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Chapter_3- - Chapter 3 Determining Costs of Products ©2009 Michael Werner and Kumen Jones Introduction to Management Accounting 3e Werner/Jones 3

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Unformatted text preview: Chapter 3 Determining Costs of Products ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 1 ­ Accumulating Product Cost – Cost Accounting LO1 Compare and contrast process costing with job order costing. • The process of assigning manufacturing The costs to manufactured products is called cost accounting. • A cost object can be a unit of cost manufactured product. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 2 LO1 Product Costing Methods • There are two basic systems used There to assign costs to products: Job order costing Process costing ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 3 LO1 Product Costing Methods • In job order costing, costs are accumulated In for each individual unit produced, or for individual each separate order of products. • In process costing, costs are accumulated In for each production process. for production ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 4 Job Order Costing Basics LO2 Describe how process costing and job order costing work. • Job order costing accumulates the Job cost of production for each job, each individual unit of production, each order, or each product. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 5 LO2 Job Order Costing Basics Paper Workers Printing Press Perlmuter Printing Cost of Visit Florida Posters Direct material Direct labor Mfg. overhead Total $ 400 600 900 $1,900 20,000 Advertising Posters ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 6 LO2 Job Order Costing Basics • Job order costing would be used by Job a caterer, a mechanic’s garage, a helicopter manufacturer, and a construction crew. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 7 LO2 Process Costing Basics • Process costing is a method of allocating Process manufacturing cost to products to manufacturing determine an average cost per unit. • If a toothbrush factory makes 2 million If toothbrushes and the total production cost is $400,000, then the cost per unit is $0.20 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 8 LO2 Process Costing Basics • Process costing would be used by businesses Process such as glass container manufacturing, food processing, and oil and gasoline refining. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 9 Documentation Relating to Job Order Costing Job cost sheets Purchase requisitions Labor time tickets 3 ­ 10 Job Cost Sheet LO3 Describe the documents used to help control the costs of manufacturing products. • A job cost sheet organizes and summarizes job the cost information for each job. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 11 LO3 Job Cost Sheet Example ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 12 LO3 Cost Information for Raw Materials ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 13 LO3 Cost Information for Raw Materials ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 14 LO3 Cost Information for Raw Materials ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 15 LO3 Cost Information for Raw Materials ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 16 LO3 Cost Information for Direct Labor ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 17 Manufacturing Overhead LO4 Describe how overhead costs are allocated to products. • Manufacturing overhead must be allocated Manufacturing to the units produced based on some reasonable base of distribution. Units Overhead Cost Pool Units ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 18 LO4 Manufacturing Overhead • Assume that Manta Power Boats Assume makes 5 boats and the manufacturing overhead is $75,000. • What is the overhead per boat? What • $75,000 ÷ 5 = $15,000 per boat $75,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 19 LO4 Manufacturing Overhead $15,000 $15,000 $15,000 $15,000 $15,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 20 LO4 Manufacturing Overhead • Allocating the overhead on the basis Allocating of units produced is not reasonable in a job order system. • Jobs or units are unique, and probably Jobs deserve different cost amounts. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 21 LO4 Manufacturing Overhead • The best allocation basis would be the one that The causes the cost which is to be allocated. Direct labor hours Direct labor cost Machine hours ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 22 LO4 Actual Cost System • When actual product cost is calculated When using actual amounts for direct material, direct labor, and manufacturing overhead, the system is called an actual cost system. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 23 LO4 Normal Cost System • In a normal cost system, estimated In annual amounts are used. • The key to normal costing is the The predetermined overhead rate. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 24 LO4 Normal Cost System • Suppose that Manta’s estimated annual Suppose overhead is $1,000,000 and estimated annual direct labor cost is $1,250,000. • What is the predetermined overhead rate? What • $1,000,000 ÷ $1,250,000 $1,000,000 = 80% of direct labor cost. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 25 LO4 Normal Cost System • The direct labor cost of Job Number 97384 The was $12,000. • How much is the overhead associated with How this job? • $12,000 × 80% = $9,600 $12,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 26 Completed Job LO5 Determine the cost of products using job order costing. • How much is the total cost of Job Number 97384? How Direct material Direct labor Manufacturing overhead Total $15,000 12,000 9,600 $36,600 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 27 LO5 Over or Under Applied Overhead • Amount applied > Actual = Over applied • Amount applied < Actual = Under applied • If the amount is relatively small, close it to If Cost of Goods Sold. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 28 Introduction to Process Costing LO6 Determine the cost of products using process costing. 1. Number of equivalent units of production 2. Cost per equivalent units of production 3. Cost of ending work-in-process inventory 4. Cost of completed units ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 29 LO6 Introduction to Process Costing • Atkinson Company has 10,000 Atkinson completed units during the period. • There are another 1,000 units in There work-in-process inventory which are 40% complete. • What are the equivalent units? What ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 30 LO6 Equivalent Units Number of raw units Units completed Ending WIP Total EU 10,000 1,000 Percent complete × × 100% 40% Equivalent units = = ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 10,000 400 10,400 3 ­ 31 LO6 Cost per Equivalent Unit Cost of beginning WIP Current month’s production cost Total production cost Total Production Cost Equivalent Units = $ 500 4,908 $5,408 Cost per equivalent unit • $5,408 ÷ 10,400 = $0.52 per equivalent unit $5,408 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 32 LO6 Cost of Ending WIP and Completed Units • Cost of ending work-in-process inventory: Cost • 400 × $0.52 = $208 400 • Cost of completed units: Cost • 10,000 × $0.52 = $5,200 10,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 33 LO6 Flow of Manufacturing Costs Cost of beginning WIP Cost added during period Total cost to account for $ 500 4,908 $5,408 Cost of completed units: Cost of uncompleted units: Finished goods inventory: $5,200 Ending work-in-process inventory: $208 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 34 LO6 Process Costing When the Process Percentage of Completion Varies Percentage Units Units to account for: Beginning work in process Units started into production Units to be accounted for Units accounted for: Units completed Ending work in process Units accounted for Direct Direct material Conversion material Conversion % complete % complete complete 9,000 112,000 121,000 100% 70% 110,000 11,000 121,000 100% 100% 100% 40% Conversion = Direct labor + Manufacturing overhead ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 35 LO6 Process Costing When the Process Percentage of Completion Varies Percentage Cost Information Direct Direct material material Conversion Total Beginning work in process $ 21,440 $ 16,287 $ 37,727 Cost added during the period 327,040 338,353 665,393 Total cost to account for $348,480 $354,640 $703,120 Conversion = Direct labor + Manufacturing overhead Conversion ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 36 LO6 Equivalent Units of Production and Equivalent Cost per EU for Direct Material Cost Number of raw units Units completed Ending WIP Total EU 110,000 11,000 Percent complete × × 100% 100% Equivalent units = = 110,000 11,000 121,000 Direct Materials Cost Per Unit: Direct $348,480 ÷ 121,000 = $2.88 $348,480 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 37 LO6 Equivalent Units of Production and Equivalent Cost per EU for Conversion Costs Cost Number of raw units Units completed Ending WIP Total EU 110,000 11,000 Percent complete × × 100% 40% Equivalent units = = 110,000 4,400 114,400 Conversion Cost Per Unit: Conversion $354,640 ÷ 114,400 = $3.10 $354,640 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 38 LO6 Cost of Ending WIP and Completed Units • Cost of ending work-in-process inventory: Cost Direct material 11,000 × $2.88 = $31,680 Conversion 4,400 × $3.10 = $13,640 Total $45,320 • Cost of completed units: Cost • 110,000 × $5.98 = $657,800 110,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 39 LO6 Flow of Manufacturing Costs Cost of beginning WIP Cost added during period Total cost to account for $ 37,727 665,393 $703,120 Cost of completed units: Cost of uncompleted units: Finished goods inventory: $657,800 Ending work-in-process inventory: $45,320 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 40 Recording Manufacturing Costs LO7 Prepare basic manufacturing journal entries. • Transaction 1: Transaction On June 7, 2009, purchased $660 of raw material on account. Jun 7 Raw Materials Inventory 660 Accounts Payable To record the purchase of raw material 660 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 41 LO7 Recording Manufacturing Costs • Transaction 2: Transaction On June 16, 2009, transferred $330 of direct material to production. Jun 16 Work-in-Process Inventory 330 Raw Material Inventory To record the transfer of direct material to production for Job 97384 330 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 42 LO7 Recording Manufacturing Costs • Transaction 3: Transaction On June 15, paid $1,600 for direct labor incurred on Job Number 97384. Jun 15 Work-in-Process Inventory 1,600 Cash To record wages paid for direct labor ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 1,600 3 ­ 43 LO7 Recording Manufacturing Costs • Transaction 4: Transaction During June, factory overhead cost was $75,000 of which $8,000 was depreciation. Jun 30 Manufacturing Overhead Cost Incurred 75,000 Cash Accumulated Depreciation 67,000 8,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 44 LO7 Recording Manufacturing Costs • Transaction 5: Transaction On July 11, $9,600 of manufacturing overhead was allocated to Job Number 97384. Jul 11 Work-in-Process Inventory 9,600 Manufacturing Overhead Applied 9,600 To record the allocation of manufacturing overhead to production ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 45 LO7 Recording Manufacturing Costs • Transaction 6: Transaction On July 11, Job No. 97384 was completed and transferred to finished goods. Jan 31 Accounts Receivable 300,000 Sales 300,000 Cost of Goods Sold 210,000 Finished Goods 210,000 To record sales on account and cost of goods sold. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 46 LO7 Recording Manufacturing Costs • Transaction 7: Transaction On July 12, the 28 Open Fisherman boat, which cost $36,600, was sold for $50,000. Jul 12 Cash 50,000 Sales 50,000 Cost of Goods Sold 36,600 Finished Goods 36,600 To record sales and the cost of goods sold ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 47 LO7 Recording Manufacturing Costs • Transaction 8: Transaction On December 31, applied overhead was closed. Actual overhead was $1,091,000, and applied overhead was $1,072,000 ($19,000 underapplied.) Dec 31 Manufacturing Overhead Applied 1,072,000 Cost of Goods Sold 19,000 Manufacturing Overhead Incurred 1,091,000 To close manufacturing overhead incurred to cost of goods sold ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 48 End of Chapter 3 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 3 ­ 49 ­ ...
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This note was uploaded on 01/19/2012 for the course ACC 212 taught by Professor Quintanna during the Spring '08 term at University of Miami.

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