Chapter 15 notes

Accounting: Tools for Business Decision Making

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Chapter 15 notes A. Cost Accounting Systems. 1. Cost accounting involves the measuring, recording, and reporting of product costs (direct materials, direct labor, and manufacturing overhead). From the data accumulated, both the total cost and the unit cost of each product are determined. The data allows manufacturers to know the amount of their cost of goods sold on their income statement, inventories on their balance sheet, and is also necessary for determining sales prices. 2. A cost accounting system consists of accounts for the various manufacturing costs. These accounts are fully integrated into the general ledger of a company. An important feature of a cost accounting system is the use of a perpetual inventory system that provides immediate, up-to-date information on the cost of a product. 3. There are two basic types of cost accounting systems: a. A job order cost system (chapter 15), where costs are assigned to each custom, one-of-a-kind job or to each custom batch of goods, and b. A process cost system (chapter 16), used when a large volume of similar, homogenous, mass-produced products are manufactured. 1
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B. Job Order Cost Flow. 1. The flow of product costs (direct materials, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods. Note: Carefully study the Job Order Cost Flows and the necessary journal entries on pages 757 through 764. Note that all product costs go through inventories and cost of goods sold, while period costs are recorded as expenses as they are incurred. 2. The costs of direct materials and direct labor are easily traced to each product or job. Manufacturing overhead, however, consists of indirect costs, and therefore cannot be traced to any single job or product. However, we cannot make anything without incurring manufacturing overhead, so we must make
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