CHAPTER 18 Introduction to Managerial Accounting Warren Reeve Duchac ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. human/iStock/360/Getty Images Accounting 27e Learning Objectives • • • • LO1: Describe managerial accounting and the role of managerial accounting in a business. LO2: Describe and illustrate the following costs: direct and indirect costs; direct materials, direct labor, and factory overhead costs; and product and period costs. LO3: Describe sustainable business activities and ecoefficiency measures. LO4: Describe and illustrate the following statements for a manufacturing business: balance sheet, statement of cost of goods manufactured, and income statement. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 1 of 4) • Accounting information is often divided into two types: o o Financial accounting Managerial accounting ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Accounting and Managerial Accounting ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 2 of 4) • Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements. o o These financial statements—the income statement, retained earnings statement, balance sheet, and statement of cash flows—are prepared according to generally accepted accounting principles (GAAP). These statements are used by external users such as the following: ▪ ▪ ▪ ▪ Shareholders Creditors Government agencies The general public ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 3 of 4) • Managerial accounting information is designed to meet the specific needs of a company’s management. o This information includes the following: ▪ Historical data, which provide objective measures of past operations ▪ Estimated data, which provide subjective estimates about future decisions o Management uses both types of information in: ▪ Directing daily operations ▪ Planning future operations ▪ Developing business strategies ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 4 of 4) • Unlike the financial statements prepared in financial accounting, managerial accounting reports do not always have to be: o Prepared according to generally accepted accounting principles (GAAP). ▪ This is because only the company’s management uses the information. ▪ Also, in many cases, GAAP are not relevant to the specific decision-making needs of management. o Prepared at fixed intervals (monthly, quarterly, yearly). ▪ Although some management reports are prepared at fixed intervals, most reports are prepared as management needs the information. o Prepared for the business as a whole. ▪ Most management reports are prepared for products, projects, sales territories, or other segments of the company. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 1 of 5) • • In most companies, departments or similar organizational units are assigned responsibilities for specific functions or activities. The operating structure of a company can be shown in an organization chart. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Partial Organization Chart for Callaway Gold Company ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 2 of 5) • The departments in a company can be viewed as having either of the following: o o Line responsibilities Staff responsibilities ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 3 of 5) • A line department is directly involved in providing goods or services to the customers of the company. o For Callaway Golf, the following occupy line positions: ▪ ▪ ▪ ▪ Senior Vice President—Equipment Plant Manager—Chicopee, MA Plant Senior Vice President—Callaway Brand Managing Director, Callaway Golf Europe ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 4 of 5) • A staff department provides services, assistance, and advice to the departments with line or other staff responsibilities. A staff department has no direct authority over a line department. o For Callaway Golf, the following are staff positions: ▪ ▪ ▪ ▪ Senior VP—Chief Administrative Officer Vice President, Human Resources Chief Financial Officer Controller ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 5 of 5) • In most companies, the controller is the chief management accountant. o The controller’s staff consists of a variety of other accountants who are responsible for specialized accounting functions such as the following: ▪ ▪ ▪ ▪ ▪ ▪ Systems and procedures General accounting Budgets and budget analysis Special reports and analysis Taxes Cost accounting ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Process • The management process has the following five basic phases, which interact with one another: o o o o o Planning Directing Controlling Improving Decision making ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Process ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Planning • • Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action. Planning may be classified as follows: o Strategic planning, which is developing long-term actions to achieve the company’s objectives. ▪ These long-term courses of action are called strategies, which often involve periods of 5 to 10 years. o Operational planning, which develops short-term actions for managing the day-to-day operations of the company. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Directing • The process by which managers run day-to-day operations is called directing. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Controlling • Monitoring operating results and comparing actual results with the expected results is controlling. o • This feedback allows management to isolate areas for further investigation and possible remedial action. The philosophy of controlling by comparing actual and expected results is called management by exception. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Improving • Continuous process improvement is the philosophy of continually improving employees, business processes, and products. o The objective of continuous process improvement is to eliminate the source of problems in a process. ▪ In this way, the right products (services) are delivered in the right quantities at the right time. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Decision Making • Inherent in each of the preceding management processes is decision making. o In managing a company, management must continually decide among alternative actions. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Uses of Managerial Accounting • Managerial accounting provides information and reports for managers to use in operating the business. o o o o o Managerial accounting provides the cost of manufacturing a product, which can be used to determine its selling price. Managerial accounting allows for comparing the costs of manufacturing products over time and can be used to monitor and control the cost of direct materials, direct labor, and factory overhead. Performance reports allow management to identify any large amounts of scrap materials or employee downtime. A report could analyze the potential efficiencies and dollar savings of purchasing computerized equipment to speed up the production process. A report could analyze how many units need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Management Process Three phases of the management process are planning, controlling, and improving. Match the following descriptions to the proper phase. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Guitar-Making Operations of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct and Indirect Costs (slide 1 of 2) • A cost is a payment of cash or the commitment to pay cash in the future for the purpose of generating revenues. o In managerial accounting, costs are often classified according to the decision-making needs of management. ▪ For example, costs are often classified by their relationship to a segment of operations, called a cost object. – A cost object may be a product, a sales territory, a department, or an activity, such as research and development. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct and Indirect Costs (slide 2 of 2) • Costs identified with cost objects are either direct costs or indirect costs. o Direct costs are identified with and can be traced to a cost object. ▪ For example, the cost of wood used to make guitars is a direct cost. o Indirect costs cannot be identified with or traced to a cost object. ▪ For example, the salaries of production supervisors are indirect costs of producing a guitar because their salaries cannot be identified with or traced to any individual guitar. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Costs of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Indirect Costs of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Classifying Direct and Indirect Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Costs • • • The cost of a manufactured product includes the cost of materials used in making the product. In addition, the cost of a manufactured product includes the cost of converting the materials into a finished product. Thus, the cost of a finished product includes: o o o Direct materials cost Direct labor cost Factory overhead cost ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Costs of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Materials Cost • • Manufactured products begin with raw materials that are converted into finished products. To be classified as a direct materials cost, the cost must be both of the following: o o An integral part of the finished product A significant portion of the total cost of the product • Examples of direct materials costs include the following: o o o o The cost of the wood used in producing a guitar The cost of electronic components for a television Silicon wafers for microcomputer chips Tires for an automobile ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Labor Cost • • • Most manufacturing processes use employees to convert materials into finished products. The cost of employee wages that is an integral part of the finished product is classified as direct labor cost. A direct labor cost must meet both of the following criteria: o o • An integral part of the finished product A significant portion of the total cost of the product Examples of direct labor costs include the following: o o o o The wages of employees who cut guitars out of raw lumber and assemble them Mechanics’ wages for repairing an automobile Machine operators’ wages for manufacturing tools Assemblers’ wages for assembling a laptop computer ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead Cost (slide 1 of 2) • • • Costs other than direct materials cost and direct labor that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes called manufacturing overhead or factory burden). All factory overhead costs are indirect costs of the product. Some factory overhead costs include the following: o o o o o Heating and lighting the factory Repairing and maintaining factory equipment Property taxes on factory buildings and land Insurance on factory buildings Depreciation of factory plant and equipment ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead Cost (slide 2 of 2) • Factory overhead cost also includes materials and labor costs that do not enter directly into the finished product. o • Examples include the cost of oil used to lubricate machinery and the wages of janitorial and supervisory employees. Also, if the costs of direct materials or direct labor are not a significant portion of the total product cost, these costs may be classified as factory overhead costs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Direct Materials, Direct Labor, and Factory Overhead Identify the following costs as direct materials (DM), direct labor (DL), or factory overhead (FO) for a baseball glove manufacturer: a. Leather used to make a baseball glove b. Coolants for machines that sew baseball gloves c. Wages of assembly line employees d. Ink used to print a player’s autograph on a glove ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prime Costs and Conversion Costs • Direct materials, direct labor, and factory overhead costs may be grouped together for analysis and reporting. o Two such common groupings are as follows: ▪ Prime costs, which consist of direct materials and direct labor costs ▪ Conversion costs, which consist of direct labor and factory overhead costs – Conversion costs are the costs of converting the materials into a finished product. • Direct labor is both a prime cost and a conversion cost. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prime Costs and Conversion Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Prime and Conversion Costs Identify the following costs as a prime cost (P), conversion cost (C), or both (B) for a baseball glove manufacturer. a. Leather used to make a baseball glove b. Coolants for machines that sew baseball gloves c. Wages of assembly line employees d. Ink used to print a player’s autograph on a glove ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs and Period Costs (slide 1 of 2) • For financial reporting purposes, costs are classified as product costs or period costs. o o Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead. Period costs consist of selling and administrative costs. ▪ Selling expenses are incurred in marketing the product and delivering the product to the customer. ▪ Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Examples of Product Costs and Period Costs—Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs and Period Costs (slide 2 of 2) • • As product costs are incurred, they are recorded and reported on the balance sheet as inventory. When the inventory is sold, the cost of the manufactured product sold is reported as cost of goods sold on the income statement. Period costs are reported as expenses on the income statement in the period in which they are incurred, and, thus, they never appear on the balance sheet. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs, Period Costs, and the Financial Statements ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Product and Period Costs Identify the following costs as a product cost or a period cost for a baseball glove manufacturer: a. Leather used to make a baseball glove b. Cost of endorsement from a professional baseball player c. Office supplies used at the company headquarters d. Ink used to print a player’s autograph on a glove ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sustainability • Sustainability is the practice of operating a business to maximize profits while attempting to preserve the environment, economy, and needs of future generations. o Sustainability practices acknowledge that a company’s long-term success requires continued availability of natural resources and a productive social environment. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sustainable Business Activities ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Eco-Efficiency Measures in Managerial Accounting (slide 1 of 2) • • Sustainability information can provide important feedback to guide a company’s strategic and operational decision making. Managers can use this information to: o o o increase revenue control costs allocate resources efficiently ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Eco-Efficiency Measures in Managerial Accounting (slide 2 of 2) • Eco-efficiency measures are a form of managerial accounting information that helps managers evaluate the savings generated by using fewer natural resources in a company’s operations. o The Sustainability Accounting Standards Board (SASB) was organized in 2011 to develop accounting standards that help companies report decision-useful sustainability information to external financial statement users. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Eco-Efficiency Measures ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Statements for a Manufacturing Business • • The retained earnings and cash flow statements for a manufacturing business are similar to those for service and merchandising businesses. However, the balance sheet and income statement for a manufacturing business are more complex. o This is because a manufacturer makes the products that it sells and, thus, must record and report product costs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet for a Manufacturing Business • • A merchandising business reports only Merchandise Inventory on its balance sheet. In contrast, a manufacturing business reports three types of inventory on its balance sheet as follows: o o o Materials inventory (sometimes called raw materials inventory) consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process. Work in process inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process). Finished goods inventory consists of completed (or finished) products that have not been sold. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet Presentation of Inventory for Manufacturing and Merchandising Companies ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 1 of 8) • The income statements for merchandising and manufacturing businesses differ primarily in the reporting of the cost of merchandise (goods) available for sale and sold during the period. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statements for Merchandising and Manufacturing Businesses ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 2 of 8) • • • A merchandising business purchases merchandise ready for resale to customers. The total cost of the merchandise available for sale during the period is determined as follows: The cost of merchandise sold is: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 3 of 8) • • • • A manufacturer makes the products it sells, using direct materials, direct labor, and factory overhead. The total cost of making products that are available for sale during the period is called the cost of goods manufactured. The cost of finished goods available for sale is determined as follows: The cost of goods sold is determined as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 4 of 8) • Cost of goods manufactured is required to determine the cost of goods sold and, thus, to prepare the income statement. o The cost of goods manufactured is often determined by preparing a statement of cost of goods manufactured. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 5 of 8) ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 6 of 8) • The statement of cost of goods manufactured is prepared using the following three steps: o o o Step 1. Determine the cost of materials used. Step 2. Determine the total manufacturing costs incurred. Step 3. Determine the cost of goods manufactured. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Flow of Manufacturing Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 7 of 8) • The following data for Legend Guitars are used: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 8 of 8) • Using the data for Legend Guitars, the cost of materials used, total manufacturing costs, and cost of goods manufactured are computed as follows: o Step 1. The cost of materials used in production is determined as follows: o Step 2. The total manufacturing costs incurred is determined as follows: o Step 3. The cost of goods manufactured is determined as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Company—Income Statement with Statement of Cost of Goods Manufactured ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Cost of Goods Sold, Cost of Goods Manufactured (slide 1 of 2) Gauntlet Company has the following information for January: For January, determine (a) the cost of goods manufactured and (b) the cost of goods sold. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Cost of Goods Sold, Cost of Goods Manufactured (slide 2 of 2) ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 18 Introduction to Managerial Accounting Warren Reeve Duchac ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. human/iStock/360/Getty Images Accounting 27e Learning Objectives • • • • LO1: Describe managerial accounting and the role of managerial accounting in a business. LO2: Describe and illustrate the following costs: direct and indirect costs; direct materials, direct labor, and factory overhead costs; and product and period costs. LO3: Describe sustainable business activities and ecoefficiency measures. LO4: Describe and illustrate the following statements for a manufacturing business: balance sheet, statement of cost of goods manufactured, and income statement. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 1 of 4) • Accounting information is often divided into two types: o o Financial accounting Managerial accounting ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Accounting and Managerial Accounting ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 2 of 4) • Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements. o o These financial statements—the income statement, retained earnings statement, balance sheet, and statement of cash flows—are prepared according to generally accepted accounting principles (GAAP). These statements are used by external users such as the following: ▪ ▪ ▪ ▪ Shareholders Creditors Government agencies The general public ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 3 of 4) • Managerial accounting information is designed to meet the specific needs of a company’s management. o This information includes the following: ▪ Historical data, which provide objective measures of past operations ▪ Estimated data, which provide subjective estimates about future decisions o Management uses both types of information in: ▪ Directing daily operations ▪ Planning future operations ▪ Developing business strategies ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 4 of 4) • Unlike the financial statements prepared in financial accounting, managerial accounting reports do not always have to be: o Prepared according to generally accepted accounting principles (GAAP). ▪ This is because only the company’s management uses the information. ▪ Also, in many cases, GAAP are not relevant to the specific decision-making needs of management. o Prepared at fixed intervals (monthly, quarterly, yearly). ▪ Although some management reports are prepared at fixed intervals, most reports are prepared as management needs the information. o Prepared for the business as a whole. ▪ Most management reports are prepared for products, projects, sales territories, or other segments of the company. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 1 of 5) • • In most companies, departments or similar organizational units are assigned responsibilities for specific functions or activities. The operating structure of a company can be shown in an organization chart. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Partial Organization Chart for Callaway Gold Company ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 2 of 5) • The departments in a company can be viewed as having either of the following: o o Line responsibilities Staff responsibilities ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 3 of 5) • A line department is directly involved in providing goods or services to the customers of the company. o For Callaway Golf, the following occupy line positions: ▪ ▪ ▪ ▪ Senior Vice President—Equipment Plant Manager—Chicopee, MA Plant Senior Vice President—Callaway Brand Managing Director, Callaway Golf Europe ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 4 of 5) • A staff department provides services, assistance, and advice to the departments with line or other staff responsibilities. A staff department has no direct authority over a line department. o For Callaway Golf, the following are staff positions: ▪ ▪ ▪ ▪ Senior VP—Chief Administrative Officer Vice President, Human Resources Chief Financial Officer Controller ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Accountant in the Organization (slide 5 of 5) • In most companies, the controller is the chief management accountant. o The controller’s staff consists of a variety of other accountants who are responsible for specialized accounting functions such as the following: ▪ ▪ ▪ ▪ ▪ ▪ Systems and procedures General accounting Budgets and budget analysis Special reports and analysis Taxes Cost accounting ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Process • The management process has the following five basic phases, which interact with one another: o o o o o Planning Directing Controlling Improving Decision making ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Process ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Planning • • Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action. Planning may be classified as follows: o Strategic planning, which is developing long-term actions to achieve the company’s objectives. ▪ These long-term courses of action are called strategies, which often involve periods of 5 to 10 years. o Operational planning, which develops short-term actions for managing the day-to-day operations of the company. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Directing • The process by which managers run day-to-day operations is called directing. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Controlling • Monitoring operating results and comparing actual results with the expected results is controlling. o • This feedback allows management to isolate areas for further investigation and possible remedial action. The philosophy of controlling by comparing actual and expected results is called management by exception. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Improving • Continuous process improvement is the philosophy of continually improving employees, business processes, and products. o The objective of continuous process improvement is to eliminate the source of problems in a process. ▪ In this way, the right products (services) are delivered in the right quantities at the right time. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Decision Making • Inherent in each of the preceding management processes is decision making. o In managing a company, management must continually decide among alternative actions. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Uses of Managerial Accounting • Managerial accounting provides information and reports for managers to use in operating the business. o o o o o Managerial accounting provides the cost of manufacturing a product, which can be used to determine its selling price. Managerial accounting allows for comparing the costs of manufacturing products over time and can be used to monitor and control the cost of direct materials, direct labor, and factory overhead. Performance reports allow management to identify any large amounts of scrap materials or employee downtime. A report could analyze the potential efficiencies and dollar savings of purchasing computerized equipment to speed up the production process. A report could analyze how many units need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Management Process Three phases of the management process are planning, controlling, and improving. Match the following descriptions to the proper phase. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Guitar-Making Operations of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct and Indirect Costs (slide 1 of 2) • A cost is a payment of cash or the commitment to pay cash in the future for the purpose of generating revenues. o In managerial accounting, costs are often classified according to the decision-making needs of management. ▪ For example, costs are often classified by their relationship to a segment of operations, called a cost object. – A cost object may be a product, a sales territory, a department, or an activity, such as research and development. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct and Indirect Costs (slide 2 of 2) • Costs identified with cost objects are either direct costs or indirect costs. o Direct costs are identified with and can be traced to a cost object. ▪ For example, the cost of wood used to make guitars is a direct cost. o Indirect costs cannot be identified with or traced to a cost object. ▪ For example, the salaries of production supervisors are indirect costs of producing a guitar because their salaries cannot be identified with or traced to any individual guitar. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Costs of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Indirect Costs of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Classifying Direct and Indirect Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Costs • • • The cost of a manufactured product includes the cost of materials used in making the product. In addition, the cost of a manufactured product includes the cost of converting the materials into a finished product. Thus, the cost of a finished product includes: o o o Direct materials cost Direct labor cost Factory overhead cost ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Costs of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Materials Cost • • Manufactured products begin with raw materials that are converted into finished products. To be classified as a direct materials cost, the cost must be both of the following: o o An integral part of the finished product A significant portion of the total cost of the product • Examples of direct materials costs include the following: o o o o The cost of the wood used in producing a guitar The cost of electronic components for a television Silicon wafers for microcomputer chips Tires for an automobile ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Labor Cost • • • Most manufacturing processes use employees to convert materials into finished products. The cost of employee wages that is an integral part of the finished product is classified as direct labor cost. A direct labor cost must meet both of the following criteria: o o • An integral part of the finished product A significant portion of the total cost of the product Examples of direct labor costs include the following: o o o o The wages of employees who cut guitars out of raw lumber and assemble them Mechanics’ wages for repairing an automobile Machine operators’ wages for manufacturing tools Assemblers’ wages for assembling a laptop computer ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead Cost (slide 1 of 2) • • • Costs other than direct materials cost and direct labor that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes called manufacturing overhead or factory burden). All factory overhead costs are indirect costs of the product. Some factory overhead costs include the following: o o o o o Heating and lighting the factory Repairing and maintaining factory equipment Property taxes on factory buildings and land Insurance on factory buildings Depreciation of factory plant and equipment ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead Cost (slide 2 of 2) • Factory overhead cost also includes materials and labor costs that do not enter directly into the finished product. o • Examples include the cost of oil used to lubricate machinery and the wages of janitorial and supervisory employees. Also, if the costs of direct materials or direct labor are not a significant portion of the total product cost, these costs may be classified as factory overhead costs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Direct Materials, Direct Labor, and Factory Overhead Identify the following costs as direct materials (DM), direct labor (DL), or factory overhead (FO) for a baseball glove manufacturer: a. Leather used to make a baseball glove b. Coolants for machines that sew baseball gloves c. Wages of assembly line employees d. Ink used to print a player’s autograph on a glove ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prime Costs and Conversion Costs • Direct materials, direct labor, and factory overhead costs may be grouped together for analysis and reporting. o Two such common groupings are as follows: ▪ Prime costs, which consist of direct materials and direct labor costs ▪ Conversion costs, which consist of direct labor and factory overhead costs – Conversion costs are the costs of converting the materials into a finished product. • Direct labor is both a prime cost and a conversion cost. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prime Costs and Conversion Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Prime and Conversion Costs Identify the following costs as a prime cost (P), conversion cost (C), or both (B) for a baseball glove manufacturer. a. Leather used to make a baseball glove b. Coolants for machines that sew baseball gloves c. Wages of assembly line employees d. Ink used to print a player’s autograph on a glove ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs and Period Costs (slide 1 of 2) • For financial reporting purposes, costs are classified as product costs or period costs. o o Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead. Period costs consist of selling and administrative costs. ▪ Selling expenses are incurred in marketing the product and delivering the product to the customer. ▪ Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Examples of Product Costs and Period Costs—Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs and Period Costs (slide 2 of 2) • • As product costs are incurred, they are recorded and reported on the balance sheet as inventory. When the inventory is sold, the cost of the manufactured product sold is reported as cost of goods sold on the income statement. Period costs are reported as expenses on the income statement in the period in which they are incurred, and, thus, they never appear on the balance sheet. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs, Period Costs, and the Financial Statements ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Product and Period Costs Identify the following costs as a product cost or a period cost for a baseball glove manufacturer: a. Leather used to make a baseball glove b. Cost of endorsement from a professional baseball player c. Office supplies used at the company headquarters d. Ink used to print a player’s autograph on a glove ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sustainability • Sustainability is the practice of operating a business to maximize profits while attempting to preserve the environment, economy, and needs of future generations. o Sustainability practices acknowledge that a company’s long-term success requires continued availability of natural resources and a productive social environment. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sustainable Business Activities ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Eco-Efficiency Measures in Managerial Accounting (slide 1 of 2) • • Sustainability information can provide important feedback to guide a company’s strategic and operational decision making. Managers can use this information to: o o o increase revenue control costs allocate resources efficiently ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Eco-Efficiency Measures in Managerial Accounting (slide 2 of 2) • Eco-efficiency measures are a form of managerial accounting information that helps managers evaluate the savings generated by using fewer natural resources in a company’s operations. o The Sustainability Accounting Standards Board (SASB) was organized in 2011 to develop accounting standards that help companies report decision-useful sustainability information to external financial statement users. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Eco-Efficiency Measures ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Statements for a Manufacturing Business • • The retained earnings and cash flow statements for a manufacturing business are similar to those for service and merchandising businesses. However, the balance sheet and income statement for a manufacturing business are more complex. o This is because a manufacturer makes the products that it sells and, thus, must record and report product costs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet for a Manufacturing Business • • A merchandising business reports only Merchandise Inventory on its balance sheet. In contrast, a manufacturing business reports three types of inventory on its balance sheet as follows: o o o Materials inventory (sometimes called raw materials inventory) consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process. Work in process inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process). Finished goods inventory consists of completed (or finished) products that have not been sold. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet Presentation of Inventory for Manufacturing and Merchandising Companies ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 1 of 8) • The income statements for merchandising and manufacturing businesses differ primarily in the reporting of the cost of merchandise (goods) available for sale and sold during the period. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statements for Merchandising and Manufacturing Businesses ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 2 of 8) • • • A merchandising business purchases merchandise ready for resale to customers. The total cost of the merchandise available for sale during the period is determined as follows: The cost of merchandise sold is: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 3 of 8) • • • • A manufacturer makes the products it sells, using direct materials, direct labor, and factory overhead. The total cost of making products that are available for sale during the period is called the cost of goods manufactured. The cost of finished goods available for sale is determined as follows: The cost of goods sold is determined as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 4 of 8) • Cost of goods manufactured is required to determine the cost of goods sold and, thus, to prepare the income statement. o The cost of goods manufactured is often determined by preparing a statement of cost of goods manufactured. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 5 of 8) ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 6 of 8) • The statement of cost of goods manufactured is prepared using the following three steps: o o o Step 1. Determine the cost of materials used. Step 2. Determine the total manufacturing costs incurred. Step 3. Determine the cost of goods manufactured. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Flow of Manufacturing Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 7 of 8) • The following data for Legend Guitars are used: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 8 of 8) • Using the data for Legend Guitars, the cost of materials used, total manufacturing costs, and cost of goods manufactured are computed as follows: o Step 1. The cost of materials used in production is determined as follows: o Step 2. The total manufacturing costs incurred is determined as follows: o Step 3. The cost of goods manufactured is determined as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Company—Income Statement with Statement of Cost of Goods Manufactured ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Cost of Goods Sold, Cost of Goods Manufactured (slide 1 of 2) Gauntlet Company has the following information for January: For January, determine (a) the cost of goods manufactured and (b) the cost of goods sold. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Cost of Goods Sold, Cost of Goods Manufactured (slide 2 of 2) ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 19 Job Order Costing Warren Reeve Duchac ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. human/iStock/360/Getty Images Accounting 27e Learning Objectives • • • • LO1: Describe cost accounting systems used by manufacturing businesses. LO2: Describe and illustrate a job order cost accounting system. LO3: Describe the use of job order cost information for decision making. LO4: Describe job order cost accounting systems for service businesses. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Accounting Systems Overview • Cost accounting systems measure, record, and report product costs. o • Managers use product costs for setting product prices, controlling operations, and developing financial statements. The two main types of cost accounting systems for manufacturing are: o o Job order cost systems Process cost systems ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems • A job order cost system provides product costs for each quantity of product that is manufactured. o • Each quantity of product that is manufactured is called a job. Job order costs systems are often used by companies that manufacture custom products for customers or batches of similar products. o Manufacturers that use a job order cost system are sometimes called job shops. ▪ Examples of a job shop would be a(n): – Apparel manufacturer – Guitar manufacturer ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Process Cost Systems • • A process cost system provides product costs for each manufacturing department or process. Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process. o Examples would be: ▪ ▪ ▪ ▪ Oil refineries Paper producers Chemical processers Food processors ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems for Manufacturing Businesses (slide 1 of 2) • A job order cost system records and summarizes manufacturing costs by jobs. o o o While jobs are still in the production process, they are part of Work in Process Inventory. As jobs are completed, they become part of Finished Goods Inventory. When the finished goods are sold to customers, their costs become part of Cost of Goods Sold. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Flow of Manufacturing Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems for Manufacturing Businesses (slide 2 of 2) • In a job order cost accounting system, perpetual inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods inventories. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inventory Ledger Accounts ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 1 of 6) • The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger. o o Increases (debits) are based on receiving reports, which is supported by the supplier’s invoice. Decreases (credits) are based on materials requisitions for particular jobs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials Information and Cost Flows ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 2 of 6) • • A receiving report is prepared when materials that have been ordered are received and inspected. The quantity received and the condition of the materials are entered on the receiving report. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 3 of 6) • • When the supplier’s invoice is received, it is compared to the receiving report. If there are no discrepancies, a journal entry is made to record the purchase. o This entry increases (debits) Materials and increases (credits) Accounts Payable. ▪ The journal entry to record the supplier’s invoice related to Receiving Report No. 196 is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 4 of 6) • • The storeroom releases materials to use in a job when a materials requisition is received. The materials requisitions for each job serve as the basis for recording materials used. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 5 of 6) • For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. o Job cost sheets make up the work in process subsidiary ledger. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 6 of 6) • A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. o For direct materials, this entry increases (debits) Work in Process and decreases (credits) Materials. ▪ The journal entry to record the direct materials used for the month for Legend Guitars is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Issuance of Materials On March 5, Hatch Company purchased 400 units of raw materials at $14 per unit. During March, raw materials were requisitioned for production as follows: 200 units for Job 101 at $12 per unit and 300 units for Job 102 at $14 per unit. Journalize the entry on March 5 to record the purchase and on March 31 to record the requisition from the materials storeroom. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Labor (slide 1 of 2) • • When employees report for work, they may use electronic badges, clock cards, or in-and-out cards to clock in. When employees work on an individual job, they use time tickets to record the amount of time they have worked on a specific job. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Labor Information and Cost Flows ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Labor (slide 2 of 2) • A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month. o This entry increases (debits) Work in Process and increases (credits) Wages Payable. ▪ The journal entry to record direct labor for the month for Legend Guitars is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Direct Labor Costs During March, Hatch Company accumulated 800 hours of direct labor costs on Job 101 and 600 hours on Job 102. The total direct labor was incurred at a rate of $16 per direct labor hour for Job 101 and $12 per direct labor hour for Job 102. Journalize the entry to record the flow of labor costs into production during March. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead (slide 1 of 2) • • Factory overhead includes all manufacturing costs except direct materials and direct labor. Factory overhead costs come from a variety of sources, including the following: o o o o Indirect materials comes from a summary of materials requisitions. Indirect labor comes from the salaries of production supervisors and the wages of other employees such as janitors. Factory power comes from utility bills. Factory depreciation comes from Accounting Department computation of depreciation. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead (slide 2 of 2) • Assume that Legend Guitars incurred $4,600 of overhead during December, which included $500 of indirect materials, $2,000 of indirect labor, $900 of utilities, and $1,200 of factory depreciation. The $500 of indirect materials consisted of $200 of glue and $300 of sandpaper. The entry to record the factory overhead is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Factory Overhead Costs During March, Hatch Company incurred factory overhead costs as follows: indirect materials, $800; indirect labor, $3,400; utilities cost, $1,600; and factory depreciation, $2,500. Journalize the entry to record the factory overhead incurred during March. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Factory Overhead (slide 1 of 2) • Factory overhead is different from direct labor and direct materials in that it is indirectly related to the jobs. That is, factory overhead costs cannot be identified with or traced to specific jobs. For this reason, factory overhead costs are allocated to jobs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Factory Overhead (slide 2 of 2) • The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation. o The factory overhead costs are allocated to jobs using a common measure related to each job. ▪ This measure is called an activity base, allocation base, or activity driver. – Three common activity bases used to allocate factory overhead are: 1. Direct labor hours 2. Direct labor cost 3. Machine hours ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Predetermined Factory Overhead Rate (slide 1 of 3) • • Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as: Predetermined Factory Estimated Total Factory Overhead Costs = Overhead Rate Estimated Activity Base ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Predetermined Factory Overhead Rate (slide 2 of 3) • Assume that Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours. The predetermined factory overhead rate is computed as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Predetermined Factory Overhead Rate (slide 3 of 3) • Many companies are using a method for accumulating and allocating factory overhead costs. This method, called activity-based costing, uses a different overhead rate for each type of factory overhead activity, such as inspecting, moving, and machining. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Jobs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 1 of 5) • Using a factory overhead rate of $5 per direct labor hour, $4,250 of factory overhead is applied as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 2 of 5) • The journal entry to apply factory overhead increases (debits) Work in Process and credits Factory Overhead. o The journal entry to apply overhead to Jobs 71 and 72 is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 3 of 5) • The factory overhead account is: o o • Increased (debited) for the actual overhead costs incurred. Decreased (credited) for the applied overhead. The actual and applied overhead usually differ because the actual overhead costs are normally different from the estimated overhead costs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 4 of 5) • Depending on whether actual overhead is greater or less than applied overhead, the factory overhead account will either have a debit or credit ending balance as follows: o If the applied overhead is less than the actual overhead incurred, the factory overhead account will have a debit balance. ▪ This debit balance is called underapplied factory overhead or underabsorbed factory overhead. o If the applied overhead is more than the actual overhead incurred, the factory overhead account will have a credit balance. ▪ This debit balance is called overapplied factory overhead or overabsorbed factory overhead. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 5 of 5) • The factory overhead account for Legend Guitars, which follows, illustrates both underapplied and overapplied factory overhead. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Applying Factory Overhead (slide 1 of 2) Hatch Company estimates that total factory overhead costs will be $100,000 for the year. Direct labor hours are estimated to be 25,000. For Hatch Company, (a) determine the predetermined factory overhead rate using direct labor hours as the activity base, (b) determine the amount of factory overhead applied to Jobs 101 and 102 in March using the data on direct labor hours from Example Exercise 19-2, and (c) prepare the journal entry to apply factory overhead to both jobs in March according to the predetermined overhead rate. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Applying Factory Overhead (slide 2 of 2) ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disposal of Factory Overhead Balance (slide 1 of 3) • • During the year, the balance in the factory overhead account is carried forward and reported as a deferred debit or credit on the monthly (interim) balance sheets. However, any balance in the factory overhead account should not be carried over to the next year. o This is because any such balance applies only to operations of the current year. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disposal of Factory Overhead Balance (slide 2 of 3) • The balance of Factory Overhead at the end of the year is disposed of by transferring it to the cost of goods sold account as follows: o If there is an ending debit balance (underapplied overhead) in the factory overhead account, it is disposed of by the entry that follows: o If there is an ending credit balance (overapplied overhead) in the factory overhead account, it is disposed of by the entry that follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disposal of Factory Overhead Balance (slide 3 of 3) • The journal entry to dispose of Legend Guitars’ December 31, 20Y8, underapplied overhead balance of $150 is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Work in Process (slide 1 of 3) • During the period, Work in Process is increased (debited) for the following: o o o Direct materials cost Direct labor cost Applied factory overhead cost ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Cost Sheets and the Work in Process Controlling Account ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Work in Process (slide 2 of 3) • During December, Job 71 was completed. Upon completion, the product costs (direct materials, direct labor, and factory overhead) are totaled. This total is divided by the number of units produced to determine the cost per unit. o Thus, the 20 Jazz Series guitars produced as Job 71 cost $512.50 ($10,250 ÷ 20) per guitar. • After completion, Job 71 is transferred from Work in Process to Finished Goods by the following entry: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Work in Process (slide 3 of 3) • Job 72 was started in December but was not completed by December 31, 20Y8. Thus, Job 72 is still part of work in process on December 31, 20Y8. o Note that the balance of the job cost sheet for Job 72 ($21,000) is also the December 31, 20Y8, balance of Work in Process. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Job Costs At the end of March, Hatch Company had completed Jobs 101 and 102. Job 101 is for 500 units, and Job 102 is for 1,000 units. Using the data from Example Exercises 19-1, 19-2, and 19-4, determine (a) the balance on the job cost sheets for Jobs 101 and 102 at the end of March and (b) the cost per unit for Jobs 101 and 102 at the end of March. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Finished Goods • The finished goods account is a controlling account for the subsidiary finished goods ledger or stock ledger. o Each account in the finished goods ledger contains cost data for the units manufactured, units sold, and units on hand. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Finished Goods Ledger Account ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sales and Cost of Goods Sold • During December, Legend Guitars sold 40 Jazz Series guitars for $850 each, generating total sales of $34,000 ($850 × 40 guitars). The cost per guitar sold was $500 or a total cost of $20,000 ($500 x 40). The entries to record the sale and related cost of goods sold are as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Period Costs (slide 1 of 2) • Period costs are used in generating revenue during the current period but are not involved in the manufacturing process. o Period costs are recorded as expenses of the current period as either selling or administrative expenses. ▪ Selling expenses are incurred in marketing and delivering the sold product to customers. ▪ Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Period Costs (slide 2 of 2) • During December, Legend Guitars recorded the following selling and administrative expenses: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Flow of Manufacturing Costs for Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement of Legend Guitars ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Costing for Decision Making (slide 1 of 2) • A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs. o In this way, a job order cost system can be used by managers for cost evaluation and control. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Comparing Data from Job Cost Sheets ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Costing for Decision Making (slide 2 of 2) • • • The job cost sheets can be analyzed for possible reasons for the increased materials cost for Job 63. Because the materials price did not change ($10 per board foot), the increased materials cost must be related to wood consumption. Thus, Legend Guitars should conduct an investigation to determine the cause of the extra 100 board feet used for Job 63. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems for Service Businesses (slide 1 of 2) • A job order cost accounting system may be used by a professional service business. o For example, an advertising agency, an attorney, and a physician each provide services to individual customers, clients, or patients. In such cases, the customer, client, or patient can be viewed as a job for which costs are accumulated. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems for Service Businesses (slide 2 of 2) • The primary product costs for a service business are direct labor and • • overhead costs. Any materials or supplies are insignificant and are included as part of overhead costs. Like a manufacturing business, direct labor and overhead costs of rendering services to clients are accumulated in a work in process account. When the job is completed and the client billed, the costs are transferred to a cost of services account. o Cost of Services is similar to the cost of merchandise sold account for a merchandising business or the cost of goods sold account for a manufacturing business. • A finished goods account and related finished goods ledger are not necessary. o This is because the revenues for the services are recorded only after the services are provided. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Flow of Costs Through a Service Business ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 19 Job Order Costing Warren Reeve Duchac ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. human/iStock/360/Getty Images Accounting 27e Learning Objectives • • • • LO1: Describe cost accounting systems used by manufacturing businesses. LO2: Describe and illustrate a job order cost accounting system. LO3: Describe the use of job order cost information for decision making. LO4: Describe job order cost accounting systems for service businesses. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Accounting Systems Overview • Cost accounting systems measure, record, and report product costs. o • Managers use product costs for setting product prices, controlling operations, and developing financial statements. The two main types of cost accounting systems for manufacturing are: o o Job order cost systems Process cost systems ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems • A job order cost system provides product costs for each quantity of product that is manufactured. o • Each quantity of product that is manufactured is called a job. Job order costs systems are often used by companies that manufacture custom products for customers or batches of similar products. o Manufacturers that use a job order cost system are sometimes called job shops. ▪ Examples of a job shop would be a(n): – Apparel manufacturer – Guitar manufacturer ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Process Cost Systems • • A process cost system provides product costs for each manufacturing department or process. Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process. o Examples would be: ▪ ▪ ▪ ▪ Oil refineries Paper producers Chemical processers Food processors ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems for Manufacturing Businesses (slide 1 of 2) • A job order cost system records and summarizes manufacturing costs by jobs. o o o While jobs are still in the production process, they are part of Work in Process Inventory. As jobs are completed, they become part of Finished Goods Inventory. When the finished goods are sold to customers, their costs become part of Cost of Goods Sold. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Flow of Manufacturing Costs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Cost Systems for Manufacturing Businesses (slide 2 of 2) • In a job order cost accounting system, perpetual inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods inventories. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Inventory Ledger Accounts ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 1 of 6) • The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger. o o Increases (debits) are based on receiving reports, which is supported by the supplier’s invoice. Decreases (credits) are based on materials requisitions for particular jobs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials Information and Cost Flows ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 2 of 6) • • A receiving report is prepared when materials that have been ordered are received and inspected. The quantity received and the condition of the materials are entered on the receiving report. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 3 of 6) • • When the supplier’s invoice is received, it is compared to the receiving report. If there are no discrepancies, a journal entry is made to record the purchase. o This entry increases (debits) Materials and increases (credits) Accounts Payable. ▪ The journal entry to record the supplier’s invoice related to Receiving Report No. 196 is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 4 of 6) • • The storeroom releases materials to use in a job when a materials requisition is received. The materials requisitions for each job serve as the basis for recording materials used. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 5 of 6) • For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. o Job cost sheets make up the work in process subsidiary ledger. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Materials (slide 6 of 6) • A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. o For direct materials, this entry increases (debits) Work in Process and decreases (credits) Materials. ▪ The journal entry to record the direct materials used for the month for Legend Guitars is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Issuance of Materials On March 5, Hatch Company purchased 400 units of raw materials at $14 per unit. During March, raw materials were requisitioned for production as follows: 200 units for Job 101 at $12 per unit and 300 units for Job 102 at $14 per unit. Journalize the entry on March 5 to record the purchase and on March 31 to record the requisition from the materials storeroom. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Labor (slide 1 of 2) • • When employees report for work, they may use electronic badges, clock cards, or in-and-out cards to clock in. When employees work on an individual job, they use time tickets to record the amount of time they have worked on a specific job. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Labor Information and Cost Flows ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Labor (slide 2 of 2) • A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month. o This entry increases (debits) Work in Process and increases (credits) Wages Payable. ▪ The journal entry to record direct labor for the month for Legend Guitars is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Direct Labor Costs During March, Hatch Company accumulated 800 hours of direct labor costs on Job 101 and 600 hours on Job 102. The total direct labor was incurred at a rate of $16 per direct labor hour for Job 101 and $12 per direct labor hour for Job 102. Journalize the entry to record the flow of labor costs into production during March. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead (slide 1 of 2) • • Factory overhead includes all manufacturing costs except direct materials and direct labor. Factory overhead costs come from a variety of sources, including the following: o o o o Indirect materials comes from a summary of materials requisitions. Indirect labor comes from the salaries of production supervisors and the wages of other employees such as janitors. Factory power comes from utility bills. Factory depreciation comes from Accounting Department computation of depreciation. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead (slide 2 of 2) • Assume that Legend Guitars incurred $4,600 of overhead during December, which included $500 of indirect materials, $2,000 of indirect labor, $900 of utilities, and $1,200 of factory depreciation. The $500 of indirect materials consisted of $200 of glue and $300 of sandpaper. The entry to record the factory overhead is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Factory Overhead Costs During March, Hatch Company incurred factory overhead costs as follows: indirect materials, $800; indirect labor, $3,400; utilities cost, $1,600; and factory depreciation, $2,500. Journalize the entry to record the factory overhead incurred during March. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Factory Overhead (slide 1 of 2) • Factory overhead is different from direct labor and direct materials in that it is indirectly related to the jobs. That is, factory overhead costs cannot be identified with or traced to specific jobs. For this reason, factory overhead costs are allocated to jobs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Factory Overhead (slide 2 of 2) • The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation. o The factory overhead costs are allocated to jobs using a common measure related to each job. ▪ This measure is called an activity base, allocation base, or activity driver. – Three common activity bases used to allocate factory overhead are: 1. Direct labor hours 2. Direct labor cost 3. Machine hours ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Predetermined Factory Overhead Rate (slide 1 of 3) • • Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as: Predetermined Factory Estimated Total Factory Overhead Costs = Overhead Rate Estimated Activity Base ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Predetermined Factory Overhead Rate (slide 2 of 3) • Assume that Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours. The predetermined factory overhead rate is computed as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Predetermined Factory Overhead Rate (slide 3 of 3) • Many companies are using a method for accumulating and allocating factory overhead costs. This method, called activity-based costing, uses a different overhead rate for each type of factory overhead activity, such as inspecting, moving, and machining. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Jobs ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 1 of 5) • Using a factory overhead rate of $5 per direct labor hour, $4,250 of factory overhead is applied as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 2 of 5) • The journal entry to apply factory overhead increases (debits) Work in Process and credits Factory Overhead. o The journal entry to apply overhead to Jobs 71 and 72 is as follows: ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 3 of 5) • The factory overhead account is: o o • Increased (debited) for the actual overhead costs incurred. Decreased (credited) for the applied overhead. The actual and applied overhead usually differ because the actual overhead costs are normally different from the estimated overhead costs. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 4 of 5) • Depending on whether actual overhead is greater or less than applied overhead, the factory overhead account will either have a debit or credit ending balance as follows: o If the applied overhead is less than the actual overhead incurred, the factory overhead account will have a debit balance. ▪ This debit balance is called underapplied factory overhead or underabsorbed factory overhead. o If the applied overhead is more than the actual overhead incurred, the factory overhead account will have a credit balance. ▪ This debit balance is called overapplied factory overhead or overabsorbed factory overhead. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead to Work In Process (slide 5 of 5) • The factory overhead account for Legend Guitars, which follows, illustrates both underapplied and overapplied factory overhead. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Example Exercise Applying Factory Overhead (slide 1 of 2) Hatch Company estimates that total factory overhead costs will be $100,000 for the year. Direct labor hours are estimated to be 25,000. For Hatch Company, (a) determine the predetermined factory overhead rate using direct labor hours as the activity base, (b) determine the...
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