Manufacturing Costs and Job-Order Costing Systems UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Chapter

Cost Classifications for Manufacturing Firms

Specify “Tag” the Cost We need to place an adjective (tag) on the cost to identify what it is. Direct Cost

Manufacturing Costs

General Model of Cost Flow and Accumulation

Cost Flows in a Manufacturing Firm Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold

Cost Flows in a Manufacturing Firm Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Manufacturing Costs Costs incurred in the manufacture of goods being produced. Known as product (inventoriable) costs. They are expensed when the product is sold.

Cost Flows in a Manufacturing Firm Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold  Those materials that become an integral part of the finished product and can be physically traced to the product.  Those factory labor costs that can be physically traced to the production of the finished product.  All costs associated with the manufacture of a product except direct materials and direct labor.

Direct Materials DM in Theory Every component DM in Reality Must apply cost-benefit rule

DM – What is Cost? The invoice price of the raw materials, Shipping costs, Import duties, and A reduction for any allowable discounts for prompt payment.

MOH – Other Names Overhead Burden Indirect Manufacturing Costs Factory Expenses

MOH – A Few Examples Factory Supervision, Factory Telephone, heat, light, power, Factory bookkeeping salaries, Insurance Depreciation/factory equipment Indirect materials, labor.

Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Cost of Goods Sold Nonmanufacturing Expenses Nonmanufacturing Expenses Sales - = Gross Margin - Net Income = Income Statement Sold Known as Period costs. They are expensedin the period in which they are incurred. Nonmanufacturing Costs Costs incurred for other than production activities.

Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Cost of Goods Sold Nonmanufacturing Expenses Nonmanufacturing Expenses Sales - = Gross Margin - Net Income = Income Statement Sold  General & Administrative Expenses All executive, organizational, and clerical costs associated with the general management of the firm.  Selling & Distribution Expenses All costs necessary to secure customer orders and get the products/services to the customer.

Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Cost of Goods Sold Nonmanufacturing Expenses Nonmanufacturing Expenses Sales - = Gross Margin - Net Income = Income Statement Sold Product Costs Period Costs

Nonmanufacturing Costs

All costs not associated with the production of goods. Selling Costs Administrative Costs

Cost Flows in a Manufacturing Firm

DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Unfinished Finished Sold Unused Used Applied

Product and Period Costs

Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Period Costs Income Statement Product Costs Unfinished Finished Sold Unused Used Applied

Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Product Costs Unfinished Finished Sold Unused Used Applied Product Costs: Costs assigned to products (i.e., Work in Process Inventory. They “attach” themselves to units of product and remain with the product until it is sold.

Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Product Costs Unfinished Finished Sold Unused Used Applied

Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Unfinished Finished Sold Unused Used Applied Period Costs: Expired non product costs. Always charged to expense in the period in which they occur. Period Costs

Product Costs Vs. Period Costs DM, DL, MOH, S&A Costs DM, DL MOH DM, DL MOH DM, DL MOH DM, DL MOH DM, DL MOH DM, DL MOH S&AS&AS&AS&A S&AS&AS&AS&A S&AS&AS&AS&A Product Costs Selling and Administrative Costs Work-in- Process Finished Goods Sale Cost of Goods Sold DM,DL MOH Period Costs Expensed in the current period.

Balance Sheet Presentation of Product Costs

Balance Sheet Presentation

Income Statement Presentation of Product Costs

Income Statement

Direct Materials Used: Beginning inventory$200,000 Add: Purchases 450,000 Materials available$650,000 Less: Ending inventory 50,000$ 600,000 Direct Labor350,000 Manufacturing overhead: Indirect labor$122,500 Depreciation177,500 Rent50,000 Utilities37,500 Property taxes12,500 Maintenance 50, ,000 Total manufacturing costs added$1,400,000 Add: Beginning work in process 200,000 Total manufacturing costs$1,600,000 Less: Ending work in process 400,000 Cost of goods manufactured$1,200,000 ========

Direct Materials Used: Beginning inventory$200,000 Add: Purchases 450,000 Materials available$650,000 Less: Ending inventory 50,000$ 600,000 Direct Labor350,000 Manufacturing overhead: Indirect labor$122,500 Depreciation177,500 Rent50,000 Utilities37,500 Property taxes12,500 Maintenance 50, ,000 Total manufacturing costs added$1,400,000 Add: Beginning work in process 200,000 Total manufacturing costs$1,600,000 Less: Ending work in process 400,000 Cost of goods manufactured$1,200,000 ======== The three component parts of a manufactured product.

Sales$2,800,000 Less cost of goods sold: Beginning finished goods inventory$ 500,000 Add: Cost of goods manufactured 1,200,000 Cost of goods available for sale$1,700,000 Less: Ending finished goods inventory 300,000 1,400,000 Gross margin$1,400,000 Less operating expenses: Selling expenses$ 600,000 Administrative expenses 300, ,000 Income before taxes$ 500,000 ======== Cost of goods manufactured from the COGM Statement.

Different Costs for Different Purposes

Product Costing Definitions Research and Development Research and Development Production Marketing Production Marketing Production Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting Value-Chain Operating Traditional Product Costs Product Costs Product Costs Customer Service

Research and Development Research and Development Production Marketing Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Value-Chain Product Costs Customer Service If making any of these types of decisions, I need to look at all costs.

Production Marketing Strategic Design Decisions Tactical Profitability Analysis Operating Product Costs Customer Service On the other hand, for these decisions, we might be able to ignore some of the costs.

Product Costing Definitions Research and Development Research and Development Production Marketing Production Marketing Production Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting Value-Chain Operating Traditional Product Costs Product Costs Product Costs Customer Service For external financial reporting, we need only these costs – because that is what GAAP says we need.

Types of Costing Systems

Balance Sheet Presentation

Accumulating Manufacturing Costs Two Types of Costing Systems

Cost Accounting Systems Product Costs Job-Order CostingProcess Costing Total/Unit Cost

Process Costing Homogeneous products continuously produced. Costs accumulated by process (time). Unit cost = total costs for period divided by number of units produced.

Process Costing System DM DL MOH Process B Process A Finished Goods Cost of Goods Sold Process C

Job-Order Costing Wide variety of distinct products. Costs accumulated by job. Unit cost = total costs of the job divided by number of units in the job.

Job-Order Costing DM DL MOH Job 100 Job 101 Job 102 Finished Goods Cost of Goods Sold Work in ProcessFinished Goods Work-in-Process