©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounting Systems for Manufacturing Businesses CHAPTER 10

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe the differences between financial and managerial accounting Distinguish the activities of a manufacturing business from those of a merchandising or service business Define and illustrate materials, factory labor, and factory overhead costs Describe cost accounting systems used by manufacturing businesses (Continued…)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe and illustrate a job order cost accounting system Use job order cost information for decision making Describe the flow of costs for a service business that uses a job order cost accounting system Describe just-in-time manufacturing practices Describe and illustrate the use of activity-based costing in a service business

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the differences between financial and managerial accounting Learning Objective 1

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Managerial Accounting Focuses on recording and reporting information for use by _________________ in decision making Helps the management to make decisions such as: What should be the selling price of a product? Which alternative should the company choose? What is the cost of manufacturing a product?

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial and Managerial Accounting ____________________ __________________________ _____________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Distinguish the activities of a manufacturing business from those of a merchandising or service business Learning Objective 2

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Nature of Manufacturing Businesses Service firms earn revenue from ______ _____________ Merchandising firms earn revenue from ______ _______________________ Manufacturing firms- Earn revenue from ___________ and _____ _________ goods Have three inventories: ________, _________, and __________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Define and illustrate materials, factory labor, and factory overhead costs Learning Objective 3

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Illustrative Example Costs can provide an immediate benefit or a benefit that is deferred to future periods

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Materials Cost Includes the cost of materials that is an integral part of the ____________ Forms a significant portion of the total cost of the product For Quixote’s Guitars: cost of the wood used in producing each guitar will be the __________ The cost of materials that are not an integral part of the finished product are called ___________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Labor Cost The cost of employee wages who are directly involved in converting materials into ____________ For Quixote Guitars: wages of the employees who operate the saws/cutting machines and assemble the guitars Labor costs that do not enter directly into the manufacture of a product are called ______________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Factory Overhead Cost Costs other than ____________ and ____________ incurred in the manufacturing process For Quixote Guitars: machine depreciation, factory supplies, factory insurance, lighting the factory, and many others

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Analysis and Reporting Terms: Prime and Conversion Costs Prime Costs: __________ and _________ costs Conversion Costs: ________ and _________ costs

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial Reporting Terms: Product Costs and Period Costs Product Costs: __________, __________, ___________ Period Costs: __________ __________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe cost accounting systems used by manufacturing businesses Learning Objective 4

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Cost Accounting Systems Objective: accumulate _________ Used to establish _______, _________, and develop ___________ Two main types: _______ cost systems

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Job Order vs. Process Cost Systems Job Order Costs are accumulated by _______ Used for custom products or companies with a large variety of products Service firms often use __________ systems Process Costs are accumulated by _______ or _______ Used for products that are not distinguishable from each other during a continuous production process

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe and illustrate a job order cost accounting system Learning Objective 5

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Job Order Cost System for Quixote Guitars __________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Materials Accounting for the purchase of materials on credit

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Materials Cost Flows Labor information and cost flows (time tickets) for Quixote Guitars

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Requisitioning Materials Flow of materials from the storeroom to production

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Labor Cost Flows Labor information and cost flows (time tickets) for Quixote Guitars

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Factory Labor Two primary objectives of time tickets: Determine the correct amount to pay ________ for each pay period Properly allocate factory labor costs to ______ _____ and ______________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Factory Overhead Cost Includes all manufacturing costs other than __________ and __________ Comes from various sources, including factory depreciation, indirect materials, indirect labor, and factory utilities

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Allocating Factory Overhead Overhead gets assigned to jobs through ________________ The measure used to allocate overhead is called an ___________ Should be a measure that reflects the _______ or _____ of overhead Examples: direct labor hours, machine hours, or direct material dollars

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Predetermined Factory Overhead Rate Overhead may be applied using a ______________________ __________________________ ______________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Predetermined Factory Overhead Rate – Quixote Guitars Assume Quixote Guitars estimates $50,000 of total factory overhead for the year and the activity base to be 10,000 direct labor hours

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Why Use Predetermined Rates? For ______ information Waiting until the end of a period when overhead costs are known would be accurate, but not timely for ___________ Many companies use __________ costing which allocates overhead costs using multiple predetermined rates

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Applying Factory Overhead to Work in Process Overhead costs are applied to work in process using job sheets and the predetermined rate

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Applying Factory Overhead to Work in Process The $4,250 of applied overhead is recorded as a transfer out of factory overhead into work-in- process

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Actual Overhead vs. Applied Overhead Actual factory overhead costs incurred will likely differ from the amount _______ Over-applied overhead occurs when the amount applied ________ actual costs Under applied overhead occurs when the amount applied _________ actual costs Large under-/over-applied balances need to be investigated

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Disposal of Factory Overhead Balance The balance in factory overhead is carried forward from month to month, but needs to be closed out at the __________ One approach is to transfer the balance to cost of goods sold

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Work in Process Costs incurred for various jobs are accumulated on __________ and they represent work in process

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Completion of Job 71 When Job 71 was completed, total manufacturing costs were transferred out of the work in process account and into the finished goods account

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Finished Goods Ledger for Quixote Guitars Finished goods is a ________ account comprised of individual finished goods subsidiary ledgers

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Sales and Cost of Goods Sold (COGS) Manufacturing business sales are treated the same as merchandising business sales Assume Quixote Guitars sold 40 guitars for $850 each (cost was $500 each)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Period Costs ______ used in generating ______ during the current period Not involved in the manufacturing process Two categories: ________ expenses– marketing the product and delivering it to customers ________ expenses– administration of the business (not related to manufacturing or selling)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Selling Expenses and Administrative Expenses ______ ___________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounting for Selling and Administrative Expenses Assume Quixote Guitars has sales salaries of $2,000 and office salaries of $1,500

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Summary of Cost Flows for Quixote Guitars

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. December Income Statement for Quixote Guitars

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Use job order cost information for decision making Learning Objective 6

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Cost Evaluation and Control Job order cost systems can be used to evaluate an organization’s cost performance Job 63 used 100 more board feet of wood to manufacture the same number of guitars. Why?

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Job Order Costing for Decision Making Possible reasons for the extra use of materials for Job 63: _________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the flow of costs for a service business that uses a job order cost accounting system Learning Objective 7

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Job Order Cost Systems for Service Businesses Useful for ______ and _______ operations Focus is on direct labor and overhead and are accumulated in a _____________ account When jobs are completed, the ____________ is transferred to a cost of services account (similar to COGS)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Job Order Cost Systems for Service Businesses A _________________ is not necessary since revenues are recorded only after the service has been provided

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe just-in-time manufacturing practices Learning Objective 8

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Just-In-Time Practices Manufacturing approaches are changing as companies need to produce products with high quality, low cost, and instant availability Focuses on reducing ____, _____ and eliminating poor quality within manufacturing processes

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Just-In-Time versus Traditional Manufacturing ____________ _____________ ________________________ _________________ ____________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Reducing Inventory As the water level (inventory) in the river drops, the rocks (production problems) become visible

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Reducing Lead Times

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Setup equipment to make brown bags Setup equipment to make sky blue bags Setup equipment to make basic white bags Reducing Setup Time

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Emphasizing Product-Oriented Layout Product-oriented layout : __________________ __________________ ________________ Process-oriented layout: ___________________ ___________________ __________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Emphasizing Employee Involvement Grants employees responsibility and authority to __________ Employees are often ________ to perform any operation within a product cell

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Emphasizing Pull Manufacturing Products manufactured only as they are needed by the ________ Traditional manufacturing emphasizes ____ manufacturing ______: the Japanese system of pull manufacturing

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Emphasizing Zero Defects Eliminate ____________ Six Sigma approach to ____ defects

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Emphasizing Supply Chain Management __________ __________ (EDI) ___________ _____________ (RFID) _____________ _____________ (ERP)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe and illustrate the use of activity- based costing in a service business Learning Objective 9

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Activity-Based Costing (ABC) Uses _______________ rates to allocate factory overhead more accurately than using a _________________ rate Costs are initially accounted for in _______ – each cost pool has its own rate

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Activity-Based Costing (ABC)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Overhead Allocation Using Activity Based Costing

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Profitability Report Using Activity Based Costing

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 10