Product Costing and the Manufacturing Environment

1. 6 C hapter Product Costing and the Manufacturing Environment Prepared by Douglas Cloud Pepperdine University

2. Objectives 1. Understand the inventory requirements and the related inventory measurement issues of service, merchandising, and manufacturing organizations. 2. Explain the basic conceptual framework of inventory costing for financial reporting. 3. Describe the manufacturing environment as it relates to product costing systems. After studying this chapter, you should be able to: Continued

3. Objectives 4. Explain the operation of a basic job costing system. 5. Explain the operation of a basic process costing system.

4. These financial reporting concepts include some fundamental techniques and prototype approaches that managers can apply to a variety of manufacturing settings and specific products. Financial reporting is the process of preparing a firm’s financial statements in accordance with GAAP. Financial Accounting

5. Merchan-dising INVENTORY COSTS IN VARIOUS ORGANIZATIONS Organization Asset Expense Supplies Inventory Supplies Expense Service Merchandise Inventory Cost of Goods Sold Supplies Inventory Supplies Expense Continued

6. Work-in Process Inventory Finished Goods Inventory Cost of Goods Sold Manu- facturing INVENTORY COSTS IN VARIOUS ORGANIZATIONS Organization Asset Expense Raw Materials Inventory Manufacturing Supplies Inventory Office Supplies Expense Office Supplies Inventory

7. These costs are assigned to the asset inventory These costs are expensed when inventory is sold Product Costs for Financial Reporting Raw materials used Manufacturing supplies used Production employees’ wages Depreciation on plant Expired insurance on plant Production supervisors’ salaries Plant maintenance Plant utilities Production equipment rent Plant office supplies used

8. These items are expensed as incurred Period Costs for Financial Reporting Nonfactory office supplies used General and administrative salaries Depreciation on showroom Expired insurance on showroom President’s salary Showroom maintenance Nonfactory office utilities Nonfactory office rent

9. Work-in-Process Inventory Finished Goods Inventory Cost of Goods Sold THREE PRODUCT COSTS Factory Overhead Direct Labor Factory Overhead Cost of the primary raw materials used in production Wages earned by production employees for the actual time spent working on the product All other manufacturing costs

10. A Closer Look At Manufacturing Overhead Possibly the biggest challenge in measuring the cost of a product is determining the amount of overhead incurred to produce it.

11. Problems Resulting From Measuring Product Cost Using Actual Overhead Actual manufacturing overhead cost may not beknown until days or weeks after the end of the period, delaying the calculation of unit product cost.

12. Problems Resulting From Measuring Product Cost Using Actual Overhead Also, some costs that are seasonal are not incurred each period, thus making the actual cost of product produced in one month greater than that of another, even though nonseasonal costs may have been identical for both months.

13. Problems Resulting From Measuring Product Cost Using Actual Overhead Another point… When there is a significant amount of fixed overhead, the costs assigned to products will vary from period to period, depending on theoverall volume of activity.

14. Using Predetermined Overhead Rates To overcome these problems, most firms use a predetermined manufacturingoverhead rateto assign manufacturing overhead costs to products.

15. Using Predetermined Overhead Rates A predetermined overhead rate based on direct labor hours Predetermined Predicted total manufacturing manufacturing overhead cost for the year overhead rate Predicted total direct labor per direct hours for the year labor hour =

16. Using Predetermined Overhead Rates Manufacturing Predetermined overhead Actual direct manufacturing assigned to labor hours overhead rate Work-In-Process per direct labor Inventory hour x =

17. Using Predetermined Overhead Rates Using a predetermined manufacturing overhead rate based on direct labor hours, we can compute the assignment of overhead to Work-in-Process Inventory.

18. Predetermined Predicted total manufacturing manufacturing overhead cost for the year overhead rate Predicted total direct labor per direct hours for the year labor hour = Using Predetermined Overhead Rates Late in 2004, Harmon Manufacturing Company predicted a 2005 activity level of 25,000 direct labor hours with manufacturing overhead totaling $187,500.

19. Using Predetermined Overhead Rates Late in 2004, Harmon Manufacturing Company predicted a 2005 activity level of 25,000 direct labor hours with manufacturing overhead totaling $187,500. $187,500 25,000 direct-labor hours $7.50per direct labor hour =

20. Using Predetermined Overhead Rates If 2,000 direct labor hours were used in September, what would be the applied overhead? 2,000 x $7.50 = $15,000

21. The Manufacturing Environment Inprocess manufacturing, a single product (or a closely related set of products) is produced on a continuous basis

22. The Manufacturing Environment In job order production, products are manufactured in singles units or in batches of identical units.

23. The Manufacturing Environment Theproduction ordercontains a job’s unique identification number and assigns a unique identification number to a job

24. Job Cost Sheet Direct Materials July 1 100 lbs. @ $ 0.25 = $ 25 3 75 oz. @ $1.40 = 105 Direct Labor July 1 3 hrs. @ $10.00 = $ 30 3 7 hrs @ $10.00 = 70 Factory Overhead July 7 10 dlh x $2 = $ 20 The Manufacturing Environment A job-cost sheet is a document used to accumulate the cost for a specific job in a job-cost system

25. Production Files and Records A file is simply a collection of related records. A record is a related set of alphabetic and/or numeric data items.

26. Basic Production Records Raw Materials Inventory Record Part No________________ Description_________________ Purchased Issued Balance Unit Total Unit Total Unit Total Date Units Cost Cost Units Cost Cost Units Cost Cost

27. Basic Production Records Finished Goods Inventory Record Product No________________ Description____________________ Received From Factory Sold Balance Unit Total Unit Total Unit Total Date Units Cost Cost Units Cost Cost Units Cost Cost

28. Basic Production Records Bill of Materials Raw Materials Requirements Per Unit of Product Product No________________ Description___________________ Part Quantity Number Description Per Unit

29. Basic Production Records Operations List Production Operations and Times Per Unit of Product Product No_______________ Description___________________ Department Operation Machine/Labor Set-up Operating Number Description Requirements Time Time

30. Job Cost System Records(Production Order) Production Order Job No.___________________ Start Date __________________ Product No_________ Description_________________ Quantity_____ Raw Materials Total Part Number Description Quantity Continued

31. Job Cost System Records(Production Order) Operations Department Operation Labor/Machine Start Stop Total Number Description Requirements Time Time Time Authorized by ___________________ Date ________________

32. Job Cost System Records(Job Cost Sheet) Job-Cost Sheet Job No.___________________ Start Date __________________ Product No_________ Description_________________ Quantity_____ Raw Materials Cost Requisition Total Date Department Number Description Cost Continued

33. Job Cost System Records(Job Cost Sheet) Conversion Costs: Direct Labor or Machine Work Ticket Total Total Date Department Number Description Time Cost Continued

34. Job Cost System Records(Job Cost Sheet) Applied Overhead Total Date Department Basis of Application Cost Total Cost of Job Unit Cost

35. Job Cost System Records(Material Requisition Form) Materials Requisition Form Requisition No. _________ Job No. _______ Date _______________ Department __________________ Part Total Unit Total Number Description Quantity Cost Cost Issued by________________ Received by __________________

36. Job Cost System Records(Work Ticket) Work Ticket Work Ticket No. _________ Date_________________ Department______________________ Job. No. _____ Time Started _________ Time Completed __________ Employee/Machine Operator _____________________ Office Use Total Time ______ Rate ______ Total Cost ________

37. Impact of Computers on Manufacturing Automatic identification systems (AIS) allow inventory and production information to be entered into a computer without writing or keying.

38. Impact of Computers on Manufacturing Computer-aided design (CAD) involves the use of computers to design products.

39. Impact of Computers on Manufacturing Computer-aided manufacturing (CAM) involves the use of computers to control machine operations.

40. In their advanced stages, factories utilizing flexible manufacturing systems and computer-integrated manufacturing are sometimes referred to as “lights-out factories” because they can be operated in the dark. Impact of Computers on Manufacturing Flexible manufacturing systems (FMS) are an extension of computer-aided manufacturing techniques through a series of manufacturing operations. Computer-integrated manufacturing (CIM) is the ultimate extension of CAD, CAM, and FMS concepts to a completed automated and computer-controlled factory.

41. Raw Materials Beginning balance $ xx (1) Purchases xx Total available xx Accounts Payable (1) Increase $ xx Basic Manufacturing Cost Flows Step 1: The cost of purchased raw materials and manufacturing supplies are recorded in Raw Materials and Manufacturing Supplies, respectively.

42. Raw Materials Raw Materials Beginning balance $ xx (1) Purchases xx Total available xx Beginning balance $ xx (1) Purchases xx Total available xx (2) Direct materials -xx Ending balance $ xx (2) Direct materials xx Basic Manufacturing Cost Flows Step 2: As primary raw materials are requisitioned to the factory, direct materials are transferred from Raw Materials to Work-in-Process. Work-in-Process Inventory Beginning balance $ xx Current manufacturing costs:

43. Wages Payable (3) Current employee earnings $ xx (3) Direct labor xx Indirect labor to Manufacturing Overhead (NEXT SLIDE) Basic Manufacturing Cost Flows Step 3: Direct labor costs are assigned to Work-in-Process on the basis of time devoted to processing raw materials. Other labor costs associated with production employees are initially assigned to Manufacturing Overhead. Work-in-Process Inventory Beginning balance $ xx Current manufacturing costs: (2) Direct materials $xx

44. Basic Manufacturing Cost Flows Manufacturing Overhead Beginning balance $ xx Current: (3) Indirect labor $xx

45. Manufacturing Supplies Beginning balance $ xx (1) Purchases xx Total available xx (4) Issued -xx Ending balance $ xx Manufacturing Overhead Beginning balance $ xx Current: (3) Indirect materials $xx (4) Manufacturing. Supplies xx (5) Depreciation xx (6) Miscellaneous xx -xx Total $ xx Accumulated Depreciation: Factory Assets (5) Increase +xx Other Payables (6) Increase +xx Basic Manufacturing Cost Flows Steps 4, 5, and 6: Other production related costs are also assigned to Manufacturing Overhead.

46. Work-in-Process Inventory Beginning balance $ xx Current manufacturing costs: (2) Direct materials $xx (3) Direct labor xx (7) Applied overhead xx Basic Manufacturing Cost Flows Manufacturing Overhead Beginning balance $ xx Current: (3) Indirect materials $xx (4) Manufacturing. Supplies xx (5) Depreciation xx (6) Miscellaneous xx -xx Total $ xx (7) Applied overhead -xx Ending balance $ xx Steps 7: Costs assigned to Manufacturing Overhead are periodically reassigned (applied) to Work-in-Process.

47. Finished Goods Inventory Beginning balance $ xx (8) Cost of goods mfg. -xx Total available xx Basic Manufacturing Cost Flows Steps 8: When products are completed, their accumulated production costs are totaled on a job cost sheet and transferred from Work-in-Process to Finished Goods Inventory. Work-in-Process Inventory Beginning balance $ xx Current manufacturing costs: (2) Direct materials $xx (3) Direct labor xx (7) Applied overhead xx +xx Total work-in-process $ xx (8) Cost of goods mfg. -xx Ending balance $ xx

48. Cost of Goods Sold (9) Cost of goods sold $xx Basic Manufacturing Cost Flows Finished Goods Inventory Beginning balance $ xx (8) Cost of goods mfg. -xx Total available xx (9) Cost of goods sold -xx Ending balance $ xx Steps 9: Later when the products are sold, their costs are transferred from Finished Goods Inventory to Cost of Goods Sod.

49. Examine Exhibit 6-6 in the textbook for a possible pattern of cost flows for a factory containing only machine-intensive manufacturing operations. Exhibit 6-7

50. Job Cost Sheet Job Cost Sheet Ledger Job Costing A critical concept in job costingis the relationship between thejob cost sheets and the accountWork-in-Process