Presentation on theme: "Prepared by Diane Tanner University of North Florida Chapter 2 1 Normal Costing."— Presentation transcript:
Prepared by Diane Tanner University of North Florida Chapter 2 1 Normal Costing
Assigning Costs to Cost Objects Three methods – Actual costing – Normal costing – Standard costing Differ in how product costs are assigned to products or services 2
3 Normal Vs. Actual Costing Normal costing Used effectively when there are multiple products Allocates manufacturing overhead to individual products based on a ‘predetermined’ rate calculation Based on estimates Actual costing Allocates manufacturing overhead to individual products based on an end of period rate calculation Based on actual amounts Estimated MOH Estimated Activity Actual MOH Actual Activity
4 How Costs Get Assigned to Products Direct materials and direct labor Traced to a product or service provided Because it is easy to determine which product/service to which the cost belongs By definition, direct costs are directly associated Manufacturing overhead Consists solely of indirect costs Indirect costs cannot be easily identified with one specific product or service Allocated to products and services in a normal costing system
5 Acquisition of Raw Materials Materials Storeroom Factory/Production Area The Purchasing Manager fills out a purchase order to order materials from a supplier 1 2 When materials are received, the Materials Storeroom Clerk tracks and stocks the materials in the storeroom. The Materials Storeroom Clerk sends the receiving report to the Accounting Department for payment. 3
6 Transactions to Acquire Materials Purchase Materials for Cash Debit Raw Materials Credit Cash Purchase Materials on Account Debit Raw Materials Credit Accounts Payable Pay for materials previously purchased on account Debit Accounts Payable Credit Cash Credit Inventory for cash discount, if any
7 Materials Requisition Process Materials Storeroom Factory/Production Area The production supervisor fills out a materials requisition form. Will E. Delite 1 The materials storeroom clerk delivers the requested materials to the production area. 2 Authorizes the use of materials on a job The requisition form is sent to Accounting. 3
8 Accounting for Materials Used in Production Requisition of Direct Materials to Production Debit Work in Process Credit Raw Materials Requisition Indirect Materials to Production Debit Manufacturing Expense Credit Raw Materials
9 Incurring Labor Costs Materials Storeroom Factory/Production Area Employees use time tickets to record the time spent on each job
Measuring and Tracking Direct Labor 10 Direct labor cost = [Hourly rate] × [Number of hours worked] Fringe benefits Normally included as part of the direct labor ‘rate’ Overtime premium (the extra ‘half’ time paid) If the result of production problems, treat as manufacturing overhead If the result of accepting a rush order, treat as direct labor Idle time Treat as overhead Because it is not part of the cost to get inventory ready to sell
11 Accounting for Labor Costs Used in Production Direct Labor Costs Incurred Debit Work in Process Credit Cash, salaries payable, etc. Indirect Labor Costs incurred Debit MOH expense Credit Cash, salaries payable, etc.
‘Applying’ MOH under Normal Costing What is ‘applying overhead’? – The process of adding MOH cost to products based on an allocation rate Why is MOH applied using normal costing? – It is an indirect cost, which is impossible or impractical to trace to a particular product – Managers need to know job costs as production occurs, i.e., on a timely basis For making decisions such as pricing, product changes, etc. – Waiting until the end of the period when actual costs are known makes information untimely 12
13 Accounting for MOH Using Normal Costing Incur MOH Costs Debit Manufacturing Overhead (control account) Credit Cash, salaries payable, etc Apply MOH to Products Debit Work in Process Credit Manufacturing Overhead Using a predetermined rate
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