Recording and Evaluating Conversion Process Activities Chapter 9 Recording and Evaluating Conversion Process Activities

What are the Primary Activities in the Conversion Process? Schedule production Obtain raw materials (internal transfer) Use labor and manufacturing resources to convert raw materials into finished goods Store finished goods until sold (internal transfer)

Which of the Conversion Process Activities are Accounting Events? Obtain raw materials Increase work-in-process inventory Decrease direct materials inventory Use labor and overhead Store finished goods Increase finished goods inventory Decrease work-in-process inventory

What is the Basic Flow of Information in the Conversion Process? Customer places an order and production is scheduled Raw materials are requisitioned and recorded Labor is used and recorded Cost record prepared and goods are manufactured Goods are finished and recorded

What are the Manufacturing Inventory Accounts? Direct materials inventory Current asset (similar to Merchandise Inventory for a merchandising company): Cost of direct materials on hand Increases when purchases of direct materials are made (Chapter 8) Decreases when direct materials are requisitioned into production

Inventories Continued Work-in-process inventory Current asset: Cost of products that have been started but not completed Increases when direct materials are requisitioned into production Increases when direct labor is used in production Increases when manufacturing overhead is applied to production Decreases when products are finished

Inventories Continued Finished goods inventory Current asset: Cost of products that have been finished but not sold Increases when products are finished Decreases when products are sold (Chapter 10)

How do Costs Flow through the Inventory Accounts? Beginning direct materials inventory + Purchases of direct materials = Cost of direct materials available for use Direct materials issued into production = Ending direct materials inventory

Cost Flows Continued Beginning work-in-process inventory + Direct materials issued into production + Direct labor used in production + Applied manufacturing overhead = Cost of goods in process Cost of goods manufactured = Ending work-in-process inventory

Cost Flows Continued Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale Cost of goods sold = Ending finished goods inventory

How does the Manufacturing Overhead Application Process Work? Beginning of period Estimate overhead for each cost pool Unit-related Batch-related Product-sustaining Facility-sustaining Estimate cost drivers for each cost pool Divide estimated overhead by estimated cost driver = predetermined overhead rate

Overhead Application Continued During period Apply overhead to production as the cost driver is used Record actual overhead as incurred End of period Compare total applied overhead to total actual overhead Close the overhead account to Cost of Goods Sold (difference between applied and actual)