Introduction to Cost Accounting and the Job Order Cost Cycle Chapter 1 Introduction to Cost Accounting and the Job Order Cost Cycle

Introduction Managements need for cost accounting Analyze cost of operating a business To understand how the business is doing To assist in making business decisions Statement of cost of goods manufactured helps in maintaining a close watch on: Production Efficiency Cost

Manufacturing Cost Classified Manufacturing process Direct materials – materials used in the manufacturing that become a significant part of finished goods Direct Labor – employees who work directly with raw materials in converting them to finished goods Manufacturing overheads – costs that cannot be classified as direct materials or direct labor Prime cost: sum of direct material and direct labor Conversion cost: sum of direct labor and manufacturing overhead

Chart of Costs – Manufacturing Company Total Costs Manufacturing Costs Distribution Costs Administration Costs Direct Materials Direct Labor Manufacturing Overhead Delivery Sales Raw materials, Semifinished Parts Finished Parts for Assembling Factory Payroll Indirect Materials Indirect Labor Rent Payroll Taxes Utilities Property Taxes Depreciation Repairs Insurance Freight Out Depreciation Gasoline and Oil Truck Repairs Delivery Workers’ Salaries Warehouse Costs Insurance Advertising Sales Salaries Samples Travel Depreciation Telephone Sales Supplies Property Taxes Payroll Taxes Insurance Office Salaries Executive Salaries Rent Depreciation Telephone Travel Property Taxes Payroll Taxes Insurance Prime Cost Conversion Cost

Inventories Raw material inventory Work in process inventory Cost of raw materials and factory supplies used in the manufacturing process Work in process inventory Cost of raw material, direct labor, and manufacturing overhead of work in progress Finished goods inventory Cost of goods completed and ready for sale

Purpose of Cost Accounting To answer questions pertaining to the organization’s Efficiency and economy Out of line cost and control Sales price versus manufacturing costs Units costs To reach decisions and evaluate results Estimating and bidding Planning, budgeting, and controlling

Types of Cost Systems Job order cost system Process cost system Cost is applied to each specified job order Uses job cost sheet to record transactions as they occur Process cost system Cost is accumulated without assigning it to a specific job Also known as average costing Dual systems Use both systems discussed above

Job Order Cost Cycle Work flow – steps in the cycle of operation Procurement: raw materials, supplies, and labor required for manufacturing Production: raw material transformation with use of labor and equipments Warehousing: finished goods held until they are sold Selling: sale of product including sales support functions and shipping

Cost Flow and Work Flow Recording cost as they are incurred: PROCUREMENT PRODUCTION WAREHOUSING SELLING Raw Materials Work in Process Finished Goods Cost of Goods Sold Factory Payroll Manufacturing Overhead Control

Departmental Cost Centers Helps to provide operating control over manufacturing activities and costs Production department Engages in work directly related to product Service department Assists the production department

Recording Cost Flows Identifying departments Identifying flow of work Creation of chart of accounts Flow of cost – sample journal entries Opening balances: carried forward from the prior period Raw materials purchased Raw material dr. Accounts payable/Cash cr.

Recording Cost Flows (cont’d) Raw material used Work in process dr. Raw materials cr. Factory wages Factory payroll dr. Salaries/Wages payable cr. Labor charged to operations Factory payroll cr.

Recording Cost Flows (cont’d) Manufacturing overhead costs Manufacturing overhead dr. Accounts payable/other accounts cr. Manufacturing overhead applied to products Work in process dr. Manufacturing overhead cr. Underapplied overhead: less overhead charged or applied compared to actual cost Overapplied overhead: more overhead charged or applied compared to actual cost

Recording Cost Flows (cont’d) Transfer of finished goods Finished goods dr. Work in process cr. Sale of finished goods Cost of goods sold dr. Finished goods cr. Inspection of accounts as the final step

End-of-Period Statements Statement of cost of goods manufactured Supported by a schedule of manufacturing overhead Income statement Includes revenue from sales, cost of goods sold, operating expenses, the income or loss of the company

Role of the Cost Accountant A specialist who: Analyzes the cost recording and reporting needs Devises a system of records and procedures. Provides up-to-date analysis of the operations of the business Helps management make rational and meaningful decisions

Professional Ethics It is essential for accountants to strive to meet high standards of ethical conduct Institute of Management Accountants Issued standards of ethical conduct that provide guidance in determining course of action Competence Confidentiality Integrity Objectivity