LEARNING OBJECTIVES

2. LEARNING OBJECTIVES When you finish this chapter, you should be able to

3. LEARNING OBJECTIVES • Distinguish activities of manufacturer from merchandising or service firm. • Define, illustrate materials, labor, factory overhead costs. • Describe accounting systems used by manufacturing businesses. • Describe, illustrate job order cost system. Continued

4. LEARNING OBJECTIVES • Use job order cost information for decision making. • Diagram flow of costs for a service business that uses job order cost system. • Describe just-in-time manufacturing • Describe, illustrate activity-based costing in a service business.

5. LEARNING OBJECTIVE 1 Distinguish activities of manufacturer from merchandising or service firm.

6. LO 1 MANUFACTURING FIRM DIFFERENCES • Service firms earn revenue from providing services • Merchandising firms earn revenue from selling merchandise inventory • Manufacturing firms • Earn revenue from manufacturing and selling finished goods • Have 3 inventories: materials, work-in-process, finished goods

7. LEARNING OBJECTIVE 2 Define, illustrate materials, labor, factory overhead costs.

8. LO 2 EXHIBIT 1 Goodwell Printing Co. has 2 departments

9. LO 2 GOODWELL PRESSCosts • Cost is payment or commitment to pay cash for future revenues • Manufacturing costs • Direct materials • Direct labor • Manufacturing overhead

10. LO 2 What are these manufacturing costs?

11. LO 2 DIRECT MATERIALS COSTS • Cost of direct materials is cost of raw materials used in the manufacture of a product • Goodwell Printing • Paper • Book covers

12. LO 2 DIRECT LABOR COSTS • Direct labor is • Labor used to convert materials into product • Goodwell Printing • Wages of employees who operate printing presses

13. LO 2 FACTORY OVERHEAD COSTS • Factory overhead is costs other than materials, labor incurred in manufacturing process • Machine depreciation • Factory insurance

14. LEARNING OBJECTIVE 3 Describe accounting systems used by manufacturing businesses.

15. LO 3 What are 2 manufacturing cost accounting systems?

16. LO 3 COST ACCOUNTING SYSTEMS • Job order costing • Costs accumulated by job for • Custom products, large variety of products • Levi Strauss • Process costing • Costs accumulated by department, process • Oil refineries

17. LEARNING OBJECTIVE 4 Describe, illustrate job order cost system.

18. LO 4 EXHIBIT 2 Illustration of 3 perpetual inventories, ending in cost of goods sold.

19. LO 4 EXHIBIT 3 Materials accounted & requisitioned for each job.

20. LO 4 ACCOUNTING FOR MATERIALS Cash Flows Balance Sheet Income Statement Receiving report #196 documents materials purchased.

21. LO 4 REQUISITIONING MATERIALS Cash Flows Balance Sheet Income Statement Materials requisitioned for conversion.

22. LO 4 DIRECT LABOR Cash Flows Balance Sheet Income Statement Direct labor cost from time cards of job assigned to work-in-process.

23. LO 4 FACTORY OVERHEAD:Examples • Examples of factory overhead • Indirect materials • Indirect labor • Factory utilities • Factory depreciation • Factory overhead allocated based on activity driver at predetermined rate • Direct labor, direct materials

24. LO 4 ACCUMULATING FACTORY OVERHEAD COSTS Cash Flows Balance Sheet Income Statement Factory overhead is accumulation of indirect costs of manufacturing process.

25. LO 4 PREDETERMINED OVERHEAD RATE Goodwell Printers estimates total factory overhead to be $50,000 and direct labor (activity base) to be 10,000 direct labor hours. Predetermined O/H rate = Est. O/H costs/ Est. activity base Predetermined O/H rate = $50,000/10,000 = $5 per direct labor hour

26. LO 4 ACCUMULATING FACTORY OVERHEAD COSTS Cash Flows Balance Sheet Income Statement Factory overhead assigned to work-in-process inventory based on 850 direct labor hours.

27. LO 4 DISPOSING OF EXCESS OVERHEAD COSTS Cash Flows Balance Sheet Income Statement Excess overhead costs charged to cost of goods sold expense. -150 CGS

28. LO 4 JOB #71 Costs to complete Job #71

29. LO 4 ACCOUNTING FOR JOB #71 Cash Flows Balance Sheet Income Statement Completed job transferred from WIP to finished goods.

30. LO 4 EXHIBIT 6 Job costs transferred to WIP control sheet

31. LO 4 EXHIBIT 7 Finished goods ledger account

32. LO 4 SALE Cash Flows Balance Sheet Income Statement Sale of finished goods costing $20,000 for $28,000. 28,000 Sales -20,000 CGS

33. LO 4 PERIOD COSTS Period costs are non-manufacturing costs

34. LEARNING OBJECTIVE 5 Use job order cost information for decision making.

35. LO 5 BASIS FOR DECISION MAKING • When 2 jobs for the same product have different costs, what is the problem? • Inexperienced labor? • Poor quality materials? • Tools need repair? • Carelessness? • Incorrect instructions?

36. LO 5 EXHIBIT 10

37. LEARNING OBJECTIVE 6 Diagram flow of costs for a service business that uses job order cost system.

38. LO 6 EXHIBIT 11 Job costs in service industry

39. LEARNING OBJECTIVE 7 Describe just-in-time manufacturing.

40. LO 7 EXHIBIT 12 Just in time (JIT) reduces costs, requires new approach.

41. LEARNING OBJECTIVE 8 Describe, illustrate activity-based costing in a service business.

42. LO 8 EXHIBIT 13 Hopewell Hospital accumulates costs by specific activities.

43. LO 8 USING ACTIVITY BASED COSTING Assigning costs based on different activities is basis of patient billing. Helps manage costs.

44. CHAPTER 10 THE END