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CHAPTER 11 Product Costing in Service and Manufacturing Entities.

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Presentation on theme: "CHAPTER 11 Product Costing in Service and Manufacturing Entities."— Presentation transcript:

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2 CHAPTER 11 Product Costing in Service and Manufacturing Entities

3 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-2 Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. Managerial Accounting Product costs are used for planning, control, directing, and management decision making. Chapter Opening

4 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-3 Learning Objective LO1 To describe the nature and treatment of product cost information for manufacturing and service companies

5 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-4 Raw Materials Finished Goods Work-in-Process (WIP) Materials waiting to be processed. Partially complete products – material to which some labor and/or overhead has been added. Completed products awaiting sale. Cost Flow in Manufacturing Companies

6 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-5 Cost of Purchases Balance Sheet Income Statement Raw Materials Work-in- Process Finished Goods Materials Used Labor Overhead Ending Inventory Total Mfg. Costs Incurred Ending Inventory Cost of Goods Mfd. Ending Inventory Cost of Goods Sold Cost Flow in Manufacturing Companies

7 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-6 Cost Flow in Service Companies Service Companies Banks Hotels AttorneysHospitals Public Accountants Insurance Firms Airlines Plumbing Companies

8 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-7 Service companies do not have work-in-process and finished goods inventory accounts where costs are stored before being transferred to a cost of goods sold account. Cost Flow in Service Companies

9 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-8 Learning Objective LO2 To demonstrate the flow of materials and labor costs for a manufacturing company

10 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 11-9 The Product Manufacturing Overhead Direct Labor Direct Material Manufacturing Cost Flow

11 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Cost of wages and fringe benefits for personnel who work directly on manufactured products. Direct Labor Example: Wages paid to an automobile assembly worker. Example: Wages paid to an automobile assembly worker.

12 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Direct Material Example: Steel used to manufacture the automobile. Example: Steel used to manufacture the automobile. Raw material that is used to make, and can be conveniently traced, to the finished product.

13 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin All other manufacturing costs Manufacturing Overhead Materials used to support the production process. Examples: Lubricants and cleaning supplies used in an automobile assembly plant. Indirect Labor Indirect Material Other Costs

14 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin All other manufacturing costs Cost of personnel who do not work directly on the product. Examples: Maintenance workers, janitors and security guards. Indirect Labor Indirect Material Other Costs Manufacturing Overhead

15 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin All other manufacturing costs Examples: Depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time. Indirect Labor Indirect Material Other Costs Manufacturing Overhead

16 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Let’s examine the cost flows in a manufacturing company. We will use T-accounts and start with materials. Manufacturing Cost Flow

17 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Work-in-Process Raw Materials Mfg. Overhead Material Purchases Direct Material Indirect Material Manufacturing Cost Flow

18 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me? Manufacturing Cost Flow

19 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Direct Labor Indirect Material Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later. Indirect Labor Direct Labor Overhea d Applied Indirect Labor Wages Payable Work-in-Process Mfg. Overhead Direct Material Manufacturing Cost Flow

20 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Now let’s complete the goods and sell them. Still with me? Manufacturing Cost Flow

21 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Work-in-Process Direct Material Direct Labor Overhea d Applied Manufacturing Cost Flow

22 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Let’s look at the January transactions of Ventra Manufacturing Company. Manufacturing Cost Flow

23 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Manufacturing Cost Flow

24 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra pays $26,500 cash to purchase raw materials.  26,500 Cash Bal. 64,500  26,500 Raw Materials Bal. 500 Manufacturing Cost Flow

25 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra places $1,100 of raw materials into production in the process of making jewelry boxes.  1,100 Work-in-Process Bal. 0 Raw Materials  26,500 Bal. 500  1,100 Manufacturing Cost Flow

26 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra pays $2,000 cash to purchase production supplies. Production Supplies Cash  26,500 Bal. 64,500  2,000 Manufacturing Cost Flow

27 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra pays production workers $1,400 cash.  26,500 Cash Bal. 64,500  2,000  1,100 Work-in-Process Bal. 0  1,400 Manufacturing Cost Flow

28 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Learning Objective LO3 To assign estimated overhead costs to inventory and cost of goods sold

29 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. $ Flow of Overhead Costs

30 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Estimated total manufacturing overhead cost for the period Estimated total units in the allocation base for the period POHR = A predetermined overhead rate (POHR), used to apply overhead to products, is determined before the period begins. Flow of Overhead Costs $40,320 12,000 jewelry boxes POHR = = $3.36 per box

31 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Overhead applied = POHR × Actual activity Actual amount of the allocation base such as units produced, direct labor hours, or machine hours. Based on estimates, and determined before the period begins. Flow of Overhead Costs

32 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra applies $1,680 of estimated manufacturing overhead costs at the end of the month of January. Applied Manufacturing Overhead Actual  1,680  1,100 Work-in-Process  1,400 Bal. 0 Applied overhead = 500 boxes × $3.36 per box = $1,680 Manufacturing Cost Flow

33 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Learning Objective LO4 To account for completion and sale of products

34 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra transfers the total cost of 500 jewelry boxes from work-in-process to finished goods.  1,100 Work-in-Process  1,400  1,680 Bal. 0  4,180 Finished Goods Bal $8.36 Unit cost = $4,180 ÷ 500 boxes = $8.36 per box Manufacturing Cost Flow

35 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra recognizes cost of goods sold for 400 jewelry boxes sold to customers. Finished Goods  4,180 Bal. 836 Cost of Goods Sold  3, $8.36 per box = $3,344 Manufacturing Cost Flow

36 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra recognizes $5,600 of sales revenue for the cash sale of 400 boxes. Revenue  5, $14.00 per box = $5,600  26,500 Cash Bal. 64,500  2,000  1,400  5,600 Manufacturing Cost Flow

37 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc. Cash  26,500 Bal. 64,500  2,000  1,400  5,600 Applied Manufacturing Overhead Actual  1,680  1,200 Manufacturing Cost Flow

38 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin  Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc. Manufacturing overhead is $480 overapplied at the end of January. Any difference between actual and applied overhead remaining at year end will be closed to cost of goods sold. Applied Manufacturing Overhead Actual  1,680  1,200 Manufacturing Cost Flow

39 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin At the end of the year, Ventra has the following account balances: Manufacturing Cost Flow

40 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Manufacturing Cost Flow

41 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Supplies: $2,000 purchased, $1,700 used. See Cost of Goods Manufactured and Sold Schedule Manufacturing Cost Flow

42 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Explanation of Manufacturing Overhead balance follows. Manufacturing Cost Flow

43 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Applied Manufacturing Overhead Actual 39,64843,400 3,752 Manufacturing overhead is $3,752 underapplied. 11,800 boxes manufactured × $3.36 POHR Analyzing Underapplied Overhead

44 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Applied Manufacturing Overhead Actual 39,64843,400 3,752 Manufacturing overhead is $3,752 underapplied. Cost of Goods Sold 83,600 10,000 $8.36 3,752 Underapplied overhead is closed to Cost of Goods Sold leaving a zero balance in the overhead account. 87,352 Analyzing Underapplied Overhead

45 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Spending variance $3,080 unfavorable Volume variance $672 unfavorable $43,400$40,320$39,648 Actual Overhead Overhead Overhead Incurred Budget Applied Total variance is $3,752 unfavorable, the amount of underapplied overhead. Analyzing Underapplied Overhead

46 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Learning Objective LO5 To prepare a schedule of cost of goods manufactured and sold

47 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Schedule of Cost of Goods Manufactured and Sold

48 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Schedule of Cost of Goods Manufactured and Sold

49 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Schedule of Cost of Goods Manufactured and Sold

50 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Schedule of Cost of Goods Manufactured and Sold Reported in the current assets section of the balance sheet.

51 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Learning Objective LO6 To prepare financial statements for a manufacturing company

52 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Financial Statements

53 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Financial Statements

54 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Financial Statements

55 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Financial Statements From Schedule of Cost of Goods Manufactured and Sold

56 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Learning Objective LO7 To distinguish between absorption and variable costing

57 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Hokai Company incurs the following costs to produce 2,000 units of inventory: Let’s see what happens to costs if Hokai increases production. Motive to Overproduce Absorption Costing

58 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Now let’s compute income at the three levels of production if Hokai sells 2,000 units. Motive to Overproduce Absorption Costing

59 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Internally, many companies use variable costing to motivate managers to increase profitability without motivating them to overproduce. Motive to Overproduce Absorption Costing

60 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Variable Costing Net income is not affected by production increases.

61 The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin End of Chapter 11


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