1. ©2013 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

2. ©2013 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. 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.

3. ©2013 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 Objective 1 Describe the differences between financial and managerial accounting

4. ©2013 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 a _________________. It helps the _________ to make _______such as: __________________________

5. ©2013 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 Exhibit 1: Financial and Managerial Accounting Differences

6. ©2013 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 Objective 2 Distinguish the activities of a manufacturing business from those of a merchandising or service business

7. ©2013 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 providing _________ Merchandising firms earn revenue from selling _________ __________________ Manufacturing firms- Earn revenue from _____________ and ________ finished goods Have three inventories: __________, ______________, and ___________________

8. ©2013 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 Objective 3 Define and illustrate materials, factory labor, and factory overhead costs

9. ©2013 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 Exhibit 2: Guitar Making Operations of Quixote Guitars

10. ©2013 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 Material Cost Include the cost of material ________to the product It forms a significant portion of the ______ _____ of the product For Quixote Guitars: cost of the wood used in producing each guitar will be the direct material cost. The cost of materials that are not an integral part of the finished product are called ______ _____________

11. ©2013 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 ________________ who are directly involved in converting materials into the manufactured product. For Quixote Guitars: ________________ 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 _______________

12. ©2013 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 ______ ______ cost and ______ ______ cost incurred in the manufacturing process. For Quixote Guitars: machine depreciation, factory supplies, factory insurance, lighting the factory, and many others

13. ©2013 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: _____ ____________ Conversion Costs: _______________ Exhibit 3: ________

14. ©2013 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: ______________ ____________ Exhibit 4: Examples of Product Costs and Period Costs—Quixote Guitars ________

15. ©2013 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 Objective 4 Describe cost accounting systems used by manufacturing businesses

16. ©2013 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 __________________ Two main types: _____ ______ cost systems

17. ©2013 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 job. Used for custom products or companies with a large variety of products. Service firms often use job order systems. Process Costs are accumulated by department or process. Used for products that are not distinguishable from each other during a continuous production process.

18. ©2013 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 Objective 5 Describe and illustrate a job order cost accounting system

19. ©2013 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 Exhibit 6: Flow of Manufacturing Costs

20. ©2013 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

21. ©2013 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 information and cost flows for the wood received and issued to production by Quixote Guitars Materials Cost Flows Exhibit 7: Materials Information and Cost Flows

22. ©2013 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.

23. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Labor information and cost flows (time tickets) for Quixote Guitars Direct Labor Cost Flows Exhibit 8: Labor Information and Cost Flows

24. ©2013 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 each employee for each pay period. Properly allocate factory labor costs to factory overhead and individual job orders.

25. ©2013 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 _____________, ______________, ______________, and ______________

26. ©2013 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 __________ to jobs through _____________ The measure used to allocate overhead is called an ________ ____________ Should be a measure that reflects the _____________ or ____________________ Examples: direct labor hours, machine hours, or direct material dollars

27. ©2013 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 _________ may be applied using a predetermined factory overhead rate Estimated _____ _______ ______ ______ Estimated __________ _________

28. ©2013 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.

29. ©2013 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 timely information Waiting until the end of a period when overhead costs are known would be accurate, but not timely for decision-making Many companies use activity-based costing which allocates overhead costs using multiple predetermined rates

30. ©2013 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 _____ _______ and the ____________ __________. Exhibit 9: Applying Factory Overhead to Jobs

31. ©2013 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.

32. ©2013 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 _________________ Over-applied overhead occurs when _____________ __________________________ Under applied overhead occurs when _____________ __________________________ Large under-/over-applied balances need to be investigated

33. ©2013 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 end of the year. One approach is to transfer the balance to cost of goods sold.

34. ©2013 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 _____________ _____ Exhibit 10: Job Cost Sheets and the Work-in-Process Controlling Accounts

35. ©2013 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.

36. ©2013 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 controlling account comprised of individual finished goods subsidiary ledgers. Exhibit 11: Finished Goods Ledger Account

37. ©2013 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).

38. ©2013 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 revenue during the ________ period Not involved in the ____________ process Two categories: ________________ expenses – marketing the product and delivering it to customers ________________ expenses – administration of the business (not related to manufacturing or selling).

39. ©2013 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

40. ©2013 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.

41. ©2013 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 Exhibit 12: Flow of Manufacturing Costs for Quixote Guitars

42. ©2013 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 Exhibit 13: Income Statement of Quixote Guitars

43. ©2013 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 Objective 6 Use job order cost information for decision making

44. ©2013 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 63 used 100 more board feet of wood to manufacture the same number of guitars. Why? Cost Evaluation and Control Exhibit 14: Comparing Data from Job Cost Sheets Job order cost systems can be used to evaluate an organization’s cost performance

45. ©2013 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: __________________________

46. ©2013 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 Objective 7 Describe the flow of costs for a service business that uses a job order cost accounting system

47. ©2013 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 planning and controlling operations Focus is on direct labor and overhead. They are accumulated in a work-in-process account When jobs are completed, the cost of the job is transferred to a ___________________ account (similar to ______________)

48. ©2013 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 finished goods account is not necessary since revenues are recorded only after the service has been provided. Exhibit 15: Flow of Costs through a Service Business

49. ©2013 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 Objective 8 Describe just-in-time manufacturing practices

50. ©2013 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. JIT focuses on reducing _______________, and eliminating poor quality within manufacturing processes.

51. ©2013 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 Exhibit 16: Operating Principles of Just-in-Time versus traditional Manufacturing

52. ©2013 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 (______________) in the river drops, the rocks (_______________) become visible.

53. ©2013 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 Exhibit 17: Components of Lead time

54. ©2013 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 Setup Time Setup equipment to make brown bags Setup equipment to make sky blue bags Setup equipment to make basic white bags

55. ©2013 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: ____________ ____________________

56. ©2013 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 ____________ and ___________ to make decisions Employees are often _______________ to perform any operation within a product cell.

57. ©2013 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 customer ___________: the Japanese system of pull manufacturing Traditional manufacturing emphasizes push manufacturing

58. ©2013 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 poor quality ___________ approach to zero defects

59. ©2013 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 Electronic Data Interchange (EDI) Radio frequency identification devices (RFID) Enterprise Resource Planning (ERP)

60. ©2013 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 Objective 9 Describe and illustrate the use of activity-based costing in a service business

61. ©2013 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 multiple ___________ to allocate factory overhead more accurately than using a single, plant-wide rate. Costs are initially accounted for in cost pools – each cost pool has its own rate.

62. ©2013 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 Pools and Rates for Hopewell Hospital

63. ©2013 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

64. ©2013 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 Exhibit 19: Customer Profitability Report

65. ©2013 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