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Manufacturing Costs and Job-Order Costing Systems

Manufacturing Costs and Job-Order Costing Systems. UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee. Chapter. Cost Classifications for Manufacturing Firms. Specify “Tag” the Cost.

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Manufacturing Costs and Job-Order Costing Systems

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  1. Manufacturing Costs and Job-Order Costing Systems UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Chapter

  2. Cost Classifications for Manufacturing Firms

  3. Specify “Tag” the Cost • We need to place an adjective (tag) on the cost to identify what it is. Direct Cost

  4. Manufacturing Costs

  5. Direct Materials Direct Labor Manufacturing Costs Manufacturing Overhead

  6. General Model of Cost Flow and Accumulation

  7. Cost Flows in a Manufacturing Firm Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead

  8. Cost Flows in a Manufacturing Firm Manufacturing Costs Costs incurred in the manufacture of goods being produced. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold • Known as product (inventoriable) costs. • They are expensed when the product is sold. Mfg. Overhead

  9. Cost Flows in a Manufacturing Firm • Those materials that become an integral part of the finished product and can be physically traced to the product. Direct Materials • Those factory labor costs that can be physically traced to the production of the finished product. Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead • All costs associated with the manufacture of a product except direct materials and direct labor.

  10. Direct Materials • DM in Theory • Every component • DM in Reality • Must apply cost-benefit rule

  11. DM – What is Cost? • The invoice price of the raw materials, • Shipping costs, • Import duties, and • A reduction for any allowable discounts for prompt payment.

  12. MOH – Other Names • Overhead • Burden • Indirect Manufacturing Costs • Factory Expenses

  13. MOH – A Few Examples • Factory Supervision, • Factory Telephone, heat, light, power, • Factory bookkeeping salaries, • Insurance • Depreciation/factory equipment • Indirect materials, labor.

  14. Direct Materials Nonmanufacturing Costs Costs incurred for other than production activities. • Known as Period costs. • They are expensed in the period in which they are incurred. Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead Sold Sales - Cost of Goods Sold Income Statement = Gross Margin - Nonmanufacturing Expenses = Net Income

  15. General & Administrative Expenses All executive, organizational, and clerical costs associated with the general management of the firm. • Selling & Distribution Expenses All costs necessary to secure customer orders and get the products/services to the customer. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Mfg. Overhead Sold Sales - Cost of Goods Sold Income Statement = Gross Margin - Nonmanufacturing Expenses = Net Income

  16. Direct Materials Direct Labor Work-in- Process Finished Goods Cost-of Goods Sold Product Costs Mfg. Overhead Sold Sales - Cost of Goods Sold Income Statement = Gross Margin - Nonmanufacturing Expenses Period Costs = Net Income

  17. Nonmanufacturing Costs

  18. Nonmanufacturing Costs • All costs not associated with the production of goods. • Selling Costs • Administrative Costs

  19. Cost Flows in a Manufacturing Firm

  20. Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Applied Finished MOH FG Inv. Sales - Sold COGS = Income Statement Gross Margin - S&A = Net Income

  21. Product and Period Costs

  22. Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied Finished MOH FG Inv. Sales - Sold COGS = Income Statement Gross Margin - Period Costs S&A = Net Income

  23. Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Inventory Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied Finished MOH FG Inv. Sales Product Costs: Costs assigned to products (i.e., Work in Process Inventory. They “attach” themselves to units of product and remain with the product until it is sold. - Sold COGS = Income Statement Gross Margin Expense - S&A = Net Income

  24. Cost Flows in a Manufacturing Firm Manufacturing Costs Balance Sheet Inventory Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Product Costs Applied Finished MOH FG Inv. Expense Sales - Sold COGS = Income Statement Gross Margin - S&A = Net Income

  25. Cost Flows in a Manufacturing Firm Period Costs: Expired non product costs. Always charged to expense in the period in which they occur. Manufacturing Costs Balance Sheet Unused DM DM Inv. Used Used Unfinished DL WIP WIP Inv. Applied Finished MOH FG Inv. Sales - Sold COGS = Income Statement Gross Margin - Period Costs S&A = Net Income

  26. Work-in-Process Product Costs Finished Goods Period Costs Sale DM ,DL MOH Cost of Goods Sold Product Costs Vs. Period Costs DM, DL, MOH, S&A Costs DM, DL MOH DM, DL MOH DM, DL MOH S&A S&A S&A Selling and Administrative Costs Expensed in the current period.

  27. Balance Sheet Presentation of Product Costs

  28. Balance Sheet Presentation

  29. Income Statement Presentation of Product Costs

  30. Income Statement

  31. Direct Materials Used: Beginning inventory $200,000 Add: Purchases 450,000 Materials available $650,000 Less: Ending inventory 50,000 $ 600,000 Direct Labor 350,000 Manufacturing overhead: Indirect labor $122,500 Depreciation 177,500 Rent 50,000 Utilities 37,500 Property taxes 12,500 Maintenance 50,000 450,000 Total manufacturing costs added $1,400,000 Add: Beginning work in process 200,000 Total manufacturing costs $1,600,000 Less: Ending work in process 400,000 Cost of goods manufactured $1,200,000 ========

  32. The three component parts of a manufactured product. Direct Materials Used: Beginning inventory $200,000 Add: Purchases 450,000 Materials available $650,000 Less: Ending inventory 50,000 $ 600,000 Direct Labor 350,000 Manufacturing overhead: Indirect labor $122,500 Depreciation 177,500 Rent 50,000 Utilities 37,500 Property taxes 12,500 Maintenance 50,000 450,000 Total manufacturing costs added $1,400,000 Add: Beginning work in process 200,000 Total manufacturing costs $1,600,000 Less: Ending work in process 400,000 Cost of goods manufactured $1,200,000 ========

  33. Cost of goods manufactured from the COGM Statement. Sales $2,800,000 Less cost of goods sold: Beginning finished goods inventory $ 500,000 Add: Cost of goods manufactured 1,200,000 Cost of goods available for sale $1,700,000 Less: Ending finished goods inventory 300,000 1,400,000 Gross margin $1,400,000 Less operating expenses: Selling expenses $ 600,000 Administrative expenses 300,000 900,000 Income before taxes $ 500,000 ========

  34. Different Costs for Different Purposes

  35. Value-Chain Operating Traditional Product Costs Product Costs Product Costs Product Costing Definitions Research and Development Production Production Production Marketing Marketing Customer Service Customer Service Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting

  36. Value-Chain Product Costs Research and Development Production Marketing Customer Service If making any of these types of decisions, I need to look at all costs. Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis

  37. Operating Product Costs Production Marketing Customer Service Strategic Design Decisions Tactical Profitability Analysis On the other hand, for these decisions, we might be able to ignore some of the costs.

  38. For external financial reporting, we need only these costs – because that is what GAAP says we need. Value-Chain Operating Traditional Product Costs Product Costs Product Costs Product Costing Definitions Research and Development Production Production Production Marketing Marketing Customer Service Customer Service Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting

  39. Types of Costing Systems

  40. Balance Sheet Presentation

  41. Accumulating Manufacturing Costs Two Types of Costing Systems

  42. Cost Accounting Systems Product Costs Job-Order Costing Process Costing Total/Unit Cost

  43. Process Costing • Homogeneous products continuously produced. • Costs accumulated by process (time). • Unit cost = total costs for period divided by number of units produced.

  44. Process Costing System Process A DM DL MOH Process B Finished Goods Cost of Goods Sold Process C WIP C WIP A WIP B COGS FGs

  45. Job-Order Costing • Wide variety of distinct products. • Costs accumulated by job. • Unit cost = total costs of the job divided by number of units in the job.

  46. Job-Order Costing Work-in-Process Job 100 Cost of Goods Sold DM DL MOH Finished Goods Job 101 Job 102 Work in Process Finished Goods Cost of Goods Sold

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