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Product Costing in Service and Manufacturing Entities

Product Costing in Service and Manufacturing Entities. Chapter 11. Introduction. Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. Managerial Accounting Product costs are used for planning, control, directing, and management decision making.

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Product Costing in Service and Manufacturing Entities

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  1. Product Costing in Service and Manufacturing Entities Chapter 11

  2. Introduction 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. Manufacturing Cost Flow DirectLabour DirectMaterial Manufacturing Overhead TheProduct

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

  5. Direct Labour Cost of salaries, wages, and fringebenefits for personnel who workdirectly on manufactured products. Example: Wages paid to anautomobile assemblyworker.

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

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

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

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

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

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

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

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

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

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

  16. Manufacturing Cost Flow Work in Process Wages Payable • Direct Labour • Direct Material • Direct Labour • IndirectLabour • 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 • IndirectLabour

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

  18. Manufacturing Cost Flow Finished Goods Work in Process • Direct Material • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labour • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold

  19. Manufacturing Cost Flow Let’s look atthe January transactions of Ventra Manufacturing company.

  20. Manufacturing Cost Flow

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

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

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

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

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

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

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

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

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

  31. Manufacturing Cost Flow • Ventura recognizes $5,600 of sales revenue for 400 boxes sold. Cash Revenue Bal. 64,500 • 26,500 • 5,600 • 5,600 • 2,000 • 1,400 400 boxes @ $14.00 per box = $5,600

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

  33. Manufacturing Cost Flow • Ventura pays $1,200 cash for actual manufacturing overhead costs including indirect labour, utilities, rent, etc. Manufacturing Overhead Manufacturing overhead is $480 overapplied at the end of January. If a difference between actual and applied overhead exists at year end, the amount will be closed to cost of goods sold. Cash Bal. 64,500 Actual • 26,500 Applied • 5,600 • 2,000 • 1,200 • 1,680 • 1,400 • 1,200

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

  35. Manufacturing Cost Flow

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

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

  38. Manufacturing Cost Flow Manufacturing overhead is $3,752 underapplied. Manufacturing Overhead Actual Applied 43,400 39,648 3,752 11,800 boxes manufactured × $3.36 POHR

  39. Manufacturing Cost Flow 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

  40. Actual Fixed Fixed Fixed 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 the Underapplied Overhead

  41. Manufacturing Cost Flow Let’s prepare aSchedule of Cost of GoodsManufactured and Soldfor Ventra.

  42. Preparing a Cost of Goods Manufactured and Sold Schedule

  43. Preparing a Cost of Goods Manufactured and Sold Schedule

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

  45. Financial Statements Let’s look at the Income Statementfor Ventra.

  46. Financial Statements

  47. Financial Statements Let’s look at the Balance Sheetfor Ventra.

  48. Financial Statements

  49. Financial Statements Let’s look at the Cash Flow Statement for Ventra.

  50. Financial Statements

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