Prepared by Diane Tanner University of North Florida ACG Manufacturing Cost Flows 1-3

Production Departments and Costs 2 Materials Storeroom Factory/Production Area Costs in departments correlate to inventory accounts. Raw Materials Work in Process Finished Goods Completed Goods Ready for Sale Direct labor added Direct materials added Showroom or Shipping Area Partially produced items Cost of Goods Sold MOH added

Acquiring Raw Materials 3 The Purchasing Manager fills out an electronic purchase order to order materials from a supplier When materials are received, the Materials Storeroom Clerk stocks the materials in the storeroom. 2 The Materials Storeroom Clerk sends the receiving report to Accounting. 3 Materials Storeroom 1 Debit Raw Materials Credit Cash or Accounts Payable Inventory account

Using Materials in Production 4 The production supervisor fills out a materials requisition form. 1 1 The materials storeroom clerk delivers the requested materials to the production area. 2 2 The processed form is sent to Accounting. 3 3 Factory/Production Area A materials requisition form authorizes the use of materials on a product or job DIRECT MATERIALS Debit Work in Process Credit Raw Materials INDIRECT MATERIALS Debit Manufacturing Overhead Credit Raw Materials Inventory accounts

Incurring Labor Costs  Time tickets = source documents identifying the cost object and time incurred DIRECT LABOR Debit Work in Process Credit Cash, Wages Payable Time tickets are sent to Accounting. INDIRECT LABOR Debit Manufacturing Overhead Credit Cash, Wages Payable Direct Labor: Employees fill out time tickets which indicate the hours worked on each product/cost object Indirect Labor: Typically salaried employees. Labor cost cannot be traced to a specific cost object. No time tickets used.

Special Issues with Labor Costs 6  Overtime premium (the extra ‘half’ time paid)  If the result of production problems, treat as manufacturing overhead (indirect labor)  If the result of accepting a rush order, treat as direct labor  Idle time  Treat as manufacturing overhead (indirect labor)  Direct labor cost = gross wages + fringe benefits [Hourly rate] × [Number of hours worked] Normally included as part of the direct labor ‘rate’

Manufacturing Overhead 7 Accounting receives notification or identifies overhead costs such as:  Incurrence of indirect labor through the payroll department  Usage of indirect materials through materials requisition forms  Incurrence or payment of factory-related costs  Usage/accruals of amounts for rent, insurance, property taxes, maintenance, etc, Accounting receives notification or identifies overhead costs such as:  Incurrence of indirect labor through the payroll department  Usage of indirect materials through materials requisition forms  Incurrence or payment of factory-related costs  Usage/accruals of amounts for rent, insurance, property taxes, maintenance, etc, Debit Manufacturing Overhead Credit Cash, Payables, Accumulated Depreciation, etc. Incurring MOH Allocating MOH  MOH is ‘applied’ (allocated) to products during production in a rational and systematic manner Debit Work in Process Credit Manufacturing Overhead

Completing Products The cost transferred out of WIP into FG is called Cost of Goods Manufactured .. Production notifies Accounting that goods have been completed. Accounting determines the cost of the completed items. Debit Finished Goods Credit Work in Process

Selling Products Accounting determines that goods have been shipped or sold from the sales invoices. Debit Cost of Goods Sold Credit Finished Goods Transfer the cost of items sold out of Finished Goods Recognize the sale of the goods Source document = sales invoice Debit Cash or Accounts Receivable Credit Sales Revenue

Statement of Cost of Goods Manufactured Speedster, Inc. Cost of Goods Manufactured Month Ending March 31, 2018 Direct materials Beginning RM inventory $ 45,000 Add net purchases 105,400 Less indirect materials (13,000) Less ending RM inventory (13,400) Direct materials used $124,000 Direct labor incurred 99,000 Manufacturing overhead cost applied 108,900 Total manufacturing costs 331,900 Add beginning WIP inventory 17,000 Less ending WIP inventory (33,000) Cost of goods manufactured $315,900 $315,900 Summarizes the production activity Can include a/an  Expanded materials section or  Single line item for ‘direct materials used’

Summarizes the finished goods activity Can include a/an  Expanded cost of goods sold section or  Single line item for cost of goods sold Income Statement Speedster, Inc. Income Statement Month Ending March 31, 2015 Sales $525,000 Cost of goods sold: Beginning FG inventory $40,000 Add cost of goods manufactured 315,900 Less ending FG inventory (21,500) Less overapplied MOH (1,700) Cost of goods sold 332,700 Gross profit 192,300 Operating expenses: General administrative expenses 59,000 Income before taxes 133,300 Income taxes expense 39,990 Net income $ 93,310

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