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Manufacturing Product Costs
The Importance of Understanding a Company's Product Costs
Establish product sales price.Understand why the company is profitable or not.Determine which of a variety of products to emphasize in marketing.Consider ways to reduce costs.
A.B.C.
D.
Financial Reporting Purposes: Product costs are reflected as an asset (inventory) rather than an expense until the inventory is sold.
Managerial Purposes: Managers need to know and understand their company's product costs to intelligently-
1.
2.
How can you intelligently operate a business without knowing the cost of your product?
You Can't !!!!
Manufacturing Product Cost Accumulation Methods
Process Costing: A method that is commonly used by companies that manufacture large numbers of standardized product(s).
Manufacturing Costs:Direct MaterialsDirect LaborManufacturing Overhead Total
$ xxxxxxxxx
$ xxx # of boxes produced
cheerios cheerios GeneralMills
General Mills
Cost Per Box
Job Order Costing:A method that is commonly used by companies that make a variety of differing products where a simple averaging of total manufacturing costs of a factory or work center over the number of units produced would not distinguish the unique costs of the different products.
Manufacturing costs are accumulated by separate product orders, runs or batches ("job orders") and averaged only over the number of common units produced within that job.
-
-
Identify for each of the following kinds of manufacturing businesses whether they would use a process or job order cost system for determining the cost of their products.
Home construction companyOil refineryCustom jewelry manufacturerPeach farmAuto manufacturerOriental rug manufacturerDoor manufacturer
a.b.c.d.e.f.g.
Financial vs. Managerial Accounting
Problem: Process vs. Job Order Costing
Page 1 of 2
Identify for each of the following kinds of manufacturing businesses whether they would use a process or job order cost system for determining the cost of their products.
Home construction companyOil refineryCustom jewelry manufacturerPeach farmAuto manufacturerOriental rug manufacturerDoor manufacturer
a.b.c.d.e.f.g.
Job order costProcess costJob order costProcess costProcess costJob order costIt depends
Financial vs. Managerial AccountingSolution: Process vs. Job Order Costing
Page 2 of 2
Date Started: 01/01/X1Date Completed:
Job Cost RecordJob Order: # 351Product Description: 4' x 8' Oak Tables Product Code: # O4811 #of Units: 5
Amount
Direct Materials:
Direct Labor:
Manufacturing Overhead:
Cost Per Unit: ÷ =
RequisitionNumber Amount
Time CardNumber Hours Rate
Amount Labor HoursRate
$
Date
Date
Date
5(total cost)$Total Cost
The Flow of Costs
Materials purchased Direct materials put into production
Direct labor cost incurredManufacturing overhead costs applied Production completed
Products sold
Inventory-RM
xxxxxxxxx
xxx
xxxxxx
xxxxxx
xxx
Inventory-WIP
Inventory-FG
Cost of Goods Sold
Job Cost Record # 351DMDLMO
xxxxxxxxx
Job Cost Record # 352DMDLMO
xxxxxxxxx
Job Cost Record # 353DMDLMO
xxxxxxxxx
Job Cost Record # 354DMDLMO
xxxxxxxxx
Job Cost Record # 355DMDLMO
xxxxxxxxx
Inventory-WIPDMDLMO
xxxxxxxxx
xxx
xxx
xxx
xxx
xxx
xxx
General Ledger
Subsidiary Ledger
Total
Total
Total
Total
Total
Example: Norm's Furniture manufactures a variety of furniture products and styles and therefore uses a job order cost system to account for its various product costs. For each of the following events prepare the journal entry to record the event and update the job cost sheet where appropriate.
Raw materials totaling $50,000 are purchased on account (direct materials of $40,000 and indirect materials of $10,000) and are placed in the raw materials inventory storage department.
Raw Materials InventoryAccounts Payable
50,000
1.
50,000
Production of Job #351 to build 5 oak tables begins on 1/1/X1 and the employee assigned to build the tables takes an authorized materials requisition form (form #10025) to the raw materials storage department to obtain the required direct materials (lumber, etc.). The cost of these direct materials requisitioned specifically for Job #351 totals $1,500.
2.
WIP InventoryRaw Materials Inventory
1,5001,500
Date Started: 01/01/X1Date Completed:
Job Cost RecordJob Order: # 351Product Description: 4' x 8' Oak Tables Product Code: # O4811 #of Units: 5
Amount
Direct Materials:
Direct Labor:
Manufacturing Overhead:
Cost Per Unit: ÷ =
RequisitionNumber Amount
Time CardNumber Hours Rate
Amount Labor HoursRate
$
Date
Date
Date
Total Cost
01/01/X1 005,1 $52001
Job Order Costing
Page 1 of 2
The employee constructing the 5 oak tables completes the work on 1/15/X1 and submits to the accounting department his semi-monthly time card (#3358) which shows all 80 hours of labor devoted to completion of the tables (Job #351). The employee is paid semi-monthly at a rate of $20 per hour.
3.
WIP InventoryCash (Wage Payable)
1,6001,600
Date Started: 01/01/X1Date Completed:
Job Cost RecordJob Order: # 351Product Description: 4' x 8' Oak Tables Product Code: # O4811 #of Units: 5
Amount
Direct Materials:
Direct Labor:
Manufacturing Overhead:
Cost Per Unit: ÷ =
RequisitionNumber Amount
Time CardNumber Hours Rate
Amount Labor HoursRate
$
Date
Date
Date
01/15/X1
01/01/X1 005,1 $52001
3358 80 $ 20 $ 1,600
During production of Job #351, the employee also requisitioned (form #10047) from the raw materials storage department various additional direct materials (tube of glue, nails) costing a total of $50to be used in the construction of the 5 oak tables plus other jobs over the next month.
5.
Raw Materials Inventory50
50
Theoretically correct entry:
WIP Inventory
Raw Materials Inventory50
50
Actual entry:
Manufacturing Overhead
During production of Job #351, the employee also requisitioned (form #10042) from the raw materials storage department various indirect materials (sandpaper, etc) costing a total of $150 to be used in the construction of the 5 oak tables plus other jobs over the next month.
Theoretically correct entry:
Problem: How much of this cost of indirect materials should be allocated to Job #351's Job Cost Sheet?
4.
WIP InventoryRaw Materials Inventory
150150
Raw Materials Inventory150
150Manufacturing Overhead
Actual entry:
xxxManufacturing Overhead CashSalary PayableAccumulated Depreciation
Other manufacturing overhead costs indirectly incurred in the production of Job #351 and all other jobs in process during the month might include the production supervisor's salary, manufacturing utility costs, depreciation of manufacturing equipment, etc. These costs would likewise be included temporarily in this holding account called "Manufacturing Overhead" until we can come up with a method of allocation or application of these costs to the individual jobs.
6.
xxxxxxxxx
Job Order Costing
Page 2 of 2
Applying Manufacturing Overhead to WIP Inventory
Manufacturing Overhead
Indirect Mtls.Indirect Labor Other Overhead
xxxxxxxxx
Direct Mtls.Direct Labor Applied Overhead
WIP
Application of a portion of manufacturing overhead to each individual job and its Job Cost Sheet is done based on an estimated basis using a "Predetermined Overhead Rate".
xxxxxxxxx
xxx
(Actual Costs)
(Applications to WIP, and Job Cost Sheets)
Step 1: Management must first identify some activity which can be separately measured job by job and bears some correlation with (or drives) manufacturing overhead costs.
For example: Direct labor hours is a commonly used activity in the application of manufacturing overhead because it can be measured by job through time cards and often correlates with overhead costs.
How is an Overhead Rate predetermined and then used?
Jan Feb Mar Apr May Jun Jul
$600,000
$300,00040,000 Hrs.
30,000 Hrs.
20,000 Hrs.
ManufacturingOverhead Costs
Direct LaborHours
$360,000
$600,000
$300,000
24,000 Hrs.
40,000 Hrs.
20,000 Hrs.
Jan. $360,000 ÷ 24,000 hrs. = $15/hr.Apr. $600,000 ÷ 40,000 hrs. = $15/hr.
Correlating Relationship:
ManufacturingOverhead Costs
Direct LaborHours
Date Started: 01/01/X1Date Completed:
Job Cost RecordJob Order: # 351Product Description: 4' x 8' Oak Tables Product Code: # O4811 #of Units: 5
Amount
Direct Materials:
Direct Labor:
Manufacturing Overhead:
Cost Per Unit: ÷ =
RequisitionNumber Amount
Time CardNumber Hours Rate
Amount Labor HoursRate
$
Date
Date
Date
$Total Cost
01/07/X1 005,1$52001
01/15/X1 3358 80 $20 $1,600
01/15/X1 612,1$0802.51$
4,316$4,316 5 863.20
Budgeted Mfg. Overhead Costsfor the next month
Budgeted Direct Labor Hoursfor the next month
$402,80026,500 hr. = $15.20/hr.
80 hrs. × $15.20 = $1,216
× Direct LaborHours
OverheadRate
daehrevOApplied=
Step 2: Calculate an overhead rate for the future based on prospective or budgeted overhead costs and budgeted direct labor hours.
Step 3: This "Predetermined Manufacturing Overhead Rate" of $15.20per direct labor hour is then used to apply overhead to each job in production based on the actual direct labor hours incurred per job as reported in the employee time cards.
1,216
Application of Manufacturing Overhead to Job #351
WIP InventoryManufacturing Overhead 1,216
7.
Applying Overhead
Page 1 of 2
Cost of Goods Sold Finished Goods Inventory
Gross Margin = $1,400 - 863.20 = $536.80
Finished Goods InventoryWIP Inventory
Accounts ReceivableSales Revenues
Production is completed on Job #351 and the tables are transferred to the finished goods inventory storage area:
One of the oak chairs from Job #351 is sold to a customer on account for $1,400.
8.
9.
4,3164,316
1,4001,400
863.20863.20
Manufacturing Overhead
Indirect Mtls.Indirect Labor Other Overhead
xxxxxxxxx
xxx
(Actual Costs)
(Applications to WIP based on $15.20 per direct labor hour)
Under-applied xxxxxx Adjustment
0Adjustment of manufacturing overhead at year end:
Cost of Goods SoldFinished Goods InventoryWIP Inventory
Manufacturing Overhead
xxxxxxxxx
xxx
Cost of Goods SoldManufacturing Overhead
xxxxxx
or just
Manufacturing Overhead
Indirect Mtls.Indirect Labor Other Overhead
xxxxxxxxx
(Actual Costs)
Adjustment of manufacturing overhead at year end:
Adjustment xxx0
Manufacturing OverheadCost of Goods Sold
xxxxxx
xxx (Applications to WIP based on $15.20 per direct labor hour)
xxx Over-applied
Applying Overhead
Page 2 of 2
Use the following diagram, and fill in the blanks to identify the flow of product costs in a manufacturing business.
Direct Material Costs Manufacturing Overhead Raw Materials Inventory
xxxxxx xx
xxxx
xxxx
WIP Inventoryxxxxxx xx
Finished Goods Inventoryxx xx
Costs of Goods Soldxx
(A) (B)
(C)Indirect Labor
(D) (E)(F)
Use the following diagram, and fill in the blanks to identify the flow of product costs in a manufacturing business.
Direct Material CostsIndirect Material Costs
Manufacturing Overhead Raw Materials Inventory
xxxxxx xx
xxxx
xxxx
WIP Inventoryxxxxxx xx
Finished Goods Inventoryxx xx
Costs of Goods Soldxx
(A) (B)
(C)
Indirect Material CostsIndirect LaborOther Mfg. Overhead
(D) Direct Material Costs(E) Manufacturing Overhead(F) Direct Labor Costs
In a job order cost system, explain how the following costs are typically determined for each separate manufacturing job:
Direct material costsDirect labor costsManufacturing overhead costs
A.B.C.
Practice Problems: Job Order Costing
In a job order cost system, explain how the following costs are typically determined for each separate manufacturing job:
Direct material costsMaterial requisition forms noting the amount and cost of raw materials released to each job.
Direct labor costsEmployee time cards noting the number of hours direct laborers worked on each specific job.
Manufacturing overhead costsManufacturing overhead is applied on an estimated basis using a predetermined overhead rate on some activity (direct labor hours, material costs, machine hours) that is measured for each specific job.
A.
B.
C.
Given the following historical data over the last three years, identify the measurable activity that best correlates with manufacturing overhead costs and would therefore serve as the best basis upon which to calculate a predetermined overhead application rate for the upcoming year:
If next year's budgeted manufacturing overhead costs and machine hours are projected at $625,000 and 77,000 hours, respectively, determine the predetermined overhead rate to be used in applying overhead to jobs in work in process for the upcoming year.
If job order #4444 actually utilizes 25 machine hours to be completed, how much manufacturing overhead cost should be applied to the job using the data previously provided in this problem.
A.
B.
C.
Manufacturing Overhead CostsDirect Labor HoursMachine HoursDirect Material Costs
$250,000 76,000 hrs. 30,000 hrs.
$750,000
$300,000 65,000 hrs. 38,000 hrs.
$760,000
$500,000 30,000 hrs. 62,000 hrs.
$800,000
20X2 20X3 20X4
Given the following historical data over the last three years, identify the measurable activity that best correlates with manufacturing overhead costs and would therefore serve as the best basis upon which to calculate a predetermined overhead application rate for the upcoming year:
A.
20X2 20X3 20X4Manufacturing Overhead
Per Direct Labor HoursPer Machine HoursPer Direct Material Costs
$3.29$8.33$ .33
$4.62$7.90$ .39
$16.67$ 8.07$ .63
Manufacturing Overhead CostsDirect Labor HoursMachine HoursDirect Material Costs
20X2 20X3 20X4
Machine hours seem to have the best correlating relationship with manufacturing overhead costs and should therefore be used as the activity basis in determining a predetermined overhead rate.
$250,000 76,000 hrs. 30,000 hrs.
$750,000
$300,000 65,000 hrs. 38,000 hrs.
$760,000
$500,000 30,000 hrs. 62,000 hrs.
$800,000
Problem: Job Cost Terms
Problem: Overhead Rate Solution: Overhead Rate
Solution: Job Cost Terms
Solution: Cost flows
Page 1 of 5
= $8.12 per hour= $625,000 77,000
Budgeting Manufacturing Overhead Costs Budgeted Machine Hours
(25 machine hrs. x $8.12 per hour) = $203 of manufacturing overhead costs applied to WIP job #4444
If next year's budgeted manufacturing overhead costs and machine hours are projected at $625,000 and 77,000 hours, respectively, determine the predetermined overhead rate to be used in applying overhead to jobs in work in process for the upcoming year.
If job order #4444 actually utilizes 25 machine hours to be completed, how much manufacturing overhead cost should be applied to the job using the data previously provided in this problem.
B.
C.
Jones Custom Furniture Manufacturing, Inc. made the following estimates at the beginning of the year, 20X7:
Jones applies manufacturing overhead to specific job orders on the basis of direct labor hours.
20X7 Budgeted Direct Labor Costs20X7 Budgeted Direct Labor Hours20X7 Budgeted Manufacturing Overhead
$300,000 20,000 hrs.$520,000
A.
B.
Calculate Jones' predetermined manufacturing overhead rate for the year 20X7.
Prepare general journal entries for the events noted below.
During the month of January, the following events transpired for Job #345, an order for 10 custom oak chairs which were manufactured in the first week of January 20X7:
$876 worth of direct materials (lumber, fabric, paint) were requisitioned (requisition #11042) and put into production on Job #345.$154 worth of indirect materials (glue, staples, sandpaper, and equipment grease) were requisitioned (#11045) for use in manufacturing the 10 chairs for job order #345 and other subsequent jobs.Time card #6655 was processed by payroll for Employee #214indicating that 25 direct labor hours were attributable to the 10oak chairs (Job #345). Employee #214's wage rate is $15 per hour.Manufacturing overhead at the predetermined rate is applied to the 10 oak chairs (Job #345) based on the actual direct labor hours for the job.The manufacturing supervisor's weekly salary of $1,000 is processed by payroll. This salary is considered indirect labor because the supervisor oversees not only Employee #214 but all jobs in process and does not account for his time on a job by job basis.
1/3/X7:
1/3/X7:
1/7/X7:
1/7/X7:
1/7/X7:
Create a job cost sheet form, and record the accumulation of costs for Job #345 determining the total cost of manufacturing the 10 oak chairs.
Prepare journal entries to record the following two additional events/transactions
The 10 oak chairs (Job #345) were completed and transferred to the Finished Goods stock room to await shipment to the customer.
The 10 oak chairs (Job #345) were shipped to the customer. The sales invoice reflects sales prices of $3,000 on account.
Determine the gross margin earned on the 10 oak chairs.
C.
D.
E.
1/7/X7:
1/9/X7:
In addition to Job #345, Jones completed 47 other orders in January with 7 others in process at month end. The following information summarizes the manufacturing transactions for Jones for the month of January in addition to those previously noted above relating to Job #345. Prepare the summarized journal entries for Jones for the January events noted below.
Raw materials purchased on account amounted to $102,675.Raw materials requisitioned to specific job orders amounted to $90,430 with 80% representing direct materials and the remainder representing indirect materials not directly attributable to any one specific job.Total direct labor hours for the month totaled 1,640 hours. At an average of $15 per hour, the direct labor wages incurred and paid amounted to $24,600.Manufacturing overhead is applied at the predetermined rate to all jobs in progress on the basis of the actual direct labor hours incurred by job.
F.
a.b.
c.
d.
Supervisory salaries incurred and paid along with other indirect manufacturing labor (i.e. maintenance labor) amounted to $7,000.The following costs associated with the manufacturing process and facility were incurred and paid:
Depreciation of manufacturing equipment for the month amounted to $5,500.The cost of the 47 jobs completed during the month as summarized by their individual job cost sheets amounted to $125,446.All completed jobs were shipped to customers by month end at a total sales price of $200,714 on account.All selling and administrative costs incurred and paid (i.e. admin. salaries, sales commissions, office supplies, office rent, etc.) amounted to $46,514.
e.
f.
g.
h.
i.
j.
Factory RentFactory UtilitiesInsuranceOther Miscellaneous
$ 7,600$ 2,700$ 1,200$ 1,900$13,400
Practice Problems: Job Order CostingSolution: Overhead Rate Problem: Comprehensive Problem
Problem: Comprehensive Problem Problem: Comprehensive Problem
Problem: Comprehensive ProblemProblem: Comprehensive Problem
Page 2 of 5
Close the manufacturing overhead account to cost of goods sold (include all entries noted above for Job #345 and all events in part F). What accounts would be debited/credited if manufacturing overhead had been over applied?
G. Jones Custom Furniture Manufacturing, Inc. made the following estimates at the beginning of the year, 20X7:
Jones applies manufacturing overhead to specific job orders on the basis of direct labor hours.
20X7 Budgeted Direct Labor Costs20X7 Budgeted Direct Labor Hours20X7 Budgeted Manufacturing Overhead
$300,000 20,000 hrs.$520,000
A. Calculate Jones' predetermined manufacturing overhead rate for the year 20X7.
= $26.00 per direct labor hour$520,00020,000 hrs.
B. Prepare general journal entries for the events noted below.
During the month of January, the following events transpired for Job #345, an order for 10 custom oak chairs which were manufactured in the first week of January 20X7:
WIP InventoryRaw Materials Inventory
876876
Manufacturing OverheadRaw Materials Inventory
154154
1/3/X7: $876 worth of direct materials (lumber, fabric, paint) were requisitioned (requisition #11042) and put into production on Job #345.
1/3/X7: $154 worth of indirect materials (glue, staples, sandpaper, and equipment grease) were requisitioned (#11045)for use in manufacturing the 10 chairs for job order #345 and other subsequent jobs.
Problem: Comprehensive Problem Solution: Comprehensive Problem
Solution: Comprehensive Problem Solution: Comprehensive Problem
Direct Materials:Date
1/3/X7Requisition #
11042Amount
$876
Emp. #214
Time Card #6655
Hours25
Rate$15
Amount$375
Direct Labor:Date
1/7/X7
25 $375
$876Total
Totals
Job Cost Sheet Job Order # 345Date Completed: 1/7/X7Description: 10 oak chairs
Date started: 1/3/X7
Overhead Rate26.00
Amount$650
Manufacturing Overhead:Labor Hours
25
Total Job Cost = $1,901 Cost per Unit = $190.10
Practice Problems: Job Order Costing
Solution: Comprehensive Problem Solution: Comprehensive Problem
1/7/X7: Time card #6655 was processed by payroll for Employee #214indicating that 25 direct labor hours were attributable to the 10 oak chairs (Job #345). Employee #214's wage rate is $15 per hour.
1/7/X7: Manufacturing overhead at the predetermined rate is applied to the 10 oak chairs (Job #345) based on the actual direct labor hours for the job. ($26 x 25 direct labor hours = $650)
1/7/X7: The manufacturing supervisor's weekly salary of $1,000 is processed by payroll. This salary is considered indirect labor because the supervisor oversees not only Employee #214 but all jobs in process and does not account for his time on a job by job basis.
WIP InventoryWage Payable
375375
WIP InventoryManufacturing Overhead
650650
Manufacturing OverheadSalary Payable
1,0001,000
Create a job cost sheet form, and record the accumulation of costs for Job #345 determining the total cost of manufacturing the 10 oak chairs.
C.
Total direct labor hours for the month totaled 1,640 hours. At an
.
c.
Page 3 of 5
Prepare journal entries to record the following two additional events/transactions
1/7/X7: The 10 oak chairs (Job #345) were completed and transferred to the Finished Goods stock room to await shipment to the customer.
1/9/X7: The 10 oak chairs (Job #345) were shipped to the customer. The sales invoice reflects sales prices of $3,000 on account.
D.
Finished Goods InventoryWIP Inventory
1,9011,901
Account ReceivableSales Revenues
Cost of Goods SoldFinished Goods Inventory
3,000
1,9013,000
1,901
Sales RevenuesLess: Cost of Goods SoldGross Margin
$3,0001,901
$1,099
Determine the gross margin earned on the 10 oak chairs.E.
In addition to Job #345, Jones completed 47 other orders in January with 7 others in process at month end. The following information summarizes the manufacturing transactions for Jones for the month of January in addition to those previously noted above relating to Job #345. Prepare the summarized journal entries for Jones for the January events noted below.
Raw materials purchased on account amounted to $102,675.
Raw materials requisitioned to specific job orders amounted to $90,430 with 80% representing direct materials and the remainder representing indirect materials not directly attributable to any one specific job.
F.
a.
b.
Raw Materials InventoryAccounts Payable
102,675102,675
WIP InventoryManufacturing Overhead
Raw Materials Inventory
72,34418,086
90,430
Solution: Comprehensive Problem Solution: Comprehensive Problem
Solution: Comprehensive Problem Solution: Comprehensive Problem
Depreciation of manufacturing equipment for the month amounted to $5,500.
The cost of the 47 jobs completed during the month as summarized by their individual job cost sheets amounted to$125,446.
All completed jobs were shipped to customers by month end at a total sales price of $200,714 on account.
g.
h.
i.
Manufacturing OverheadAccum. Depreciation
5,5005,500
Finished Goods InventoryWIP Inventory
125,446125,446
Accounts ReceivableSales Revenues
Cost of Goods SoldFinished Goods Inventory
200,174
125,446200,174
125,446
Practice Problems: Job Order Costing
Solution: Comprehensive Problem Solution: Comprehensive Problem
Total direct labor hours for the month totaled 1,640 hours. At an average of $15 per hour, the direct labor wages incurred and paid amounted to $24,600.
Manufacturing overhead is applied at the predetermined rate to all jobs in progress on the basis of the actual direct labor hours incurred by job.
c.
d.
WIP InventoryCash
24,60024,600
WIP InventoryManufacturing Overhead
(1,640 x $26/hour = 42,640)
42,64042,640
Supervisory salaries incurred and paid along with other indirect manufacturing labor (i.e. maintenance labor) amounted to$7,000.
The following costs associated with the manufacturing process and facility were incurred and paid:
e.
f.
Factory RentFactory UtilitiesInsuranceOther Miscellaneous
$ 7,600$ 2,700$ 1,200$ 1,900$13,400
Manufacturing OverheadCash
7,0007,000
Manufacturing OverheadCash
13,40013,400
Page 4 of 5
All selling and administrative costs incurred and paid (i.e. admin. salaries, sales commissions, office supplies, office rent, etc.) amounted to $46,514.
j.
Selling and Admin. ExpensesCash
46,51446,514
Close the manufacturing overhead account to cost of goods sold (include all entries noted above for Job #345 and all events in part F).
G.
Cost of Goods SoldManufacturing Overhead
1,8501,850
Manufacturing Overhead154
1,00018,086
7,00013,400
5,5001,850
under applied
650
42,640
Practice Problems: Job Order CostingSolution: Comprehensive Problem Solution: Comprehensive Problem
Page 5 of 5