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.
DirectLabor DirectMaterial Manufacturing Overhead TheProduct Manufacturing Cost Flow
Example: Steel used tomanufacturethe automobile. Direct Material Raw material that is used to make,and can be convenientlytraced, to the finished product.
Example: Wages paid to anautomobile assemblyworker. Direct Labor Cost of salaries, wages, and fringebenefits for personnel who workdirectly on manufactured products.
Materials used to support the production process.Examples: lubricants and cleaning supplies used in an automobile assembly plant. Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts
Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts Cost of personnel who do not work directly on the product.Examples: maintenance workers, janitors and security guards.
Manufacturing Overhead All other manufacturing costs IndirectMaterial IndirectLabor OtherCosts Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.
Materials waiting to be processed. Partially complete products – material to which some labor and/or overhead has been added. Completed products awaiting sale. Manufacturing Cost Flow Raw Materials Work-in-Process Finished Goods
Materials Used • Labor • Overhead Total Mfg.CostsIncurred Cost of Goods Mfd. Cost of GoodsSold EndingInventory EndingInventory EndingInventory Manufacturing Cost Flow Income Statement Balance Sheet RawMaterials Work-in-Process FinishedGoods Cost of Purchases
InsuranceFirms PublicAccountants Airlines ServiceCompanies Hospitals Attorneys PlumbingCompanies Banks Hotels 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. Cost Flow in Service Companies
Let’s examine the cost flows in a manufacturing company. We will use T-accounts and start withmaterials. Manufacturing Cost Flow
Direct Material Manufacturing Cost Flow Raw Materials Work in Process • Direct Material • Material • Purchases • Indirect Material Mfg. Overhead • Indirect Material
Manufacturing Cost Flow Next let’s addlabor costs andapplied manufacturing overhead to the job-order cost flows. Are you with me?
Manufacturing Cost Flow Work in Process Wages Payable • Direct Labor • Direct Material • Direct Labor • IndirectLabor • 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 • IndirectLabor
Manufacturing Cost Flow Now let’s complete the goods and sell them. Still with me?
Manufacturing Cost Flow Finished Goods Work in Process • Direct Material • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labor • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold
Manufacturing Cost Flow Let’s look atthe January transactions of Ventra Manufacturing company.
Manufacturing Cost Flow • Ventra pays $26,500 cash to purchase raw materials. Raw Materials Cash Bal. 64,500 • 26,500 Bal. 500 • 26,500
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
Manufacturing Cost Flow • Ventra pays $2,000 cash to purchase production supplies. Production Supplies Cash Bal. 64,500 • 26,500 • 2,000 • 2,000
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
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
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.
Based onestimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actualamount of theallocation basesuch asunits produced, direct labor hours, or machine hours. The Flow of Overhead Costs
$ 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.
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
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
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
Manufacturing Cost Flow • Ventura pays $1,200 cash for actual manufacturing overhead costs including indirect labor, 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
Manufacturing Cost Flow • Ventura pays $1,200 cash for actual manufacturing overhead costs including indirect labor, 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
At the end of the year,Ventra has the followingaccount balances: Manufacturing Cost Flow
Supplies: $2,000 purchased, $1,700 used. See Cost of GoodsManufactured andSold Schedule Manufacturing Cost Flow
Manufacturing Cost Flow Explanation of Manufacturing Overhead balance follows.
Manufacturing Overhead Actual Applied 43,400 39,648 3,752 Manufacturing Cost Flow Manufacturing overhead is $3,752 underapplied. 11,800 boxes manufactured × $3.36 POHR
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
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
Let’s prepare aSchedule of Cost of GoodsManufactured and Soldfor Ventra. Manufacturing Cost Flow
Preparing a Cost of Goods Manufactured and Sold Schedule Reported in the current assets section of the balance sheet.
Let’s look at the Income Statementfor Ventra. Financial Statements
Let’s look at the Balance Sheetfor Ventra. Financial Statements