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16-1
16-2
Cost Accounting involves:
Measuring, Recording, Reporting …
product costs.
Accounts are fully integrated into the general ledger.
Perpetual inventory system provides up-to-date information.
Two basic types: (1) job order cost system (2) process cost system.
Cost Accounting SystemsCost Accounting Systems
16-3
Job Order Cost System
Costs assigned to each job / batch. Key feature: Each job has distinguishing characteristics.
Measures costs for each job completed –
not for set time periods.
Cost Accounting SystemsCost Accounting Systems
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Costs assigned to dept / process
for a specified period of time. Used for large volume, similar products are produced.
(cereal, gasoline, twinkies, ice cream).
Costs accumulated for a time period –
(week or month).
Process Cost System
Cost Accounting SystemsCost Accounting Systems
16-5
Costs accumulate in “INVENTORY” (control) accounts that
parallel to the physical flow of the materials and labor.
•Material costs first go to Raw Materials Inventory
•Manufacturing costs assigned to Work in Process Inventory
•Completed cost (job) transfer to Finished Goods Inventory.
When sold, cost is “expensed” to Cost of Goods Sold.
Job Order Cost FlowJob Order Cost Flow
16-6
A control account is a summary account within a general ledger that accumulates the details of an account in a subsidiary ledger
400 400
100 100
100 100Mary's A / R Judy's A / R
Control (or Controlling) Accounts
Accounts Receivable Revenue
Accounts Receivable Subsidiary LedgerBob's A / R Joe's A / R
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16-8
Job Order Cost FlowJob Order Cost Flow
ExpenseAssets
16-9
Raw Material Costs
Illustration: Company buys:
2,000 batteries (Stock #AA) at $5 each … $10,000
800 modules (Stock #Mod) at $40 each .. $32,000
Job Order Cost FlowJob Order Cost Flow
Jan 04 Raw Materials Inventory 42,000
Accounts Payable 42,000
16-10
Illustration: Company incurs $32,000 of factory labor costs
(includes BOTH direct labor wages (machine operators)
AND … indirect labor wages (factory janitor and factory manager).
Job Order Cost FlowJob Order Cost Flow
Factory Labor Costs
Jan Factory Labor 32,000
Cash (or Wages Payable) 32,000
16-11
Product Costs: Costs related to mfg process are
accumulated in Mfg (Factory) Overhead.
Period Costs: Costs unrelated to manufacturing
process are expensed.
Job Order Cost FlowJob Order Cost Flow
Manufacturing Overhead Costs
16-12
Jan Rent Expense (CORP OFFICE) 1,000
Cash 1,000
Jan Mfg Overhead (FACTORY Rent) 2,000
Cash 2,000
Company paid JAN rent of:•$ 2,000 for Factory Building •$ 1,000 for Corporate Offices
Period Cost
Product Cost
16-13
Manufacturing Overhead Costs
Illustration: entry for manufacturing overhead in Company is:
Job Order Cost FlowJob Order Cost Flow
Jan Factory Overhead 13,600
Accum Deprec (Factory Machines) 3,000
Factory Utilities 10,000
Factory Property Taxes 600
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Assigning Manufacturing Costs to:Work-In-Process Inventory (W-I-P)
Job Order Cost FlowJob Order Cost Flow
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Manufacturing costs assigned to W-I-P with
Debits to Work in Process Inventory
Credits to Raw Materials Inventory
Factory Labor
Manufacturing
Overhead
Job Order Cost FlowJob Order Cost Flow
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Job Order Cost FlowJob Order Cost Flow
Illustration 16-5
16-18
Assigning Raw Material Costs
Illustration: Wallace uses $24,000 of direct materials and $6,000
of indirect materials in January, the entry is:
LO 3
Job Order Cost FlowJob Order Cost Flow
Jan Work In Process Inventory 24,000
Manufacturing Overhead 6,000
Raw Materials Inventory 30,000
16-19
Illustration 16-7
Job Order Cost FlowJob Order Cost Flow
16-20
Illustration: $32,000 total factory labor cost consists of $28,000 of
direct labor and $4,000 of indirect labor, the entry is:
Job Order Cost FlowJob Order Cost Flow
Assigning Factory Labor Costs
Jan Work In Process Inventory 28,000
Manufacturing Overhead 4,000
Factory Labor 32,000
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Relates to production operations as a whole.
Cannot be assigned to specific jobs
based on actual costs incurred.
Companies assign to work in process and to specific jobs
on an estimated basis through the use of a …
Manufacturing Overhead Costs
Predetermined Overhead Rate
Job Order Cost FlowJob Order Cost Flow
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Based on the relationship between estimated annual overhead costs and expected annual operating activity
Expressed in terms of an activity base such as
► Direct labor costs
► Direct labor hours
► Machine hours
Job Order Cost FlowJob Order Cost Flow
Predetermined Overhead Rate
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Established at the beginning of the year.
May use a single, company-wide predetermined rate.
May use a different rate for each department and each department may have a different activity base.
Formula is
Job Order Cost FlowJob Order Cost Flow
Predetermined Overhead Rate
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This means that for every dollar of direct labor, company will
ALSO assign __________ of manufacturing overhead to a job.
So if Direct Labor = $45,000 how much ADDITIONAL cost will
be added for manufacturing overhead … ANOTHER $45,000 …
(DL + Mfg OH = 45,000 + 45,000 = 90,000)
Illustration: Using direct labor as activity base … assume that the
company expects annual overhead costs to be $200,000 and direct
labor costs for the year to be $200,000, compute overhead rate.
$200,000 $200,000 = 100%
1 dollar
Job Order Cost FlowJob Order Cost Flow
Manufacturing Overhead Costs
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So if Direct Labor = $100,000 how much ADDITIONAL cost will
be added for manufacturing overhead … ANOTHER $150,000 …
Is the 150,000 OH ACTUAL or APPLIED (as in estimated)
Illustration: Using direct labor as activity base … assume that the
company expects annual overhead costs to be $450,000 and direct
labor costs for the year to be $300,000, compute overhead rate.
$450,000 $300,000 = 150%
Job Order Cost FlowJob Order Cost Flow
Manufacturing Overhead Costs (Mfg OH)
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This means that for every dollar of direct labor, company will
assign __________ of manufacturing overhead to a job.
Illustration: Using direct labor as activity base … assume that the
company expects annual overhead costs to be $280,000 and direct
labor costs for the year to be $350,000, compute overhead rate.
$280,000 $350,000 = 80%
80 cents
Job Order Cost FlowJob Order Cost Flow
Manufacturing Overhead Costs
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Illustration: Company applies manufacturing overhead to work in
process when it assigns direct labor costs. Calculate the amount of
applied overhead assuming direct labor costs of $28,000.
$28,000 x 80% = $22,400
The following entry records this application.
Job Order Cost FlowJob Order Cost Flow
Manufacturing Overhead Costs
Jan Work In Process Inventory 22,400
Manufacturing Overhead 22,400
16-28
Illustration: When a job is finished, Company transfer its total cost
to finished goods inventory.
Job Order Cost FlowJob Order Cost Flow
Assigning Costs to Finished Goods
Jan Finished Goods Inventory 39,000
Work In Process Inventory 39,000
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Illustration: On January 31 company sells on account Job 101.
The job cost $39,000, and it sold for $50,000. The entries are:
Job Order Cost FlowJob Order Cost Flow
Assigning Costs to Cost of Goods Sold
Jan Accounts Receivable 50,000
Sales Revenue 50,000
Cost of Goods Sold 39,000
Finished Goods Inventory 39,000
Gross Profit: 50,000 – 39,000 = 11,000Subtract PERIOD costs (selling-admin) to get:
Net Profit
16-30 LO 5
Job Order Cost FlowJob Order Cost Flow
Summary Illustration 16-15
16-31
Under- or Overapplied Overhead
A debit balance in manufacturing overhead means
that overhead is underapplied.
A credit balance in manufacturing overhead means
that overhead is overapplied.
Illustration 16-19
Reporting Job Cost DataReporting Job Cost Data
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Any Year-End Balance in manufacturing overhead is
eliminated by adjusting cost of goods sold.
Underapplied overhead is debited to COGS
Overapplied overhead is credited to COGS
Reporting Job Cost DataReporting Job Cost Data
Under- or Overapplied Overhead
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Illustration: Wallace has a $2,500 credit balance in Manufacturing
Overhead at December 31. The adjusting entry for the over-applied
overhead is:
Dec. 31 Manufacturing Overhead 2,500
Cost of Good Sold 2,500
Under- or Overapplied Overhead
Reporting Job Cost DataReporting Job Cost Data
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