Managerial Accounting CHAPTER FOUR

Direct labor has decreased relative to overhead as a component of product costs for two reasons - please list

1) Sophisticated automated equipment has taken over functions that used to be performed by direct labor workers. This increases overhead while decreasing direct labor 2) Products are becoming more sophisticated and complex and are modified more frequently - increases need for skilled indirect workers such as engineers

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

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

Job-order costing

A costing system used in situations where many different products, jobs, or services are produced each period

Multiple predetermined overhead rates

A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead cost pool.

Overapplied overhead

A credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually incurred during a period

Underapplied overhead

A debit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period

Time Ticket

A document that is used to record the amount of time an employee spends on various activities

Bill of Materials

A document that shoes the quantity of each type of direct material required to make 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 matierials

Cost Driver

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

Job cost sheet

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

Allocation base

A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects

Plantwide overhead rate

A single predetermined overhead rate that is used throughout a plant

Manufacturing overhead needs to be recorded on the job cost sheet, however there are three difficulties. Given these difficulties allocations is used to assign overhead costs to products. A measure, such as direct labor-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services is an _______________ ________________

Allocation base

Raw materials

Any materials that go into the final product

Job cost sheets are the basis for valuing inventory in a job-order costing system 1. ___________ (before/during/after) a job is completed, its cost from the job cost sheet is included in work in process inventory. 2. When a job is completed, its costs from the job cost sheet is included in _____________________ inventory. 3. When complete products are sold, their costs from their job cost sheets become part of ________________________,

BEFORE a job is completed, its cost from the job cost sheet is included in work in process inventory When a job is complete, it is part of FINISHED GOODS INVENTORY. When complete products are sold, their costs from their job cost sheets become part of COST OF GOODS SOLD.

Predetermined overhead rate is computed (before/during/after) the period begins

Before

__________________ is cost of products sold to customers

COST of GOODS SOLD is cost of products sold to customers

Computing Predetermined Overhead Rates Manufacturing overhead needs to be recorded on the job cost sheet, however there are three difficulties. The third one is 3) Because of the fixed costs in manufacturing overhead, total manufacturing overhead costs tend to remain relatively ____________ from one period to the next even though the number of units produced can fluctuate _________

Constant Widely Because of this the AVERAGE cost per unit will vary from one period to the next

Measuring Direct Labor ________________ labor consists of labor charges that can be easily traced to a particular job. Labor charges that cannot be easily traced directly to any job are treated as part of __________________ _________________ (indirect labor) ...maintenance, supervision, and clean up

Direct Labor Manufacturing Overhead

TRUE OR FALSE Bill of Materials is a document that lists the type and quantity of each type of direct and indirect material needed to complete the unit of product

FALSE Bill of Materials is a document that lists the type and quantity of each type of DIRECT MATERIAL needed to complete the unit of product.

TRUE or FALSE In absorption costing some manufacturing costs, both fixed and variable, are assigned to units of product

FALSE In absorption costing ALL manufacturing cost, both fixed and variable, are assigned to units of product (Units are said to fully absorb manufacturing costs)

TRUE or FALSE Job-order costing system - costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at a total cost

FALSE Job-order costing system - costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an AVERAGE COST PER UNIT

Job-Order Costing (The Flow of Cost) TRUE or FALSE Product costs flow through inventories on the income statement and then on to the cost of goods sold on the balance sheet

FALSE Product costs flow through inventories on the BALANCE SHEET and then on to the cost of goods sold on the INCOME STATEMENT

Many companies rely on computerized systems (rather than paper and pencil) to maintain employee time tickets. True or False Time ticket is a day-by-day summary of the employee's activities throughout the day

FALSE Time ticket is an hour-by-hour summary of the employee's activities throughout the day

TRUE or FALSE Period costs (or selling and administrative expenses) flow through inventories on the balance sheet.

FALSE Period costs (or selling and administrative expenses) DO NOT flow through inventories on the balance sheet. They are recorded as expenses on the income statement in the period incurred.

When goods are complete, their costs are transferred from Work in Progress to _________________ _________________

Finished Goods Finished goods consists of completed units of product that have not been sold to customers

Computing Predetermined Overhead Rates Manufacturing overhead needs to be recorded on the job cost sheet, however there are three difficulties. The first one is 1) (Direct/Indirect) cost difficult to trace to a particular product or job

Indirect

After a production order has been issued, the Accounting Department's job-order costing software system automatically generates a _____________ ____________ sheet which records the materials, labor, and manufacturing overhead charge to that job

Job Cost Sheet

____________-_____________costing used where many different products are produced each period: Example: Company: LSGSkyChefs Product: Meals Job-order: each airline orders a different type of meals from LSG SkyChefs

Job-Order Costing

_____________ - _______________ costing used where many different products are produced each period. Example: Company Levi Strauss Product Blue Jeans Job-order is 1,000 boot-cut men's blue demin jeans style number A312

Job-Order Costing

_____________-______________costing used where many differnet products are produced each period Example Company: Hallmark Cards Product: Greeting Cards Job-order: Christmas Greeting Cards Job-order: Birthday Greeting Cards

Job-Order Costing

_______________-________________ costing used where many different products are produced each period. Example: Company: Bechtelo Product:International large-scale construction jobs Job-order is constructing a dam in the Republic of Congo Job-order is constructing a bridge in Indonesia

Job-Order Costing

The amount transferred from Work in Process to Finished Goods is referred to as the cost of goods _____________________

Manufactured The cost of goods manufactured includes the manufacturing costs associated with the goods that were finished during the period At this point the various cost required to make the product are finally recorded as an expense (Until that point, these costs are in inventory accounts on the balance sheet)

__________________ __________________ 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.

Materials Requisition Form The form is used to control the flow of materials into production and also for making entries in the accounting records

If an employee time ticket has $9 indirect labor costs related to performing maintenance, does this get posted on a job cost sheet.

NO - maintenance (indirect labor) is treated as part of manufacturing overhead and DOES NOT get posted on a job cost sheet DIRECTLY FROM the time sheet

Predetermined overhead rate is computed before the period begins using a four-step process

Predetermined overhead rate = Estimated total manufacturing overhead cost (for the period) / Estimated total amount of the allocated base (for the period) Step ONE: Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production STEP TWO: Estimate the total FIXED manufacturing overhead costs for the coming period and the VARIABLE manufacturing overhead cost per unit of the allocation base STEP THREE: Use the cost formula (Y= a + bX) to estimate the total manufacturing overhead (the numerator for the coming period STEP FOUR: Compute the predetermined overhead rate. NOTICE the estimated amount of the allocation base is determined BEFORE estimating the total manufacturing overhead cost. This needs to be done because total manufacturing overhead cost includes variable overhead costs that depend on the amount of the allocation base.

Manufacturing overhead is commonly assigned to products using a predetermined overhead rate. What is the formula

Predetermined overhead rate = Estimated total manufacturing overhead cost (for the period)/ Estimated total amount of the allocated base (for the period

___________________ ORDER when an agreement has been reached with the customer concerning the quantities, prices, and shipment date for the order, a product order is issued

Production Order The Production Department then prepares a materials requisition form

Calculating Manufacturing Overhead for Yost Machining Step ONE: Company estimated that 40,000 direct labor hours would be required to support the production plan for the year (Allocation base is 40,000 direct labor hours) Step TWO: Company estimated $220,000 of total fixed manufacturing overhead costs for the coming year and $2.50 of variable manufacturing overhead cost per direct labor hour STEP THREE: Use the cost formula (Y= a + bX) to estimate the total manufacturing overhead (the numerator for the coming period STEP FOUR: Compute the predetermined overhead rate

STEP THREE: Y = a + bX Y = $220,000 + $2.50 x 40,000 Y = $220,000 + $100,000 Y = $320,000 STEP FOUR: Predetermined overhead rate = Estimated total manufacturing overhead cost (for the period) / Estimated total amount of the allocated base (for the period $320,000 (note this is the answer from step three) / 40,000 direct labor hours = $8 per direct labor hours

TRUE or FALSE Most companies use predetermined overhead rates rather than actual overhead rates in their cost accounting systems

TRUE

TRUE or FALSE The cost of goods sold is identical under BOTH methods (direct/indirect)

TRUE

TRUE or FALSE Direct labor may not be an appropriate allocation based in some industries, it continues to be a significant driver of manufacturing overhead

TRUE Key Point: the ALLOCATION base used by the company should really drive, or cause, overhead costs, and direct labor is not always the most appropriate allocation base

TRUE or FALSE Under both methods the underapplied overhead is added to the unadjusted cost of good sold to determine the cost of goods sold

TRUE Remember the reason for this. Underapplied overhead means that not enough overhead was applied to jobs- the actual manufacturing overhead exceeded the amount of manufacturing overhead applied to jobs using the predetermined overhead rate. We MUST add underapplied overhead to the unadjusted cost of goods sold to remove this discrepancy

TRUE or FALSE The service industry utilizes job-order costing: hospitals, law firms, movie studios, accounting firms, advertising agencies, and repair shops uses a variation of job-order costing to accumulate costs

TRUE The examples in this chapter will focus on manufacturing

What is the DIRECT METHOD of Determining Cost of Goods Sold

The Direct Method of Determining Cost of Goods Sold Unadjusted cost of goods sold Add: Underapplied overhead = Cost of goods sold

What is the INDIRECT METHOD of Determining Cost of Goods Sold

The Indirect Method of Determining Cost of Goods Sold Cost of goods manufactured = Total manufacturing cost charged to jobs + Beginning work in process inventory - Ending work in process inventory Cost of Goods Sold = Beginning finished goods inventory + Cost of goods manufactured -Ending finished goods inventory To determine the cost of goods sold with these formulas, we will need to know five items a) The beginning work in process inventory b) The total manufacturing cost charged to jobs for the period c) The ending work in process inventory d) The beginning finished goods inventory e) The ending finished goods inventory

Overhead applied to a particular job = Predetermined overhead rate X Amount of the allocation base incurred by the job. Predetermined overhead rate is $8 per direct labor hour. What is the designated allocation base

The designated allocation base is direct labor-hour

Cost of goods manufactured

The manufacturing costs associated with the goods that were finished during the period

Overhead application

The process of charging manufacturing overhead cost to job cost sheets and to the Work in Process account

Predetermined overhead rate

The rate used to charge manufacturing overhead costs to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period

Most widely used allocation bases in manufacturing are Direct labor-hours Direct labor costs Machine -hours Where a company has only a single product (units or products) Which are NOT used as allocation bases

They are all used

Computing Predetermined Overhead Rates Manufacturing overhead needs to be recorded on the job cost sheet, however there are ________ difficulties

Three

Computation of Unit Costs in the Job Cost Sheet for valuing unsold units in ending inventory and determining cost of goods sold. What is the formula

Total Product Costs = Direct Materials + Direct Labor + Manufacturing Overhead/Unit Product Costs = _____ per unit

Disposition of Underapplied/Overapplied Overhead Company accounts must be adjusted at the end of the period so that they reflect actual costs vs estimate For this course- we will assume that underapplied or overapplied overhead is closed out to Cost of Goods Sold _______________overhead is added to Cost of Goods Sold _______________overhead is deducted from Cost of Goods Sold

UNDERAPPLIED overhead is added to Cost of Goods Sold OVERAPPLIED overhead is deducted from Cost of Goods Sold The reasoning is that if overhead is underapplied, not enough manufacturing overhead was applied to jobs and their jobs are understated If overhead is overapplied too much manufacturing overhead was applied to jobs and hence their jobs are overstated

Under absorption costing, product cost include all manufacturing costs: 1) Direct ____________________ 2) Direct ___________________ 3) Manufacturing Overhead

Under absorption costing, product cost include all manufacturing costs: 1) Direct Materials 2) Direct Labor 3) Manufacturing Overhead

Work in process

Units of product that are only partially complete and will require further work before they are ready for sales to the customer

Finished goods

Units of product that have been completed, but not yet sold to customers

Computing Predetermined Overhead Rates Manufacturing overhead needs to be recorded on the job cost sheet, however there are three difficulties. The second one is 2) Consists of many different types of cost ranging form the grease used in machines to annual salary of production manager ________________________ vary in direct proportion to changes in the level of production (indirect materials, supplies and power) _______________________remain constant as the level of production fluctuates (head and light property taxes, and insurance)

Variable Overhead Costs Fixed Overhead Costs

TRUE or FALSE When posting manufacturing overhead to job cost sheets the actual amount of overhead caused by the job is charged

When posting manufacturing overhead to job cost sheets this IS NOT the actual amount of overhead caused by the job. Actual overhead costs ARE NOT assigned to jobs - if that could be done, the costs would be direct costs, not overhead

Raw materials is any materials that go into the final product When raw materials are used in production their costs are transferred to the ____________ _________ ___________ inventory account as direct materials

Work in Process

Manufacturing overhead costs (are/are not) applied to Work in Process by multiplying the predetermined overhead rate by the actual quantity of the allocation based consumed by each job

are

Direct labor costs are added directly to Work in Process - they (do/do not) flow through Raw Materials Inventory

do not

Overhead applied to a particular job = Predetermined overhead rate X Amount of the allocation base incurred by the job If the predetermined overhead rate is $8 per direct labor hour - what is the overhead applied to a job that takes 10 direct labor hours

overhead applied to this job is $80

The difference between the manufacturing overhead cost applied to jobs and the actual manufacturing overhead costs of a period is called (___________/_____________) overhead

underapplied/overapplied overhead