2. 18-1 CHAPTER 18 M ANAGERIAL A CCOUNTING C ONCEPTS /J OB C OSTING

3. 18-2 Compare Managerial and Financial Accounting Managerial accounting provides information for internal use. Financial accounting provides information for external use. Creditors and investorsManagers

4. 18-3 Financial Accounting l Uses historical data l Presents summary data l Complies with GAAP (Generally Accepted Accounting Principles) Managerial Accounting l May use estimates of future (e.g., budgeting) l More detailed data l Flexible format, cost/ benefit analysis determines proper level of information Compare Managerial and Financial Accounting

5. 18-4 Ethical Issues IntegrityObjectivity ConfidentialityCompetence Institute of Management Accountants Standards of Ethical Conduct

6. 18-5 Manufacturing Cost Concepts Product costs are the costs a company assigns to units produced. (i.e., costs which relate to or attach to the product) Product costs are the costs a company assigns to units produced. (i.e., costs which relate to or attach to the product) Cost is a financial measure of resources used or given up to achieve an objective.

7. 18-6 Product Cost Components Product Costs Manufacturing Overhead Direct Material Direct Labor

8. 18-7 Direct Materials u Materials that are clearly and easily traced to a particular product u Example: Wood used to manufacture a high-quality dining room table Direct Materials u Materials that are clearly and easily traced to a particular product u Example: Wood used to manufacture a high-quality dining room table Product Cost Components

9. 18-8 Direct Labor u Labor cost of employees working to convert materials into finished goods u Labor cost clearly traceable to, or readily identifiable with, the finished product u Example: Wages paid to carpenter Direct Labor u Labor cost of employees working to convert materials into finished goods u Labor cost clearly traceable to, or readily identifiable with, the finished product u Example: Wages paid to carpenter Product Cost Components

10. 18-9 Manufacturing Overhead u All manufacturing costs except direct material and direct labor u Manufacturing costs that cannot be traced directly to specific units produced u Example: Indirect labor such as furniture designer Manufacturing Overhead u All manufacturing costs except direct material and direct labor u Manufacturing costs that cannot be traced directly to specific units produced u Example: Indirect labor such as furniture designer Product Cost Components

11. 18-10 Manufacturing Overhead - other examples - Indirect labor: Janitors, Supervisors, Materials storeroom personnel, Cost accountant Glue - Indirect materials: Oil, Nails, Glue - Other indirect costs: –Repairs and maintenance on factory buildings and equipment –Payroll taxes and fringe benefits for manufacturing employees –Depreciation on factory buildings and equipment –Insurance and taxes on factory property and inventories –Utilities for factory buildings Manufacturing Overhead - other examples - Indirect labor: Janitors, Supervisors, Materials storeroom personnel, Cost accountant Glue - Indirect materials: Oil, Nails, Glue - Other indirect costs: –Repairs and maintenance on factory buildings and equipment –Payroll taxes and fringe benefits for manufacturing employees –Depreciation on factory buildings and equipment –Insurance and taxes on factory property and inventories –Utilities for factory buildings Product Cost Components

12. 18-11 Why are product costs often called inventoriable costs? Because the costs remain in inventory until the product is sold, at which time they become an expense called cost of goods sold. Product Costs

13. 18-12 Period costs are expensed in the period incurred. Period costs are never inventoried with the product. Nonmanufacturing costs which relate to or attach to the period Can be classified as Selling costs Administrative costs Period Costs

14. 18-13 Selling Costs Costs incurred to obtain customer orders and to deliver finished goods to customers (e.g., advertising and shipping) Selling Costs Costs incurred to obtain customer orders and to deliver finished goods to customers (e.g., advertising and shipping) Administrative Costs accounting Nonmanufacturing costs of staff support and administrative functions (e.g., accounting, data processing, personnel, research and development) Administrative Costs accounting Nonmanufacturing costs of staff support and administrative functions (e.g., accounting, data processing, personnel, research and development) Period Costs

15. 18-14Question The primary distinction between product and period costs is... a.Product costs are expensed in the period incurred. b.Product costs are directly traceable to product units. c.Product costs are inventoriable. d.Period costs are inventoriable. The primary distinction between product and period costs is... a.Product costs are expensed in the period incurred. b.Product costs are directly traceable to product units. c.Product costs are inventoriable. d.Period costs are inventoriable.

16. 18-15Question The primary distinction between product and period costs is... a.Product costs are expensed in the period incurred. b.Product costs are directly traceable to product units. c.Product costs are inventoriable. d.Period costs are inventoriable. The primary distinction between product and period costs is... a.Product costs are expensed in the period incurred. b.Product costs are directly traceable to product units. c.Product costs are inventoriable. d.Period costs are inventoriable. a. b. c. d.

17. 18-16 Ways to Classify Costs 1 Product Costs Period Costs 2 Direct Materials Direct Labor Manufacturing Overhead Selling Administrative 3 Manufacturing Costs Non- Manufacturing Costs 4 Either fixed or Variable Costs

18. 18-17 Raw Materials Finished Goods Work in Process Financial Reporting by Manufacturing Companies Manufacturing Inventory Classifications

19. 18-18 Completed products for sale Materials waiting to be processed Partially complete products Material to which some labor and/or overhead have been added Raw Materials Finished Goods Work in Process Financial Reporting by Manufacturing Companies

20. 18-19 Balance Sheet Presentation MERCHANDISER Current Assets u Cash u Receivables u Prepaid Expenses u Merchandise Inventory MANUFACTURER Current Assets u Cash u Receivables u Prepaid Expenses u Inventories Raw Materials Work in Process Finished Goods

21. 18-20Question What type of account is the manufacturing work in process account? a.Income statement expense account. b.Balance sheet inventory account. c.Temporary clearing account for direct material and direct labor. d.Holding account for manufacturing overhead and direct labor. What type of account is the manufacturing work in process account? a.Income statement expense account. b.Balance sheet inventory account. c.Temporary clearing account for direct material and direct labor. d.Holding account for manufacturing overhead and direct labor.

22. 18-21Question What type of account is the manufacturing work in process account? a.Income statement expense account. b.Balance sheet inventory account. c.Temporary clearing account for direct material and direct labor. d.Holding account for manufacturing overhead and direct labor. What type of account is the manufacturing work in process account? a.Income statement expense account. b.Balance sheet inventory account. c.Temporary clearing account for direct material and direct labor. d.Holding account for manufacturing overhead and direct labor. a. b. c. d.

23. 18-22 Manufacturing Cost Flows Direct Labor Manufacturing Overhead Direct Material Work in Process Finished Goods Cost of Goods Sold

24. 18-23 Cost of Goods Manufactured Cost of all goods completed during a period and transferred from work in process to finished goods

25. 18-24 Cost of Goods Manufactured Cost of all goods completed during a period and transferred from work in process to finished goods Direct Materials Used +Direct Labor +Manufacturing Overhead Cost to Manufacture =Cost to Manufacture +Beginning Work in Process – Ending Work in Process =Cost of Goods Manufactured

26. 18-25 Cost of Goods Sold Cost of the items sold to customers during a period

27. 18-26 Cost of Goods Sold Cost of the items sold to customers during a period Beginning Finished Goods +Cost of Goods Manufactured =Cost of Goods Available for Sale – Ending Finished Goods =Cost of Goods Sold

28. 18-27 Income Statement Presentation Sales – Cost of Goods Sold =Gross Margin –Operating Expenses = Operating Income Sales – Cost of Goods Sold =Gross Margin –Operating Expenses = Operating Income p. 688

29. 18-28 Types of Cost Systems Process Costing Job Costing F Used for production of small, identical, low-cost items F Mass produced in automated continuous production process F Costs cannot be directly traced to each unit of product F Used for production of small, identical, low-cost items F Mass produced in automated continuous production process F Costs cannot be directly traced to each unit of product

30. 18-29 Process Costing Job Costing Types of Cost Systems Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill

31. 18-30 Process Costing Job Costing F Used for production of large, unique, high-cost items F Built to order rather than mass produced F Many costs can be directly traced to each job F Used for production of large, unique, high-cost items F Built to order rather than mass produced F Many costs can be directly traced to each job Types of Cost Systems

32. 18-31 Process Costing Job Costing F Typical job order cost applications v Custom furniture manufacturing v Building construction F Also used in service industry v Hospitals v Accounting and law firms F Typical job order cost applications v Custom furniture manufacturing v Building construction F Also used in service industry v Hospitals v Accounting and law firms Types of Cost Systems

33. 18-32 Job Order Costing THE JOB Direct material Direct labor Traced directly to each job

34. 18-33 Job Order Costing THE JOB Direct material Direct labor Traced directly to each job Manufacturing Overhead (OH) Applied to each job based on activity causing the OH

35. 18-34 Manufacturing Overhead (OH) Applied to each job based on activity causing the OH Job Order Costing Synonyms for “Applied” Overhead Assigned Distributed Allocated Absorbed

36. 18-35 I see some journal entries for job costing on the horizon! Job Order Costing

37. 18-36 Typical Accounting Entries (pp. 690 - 693) Ê To record purchase of materials Raw Materials Inventory(Debit) Accounts Payable (Credit) · To record use of materials Work in Process Inventory(Debit) Manufacturing Overhead(Debit) Materials Inventory (Credit) Job Order Costing

38. 18-37 Payroll Accounting Entry (Not discussed in text) To record payment to employees Payroll Summary (Debit) Wages Payable (Credit) Various Taxes Withheld(Credit) Job Order Costing

39. 18-38 Typical Accounting Entries (pp. 690 - 693) ¸ To record labor costs Work in Process Inventory(Debit) Manufacturing Overhead(Debit) Payroll Summary (Credit) ¹ To apply overhead to jobs Work in Process Inventory(Debit) Manufacturing Overhead (Credit) Job Order Costing

40. 18-39 Job Order Costing Typical Accounting Entries (pp. 690 - 693) º To record completion of jobs Finished Goods Inventory(Debit) Work in Process Inventory(Credit)

41. 18-40 Typical Accounting Entries (pp. 690 - 693) » To record sales Accounts Receivable (Debit) Sales (Credit) » To record cost of goods sold Cost of Goods Sold(Debit) Finished Goods Inventory(Credit) Job Order Costing

42. 18-41 Job Cost Flows WIPRaw Materials Mfg. O/H FG CGS

43. 18-42 Work in ProcessRaw Materials Material Purchases Mfg. Overhead Job Cost Flows

44. 18-43 Work in ProcessRaw Materials Material Purchases Direct Material Mfg. Overhead Job Cost Flows

45. 18-44 Work in ProcessRaw Materials Material Purchases Direct Material Indirect Material Direct Material Mfg. Overhead Actual Overhead Costs Job Cost Flows

46. 18-45 Work in ProcessPayroll Summary Incurred Direct Material Mfg. Overhead Actual Overhead Costs Job Cost Flows

47. 18-46 Work in ProcessPayroll Summary Incurred Direct Labor Direct Material Direct Labor Mfg. Overhead Actual Overhead Costs Job Cost Flows

48. 18-47 Work in ProcessPayroll Summary Incurred Direct Labor Indirect Labor Direct Material Direct Labor Mfg. Overhead Actual Overhead Costs Job Cost Flows

49. 18-48 Work in ProcessPayroll Summary Incurred Direct Labor Indirect Labor Direct Material Direct Labor Overhead Mfg. Overhead Actual Overhead Costs Overhead Applied to Work in Process Job Cost Flows

50. 18-49 Work in Process Direct Material Direct Labor Overhead Finished Goods Cost of Goods Sold Job Cost Flows

51. 18-50 Work in Process Direct Material Direct Labor Overhead Cost of Goods Mfg. Finished Goods Cost of Goods Mfg. Cost of Goods Sold Job Cost Flows

52. 18-51 Work in Process Direct Material Direct Labor Overhead Cost of Goods Mfg. Finished Goods Cost of Goods Sold Cost of Goods Mfg. Cost of Goods Sold Job Cost Flows

53. 18-52 Applying Overhead A predetermined overhead rate (POHR) is used to apply costs to jobs.

54. 18-53 Applying Overhead A predetermined overhead rate (POHR) is used to apply costs to jobs. Established before the period begins Based on estimated OH cost and estimated activity level

55. 18-54 Applying Overhead A predetermined overhead rate (POHR) is used to apply costs to jobs. POHR = Estimated total overhead for the period Estimated total activity for the period Established before the period begins Based on estimated OH cost and estimated activity level

56. 18-55 Applying Overhead POHR = Estimated total overhead for the period Estimated total activity for the period This activity is called the cost driver

57. 18-56 Applying Overhead POHR = Estimated total overhead for the period Estimated total activity for the period This activity is called the cost driver The cost driver is assumed to be a causal factor in overhead incurrence. Examples: Units produced Direct labor hours Direct labor cost Machine hours The cost driver is assumed to be a causal factor in overhead incurrence. Examples: Units produced Direct labor hours Direct labor cost Machine hours

58. 18-57 Tell me again how we use the POHR to apply overhead to jobs. Applying Overhead

59. 18-58 We multiply the POHR times the number of cost driver activity units incurred for the job. Tell me again how we use the POHR to apply overhead to jobs. Applying Overhead

60. 18-59 We multiply the POHR times the number of cost driver activity units incurred for the job. I don’t get it! Show me an example. Applying Overhead

61. 18-60 If FishCo budgets overhead at $200,000 and estimates its cost driver activity to be 25,000 direct labor hours for 1999, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour If FishCo budgets overhead at $200,000 and estimates its cost driver activity to be 25,000 direct labor hours for 1999, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Applying Overhead Example

62. 18-61 If FishCo budgets overhead at $200,000 and estimates its cost driver activity to be 25,000 direct labor hours for 1999, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour If FishCo budgets overhead at $200,000 and estimates its cost driver activity to be 25,000 direct labor hours for 1999, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Estimated Overhead Estimated Activity $200,000 25,000 hours POHR = $8.00 per hour Applying Overhead Example

63. 18-62 If FishCo actually worked 24,000 direct labor hours for 1999, what amount of overhead would be applied to jobs in work in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 If FishCo actually worked 24,000 direct labor hours for 1999, what amount of overhead would be applied to jobs in work in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 Applying Overhead Example

64. 18-63 If FishCo actually worked 24,000 direct labor hours for 1999, what amount of overhead would be applied to jobs in work in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 If FishCo actually worked 24,000 direct labor hours for 1999, what amount of overhead would be applied to jobs in work in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 24,000 hours × $8.00 per hour = $192,000 Applying Overhead Example

65. 18-64 Applying Overhead Reasons for using a predetermined overhead rate Overhead is not incurred uniformly during the year. Actual overhead rate might vary from month to month. Predetermined rate makes it possible to estimate job costs sooner.

66. 18-65 Applying Overhead The POHR is based on estimates. What happens if actual results differ from the estimates?

67. 18-66 The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period. Here, let me show you. Applying Overhead The POHR is based on estimates. What happens if actual results differ from the estimates?

68. 18-67 Applying Overhead Overhead is overapplied Actual overhead costs incurred Overhead applied to Work in Process (POHR × Activity)

69. 18-68 Applying Overhead Overhead is underapplied Actual overhead costs incurred Overhead applied to Work in Process (POHR × Activity)

70. 18-69 Applying Overhead Adjustments for underapplied or overapplied overhead Theoretically, we should adjust all accounts affected by misapplied overhead: Work in Process Finished Goods Cost of Goods Sold

71. 18-70 Applying Overhead Cost of Goods Overhead is:Sold is:Adjustment will: Applied overhead < actual overhead UnderappliedToo low Increase Cost of Goods Sold Applied overhead > actual overhead OverappliedToo high Decrease Cost of Goods Sold Adjusting Cost of Goods Sold for underapplied or overapplied overhead

72. 18-71 Manufacturing Overhead Actual Actual Overhead Costs Incurred Applied Overhead Applied to Work in Process (Debit bal.) Underapplied Overhead (Credit bal.) Overapplied Overhead Applying Overhead

73. 18-72 Manufacturing OverheadCost of Goods Sold ActualApplied Underapplied Balance Applying Overhead

74. 18-73 Manufacturing OverheadCost of Goods Sold ActualApplied Underapplied Balance Underapplied Balance Applying Overhead

75. 18-74 Manufacturing OverheadCost of Goods Sold ActualApplied Overapplied Balance Applying Overhead

76. 18-75 Manufacturing OverheadCost of Goods Sold ActualApplied Overapplied Balance Overapplied Balance Applying Overhead

77. 18-76 FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. Applying Overhead Question

78. 18-77 FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. Applying Overhead Question a. b. c. d.

79. 18-78 FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. Applying Overhead Question

80. 18-79 Assume that FishCo's overhead was $10,000 overapplied. This amount would result in an adjustment that would decrease cost of goods sold by $10,000. a. True b. False Assume that FishCo's overhead was $10,000 overapplied. This amount would result in an adjustment that would decrease cost of goods sold by $10,000. a. True b. False Applying Overhead Question

81. 18-80 Assume that FishCo's overhead was $10,000 overapplied. This amount would result in an adjustment that would decrease cost of goods sold by $10,000. a. True b. False Assume that FishCo's overhead was $10,000 overapplied. This amount would result in an adjustment that would decrease cost of goods sold by $10,000. a. True b. False Applying Overhead Question a. b.

82. 18-81 Assume that FishCo's overhead was $10,000 overapplied. This amount would result in an adjustment that would decrease cost of goods sold by $10,000. a. True b. False Assume that FishCo's overhead was $10,000 overapplied. This amount would result in an adjustment that would decrease cost of goods sold by $10,000. a. True b. False If overhead is overapplied, cost of goods sold is too high. The adjustment will decrease cost of goods sold. Applying Overhead Question

83. 18-82 Have a great spring break! (One more slide)

84. 18-83 THE END