Prepared by Diane Tanner University of North Florida

1. Chapter 2 Normal Costing Prepared by Diane Tanner University of North Florida

2. Assigning Costs to Cost Objects • Three methods • Actual costing • Normal costing • Standard costing • Differ in how product costs are assigned to products or services

3. Normal Vs. Actual Costing • Normal costing • Used effectively when there are multiple products • Allocates manufacturing overhead to individual products based on a ‘predetermined’ rate calculation • Based on estimates • Actual costing • Allocates manufacturing overhead to individual products based on an end of period rate calculation • Based on actual amounts Estimated MOH Estimated Activity Actual MOH Actual Activity

4. How Costs Get Assigned to Products • Direct materials and direct labor • Traced to a product or service provided • Because it is easy to determine which product/service to which the cost belongs • By definition, direct costs are directly associated • Manufacturing overhead • Consists solely of indirect costs • Indirect costs cannot be easily identified with one specific product or service • Allocated to products and services in a normal costing system

5. Materials Storeroom Acquisition of Raw Materials 1 The Purchasing Manager fills out a purchase order to order materials from a supplier 2 When materials are received, the Materials Storeroom Clerk tracks and stocks the materials in the storeroom. Factory/Production Area 3 The Materials Storeroom Clerk sends the receiving report to the Accounting Department for payment.

6. Transactions to Acquire Materials Purchase Materials for Cash • Debit Raw Materials • Credit Cash Purchase Materials on Account • Debit Raw Materials • Credit Accounts Payable Pay for materials previously purchased on account • Debit Accounts Payable • Credit Cash • Credit Inventory for cash discount, if any Same under Actual and Normal Costing

7. Will E. Delite Materials Requisition Process Materials Storeroom Factory/Production Area 1 The production supervisor fills out a materials requisition form. The materials storeroom clerk delivers the requested materials to the production area. 2 Authorizes the use of materials on a job 3 The requisition form is sent to Accounting.

8. Accounting for Materials Used in Production Requisition of Direct Materials to Production • Debit Work in Process • Credit Raw Materials Requisition Indirect Materials to Production • Debit Manufacturing Expense • Credit Raw Materials

9. Incurring Labor Costs Factory/Production Area Materials Storeroom Employees use time tickets to record the time spent on each job

10. Measuring and Tracking Direct Labor • Direct labor cost = • [Hourly rate] × [Number of hours worked] • Fringe benefits • Normally included as part of the direct labor ‘rate’ • Overtime premium (the extra ‘half’ time paid) • If the result of production problems, treat as manufacturing overhead • If the result of accepting a rush order, treat as direct labor • Idle time • Treat as overhead • Because it is not part of the cost to get inventory ready to sell

11. Accounting for Labor Costs Used in Production Direct Labor Costs Incurred • Debit Work in Process • Credit Cash, salaries payable, etc. Indirect Labor Costs incurred • Debit MOH expense • Credit Cash, salaries payable, etc.

12. ‘Applying’ MOH under Normal Costing • What is ‘applying overhead’? • The process of adding MOH cost to products based on an allocation rate • Why is MOH applied using normal costing? • It is an indirect cost, which is impossible or impractical to trace to a particular product • Managers need to know job costs asproduction occurs, i.e., on a timely basis • For making decisions such as pricing, product changes, etc. • Waiting until the end of the period when actual costs are known makes information untimely

13. Accounting for MOH Using Normal Costing Incur MOH Costs • Debit Manufacturing Overhead (control account) • Credit Cash, salaries payable, etc Apply MOH to Products • Debit Work in Process • Credit Manufacturing Overhead Using a predetermined rate

14. The End