Accounting for manufacturing

1. 6 Topic Accounting for manufacturing

2. Objectives • Explain on the concept of cost. • Define cost behavior for fixed, variable, and mixed costs. • Analyze the manufacturing cost. • Describe the steps in preparing statement of goods manufactured. After studying this chapter, you should be able to:

3. Cost is the cash or cash-equivalent value sacrificed for goods and services that is expected to bring a current or future benefit to the organization. I see… It’s a dollar measure of the resources used to achieve a given benefit. Cost Assignment Exactly what is meant by “cost”?

4. Cost Assignment A cost object is any item such as products, customers, departments, projects, activities, and so on, for which costs are measured and assigned. Example:A bicycle is a cost object when you are determining the cost to produce a bicycle. An activityis a basic unit of work performed within an organization. Example:Setting up equipment, moving materials, maintaining equipment, designing products, etc.

5. Understanding Cost Behaviour A cost that stays the same as output changes is a fixed cost. Fixed Costs

6. Understanding Cost Behaviour A variable cost is a cost that, in total, varies in direct proportion to changes in output. Variable Cost

7. Understanding Cost Behaviour A mixed cost is a cost that has both a fixed and a variable component. Mixed Cost

8. The different type of cost... • Direct costsare those costs that can be easily and accurately traced to a cost object. • Example:If a hospital is the cost object, • the cost of heating and • cooling the hospital is • a direct cost.

9. The different type of cost... Indirect costsare those costs that cannot be easily and accurately traced to a cost object. Example:The salary of a plant manager, where departments within the plant are defined as the cost objects.

10. Production Costs • Direct materials are those materials that are directly traceable to the goods or services being produced. • Steel in an automobile • Wood in furniture • Rubber in tyre • Bricks in building • Cloth in shirts

11. Production Costs Direct laboris the labor that is directly traceable to the goods or services being produced. • Workers on an assembly line at Proton • A chef in a restaurant • A surgical nurse attending an open heart operation • Airline pilot

12. Production Costs Overheadare all other production costs. • Depreciation on building and equipment • Maintenance • Supplies • Supervision • Power • Property taxes

13. Calculating Production Costs • Production Costs = Direct Materials + Direct Labor + Manufacturing Overhead

14. Period Costs Period costs are expensed in the period in which they are incurred. • Salaries and commissions of sales personnel (marketing) • Advertising (marketing) • Manager salaries (administrative) • Rent of office building (administrative)

15. Production Costs Prime Cost : Direct Materials Costs + Direct Labor Costs Conversion Cost: Direct Labor Costs + Overhead Costs

16. External Financial Statements

17. Manufacturing OrganizationIncome StatementFor the Year Ended December 31, 2004 2-20 • Sales $2,800,000 • Less cost of goods sold: • Beginning finished goods inventory $ 500,000 • Add: Cost of goods manufactured 1,200,000 • Cost of goods available for sale $1,700,000 • Less: Ending finished goods inventory 300,000 1,400,000 • Gross margin $1,400,000 • Less operating expenses: • Selling expenses $ 600,000 • Administrative expenses 300,000 900,000 • Income before taxes $ 500,000

18. Statement of Cost of Goods ManufacturedFor the Year Ended December 31, 2004 2-21 • Direct materials: • Beginning inventory $200,000 • Add: Purchases 450,000 • Materials available $650,000 • Less: Ending inventory 50,000 • Direct materials used $ 600,000 • Direct labor 350,000 • Manufacturing overhead: • Indirect labor $122,500 • Depreciation 177,500 • Rent 50,000 • Utilities 37,500 • Property taxes 12,500 • Maintenance 50,000 450,000 • Total manufacturing costs added $1,400,000 continued on next slide

19. Work in process consists of all partially completed units found in production at a given point in time. Total manufacturing costs added $1,400,000 Add: Beginning work in process 200,000 Total manufacturing costs $1,600,000 Less: Ending work in process 400,000 Cost of goods manufactured $1,200,000

20. Service OrganizationIncome StatementFor the Year Ended December 31, 2004 2-18 Sales $300,000 Less expenses: Cost of services sold: Beginning work in process $ 5,000 Service costs added: Direct materials $ 40,000 Direct labor 80,000 Overhead 100,000 220,000 Total $225,000 Less: Ending work in process 10,000 215,000 Gross margin $ 85,000 Less operating expenses: Selling expenses $ 8,000 Administrative expenses 22,000 30,000 Income before income taxes $ 55,000