CHAPTER 11 PowerPoint Author: LuAnn Bean, Ph.D., CPA, CIA, CFE Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11-2 Cost of Materials Available for Use Balance Sheet Income Statement Raw Materials Work-in- Process Finished Goods Materials Used Labor Overhead Ending Inventory Total Mfg. Costs Incurred Ending Inventory Cost of Goods Mfd. Ending Inventory Cost of Goods Sold Cost Flow in Manufacturing Companies

11-3 Service companies do not have work-in-process and finished goods inventory accounts where costs are stored before being transferred to a cost of goods sold account. Cost Flow in Service Companies

11-4 The Product Manufacturing Overhead Direct Labor Direct Material Manufacturing Cost Flow

11-5 All other manufacturing costs Manufacturing Overhead Materials used to support the production process. Examples: Lubricants and cleaning supplies used in an automobile assembly plant. Indirect Labor Indirect Material Other Costs Cost of personnel who do not work directly on the product. Examples: Maintenance workers, janitors and security guards. Examples: Depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.

11-6 Direct Labor Indirect Material Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Indirect Labor Direct Labor Overhead Applied Indirect Labor Wages Payable Work-in-Process Mfg. Overhead Direct Material Manufacturing Cost Flow

11-7 Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Work-in-Process Direct Material Direct Labor Overhead Applied Manufacturing Cost Flow

11-8 Using a predetermined rate makes it possible to estimate total job costs sooner. Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. Actual overhead for the period is not known until the end of the period. Flow of Overhead Costs $

11-9 Estimated total manufacturing overhead cost for the period Estimated total units in the allocation base for the period POHR = A predetermined overhead rate (POHR), used to apply overhead to products, is determined before the period begins. A predetermined overhead rate (POHR), used to apply overhead to products, is determined before the period begins. Flow of Overhead Costs $40,320 12,000 jewelry boxes POHR = = $3.36 per box

11-10 Overhead applied = POHR × Actual activity Actual amount of the allocation base such as units produced, direct labor hours, or machine hours. Based on estimates, and determined before the period begins. Flow of Overhead Costs

11-11 Spending variance $3,080 unfavorable Volume variance $672 unfavorable $43,400$40,320$39,648 Actual Overhead Overhead Overhead Incurred Budget Applied Total variance is $3,752 unfavorable, the amount of underapplied overhead. Analyzing Underapplied Overhead

11-12 Schedule of Cost of Goods Manufactured and Sold

11-13 Hokai Company incurs the following costs to produce 2,000 units of inventory: Let’s see what happens to costs if Hokai increases production. Motive to Overproduce Absorption Costing

11-14 Now let’s compute income at the three levels of production if Hokai sells 2,000 units. Motive to Overproduce Absorption Costing

11-15 Internally, many companies use variable costing to motivate managers to increase profitability without motivating them to overproduce. Motive to Overproduce Absorption Costing

11-16 Variable Costing Net income is not affected by production increases.

11-17 End of Chapter 11