Accounting Systems for Manufacturing Businesses - A Survey & Presentation

1. Survey of Accounting Electronic Presentationby Douglas Cloud Pepperdine University Carl S.Warren

2. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3. Chapter 10 Accounting Systems for Manufacturing Businesses

4. Learning Objectives 1. Distinguish the activities of a manufacturing business from those of a merchandise or service business. 2. Define and illustrate materials, factory labor, and factory overhead costs. 3. Describe accounting systems used by manufacturing businesses. 4. Describe and illustrate a job order cost accounting system. After studying this chapter, you should be able to: Continued

5. Learning Objectives 5. Use job order cost information for decision making. 6. Diagram the flow of costs for a service business that uses a job order cost accounting system. 7. Describe just-in-time manufacturing. 8. Describe and illustrate the use of activity-based costing in a service business.

6. Learning Objective 1 Distinguish the activities of a manufacturing business from those of a merchandise or service business.

7. Merchandising Reports: Cost of merchandise sold Merchandise inventory Manufacturing Reports: Cost of goods sold Materials inventory Work in process inventory Finished goods inventory

8. Learning Objective 2 Define and illustrate materials, factory labor, and factory overhead costs.

9. Cost Classifications Direct Materials Product Costs Direct Labor Factory Overhead Selling Expenses Period Costs Administrative Expenses

10. Manufacturing Costs Direct Materials: 1. Enters directly into the product. 2. Is significant amount of total product cost. 1. Enters directly into manufacturing the product. 2. Is significant amount of total product cost. Cost other than direct materials cost and direct labor cost incurred in the manufacturing of product. Direct Labor: Factory Overhead:

11. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Purchases Direct Labor Factory Overhead Income Statement Period Costs Selling and Administrative

12. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Inventory Materials Purchases Direct Labor Factory Overhead Income Statement Period Costs Selling and Administrative

13. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Inventory Materials Purchases Direct Labor Work in Process Inventory Factory Overhead Income Statement Period Costs Selling and Administrative

14. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Inventory Materials Purchases Cost of Goods Manufactured Direct Labor Work in Process Inventory Factory Overhead Income Statement Finished Goods Inventory Period Costs Selling and Administrative

15. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Product costs flow through the balance sheet to the income statement Materials Inventory Materials Purchases Direct Labor Work in Process Inventory Factory Overhead Income Statement Finished Goods Inventory Cost of Goods Sold Period Costs Selling and Administrative

16. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Materials Inventory Materials Purchases Period costs flow directly to the income statement Direct Labor Work in Process Inventory Factory Overhead Income Statement Finished Goods Inventory Cost of Goods Sold Period Costs Selling and Administrative Selling and Administrative

17. Learning Objective 3 Describe accounting systems used by manufacturing businesses.

18. Cost Accounting Systems Job Order Cost System 1. Many different jobs are worked on during each period and unit costs are computed by job. 2. Costs are accumulated using a job cost sheet. 1. A single product is produced on a continuous basis and unit costs are computed by department. 2. Costs are accumulated and reported using a departmental production report. Process Cost System

19. Learning Objective 4 Describe and illustrate a job order cost accounting system.

20. Materials Information and Cost Flows Job 71 1,000 units of American History Balance $ 3,000 Direct Materials Direct Labor Factory Overhead Materials Requisitions Job 72 4,000 units of Algebra Direct Materials Direct Labor Factory Overhead

21. Materials Information and Cost Flows Job 71 1,000 units of American History Balance $ 3,000 Direct Materials 2,000 Direct Labor Factory Overhead Materials Requisitions Job 72 4,000 units of Algebra Direct Materials $11,000 Direct Labor Factory Overhead

22. Labor Information and Cost Flows Job 71 1,000 units of American History Balance $ 3,000 Direct Materials 2,000 Direct Labor Factory Overhead Time Tickets Job 72 4,000 units of Algebra Direct Materials $11,000 Direct Labor Factory Overhead

23. Labor Information and Cost Flows Job 71 1,000 units of American History Balance $ 3,000 Direct Materials 2,000 Direct Labor 3,500 Factory Overhead Time Tickets Job 72 4,000 units of Algebra Direct Materials $11,000 Direct Labor 7,500 Factory Overhead

24. Estimated total factory overhead costs Predetermined factory overhead rate = Estimated activity base Predetermined Factory Overhead Rates 1. Direct labor hours 2. Direct labor dollars 3. Machine hours 4. Direct materials 5. Other Activity base examples

25. Estimated total factory overhead costs Predetermined factory overhead rate = Estimated activity base Predetermined Factory Overhead Rates It is a tradeoff between accuracy and timeliness. If a company waited until the end of an accounting period, when all overhead costs are known, the allocated factory overhead would be accurate but not timely. Why is the predetermined overhead rate calculated from estimated numbers at the beginning of the period?

26. Estimated total factory overhead costs Estimated activity base $50,000 estimated factory overhead costs 10,000 estimated direct labor hours Predetermined Factory Overhead Rates Predetermined factory overhead rate = =

27. Estimated total factory overhead costs Estimated activity base $50,000 estimated factory overhead costs 10,000 estimated direct labor hours Predetermined Factory Overhead Rates Predetermined factory overhead rate = $5 per direct labor hour =

28. Estimated total factory overhead costs Estimated activity base $50,000 estimated factory overhead costs 10,000 estimated direct labor hours Predetermined Factory Overhead Rates Predetermined factory overhead rate = $5 per direct labor hour = For each direct labor hour worked, factory overhead applied is $5. Direct Factory Labor Overhead Hours Applied Job 71 350 x $5 = $1,750 Job 72 500 x $5 = $2,500

29. Assigning Factory Overhead to Jobs Job 71 1,000 units of American History Balance $ 3,000 Direct Materials 2,000 Direct Labor 3,500 Factory Overhead Time Tickets Predetermined Overhead Rates Job 72 4,000 units of Algebra Direct Materials $11,000 Direct Labor 7,500 Factory Overhead

30. Assigning Factory Overhead to Jobs Job 71 1,000 units of American History Balance $ 3,000 Direct Materials 2,000 Direct Labor 3,500 Factory Overhead 1,750 Time Tickets Predetermined Overhead Rates Job 72 4,000 units of Algebra Direct Materials $11,000 Direct Labor 7,500 Factory Overhead 2,500

31. Summary of Job Cost Sheets Job 71 1,000 units of American History Balance $ 3,000 Direct Materials 2,000 Direct Labor 3,500 Factory Overhead 1,750 Total Job Cost $10,250 Job 72 4,000 units of Algebra Direct Materials $11,000 Direct Labor 7,500 Factory Overhead 2,500 $21,000 Total of debits to Work in Process

32. Goodwell Printers Income Statement For the Month Ended December 31, 2004 Sales $28,000 Cost of goods sold 20,150 Gross profit $ 7,850 Selling and admin. expenses: Sales salaries expense $2,000 Office salaries expense 1,500 Total selling and admin. expenses 3,500 Income from operations $ 4,350

33. Learning Objective 5 Use job order cost information for decision making.

34. Job 144 Item: 200 folding chairs Materials Quantity (board feet) Materials Price Materials Amount Direct materials: Wood Direct materials per chair 1,600 $3.50 $5,600 $28

35. Job 163 Item: 200 folding chairs Materials Quantity (board feet) Materials Price Materials Amount Direct materials: Wood Direct materials per chair 2,000 $3.50 $7,000 $35

36. Learning Objective 6 Diagram the flow of costs for a service business that uses a job order cost accounting system.

37. Flow of Costs Through a Service Business Work in Process Cost of Services Wages Payable Direct labor xxx Indirect labor xxx Direct labor xxx Applied overhead xxx Completed jobs (xxx) Completed jobs xxx Factory Overhead Indirect labor xxx Supplies used xxx Applied overhead (xxx) Supplies Used xxx

38. Learning Objective 7 Describe just-in-time manufacturing.

39. Continued

41. Learning Objective 8 Describe and illustrate the use of activity-based costing in a service business.

43. HOPEWELL HOSPITAL Customer (Patient) Profitability Report For the Period Ending December 31, 2004

44. Chapter 10 The End