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Chapter 2 Classifying Costs

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1 Chapter 2 Classifying Costs
©2017 Mark Friedman and Michael Werner, Management Accounting , Friedman/Werner

2 Learning Objectives 1. Classify costs by cost objects, and distinguish between direct and indirect costs. 2. Distinguish between product costs and period costs, and contrast their accounting treatment. 3. Explain the differences between product cost for a merchandiser and for a manufacturer. 4. Describe the components of the costs included in each of the three types of inventory in a manufacturing operation. 5. Calculate cost of goods manufactured and cost of goods sold. 6. Describe the components of the cost of services provided by a service firm. 7. Prepare basic journal entries for a manufacturer. ©2016 Michael Werner and Mark Friedman, Management Accounting , Werner/Friedman

3 Assigning Costs to Cost Objects
LO1 Classify costs by cost objects, and distinguish between direct and indirect costs. A cost object is any activity or item for which a separate measurement of costs is desired. Activity Product Service Project Geographic region Department ©2016 Michael Werner and Mark Friedman, Management Accounting , Werner/Friedman

4 Assigning Costs to Cost Objects
LO1 Assigning Costs to Cost Objects Direct costs Indirect costs (common costs) ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

5 Product Costs Product costs are the costs associated
LO2 Distinguish between product costs and period costs, and contrast their accounting treatment. Product costs are the costs associated with making the product available and ready to sell. Product costs are inventoriable costs. ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

6 Period costs are not considered product costs.
LO2 Period Costs Period costs are not considered product costs. Selling Costs Administrative Costs ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

7 Product Cost Identification for Merchandising Firms
LO3 Explain the differences between product cost for a merchandiser and for a manufacturer. Product cost includes the cost of the merchandise, freight costs, and any other costs incurred to get the product ready to sell. ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

8 The Flow of Product Costs
Invoice cost of merchandise Other costs to prepare merchandise for sale Freight-in Merchandise Inventory Cost of Goods Sold (Income Statement) Goods sold Ending Inventory (Balance Sheet) Goods not yet sold ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

9 Cost of Goods Sold Schedule
LO3 Cost of Goods Sold Schedule JASON’S SUPPLY COMPANY Cost of Goods Sold Schedule For the Year Ending December 31, 2016 Beginning inventory, Jan. 1, $ 23,000 + Purchases during ,000 = Goods available for sale in $323,000 – Ending inventory, Dec. 31, ,000 = Cost of goods sold for $293,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

10 Product Cost Identification for Manufacturing Firms
LO3 Product Cost Identification for Manufacturing Firms Direct material cost Direct labor cost Manufacturing overhead ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

11 Prime Cost and Conversion Cost
LO3 Prime Cost and Conversion Cost Direct material cost labor Manufacturing overhead Prime cost Conversion cost ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

12 Inventory Classifications
LO4 Describe the components of the costs included in each of the three types of inventory in a manufacturing operation. Raw materials inventory or stores Work-in-process inventory Finished goods inventory ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

13 Manufacturing Overhead or Burden
LO4 Manufacturing Overhead or Burden Indirect material Indirect labor Other overhead costs ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

14 The Flow of Product Costs –Manufacturing Company
Beginning direct material inventory + Purchases = Direct materials available for use – Ending inventory = Direct materials used ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

15 The Flow of Product Costs –Manufacturing Company
Raw materials inventory Ending raw materials Balance sheet purchases Work-in-process inventory Direct materials Direct materials cost Manufacturing overhead cost Indirect materials ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

16 The Flow of Product Costs –Manufacturing Company
Direct materials cost Work-in-process inventory ● Direct materials ● Direct labor ● Manufacturing overhead Direct labor cost Manufacturing overhead cost ● Indirect materials ● Indirect labor ● Factory rent ● Depreciation ● Factory taxes ● Factory insurance ● Other factory costs ©2016 Michael Werner and Kumen Jones, Introduction to Management Accounting , 3e Werner/Jones

17 The Flow of Product Costs –Manufacturing Company
Work-in-process inventory ● Direct materials ● Direct labor ● Manufacturing overhead Ending work-in-process Balance sheet Finished goods ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

18 The Flow of Product Costs –Manufacturing Company
Finished goods inventory Ending finished goods inventory Cost of goods sold Balance sheet Income statement ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

19 Cost of Goods Manufactured Schedule
LO5 Calculate cost of goods manufactured and cost of goods sold. ZHANG MANUFACTURING, INC. Cost of Goods Manufactured Schedule For the Year Ended December 31, 2016 Beginning inventory, Jan. 1, $ 13,000 Inventory purchases during ,000 Materials available during $413,000 Ending inventory, Dec. 31, –20,000 Direct materials used during $393,000 Direct Materials Section ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

20 Cost of Goods Manufactured Schedule
LO5 Cost of Goods Manufactured Schedule ZHANG MANUFACTURING, INC. Cost of Goods Manufactured Schedule For the Year Ended December 31, 2016 Direct Labor Section Direct labor during $220,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

21 Cost of Goods Manufactured Schedule
LO5 Cost of Goods Manufactured Schedule ZHANG MANUFACTURING, INC. Cost of Goods Manufactured Schedule For the Year Ended December 31, 2016 Manufacturing Overhead Section Indirect materials $ 5,000 Indirect labor ,000 Factory rent ,000 Other ,000 Total 2016 manufacturing overhead $513,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

22 Cost of Goods Manufactured Schedule
LO5 Cost of Goods Manufactured Schedule ZHANG MANUFACTURING, INC. Cost of Goods Manufactured Schedule For the Year Ended December 31, 2016 Manufacturing Costs Summary Direct materials used during $ 393,000 Direct labor used during ,000 Total manufacturing overhead ,000 Manufacturing cost for current period $1,126,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

23 Cost of Goods Manufactured Schedule
LO5 Cost of Goods Manufactured Schedule ZHANG MANUFACTURING, INC. Cost of Goods Manufactured Schedule For the Year Ended December 31, 2016 Cost Summary and Work-in-Process Section Manufacturing cost for current period $1,126,000 Beginning WIP, (01/01/16) ,000 Cost of goods to be finished $1,167,000 Less: Ending WIP, (12/31/16) ,000 Cost of goods manufactured in $1,102,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

24 Cost of Goods Manufactured Schedule
LO5 Cost of Goods Manufactured Schedule ZHANG MANUFACTURING, INC. Cost of Goods Sold Schedule For the Year Ended December 31, 2016 Beginning finished goods inventory $ ,000 Cost of goods manufactured in ,102,000 Goods available for sale in $1,172,000 Less: Finished goods inventory ,000 Cost of goods sold for $1,144,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

25 Product Cost Identification for Service Firms
LO6 Describe the components of the cost of services provided by a service firm. Service products lack physical substance. Materials are incidental supplies. Labor costs are high. Overhead costs are similar to those for a manufacturer. ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

26 The Flow of Service Costs
Supplies inventory Cost of services provided Direct supplies cost Direct labor cost Ending supplies inventory Overhead cost ● Indirect supplies ● Indirect labor ● Office rent ● Depreciation ● Office taxes ● Office insurance ● Other indirect costs Balance sheet Income statement ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

27 Cost of Services Schedule
LO6 Cost of Services Schedule Direct labor cost $ 940,000 Overhead cost ,000 Direct supplies cost ,000 Cost of services provided $1,030,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

28 Hybrid Firms Companies that generate significant
LO6 Hybrid Firms Companies that generate significant revenues from both services and products are known as hybrid firms. ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

29 Recording Manufacturing Costs
LO7 Prepare basic journal entries for a manufacturer. Transaction 1: On January 3, transferred $70,000 of direct material to production. Jan 2 Raw Materials Inventory 90,000 Accounts Payable ,000 To record the purchase of raw material ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

30 Recording Manufacturing Costs
LO7 Recording Manufacturing Costs Transaction 2: On January 3, transferred $70,000 of direct material to production. Jan 3 Work-In-Process Inventory 70,000 Raw Material Inventory ,000 To record the transfer of direct material to production ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

31 Recording Manufacturing Costs
LO7 Recording Manufacturing Costs Transaction 3: On January 31, paid $80,000 for direct labor cost incurred during January 2016 Jan 31 Work-In-Process Inventory 80,000 Cash ,000 To record wages paid for direct labor in January ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

32 Recording Manufacturing Costs
LO7 Recording Manufacturing Costs Transaction 4: In January, paid $10,000 of overhead costs in cash and balance of $100,000 on account. Jan 31 Work-In-Process Inventory 110,000 Cash ,000 Accounts Payable ,000 To record overhead for January ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

33 Recording Manufacturing Costs
LO7 Recording Manufacturing Costs Transaction 5: On January 31, transferred $230,000 of goods from work in process to finished goods. Jan 31 Finished Goods Inventory 230,000 Work-in-Process Inventory ,000 To transfer completed goods from production to finished goods ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

34 Recording Manufacturing Costs
LO7 Recording Manufacturing Costs Transaction 6: On January 31, sold finished goods costing $210,000 to manufacture for $300,000. Jan 31 Accounts Receivable 300,000 Sales ,000 Cost of Goods Sold 210,000 Finished Goods ,000 To record sales on account and cost of goods sold. ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

35 Recording Manufacturing Costs
LO7 Recording Manufacturing Costs Work-in-Process Inventory Accounts Receivable 1/03/ ,000 1/31/ ,000 1/31/16 110,000 Balance 30,000 230,000 1/31/16 1/31/16 300,000 Sales 300,000 1/31/16 Finished Goods Inventory Cost of Goods Sold 1/31/16 230,000 Balance 20,000 210,000 1/31/16 1/31/16 210,000 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman

36 End of Chapter 2 ©2016 Michael Werner and Mark Friedman, Management Accounting Werner/Friedman


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