Managerial Accounting Chapter Two Job Costs

1. Managerial Accounting Chapter Two Job Costs JMS

2. Cost Accounting Systems • Cost accounting involves the: Measuring, Recording, and Reporting of product costs. • Determines both the total cost and unitcost of each product. • Accuracy is critical to company success. • Helps determine 1) which product(s) to produce, 2) the amount to produce, and 3) price to charge. • Improves effectiveness of employee performance evaluations.

3. Cost Accounting Systems Needed: Accounts for various manufacturing costs. Such accounts are fully integrated into the general ledger system. Requires: perpetual inventory system to provide immediate, up-to-date information on the cost of a product.

4. Cost Accounting Systems Two basic types of cost accounting systems: Job Order Cost Systems and Process Cost Systems Chapt 3

5. JOB ORDER COST SYSTEM • Costs are assigned to each job or batch • A job may be for a specific order • A key feature: Each job or batch has its own distinguishing characteristics (each is identifiable) • The objective: tocompute the cost per job • Measures costs for each job completed - not for set time periods

6. JOB ORDER COST FLOWS • Cost flow parallelsphysical flow of the materials as they are manufactured. How? • Manufacturing costs are assigned (debited) to Work in Process Inventory. • Cost of completed jobs are transferred to Finished Goods Inventory. • When units are sold, the cost is transferred to Cost of Goods Sold (expensed).

7. In Manufacturing Companies - Costs come from three main sources: Manufacturing Costs Selling Costs Administrative Costs

8. Manufacturing Costs are divided into two types: Direct Costs The Material and Labor needed to actually make the product(s) Indirect Costs - (Mfg Overhead) Other costs needed to support manufacturing Such as: Building Maintenance Equipment

9. The Problem is . . .

10. When do you recognize each type of cost? Manufacturing Costs Direct Costs Indirect Costs Selling Costs Administrative Costs

11. The Matching Principle requires: • Costs must be expensed in the same period that the related revenues are recorded.

12. The Matching Principle requires: • Costs must be expensed in the same period that the related revenues are recorded. As in a Merchandising Business . . . The cost of products sold must be recorded in the same period as the sale. Product Costs = the costs to manufacture products. These costs become part of the product and are expensed when it is sold.

13. Theseare the Product Costs Manufacturing Costs Direct Costs Indirect Costs Selling Costs The rest are period costs Administrative Costs

14. Keep your eye on the goal of Cost Accounting! + Direct Material Direct Labor What did the Finished Goods cost to make??? + Manufacturing Overheads =

15. Theseare the Product Costs Manufacturing Costs Direct Costs Indirect Costs Notice this: Direct Costs in a product are usually straight forward. They are measurable! Indirect costs to products is usually more difficult. They must be Allocated.

16. Manufacturing Overhead Costs Manufacturing Costs Indirect Costs How do you allocate manufacturing overheads to products or jobs?

17. To Allocate Manufacturing Overheads • The first step is to ESTIMATE the total Manufacturing Overheads for the period. $ $ $ Utilities Supervisor’s Salary Maintenance Material and Labor $ $ Factory Rent Equip. Depreciation $ $

18. To Allocate Manufacturing Overheads • The second step is to ESTIMATE the total units to be produced in the period.

19. By knowing expected O/H costs and production we can allocate O/H to Units. $ Estimated Overhead Costs $ Estimated Units to be Produced = Predetermined Overhead Rate

20. By knowing expected O/H costs and production we can allocate O/H to Units. If every item produced were identical we could allocate a fixed amount to each item. But . . . That is rarely the case. $ $

21. Allocating Overheads • Therefore, we allocate (apply) overheads based on some measure of relative effort put into each item (activity base). Common activity bases include: • Direct Labor Hours • Direct Labor Dollars • Machine Hours So. We’ll need a predetermined overhead rate for . . . say . . . Machine Hours

22. Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $615,000. The company incurred actual overhead costs totaling $630,000. The budgeted machine hours for the year totaled 20,000. How much is the predetermined overhead rate? a. $30.75 per machine hour b. $31.50 per machine hour c. $31.50 per job d. $0.75 per job

23. Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $615,000. The company incurred actual overhead costs totaling $630,000. The budgeted machine hours for the year totaled 20,000. How much is the predetermined overhead rate? a. $30.75 per machine hour b. $31.50 per machine hour c. $31.50 per job d. $0.75 per job

24. Vektek, Inc. used 1,000 hours of machine time to process Job No. B12 during the. How much manufacturing overhead should be applied to Job No. B12? a. $630 b. $30,750 c. $31,500 d. $615

25. Vektek, Inc. used 1,000 hours of machine time to process Job No. B12 during the. How much manufacturing overhead should be applied to Job No. B12? a. $630 b. $30,750 c. $31,500 d. $615

26. ASSIGNING MANUFACTURING COSTS TO WORK IN PROCESS Predetermined Overhead Rate • Established at the beginning of the year. • May use a single, company-wide predetermined rate. • May use a different rate for each department and each department may have a different activity base. • The formula for a predetermined overhead rate is

27. Allocating Overheads The concept of applying overheads to production based on some activity base is used for both • Job Cost and • Process Cost systems.

28. Let’s review job cost Journal Entries The entries are similar for Material Labor Manufacturing Overhead But they are NOT identical

29. 1 Flow of Material Costs WIP Step 1 (Journal Entry ) Purchase Material Raw Material Finished Goods Direct Materials $85,000

30. 1 Journal Entries Raw Materials 85,000 Accounts Payable 85,000 Purchase Raw Materials

31. 2 Flow of Material Costs Step 2 (Journal Entry ) Raw material is issued to a job based on the job’s specific requirements. WIP Direct Materials $80,000 Dr Raw Material Finished Goods Direct Materials $85,000 Direct Materials $80,000 Cr

32. 2 1 Journal Entries Raw Materials 85,000 Accounts Payable 85,000 Purchase raw materials WIP 80,000 Raw Materials 80,000 Issued material to WIP

33. 2 Indirect Materials $2,000 Indirect Materials $2,000 Flow of Material Costs Step 2 (Journal Entry ) A related entry is to issue raw material for indirect production needs (grease, cleaning supplies). WIP Direct Materials $80,000 Dr Raw Material Manufacturing O/H Direct Materials $85,000 Direct Materials $80,000 Cr Dr Cr

34. 2 3 1 Labor is similar. Journal Entries Material Raw Materials 85,000 Accounts Payable 85,000 Purchase raw materials WIP 80,000 Raw Materials 80,000 Issued material to WIP Manufacturing Overheads 2,000 Raw Materials 2,000 Issued indirect material

35. 2 3 1 Journal Entries Labor Factory Labor Raw Materials 90,000 Accounts Payable 90,000 June mfg payroll WIP 85,000 Raw Materials 85,000 Dir. labor to WIP Manufacturing Overheads 5,000 Raw Materials 5,000 Indir. labor to O/H Wages Factory Labor Factory Labor

36. 2 1 Journal Entries Manufacturing O/H Manufacturing O/H 133,000 Accounts Payable 133,000 WIP 140,000 Manufacturing O/H 140,000

37. Flow of Manufacturing Costs Work-In Process Finished Goods Direct Materials $80,000 Finished Goods $250,000 Finished Goods $250,000 Direct Labor $85,000 Factory Overhead $140,000 Cost of Goods Sold Balance $45,000

38. Prepare these 2 entries Flow of Manufacturing Costs Work-In Process Finished Goods Direct Materials $80,000 Finished Goods $250,000 Finished Goods $250,000 Goods Sold $210,000 Direct Labor $85,000 Factory Overhead $140,000 Cost of Goods Sold Goods Sold $210,000 Balance $45,000

39. Flow of Manufacturing Costs Work-In Process Finished Goods Direct Materials $85,000 Finished Goods $250,000 Finished Goods $250,000 Goods Sold $210,000 Direct Labor $100,000 Balance $40,000 Factory Overhead $140,000 Cost of Goods Sold Goods Sold $210,000 Balance $75,000

40. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Income Statement Period Costs

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

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

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

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

45. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Raw 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

46. 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

47. Manufacturing Cost Flows and Classifications Costs Product Costs Balance Sheet Raw 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

48. Goodwell Printers Income Statement For the Month Ended January 31, 2010 Sales $400,000 Cost of goods sold 210,000 Gross profit $190,000 Operating expenses: Selling expenses $80,000 Administrative expenses 50,000 Total operating expenses 130,000 Net income $ 60,000

49. Resource Flows Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? • a. $276,000 • b. $272,000 • c. $280,000 • d. $ 2,000

50. Resource Flows Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? • a. $276,000 • b. $272,000 • c. $280,000 • d. $ 2,000