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Cost Accounting Systems

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Presentation on theme: "Cost Accounting Systems"— Presentation transcript:

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2 Cost Accounting Systems
Cost Accounting involves: Measuring, Recording, Reporting … product costs. Accounts are fully integrated into the general ledger. Perpetual inventory system provides up-to-date information. Two basic types: (1) job order cost system (2) process cost system.

3 Costs assigned to each job / batch.
Cost Accounting Systems Job Order Cost System Costs assigned to each job / batch. Key feature: Each job has distinguishing characteristics. Measures costs for each job completed – not for set time periods.

4 Costs assigned to dept / process for a specified period of time.
Cost Accounting Systems Process Cost System Costs assigned to dept / process for a specified period of time. Used for large volume, similar products are produced. (cereal, gasoline, twinkies, ice cream). Costs accumulated for a time period – (week or month).

5 Job Order Cost Flow Costs accumulate in “INVENTORY” (control) accounts that parallel to the physical flow of the materials and labor. Material costs first go to Raw Materials Inventory Manufacturing costs assigned to Work in Process Inventory Completed cost (job) transfer to Finished Goods Inventory. When sold, cost is “expensed” to Cost of Goods Sold.

6 A control account is a summary account within a general ledger that accumulates the details of an account in a subsidiary ledger

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8 Job Order Cost Flow Assets Expense

9 Job Order Cost Flow Raw Material Costs Illustration: Company buys:
2,000 batteries (Stock #AA) at $5 each … $10,000 800 modules (Stock #Mod) at $40 each .. $32,000 Jan 04 Raw Materials Inventory 42,000 Accounts Payable

10 Job Order Cost Flow Factory Labor Costs
Illustration: Company incurs $32,000 of factory labor costs (includes BOTH direct labor wages (machine operators) AND … indirect labor wages (factory janitor and factory manager). Jan Factory Labor 32,000 Cash (or Wages Payable)

11 Job Order Cost Flow Manufacturing Overhead Costs
Product Costs: Costs related to mfg process are accumulated in Mfg (Factory) Overhead. Period Costs: Costs unrelated to manufacturing process are expensed.

12 Company paid JAN rent of: $ 2,000 for Factory Building
Mfg Overhead (FACTORY Rent) 2,000 Cash Product Cost Company paid JAN rent of: $ 2,000 for Factory Building $ 1,000 for Corporate Offices Period Cost Jan Rent Expense (CORP OFFICE) 1,000 Cash

13 Job Order Cost Flow Manufacturing Overhead Costs
Illustration: entry for manufacturing overhead in Company is: Jan Factory Overhead 13,600 Accum Deprec (Factory Machines) 3,000 Factory Utilities 10,000 Factory Property Taxes 600

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15 Job Order Cost Flow Assigning Manufacturing Costs to:
Work-In-Process Inventory (W-I-P)

16 Job Order Cost Flow Manufacturing costs assigned to W-I-P with
Debits to Work in Process Inventory Credits to Raw Materials Inventory Factory Labor Manufacturing Overhead

17 Job Order Cost Flow Illustration 16-5

18 Job Order Cost Flow Assigning Raw Material Costs
Illustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January, the entry is: Jan Work In Process Inventory 24,000 Manufacturing Overhead 6,000 Raw Materials Inventory 30,000 LO 3

19 Job Order Cost Flow Illustration 16-7

20 Job Order Cost Flow Assigning Factory Labor Costs
Illustration: $32,000 total factory labor cost consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is: Jan Work In Process Inventory 28,000 Manufacturing Overhead 4,000 Factory Labor 32,000

21 Predetermined Overhead Rate
Job Order Cost Flow Manufacturing Overhead Costs Relates to production operations as a whole. Cannot be assigned to specific jobs based on actual costs incurred. Companies assign to work in process and to specific jobs on an estimated basis through the use of a … Predetermined Overhead Rate

22 Job Order Cost Flow Predetermined Overhead Rate
Based on the relationship between estimated annual overhead costs and expected annual operating activity Expressed in terms of an activity base such as Direct labor costs Direct labor hours Machine hours

23 Job Order Cost Flow Predetermined Overhead Rate
Established at the beginning of the year. May use a single, company-wide predetermined rate. May use a different rate for each department and each department may have a different activity base. Formula is

24 Job Order Cost Flow Manufacturing Overhead Costs
Illustration: Using direct labor as activity base … assume that the company expects annual overhead costs to be $200,000 and direct labor costs for the year to be $200,000, compute overhead rate. $200, $200,000 = 100% This means that for every dollar of direct labor, company will ALSO assign __________ of manufacturing overhead to a job. So if Direct Labor = $45,000 how much ADDITIONAL cost will be added for manufacturing overhead … ANOTHER $45,000 … (DL + Mfg OH = 45, ,000 = 90,000) 1 dollar

25 Job Order Cost Flow Manufacturing Overhead Costs (Mfg OH)
Illustration: Using direct labor as activity base … assume that the company expects annual overhead costs to be $450,000 and direct labor costs for the year to be $300,000, compute overhead rate. $450, $300,000 = 150% So if Direct Labor = $100,000 how much ADDITIONAL cost will be added for manufacturing overhead … ANOTHER $150,000 … Is the 150,000 OH ACTUAL or APPLIED (as in estimated)

26 Job Order Cost Flow Manufacturing Overhead Costs
Illustration: Using direct labor as activity base … assume that the company expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, compute overhead rate. $280, $350,000 = 80% This means that for every dollar of direct labor, company will assign __________ of manufacturing overhead to a job. 80 cents

27 Job Order Cost Flow Manufacturing Overhead Costs
Illustration: Company applies manufacturing overhead to work in process when it assigns direct labor costs. Calculate the amount of applied overhead assuming direct labor costs of $28,000. $28,000 x 80% = $22,400 The following entry records this application. Jan Work In Process Inventory 22,400 Manufacturing Overhead

28 Job Order Cost Flow Assigning Costs to Finished Goods
Illustration: When a job is finished, Company transfer its total cost to finished goods inventory. Jan Finished Goods Inventory 39,000 Work In Process Inventory

29 Subtract PERIOD costs (selling-admin) to get:
Job Order Cost Flow Assigning Costs to Cost of Goods Sold Illustration: On January 31 company sells on account Job 101. The job cost $39,000, and it sold for $50,000. The entries are: Jan Accounts Receivable 50,000 Sales Revenue Cost of Goods Sold 39,000 Finished Goods Inventory Gross Profit: 50,000 – 39,000 = 11,000 Subtract PERIOD costs (selling-admin) to get: Net Profit

30 Job Order Cost Flow Summary Illustration 16-15 LO 5

31 Reporting Job Cost Data
Under- or Overapplied Overhead A debit balance in manufacturing overhead means that overhead is underapplied. A credit balance in manufacturing overhead means that overhead is overapplied. Illustration 16-19

32 Reporting Job Cost Data
Under- or Overapplied Overhead Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold. Underapplied overhead is debited to COGS Overapplied overhead is credited to COGS

33 Reporting Job Cost Data
Under- or Overapplied Overhead Illustration: Wallace has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the over-applied overhead is: Dec. 31 Manufacturing Overhead 2,500 Cost of Good Sold 2,500


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