PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. CARL S. WARREN SURVEY OF ACCOUNTING Chapter 10

2 LEARNING OBJECTIVES When you finish this chapter, you should be able to

3 1.Distinguish activities of manufacturer from merchandising or service firm. 2.Define, illustrate materials, labor, factory overhead costs. 3.Describe accounting systems used by manufacturing businesses. 4.Describe, illustrate job order cost system. LEARNING OBJECTIVES Continued

4 LEARNING OBJECTIVES 5.Use job order cost information for decision making. 6.Diagram flow of costs for a service business that uses job order cost system. 7.Describe just-in-time manufacturing 8.Describe, illustrate activity-based costing in a service business.

5 LEARNING OBJECTIVE 1 Distinguish activities of manufacturer from merchandising or service firm.

6 MANUFACTURING FIRM DIFFERENCES  Service firms earn revenue from providing services  Merchandising firms earn revenue from selling merchandise inventory  Manufacturing firms  Earn revenue from manufacturing and selling finished goods  Have 3 inventories: materials, work-in-process, finished goods LO 1

7 LEARNING OBJECTIVE 2 Define, illustrate materials, labor, factory overhead costs.

8 LO 2 EXHIBIT 1 Goodwell Printing Co. has 2 departments

9 GOODWELL PRESS Costs  Cost is payment or commitment to pay cash for future revenues  Manufacturing costs  Direct materials  Direct labor  Manufacturing overhead LO 2

10 LO 2 What are these manufacturing costs?

11 DIRECT MATERIALS COSTS LO 2  Cost of direct materials is cost of raw materials used in the manufacture of a product  Goodwell Printing  Paper  Book covers

12 DIRECT LABOR COSTS  Direct labor is  Labor used to convert materials into product  Goodwell Printing  Wages of employees who operate printing presses LO 2

13 FACTORY OVERHEAD COSTS  Factory overhead is costs other than materials, labor incurred in manufacturing process  Machine depreciation  Factory insurance LO 2

14 LEARNING OBJECTIVE 3 Describe accounting systems used by manufacturing businesses.

15 LO 3 What are 2 manufacturing cost accounting systems?

16 COST ACCOUNTING SYSTEMS  Job order costing  Costs accumulated by job for  Custom products, large variety of products  Levi Strauss  Process costing  Costs accumulated by department, process  Oil refineries LO 3

17 LEARNING OBJECTIVE 4 Describe, illustrate job order cost system.

18 LO 4 EXHIBIT 2 Illustration of 3 perpetual inventories, ending in cost of goods sold.

19 EXHIBIT 3 Materials accounted & requisitioned for each job. LO 4

20 Assets =Liabilities +Equity Materials =A/P 10,500 =10,500 Cash Flows Balance Sheet Income Statement LO 4 ACCOUNTING FOR MATERIALS Receiving report #196 documents materials purchased.

21 Assets =Liabilities +Equity Materials WIP = -13,000 13,000 Cash Flows Balance Sheet Income Statement LO 4 REQUISITIONING MATERIALS Materials requisitioned for conversion.

22 Assets =Liabilities +Equity WIP =Wages Pay 11,000 = 11,000 Cash Flows Balance Sheet Income Statement LO 4 DIRECT LABOR Direct labor cost from time cards of job assigned to work-in- process.

23 FACTORY OVERHEAD: Examples  Examples of factory overhead  Indirect materials  Indirect labor  Factory utilities  Factory depreciation  Factory overhead allocated based on activity driver at predetermined rate  Direct labor, direct materials LO 4

24 Assets =Liabilities +Equity Mat O/H A/D =Wages Pay Util Pay ,600 -1,200= 2, Cash Flows Balance Sheet Income Statement LO 4 ACCUMULATING FACTORY OVERHEAD COSTS Factory overhead is accumulation of indirect costs of manufacturing process.

25 PREDETERMINED OVERHEAD RATE Goodwell Printers estimates total factory overhead to be $50,000 and direct labor (activity base) to be 10,000 direct labor hours. Predetermined O/H rate = Est. O/H costs/ Est. activity base Predetermined O/H rate = $50,000/10,000 = $5 per direct labor hour LO 4

26 Assets =Liabilities +Equity WIP O/H 4,250 -4,250 Cash Flows Balance Sheet Income Statement LO 4 ACCUMULATING FACTORY OVERHEAD COSTS Factory overhead assigned to work-in-process inventory based on 850 direct labor hours.

27 Assets =Liabilities +Equity O/H Ret Earn -150 Cash Flows Balance Sheet Income Statement LO 4 DISPOSING OF EXCESS OVERHEAD COSTS Excess overhead costs charged to cost of goods sold expense CGS

28 JOB #71 Costs to complete Job #71 LO 4

29 Assets =Liabilities +Equity WIP Fin. Goods -10,250 10,250 Cash Flows Balance Sheet Income Statement LO 4 ACCOUNTING FOR JOB #71 Completed job transferred from WIP to finished goods.

30 EXHIBIT 6 Job costs transferred to WIP control sheet LO 4

31 EXHIBIT 7 Finished goods ledger account LO 4

32 Assets =Liabilities +Equity A/R Fin. Goods = Ret Earn 28, ,000 8,000 Cash Flows Balance Sheet Income Statement LO 4 SALE Sale of finished goods costing $20,000 for $28, ,000 Sales -20,000 CGS

33 PERIOD COSTS Period costs are non-manufacturing costs LO 4

34 LEARNING OBJECTIVE 5 Use job order cost information for decision making.

35  When 2 jobs for the same product have different costs, what is the problem?  Inexperienced labor?  Poor quality materials?  Tools need repair?  Carelessness?  Incorrect instructions? BASIS FOR DECISION MAKING LO 5

36 LO 5 EXHIBIT 10

37 LEARNING OBJECTIVE 6 Diagram flow of costs for a service business that uses job order cost system.

38 LO 6 EXHIBIT 11 Job costs in service industry

39 LEARNING OBJECTIVE 7 Describe just-in-time manufacturing.

40 EXHIBIT 12 Just in time (JIT) reduces costs, requires new approach. LO 7

41 LEARNING OBJECTIVE 8 Describe, illustrate activity-based costing in a service business.

42 EXHIBIT 13 Hopewell Hospital accumulates costs by specific activities. LO 8

43 USING ACTIVITY BASED COSTING Assigning costs based on different activities is basis of patient billing. Helps manage costs. LO 8

44 THE END CHAPTER 10