Product Cost Flows and Business Organizations

1. 3 • C H A P T E R Product Cost Flows and Business Organizations

2. Learning Objective 1 • Understand the difficulty, yet importance, of having accurate product cost information.

3. Difficult to assign to products. Easily assigned to products. Easily assigned to products. Direct Materials Costs Manufacturing Overhead Costs Direct Labor Costs - Total costs not known until the end of the period. - Not usually assigned to specific products. - “Lumped” costs don’t match production very well. - Expenditure and use usually match production. - Expenditure and use usually match production. Assignment of Product Costs Product Cost

4. Product Cost Systems Why does management needs accurate product cost information?

5. Product Cost Systems What does accurate information allow management to do?

6. Learning Objective 2 • Explain the flow of goods and services in a manufacturing organization and follow the accumulation of product costs in its accounting system.

7. Review the Time Line of Business

8. Measuring Cost To accurately measure product costs, accountants must:

9. Outline the Flow of Cost in a Manufacturing Process

10. What are some difficulties in determining costs of manufactured products? Determining Cost

11. Costs of Manufacturing ProductsDiscuss the Nature of Raw Materials. Direct materials

12. Example: Direct Materials Costs Venus Vehicles purchased $2 million of steel for its new line of cars. What is the journal entry? Half the new steel is requested from the warehouse for production. What is the journal entry? Indirect materials ($250,000 of glue and bolts) are requisitioned from the storeroom. What is the journal entry?

13. Costs of Manufacturing ProductsDiscuss the Nature of Direct Labor. Direct labor

14. Direct Labor Costs and Example • Time clocks, computer entries, time sheets— • - All allow production personnel to identify specific jobs worked on. • This information is revealed on the job cost sheet. • Labor costs can be direct or indirect. • Payroll records report direct labor of $50,000 and indirect labor of $50,000. Record the direct labor. Record the indirect labor.

15. Costs of Manufacturing ProductsDiscuss the Nature of Factory Overhead. Manufacturing overhead

16. Describe Characteristics of Manufacturing Overhead Costs

17. Describe the Two-Step Process to Apply Manufacturing Overhead to Products Step One Step Two

18. Determining Manufacturing Overhead Rate Steel Works estimates annual variable manufacturing overhead costs of $10,000 and fixed manufacturing overhead of $20,000. What is the predetermined overhead rate if the companyexpects to use the machines 10,000 hours?

19. Determining Manufacturing Overhead Rate Steel Works used 10 machine hours in the production of Job No. 12. Using the $3.00 predetermined overhead rate, what overhead costs will be applied to manufacturing overhead (MOH) for this job? What is the journal entry to apply this MOH to Job No. 12?

20. Transferring Completed Products to Finished Goods Inventory & then Selling the Products Steel Works used $100 in direct materials in Job No. 12’s production as well as 10 hours of direct labor at $20 per hour. Using a job cost sheet, determine the job’s total cost. Now that the job is complete, prepare the entries for its transfer to Finished Goods and its sale.

21. Learning Objective 3 • Understand the process of accounting for overhead.

22. Actual versus Applied Manufacturing Overhead • Actual Overhead • Actual annual manufacturing overhead costs. • Needed for accurate determination of income. • Recorded as debit to Manufacturing Overhead. • Applied Overhead • Amount of overhead applied to products using the predetermined overhead rate. • Recorded as credit to Manufacturing Overhead.

23. Manufacturing Overhead Manufacturing Overhead Actual 10 Applied 20 Actual 20 Applied 10 Disposition of Over- and Underapplied MOH • Overapplied Manufacturing Overhead: • The excess of applied overhead costs over actual overhead costs for a period. (Cost of job is overstated) (Cost of job is understated) Underapplied Manufacturing Overhead: The excess of actual overhead costs over applied overhead costs for a period.

24. - Close over- or underapplied overhead directly to Cost of Goods Sold. - Easier and more commonly used, especially if amount is small. - Debit MOH, Credit COGS. - Allocate over- or underapplied manufacturing overhead to Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold on the basis of the ending balances in these three accounts. - More accurate; any difference is allocated proportionately. - More complicated; requires detailed calculations. Treating Applied Overhead Two methods for treating over- and underapplied MOH:

25. Learning Objective 4 • Create a Cost of Goods Manufactured schedule and understand how it is used to calculate cost of goods sold.

26. Discuss the Cost of Goods Manufactured Schedule

27. Example: Cost of Goods Manufactured Schedule • Satchel Manufacturing, Inc. • Cost of Goods Manufactured Schedule • For the Year Ended December 31, 2006 • Raw Materials: • Beginning raw materials inv. $ 30,000 • Add: Raw materials purchased 150,000 • Total: raw materials available $180,000 • Less: Ending raw materials inv. 20,000 • Raw materials used in production $ 160,000 • Direct labor 220,000 • Applied manufacturing overhead 330,000 • Total manufacturing costs $ 710,000

28. Example: Cost of Goods Manufactured Schedule • We will begin with the bottom line from the previous slide. • Total manufacturing cost $ 710,000 • Add: Beginning work-in-process 25,000 • Less: Ending work-in-process 35,000 • Cost of goods manufactured $ 700,000

29. Learning Objective 5 • Explain the flow of goods and services in a merchandising organization and follow the accumulation of product costs in its accounting system.

30. The Distribution Channel • The process of wholesalers purchasing from manufacturers and supplying retailers who sell to final customers.

31. Manufacturer Brand A Wholesaler Brand A Customers Manufacturer Brand B Brand B Customers Manufacturer Brand C Brand C Customers Retailer Wholesaler Manufacturer Brand D Brand D Customers Manufacturer Brand E Brand E Customers Wholesaler Manufacturer Brand F Brand F Customers A Typical Channel of Distribution

32. Describe What Wholesalers Do

33. Retailers – Define Risk and Stockturns • Often work with many wholesalers (and some manufacturers) to obtain inventory mix. • Risk • Stockturns Second-tier merchants who typically purchase products from wholesalers to distribute to customers. Many will often bypass wholesalers to purchase inventory directly from the original manufacturers.

34. Describe Merchandise Cost Flows Accounts Payable xxx MerchandiseInventory xx xx xxx xx Cost of Goods Sold xx x xx

35. Describe Accounting for Inventory • Prepare journal entry for when $465 inventory is sold.

36. Learning Objective 6 Explain the flow of goods and services in a service organization and follow the accumulation of product costs in its accounting system

37. Define a Service Company

38. What are the Effects of Deregulation?

39. List Similarities Between Service and Manufacturing Firms

40. List Differences Between Service and Manufacturing Firms

41. Work-in-Process Inventory • At period’s end, there may be situations where significant effort and resources have been invested in a service product that is not yet completed. • Revenue is not yet earned; therefore, costs should not be recognized yet as expenses. This work in process is an asset, referred to asWork-in-Process Services. • When service is completed and delivered, service costs (overhead costs and work-in-process services) are transferred to Cost of Services.

42. Learning Objective 7 • Understand the impact of e-business on product costing.

43. What Impact Has e-business Had on Product Costs?

44. Expanded MaterialLearning Objective 7 • Use the FIFO method to do process costing.

45. Process Costing Process costing is appropriate if what two general conditions are met?

46. What are the 5 Steps in Process Costing? • 1 • 2 • 3 • 4 • 5

47. Step 1: Compute Equivalent Units of Production

48. Step 2: Compute Product Costs per Unit

49. Step 3: Compute the Costs Transferred Out

50. Step 4: Compute Costs of Ending Work-in Process Inventory