and accurately traced to a cost object. ex. manufacturing overhead
Conversion costs
Direct Labor + Manufacturing Overhead
Prime Costs
Direct Materials + Direct Labor
Which of the following statements about using a plantwide overhead rate based on direct labor is correct?
It is often overly simplistic and incorrect to assume that direct labor-hours is a company's only manufacturing overhead cost driver.
Job order costing vs process costing
JO - many jobs are worked on during the period (custom homes) - costs are accumulated by individual jobs - unit costs are computed by Job on the job cost sheet PC - a single product is produced either on a continuous basis or for long periods of time, all units of the product are IDENTICAL (coke) -costs are accumulated by department -unit costs are compute by department
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.
POHR=760,000/20,000= 38 direct materials= 200 direct labor = ($15x10)=150 overhead=(38x10)=380 TC= 730
Contribution Margin
Sales - Variable Costs. note; cost of good sold is a variable cost
under/over applied overhead
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period undersupplied overhead increases cost of goods sold and decreases net. operating income over applied overhead decreases cost of goods sold and increases net operating income
equivalent units of production always equals
Units completed and transferred + Equivalent units remaining in work in process notice; don't worry about beginning tip because it is included in started units
estimating manufacturing overhead
Y=a+bX y= estimated total manufacturing overhead cost a= estimated total fixed manufacturing overhead cost b= estimated Variable manufacturing overhead cost per unit of the allocation base X= estimated total amount of the allocation base
Hunter products computes its predetermined overhead rate annually on the basis of direct labor hours. at the beginning of the year its estimated that 28,000 direct labor hours would be required for the periods estimated level of production. The company also estimates 126,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturings of $6 per direct labor hour. Hunter actual manufacturing overhead for the year was 307800 and direct labor was 29,500 hours. What was the predetermined overhead rate?
Y=a+bX y=126,000+(6)(28,000)= 294,000 294,000/ 28000= 10.50 per direct labor hour
fixed costs
a fixed cost does NOT change in TOTAL as the level of activity changes within the relevant range so if activity increases by 20% TOTAL fixed costs still remain the same = NO CHANGE However the fixed costs per unit DOES CHANGE if expressed on a par unit basis, the average fixed cost per unit varies inversely with changes in activity (horizontal line graph) make more -> the cheaper per unit it costs
activity based (aka cost driver )
a measure of what causes the incurrence of a variable cost ex units produced, miles driven, machine hours, units produced
Predetermined Overhead Rate
a predetermined overhead rate is used to apply overhead to jobs, which is determined before the period begins POH=(estimated total manufacturing overhead cost)/ (estimated total activity in the allocation base) the denominator in this case is the price driver why do we use POHR? timing, because actual overhead isn't known until the end of the period
Garret uses a predetermined overhead rate of 42.45 per direct labor hour. This rate was based on a cost formula that estimated 7,216,500 of total manufacturing overhead for an estimated level of 170,000 direct labor hours. the actual total manufacturing overhead costs of 7,110,375 and 165,000 direct labor hours. determine the manufacturing overhead that would have been applied to all jobs during the period
actual direct labor hours 165000 x predetermined overhead rate 42.45= applied manufacturing overhead of 7,004,250
Activity Based Costing
allocation of overhead to MULTIPLE jobs based on their percentage of activities
processing department
are any unit in an organization where materials, labor, or overhead are added to the product (activities performed in a processing department are performed uniformly and the output of the processing department must be homogeneous)
differential cost (aka incremental costs)
are the difference in costs between any two alternatives a difference in revenue between two alternatives is called differential revenue both are always relevant to decisions differential costs can be either fixed or variable
raw materials purchases, direct labor, and manufacturing overhead all flow into
balance sheet accounts raw material -> raw materials inventory manufacturing overhead and direct labor -> work in process account all of these flow into the FINISHED GOOD INVENTORY which then flows to the INCOME STATEMENT into cost of goods sold
while job order costing systems can accurately trace direct materials and direct labor costs to jobs, they often fail to accurately allocate the manufacturing overhead costs used during the production process to their prospective jobs. Why?
because it uses the wrong allocation base that do not drive the overhead costs note: if more than one cost driver can be identified, job cost accuracy is. improved by using multiple predetermined overhead rates
Cost of goods sold= note: cost of goods manufactured needs to be done before you can do cost of goods sold
beg finished goods+ cost of goods manufactured= goods available for sale goods available for sale- ending finished goods= unadjusted cost of goods sold Unadjusted cost of goods sold + undersupplied OR - over applied= adjusted cost of goods sold
cost of goods sold=
beginning FG +COGS - ending FG
variable costs
changes un TOTAL in direct proportion to a change in the level of activity -1:1 change -so if activity increases by 20% then TOTAL variable costs increase by 20 as well However the VARIABLE costs per unit does NOT change ex 1 for 100 and 4 for 400 (cost per unit is 100 no matter what)
Weighted Average Method
combines together units and costs from the prior and current periods the equivalent units of production from a department are the number of units transferred to the next department (or finished goods) plus the equivalent units in the departments ending work in process inventory
there are two methods for performing the unit cost computations the weighted average and FIFO. We will use weighted average which is
combining costs and outputs from the current and prior periods
finished goods
consist of completed units of product that have not been sold to customers
Work in Process (WIP)
consists of units of production that are only partially complete and will require further work before they are ready for sale to customers direct materials
mixed costs
contains both variable and fixed cost elements ex. cell phone plan because you pay a certain amount but when you go over you pay more y=a + bx where y= the total mixed cost a= total fixed cost (vertical intercept) b= variable cost per unit of activity (slope of the line) x= the level of activity
direct labor + manufacturing overhead=
conversion cost s
the transfer from work in process to finished goods is called
cost of goods manufactured
Indirect Labor
cost of personnel who do not work directly on product but who's services are necessary ex janitor
selling costs
costs necessary to secure the order and deliver the product. can be either direct or indirect ex. sales commission
Sunk costs are
costs that have already been incurred and cannot be changed now or in the future as such, sunk costs are irrelevant costs, which should be ignored when making decisions
if you over apply you should
credit and if you under apply you should debit
ex continued from previous problem: if we are allocating 30,000 of overapplied overhead, to would be closed out of the MOH accounts
debit MOH and (credit WIP, finished goods inventory, and cost of goods sold)
Job a was completed during April so you need to transfer Work in process account to finished goods. How is this done? note if a job was not completed it would remain in WIP
debit finished goods for 158,00 credit work in process for 158,00
Record Depreciation on a FACTORY you should
debit manufacturing overhead and credit accumulated depreciation
if you over apply manufacturing overhead you should
debit manufacturing overhead and then allocate either acrossed all or credit cost of goods sold
manufacturing overhead of 225,000 was applied to production using the company's predetermined overhead rates. record this by
debit work in process and credit manufacturing overhead
if MOH is undersupplied gross margin
decreases and if MOH is over applied gross margin increases
total manufacturing cost=
direct material+direct labor+ MOH applied
debit expense, credit asset to INCREASE
expense accounts reside on the income statement
raw materials
include any materials that go into the final product
Cost of Goods Manufactured
includes the manufacturing costs associated with the goods that were finished during the period
Normal costing
is 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
job order costing
is a costing system used in situation where many different products, jobs, or services of a unique nature are produced each period
job costing sheet
is a form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job
allocation based
is a measure of activity such as direct labor hours, or machine hours that is used to assign cost to objects
Predetermined Overhead Rate
is rate used to apply manufacturing overhead to jobs that is determined in advance for each period POHR= estimated total manufacturing overhead cost/ estimated total amount of the allocation base
Overhead application
is the process of assigning overhead costs to specific jobs using the formula: POHR x (the actual amount of allocation base incurred by the job)
if something occurs on FACTORY EQUIPMENT it is
manufacturing overhead
Indirect Materials
materials required for production that do not become part of products ex: drill bits used to fabricate metal materials that are apart of final product but insignificant in cost ex. glue, nails, screw
property tax associated with a company facility is a
non manufacturing cost
equivalent completed units=
number of partially completed units x percentage completion
manufacturing cots
prime and conversion
Product Costs
product costs includes all the costs that are involved in acquiring or making a product TOUCH PRODUCT OR PART OF PRODUCT , or depreciation on FACTORY equipment "attach a unit of product as it is purchased or manufactured and they stay attached to each unit of product as ling as it remains in inventory awaiting sale"
there are 3 inventory accounts
raw material: which includes any materials that go into the final product working in progress: which consists of units of product that are only partially complete and will require further work before they are ready for sale to customer finished goods:which consists of the completed units of product that have not yet been sold to customers
accounting for non manufacturing costs aka Period costs
recall non manufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred (PERIOD COSTS) ex. advertising expenses salary and wages expense for employees who work in a marketing, selling, or administrative capacity
Non-manufacturing costs
selling costs and administrative costs
Period Costs
selling expenses (marketing, sales personnel, sales commission) Administrative expenses (office supplies, office personnel, office depreciation) note: matching principle says ARE IN PERIOD INCURRED
when goods are sold, they must be transferred out of Finished Goods (bs account) and into
the Cost of Goods sold (income stat account)
Period costs like selling and administrative flow straight into
the income statement in the selling and administrative expense category
opportunity cost
the potential benefit that is given up when one alternative is selected over another not usually found in records but must be considered ex: college you don't work
fixed costs and relevant range ex
the relevant range of an activity pertains to fixed cost as well as variable costs. For example assume office space is available at a rental rate of 30,000 per year in increments of 1000 square feet fixed costs would increase in a STEP fashion at a rate of 30,000 for each additional 1000 square feet
Cost of goods manufactured=
total manufacturing costs+beginning work in process inventory-ending work in process inventory
Income Statement formats
traditional and contribution (management uses this more) used for internal planning and decision making tool 59 min on first video
total cost / number of units
unit production cost
Cost Classifications for Predicting Cost Behavior
variable costs fixed costs mixed costs
assume that rugers corporation predetermined overhead rate is $6 per machine hour and that during April 10,000 machine hours were worked for job A and 5,000 hours for job B. so how much would be applied to Work in Process
work in process ---- 90,000 manufacturing OH---------------------------90,000
