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Chapter 17 1. Gather information to determine the production cost per unit Help managers: set selling prices that will lead to profits compute cost of.

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Presentation on theme: "Chapter 17 1. Gather information to determine the production cost per unit Help managers: set selling prices that will lead to profits compute cost of."— Presentation transcript:

1 Chapter 17 1

2 Gather information to determine the production cost per unit Help managers: set selling prices that will lead to profits compute cost of goods sold for the income statement compute the cost of inventory for the balance sheet Assign these costs to the companys product or service using: Job order costing Process costing 2

3 Job Order Costing For manufactured batches of unique products or specialized services Accounting firms Music studios Building contractors Health-care providers Accumulates cost per batch or job More prevalent with service- based companies and with ERP systems Process Costing For companies that produce identical units through a series of processes Coca-Cola Surfboards Medical equipment Used by large producers of similar goods Accumulates cost of each process needed to complete the product Assigns costs to products 3

4 Cost tracing is used to assign directly traceable costs Direct materials Direct labor Cost allocation Assigns indirect costs to the product Overhead costs Less precise technique 4

5 5 Direct materials Direct labor Overhead Job 293 Materials $793 Labor 944 Overhead 472 Work in process Finished goods Cost of goods sold

6 Purchasing for cash or on account Debit materials inventory Asset account Subsidiary ledger Direct materials Indirect materials 6 Materials inventory 70,000

7 Direct materials debited to Work in process Indirect materials debited to Manufacturing overhead Inventory is credited for materials removed 7 Materials inventory Work in process Manufacturing overhead

8 8 Used to request the transfer of materials to Work in process Assigns the cost of the direct material to a job (Job 16) Shows the company cost of the material requested

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10 Debit Work in process inventory (for direct labor) Debit Manufacturing overhead (for indirect labor) Credit Wages payable 10 Work in process Manufacturing overhead Wages payable

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13 Actual overhead costs are accumulated in the Manufacturing overhead account Overhead costs are essential to production Must be assigned to determine full cost Two step process Step 1 – Calculate overhead allocation rate Step 2 – Rate is multiplied by the actual quantity of allocation base used on the job Formula: 13

14 Most accurate allocation when total overhead cost is known A predetermined rate is calculated before the period begins using estimates Use this rate to allocate estimated overhead cost to jobs Rate is based upon two factors: Total estimated manufacturing overhead costs for the period Total estimated quantity of the manufacturing overhead allocation base 14

15 Identify an allocation base Direct labor hours (labor-intensive production) Direct labor cost (labor-intensive production) Machine hours (machine-intensive production) 15

16 How to allocate overhead cost to jobs Compute the predetermined manufacturing overhead rate The application rate is multiplied by the actual quantity of allocation base used on the job If the rate is based on direct labor hours Rate is multiplied by the direct labor hours used on each job 16 Predetermined manufacturing Actual quantity of the overhead rate (from Step 1) allocation base used by each job x

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18 Overhead is allocated to jobs in process The journal entry includes: At the end of the period, when a balance exists If allocated amount is less than actual overhead underallocated If allocated amount is more than actual overhead overallocated 18

19 Teak Outdoor Furniture manufactures wood patio furniture. The company reports the following costs for June 2012: Wood $ 250,000 Nails, glue, and stain ,000 Depreciation on saws ,500 Indirect manufacturing labor ,000 Depreciation on delivery truck ,300 Assembly-line workers wages , What is the balance in the Manufacturing overhead account before overhead is applied to jobs? 19

20 Job 303 includes direct materials costs of $500 and direct labor costs of $430. Requirement 1. If the manufacturing overhead allocation rate is 80% of direct labor cost, what is the total cost assigned to Job 303? 20

21 Seattle Enterprises produces LCD touch screen products. The company reports the following information at December 31, 2012: 1. What is the actual manufacturing overhead of Seattle Enterprises? 2. What is the allocated manufacturing overhead? 3. Is manufacturing overhead underallocated or overallocated? By how much? 21 $ 51,900 $53,900 Overallocated $ 2,000

22 To complete the process, we must: Account for the completion and sale of finished goods Adjust manufacturing overhead at the end of the period 22

23 Remember the flow of costsa job goes from: work in process to finished goods to cost of goods sold Journal entry: Work in process to Finished goods Finished goods to Cost of goods sold 23

24 Accounting for Finished Goods Cost Flows T-account example of cost flows 24

25 Overhead is allocated to jobs in process At the end of the period, when a balance exists If allocated amount is less than actual overhead underallocated If allocated amount is more than actual overhead overallocated An adjustment is made to close out the account Adjustment should increase (decrease) Cost of goods sold 25 Adjusting Manufacturing Overhead

26 To close Manufacturing overhead If underallocated: Debit Cost of goods sold Credit Manufacturing overhead Increases Cost of goods sold for unallocated amount If overallocated: Debit Manufacturing overhead Credit Cost of goods sold Decreases Cost of goods sold for overallocated amount 26

27 Selected cost data for Antique Print, Co. are as follows: Estimated manufacturing overhead cost for the year..... $ 115,000 Estimated direct labor cost for the year ,875 Actual manufacturing overhead cost for the year ,000 Actual direct labor cost for the year ,000 1.Compute the predetermined manufacturing overhead rate per direct labor dollar. 2. Prepare the journal entry to allocate overhead cost for the year. 27 The predetermined manufacturing overhead rate per direct labor dollar is 160%. $ 115,000 71,875

28 Selected cost data for Antique Print, Co., are as follows: Estimated manufacturing overhead cost for the year..... $ 115,000 Estimated direct labor cost for the year ,875 Actual manufacturing overhead cost for the year ,000 Actual direct labor cost for the year , Use a T-account to determine the amount of underallocated or overallocated manufacturing overhead. 4. Prepare the journal entry to close the balance of the Manufacturing overhead account. 28 Underallocated by $ 2,200

29 Used where large quantities of similar products are produced Two methods: Weighted-average * FIFO Costs accumulated in each manufacturing process Company then assigns these costs to products passing through that process Sum of the costs applied to units produced to determine costs per unit 29

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32 Two cost categories: Direct materials Conversion costs Direct labor and manufacturing overhead combined Costs incurred to convert materials into finished products Equivalent units Allow measurement of partially finished goods Express production in terms of fully completed units Materials may have different percentage completed than conversion costs 32

33 Equivalent units Direct materials often added at a specific point or different points in the process Compute separate equivalent units Direct materials Conversion cost 33

34 Summarize the flow of physical units Compute output in equivalent units Compute the cost per equivalent unit Assign costs to completed and ending inventory units 34

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36 36 Step 1- Units to account for: Number of units in process plus the number of units started Step 2- Units accounted for: Number of units completed and transferred out plus number of partially completed units

37 Cost of direct materials is divided by the equivalent units For conversion costs, direct labor and overhead costs are added together and divided by the equivalent units for conversion costs 37

38 For the 40,000 units transferred out, multiply them by both the materials and labor cost per unit Ending inventory needs to be split between materials and conversion Materials cost uses the 10,000 equivalent units multiplied by the material unit costs For conversion, use 2,500 equivalent units multiplied by $

39 Journal entries to record July costs placed into production The entry to transfer the cost of the 40,000 completed puzzles 39

40 Work in Process: Dept. 1 Account This costing system continues for each remaining department Total cost from previous department is transferred to the next department Process continues 40

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