Product Costing in Service and Manufacturing Entities Chapter 11.
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Transcript of Product Costing in Service and Manufacturing Entities Chapter 11.
Product Costing in Service and Manufacturing Entities
Chapter 11
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-2
Introduction
Financial Accounting
Product costs are used to value inventory and
to compute cost ofgoods sold.
Managerial Accounting
Product costs are used for planning, control,
directing, and management decision
making.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-3
TheProduct
Manufacturing Overhead
DirectLabour
DirectMaterial
Manufacturing Cost Flow
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Direct Material
Example:Steel used tomanufacture
the automobile.
Raw material that is used to make,and can be conveniently
traced, to the finished product.
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Cost of salaries, wages, and fringebenefits for personnel who work
directly on manufactured products.
Direct Labour
Example:Wages paid to an
automobile assemblyworker.
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All other manufacturing costs
Manufacturing Overhead
Materials used to support the production process. Examples: lubricants and
cleaning supplies used in an automobile assembly plant.
IndirectLabour
IndirectMaterial
OtherCosts
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-7
All other manufacturing costs
Manufacturing Overhead
Cost of personnel who do not work directly on
the product. Examples: maintenance workers, janitors and security
guards.
IndirectLabour
IndirectMaterial
OtherCosts
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-8
All other manufacturing costs
Manufacturing Overhead
Examples: depreciation on plant and equipment,
property taxes, insurance, utilities,
overtime premium, and unavoidable idle time.
IndirectLabour
IndirectMaterial
OtherCosts
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-9
Manufacturing Cost Flow
Materials waiting to be processed.
Partially complete products – material to
which some labour and/or overhead has
been added.
Completed products awaiting sale.
Raw Materials
Finished Goods
Work-in-Process
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-10
Manufacturing Cost Flow
Cost of Purchases
• Materials Used• Labour• Overhead
Cost of GoodsSold
Balance SheetIncome
StatementRaw
Materials
Total Mfg.Costs
Incurred
EndingInventory
EndingInventory
Cost of Goods Mfd.
EndingInventory
Work-in-Process
FinishedGoods
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-11
Cost Flow in Service Companies
Hotels
Attorneys
Banks
Hospitals ServiceCompanies
PublicAccountants
InsuranceFirmsAirlines
PlumbingCompanies
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-12
Service companies do not havework-in-process and finished
goods inventory accountswherein costs are stored before
being transferred to a cost ofgoods sold account.
Cost Flow in Service Companies
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-13
Let’s examine the cost flows in a manufacturing
company. We will use T-accounts and start with
materials.
Manufacturing Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-14
Work in ProcessRaw Materials
Mfg. Overhead
•MaterialPurchases
Manufacturing Cost Flow
•Direct Material
•Direct Material
•Indirect Material
•Indirect Material
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-15
Next let’s add labour costs and
applied manufacturing overhead to the job-order cost flows. Are you
with me?
Manufacturing Cost Flow
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•Direct Labour
•Indirect Material
•OverheadApplied to
Work inProcess
If actual and applied manufacturing overhead are
not equal, a year-end adjustment is required. We will look at the procedure to
accomplish this later.
•IndirectLabour
•Direct Labour
•Overhead Applied
•IndirectLabour
Wages Payable Work in Process
Mfg. Overhead
Manufacturing Cost Flow
•Direct Material
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Now let’s complete the
goods and sell them. Still with
me?
Manufacturing Cost Flow
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•Cost ofGoodsMfd.
Finished Goods
•Cost ofGoodsSold
•Cost ofGoodsMfd.
Cost of Goods Sold
•Cost ofGoodsSold
Work in Process•Direct
Material•Direct Labour
•Overhead Applied
Manufacturing Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-19
Let’s look atthe January
transactions of Ventra
Manufacturing company.
Manufacturing Cost Flow
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Manufacturing Cost Flow
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Manufacturing Cost Flow
Ventra pays $26,500 cash to purchase raw materials.
Raw Materials26,500
CashBal. 64,500
26,500Bal. 500
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Manufacturing Cost Flow
Ventra places $1,100 of raw materials into production in the process of making jewelry boxes.
Raw Materials
1,100
Work-in-ProcessBal. 0
26,500Bal. 500 1,100
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-23
Manufacturing Cost Flow
Ventra pays $2,000 cash to purchase production supplies.
Production Supplies
26,500Cash
Bal. 64,500 2,000 2,000
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-24
Manufacturing Cost Flow
Ventra pays production workers $1,400 cash.
26,500Cash
Bal. 64,500 2,000 1,100
Work-in-ProcessBal. 0
1,400 1,400
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-25
Manufacturing Cost Flow
Ventra applies $1,680 of estimated manufacturing overhead costs at the end of the month of January.
Applied
Manufacturing Overhead
Actual 1,100
Work-in-Process
1,400 1,680
1,680
Bal. 0
Applied overhead = 500 boxes × $3.36 per box
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-26
Estimated total manufacturingoverhead cost for the yearEstimated total units in theallocation base for the year
POHR =
A predetermined overhead rate (POHR) used to apply overhead to jobs is determined
before the period begins.
The Flow of Overhead Costs
$40,32012,000 jewelry boxes
POHR = = $3.36per box
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-27
Overhead applied = POHR × Actual activity
Actual amount of theallocation base such as
units produced, direct labour hours, or machine hours.
Based on estimates, and determined before the
period begins.
The Flow of Overhead Costs
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-28
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
$$
The Flow of Overhead Costs
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-29
Manufacturing Cost Flow
Ventra transfers the total cost of 500 jewelery boxes from work-in-process to finished goods.
Finished Goods
1,100
Work-in-Process
1,400 1,680
Bal. 0 4,180Bal. 836
4,180
100 boxes @ $8.36
Unit cost = $4,180 ÷ 500 boxes = $8.36 per box
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-30
Manufacturing Cost Flow
Ventra recognizes cost of goods sold expense for 400 jewelry boxes sold to customers.
Finished Goods
4,180Bal. 836
Cost of Goods Sold 3,344 3,344
400 boxes @ $8.36 per box = $3,344
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-31
Manufacturing Cost Flow
Ventura recognizes $5,600 of sales revenue for 400 boxes sold.
Revenue 5,600
400 boxes @ $14.00 per box = $5,600
26,500Cash
Bal. 64,500 2,000 1,400
5,600
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-32
Manufacturing Cost Flow
Ventura pays $1,200 cash for actual manufacturing overhead costs including indirect labour, utilities, rent, etc.
26,500Cash
Bal. 64,500 2,000 1,400
5,600Applied
Manufacturing Overhead
Actual 1,680 1,200
1,200
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-33
Manufacturing Cost Flow
Ventura pays $1,200 cash for actual manufacturing overhead costs including indirect labour, utilities, rent, etc.
26,500Cash
Bal. 64,500 2,000 1,400
5,600Applied
Manufacturing Overhead
Actual 1,680 1,200
1,200
Manufacturing overhead is $480 overapplied at the end of
January. If a difference between actual and applied overhead exists at year end, the amount will be closed to
cost of goods sold.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-34
Manufacturing Cost Flow
At the end of the year,Ventra has the following
account balances:
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-35
Manufacturing Cost Flow
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Manufacturing Cost Flow
Supplies: $2,000 purchased, $1,700 used.
See Cost of GoodsManufactured and
Sold Schedule
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-37
Manufacturing Cost Flow
Explanation of Manufacturing
Overhead balance follows.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-38
Manufacturing Cost Flow
Applied
Manufacturing Overhead
Actual39,64843,400
3,752
Manufacturing overhead is $3,752 underapplied.
11,800 boxes manufactured × $3.36 POHR
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-39
Manufacturing Cost Flow
Applied
Manufacturing Overhead
Actual39,64843,400
3,752
Manufacturing overhead is $3,752 underapplied.
Cost of Goods Sold 83,600
10,000 boxes @ $8.36
3,752 3,752
Underapplied overhead is closed to Cost of Goods Sold leaving a zero balance in the
overhead account.
87,352
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-40
Analyzing the Underapplied Overhead
Spending variance$3,080 unfavorable
$43,400 $40,320 $39,648
Volume variance$672 unfavorable
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
Total variance is $3,752 unfavorable, theamount of underapplied overhead.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-41
Manufacturing Cost Flow
Let’s prepare aSchedule of Cost of Goods
Manufactured and Soldfor Ventra.
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Preparing a Cost of Goods Manufactured and Sold Schedule
Direct Raw Material Used 25,960$ Direct Labour 33,040 Manufacturing Overhead Applied 39,648 Total Manufacturing Costs 98,648 Plus : Beginning Work-in-Process Inventory 0Total Work-in-Process Inventory 98,648 Less Ending Work-in-Process Inventory 8,360 Cost of goods manufactured 90,288 Plus Beginning Finished Goods Inventory 836 Cost of Goods Available for Sale 91,124 Less Ending Finished Goods Inventory 7,524 Cost of Goods Sold-Unadjusted 83,600 Plus : Under Applied Overhead 3,752 Cost of Goods Sold-Actual 87,352$
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-43
Ventra Manufacturing CompanySchedule of Cost of Goods Manufactured and Sold
Direct Raw Material Used 25,960$ Direct Labour 33,040 Manufacturing Overhead Applied 39,648 Total Manufacturing Costs 98,648 Plus Beginning Work-in-Process Inventory 0Total Work-in-Process Inventory 98,648 Less Ending Work-in-Process Inventory 8,360 Cost of goods manufactured 90,288 Plus Beginning Finished Goods Inventory 836 Cost of Goods Available for Sale 91,124 Less Ending Finished Goods Inventory 7,524 Cost of Goods Sold 83,600
Computation of Direct Raw Materials Used
Beginning Raw Materials Inventory 500$ Plus Purchases 26,500 Raw Materials Available for Use 27,000 Less Ending Raw Materials Inventory 1,040 Direct Raw Materials Used 25,960$
Preparing a Cost of Goods Manufactured and Sold Schedule
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-44
Direct Raw Material Used 25,960$ Direct Labour 33,040 Manufacturing Overhead Applied 39,648 Total Manufacturing Costs 98,648 Plus Beginning Work-in-Process Inventory 0Total Work-in-Process Inventory 98,648 Less Ending Work-in-Process Inventory 8,360 Cost of goods manufactured 90,288 Plus Beginning Finished Goods Inventory 836 Cost of Goods Available for Sale 91,124 Less Ending Finished Goods Inventory 7,524 Cost of Goods Sold-Unadjusted 83,600 Plus: Under Applied Overhead 3,752 Cost of Goods Sold-Unadjusted 87,352$
Preparing a Cost of Goods Manufactured and Sold Schedule
Reported in the current assets section of the balance sheet.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-45
Let’s look at theIncome Statement
for Ventra.
Financial Statements
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Financial Statements
Ventra Manufacturing CompanyIncome Statement
For the Year Ended December 31, 20X2
Sales revenue (10,000 boxes @$14.00) 140,000$ Cost of Goods Sold 87,352 Gross margin 52,648 Selling and Administrative Expenses 31,400 Net income 21,248$
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-47
Let’s look at theBalance Sheet
for Ventra.
Financial Statements
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Financial Statements
Assets Cash 79,860$ Raw Materials Inventory 1,040 Work-inProcess Inventory 8,360 Finished Goods Inventory 7,524 Production Supplies 300 Manufacturing Equipment 40,000$ Less Accumulated Amortization 20,000 Book Value Manufacturing Equipment 20,000 Total Assets 117,084
Shareholder's Equity Common Stock 76,000 Retained Earnings 41,084 Total Shareholders' Equity 117,084$
Ventra Manufacturing CompanyBalance Sheet
As of December 31, 20X2
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Let’s look at theCash Flow Statement
for Ventra.
Financial Statements
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Financial Statements
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Financial Statements
Cash Outflows for Production of Inventory: Raw Material Purchases 26,500$ Labour ($1,400 + $31,640) 33,040 Supplies 2,000 Other Manufacturing Overhead ($1,200 + $30,500) 31,700 Total 93,240
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-52
Let’s compare absorption and
variable costing.
The Motive to Overproduce – Absorption Costing
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The Motive to Overproduce – Absorption Costing
Reeve Manufacturing Company incurs the followingcosts to produce 2,000 units of inventory:
Let’s see what happens to costsif Reeve increases production.
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Now let’s compute income at the three levelof production if Reeve sells 2,000 units.
The Motive to Overproduce – Absorption Costing
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The Motive to Overproduce – Absorption Costing
Level of Production 2000 3000 4000Sales @ $20 per unit × 2,000 units 40,000$ 40,000$ 40,000$ Cost of Goods Sold $15 per unit × 2,000 units 30,000 $13 per unit × 2,000 units 26,000 $12 per unit × 2,000 units 24,000 Gross Margin 10,000$ 14,000$ 16,000$
Internally, many companies use variable costingto motivate managers to increase profitability
without motivating them to overproduce.
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Variable Costing
Net income is not affected by production increases.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada11-57
End of Chapter 11