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CHAPTER 11

CHAPTER 11. Product Costing in Service and Manufacturing Entities. Chapter Opening. Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. . Managerial Accounting

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CHAPTER 11

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  1. CHAPTER 11 Product Costingin Service and Manufacturing Entities

  2. Chapter Opening Financial Accounting Product costs are used to value inventory and to compute cost ofgoods sold. Managerial Accounting Product costs are used for planning, control, directing, and management decision making.

  3. Learning Objective To describe the natureand treatment ofproduct cost informationfor manufacturing andservice companies LO1

  4. Materials waiting to be processed. Partially complete products – material to which some labor and/or overhead has been added. Completed products awaiting sale. Cost Flow in Manufacturing Companies Raw Materials Work-in-Process(WIP) Finished Goods

  5. Materials Used • Labor • Overhead Total Mfg.CostsIncurred Cost of Goods Mfd. Cost of GoodsSold EndingInventory EndingInventory EndingInventory Cost Flow in Manufacturing Companies Income Statement Balance Sheet RawMaterials Work-in-Process FinishedGoods Cost of Purchases

  6. InsuranceFirms PublicAccountants Airlines Service Companies Hospitals Attorneys PlumbingCompanies Banks Hotels Cost Flow in Service Companies

  7. Service companies do not havework-in-process and finished goods inventory accountswhere costs are stored beforebeing transferred to a cost ofgoods sold account. Cost Flow in Service Companies

  8. Learning Objective To demonstrate theflow of materials andlabor costs for amanufacturing company LO2

  9. DirectLabor DirectMaterial Manufacturing Overhead TheProduct Manufacturing Cost Flow

  10. Example: Wages paid to anautomobile assemblyworker. Direct Labor Cost of wages and fringebenefits for personnel who workdirectly on manufactured products.

  11. Example: Steel used tomanufacturethe automobile. Direct Material Raw material that is used to make,and can be convenientlytraced, to the finished product.

  12. Materials used to support the production process.Examples: Lubricants and cleaning supplies used in an automobile assembly plant. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts

  13. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts Cost of personnel who do not work directly on the product.Examples: Maintenance workers, janitors and security guards.

  14. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts Examples: Depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.

  15. Let’s examine the cost flows in a manufacturing company. We will use T-accounts and start withmaterials. Manufacturing Cost Flow

  16. Direct Material Manufacturing Cost Flow Raw Materials Work-in-Process • Direct Material • Material • Purchases • Indirect Material Mfg. Overhead • Indirect Material

  17. Manufacturing Cost Flow Next let’s addlabor costs andapplied manufacturing overhead to the job-order cost flows. Are you with me?

  18. Manufacturing Cost Flow Work-in-Process Wages Payable • Direct Labor • Direct Material • Direct Labor • IndirectLabor • Overhead Applied Mfg. Overhead If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later. • Indirect Material • OverheadApplied to Work inProcess • IndirectLabor

  19. Manufacturing Cost Flow Now let’s complete the goods and sell them. Still with me?

  20. Manufacturing Cost Flow Finished Goods Work-in-Process • Direct Material • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labor • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold

  21. Manufacturing Cost Flow Let’s look atthe January transactions of Ventra Manufacturing Company.

  22. Manufacturing Cost Flow

  23. Raw Materials Cash Bal. 64,500 Bal. 500 Manufacturing Cost Flow • Ventra pays $26,500 cash to purchase raw materials. • 26,500 • 26,500

  24. Raw Materials Work-in-Process Bal. 0 Bal. 500 • 26,500 Manufacturing Cost Flow • Ventra places $1,100 of raw materials into production in the process of making jewelry boxes. • 1,100 • 1,100

  25. Production Supplies Cash Bal. 64,500 • 26,500 Manufacturing Cost Flow • Ventra pays $2,000 cash to purchase production supplies. • 2,000 • 2,000

  26. Cash Work-in-Process Bal. 64,500 Bal. 0 • 26,500 • 2,000 • 1,100 Manufacturing Cost Flow • Ventra pays production workers $1,400 cash. • 1,400 • 1,400

  27. Learning Objective To assign estimatedoverhead costs toinventory andcost of goods sold LO3

  28. $ Flow of Overhead Costs Using a predetermined rate makes itpossible toestimatetotal job costs sooner. Actual overheadfor the period is notknown until the end of the period.

  29. Estimated total manufacturingoverhead cost for theperiod POHR = Estimated total units in theallocation base for the period $40,320 $3.36per box = POHR = 12,000 jewelry boxes Flow of Overhead Costs A predetermined overhead rate (POHR), used to apply overhead to products, is determined before the period begins.

  30. Based onestimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actualamount of theallocation basesuch asunits produced, direct labor hours, or machine hours. Flow of Overhead Costs

  31. Manufacturing Overhead Work-in-Process Actual Bal. 0 Applied • 1,100 • 1,400 Manufacturing Cost Flow • Ventra applies $1,680 of estimated manufacturing overhead costs at the end of the month of January. • 1,680 • 1,680 Applied overhead = 500 boxes × $3.36 per box = $1,680

  32. Learning Objective To account forcompletion andsale of products LO4

  33. 100 boxes @ $8.36 Work-in-Process Bal. 0 Finished Goods • 1,100 Bal. 836 • 1,400 • 1,680 Manufacturing Cost Flow • Ventra transfers the total cost of 500 jewelry boxes from work-in-process to finished goods. • 4,180 • 4,180 Unit cost = $4,180 ÷ 500 boxes = $8.36 per box

  34. Cost of Goods Sold Finished Goods Bal. 836 • 4,180 Manufacturing Cost Flow • Ventra recognizes cost of goods sold for 400 jewelry boxes sold to customers. • 3,344 • 3,344 400 boxes @ $8.36 per box = $3,344

  35. Cash Revenue Bal. 64,500 • 26,500 • 2,000 • 1,400 Manufacturing Cost Flow • Ventra recognizes $5,600 of sales revenue for the cash sale of 400 boxes. • 5,600 • 5,600 400 boxes @ $14.00 per box = $5,600

  36. Manufacturing Overhead Cash Bal. 64,500 Actual • 26,500 Applied • 5,600 • 2,000 • 1,680 • 1,400 Manufacturing Cost Flow • Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc. • 1,200 • 1,200

  37. Manufacturing Cost Flow • Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc. Manufacturing overhead is $480 overapplied at the end of January. Any difference between actual and applied overhead remaining at year end will be closed to cost of goods sold. Manufacturing Overhead Actual Applied • 1,200 • 1,680

  38. At the end of the year,Ventra has the followingaccount balances: Manufacturing Cost Flow

  39. Manufacturing Cost Flow

  40. Supplies: $2,000 purchased, $1,700 used. See Cost of GoodsManufactured andSold Schedule Manufacturing Cost Flow

  41. Manufacturing Cost Flow Explanation of Manufacturing Overhead balance follows.

  42. Manufacturing Overhead Actual Applied 43,400 39,648 3,752 Analyzing Underapplied Overhead Manufacturing overhead is $3,752 underapplied. 11,800 boxes manufactured × $3.36 POHR

  43. Analyzing Underapplied Overhead Manufacturing overhead is $3,752 underapplied. Manufacturing Overhead Cost of Goods Sold Actual Applied 83,600 43,400 39,648 3,752 3,752 3,752 87,352 Underapplied overhead is closed to Cost of Goods Sold leaving a zero balance in the overhead account. 10,000 boxes @ $8.36

  44. Actual Overhead Overhead Overhead Incurred Budget Applied $43,400 $40,320 $39,648 Spending variance$3,080 unfavorable Volume variance$672 unfavorable Total variance is $3,752 unfavorable, theamount of underapplied overhead. Analyzing Underapplied Overhead

  45. Learning Objective To prepare aschedule of cost ofgoods manufacturedand sold LO5

  46. Schedule of Cost of Goods Manufactured and Sold

  47. Schedule of Cost of Goods Manufactured and Sold

  48. Schedule of Cost of Goods Manufactured and Sold

  49. Reported in the current assets section of the balance sheet. Schedule of Cost of Goods Manufactured and Sold

  50. Learning Objective To prepare financialstatements for a manufacturing company LO6

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