chapter 11 product costing in service and manufacturing entities

CHAPTER 11

Product Costingin Service and Manufacturing

Entities

The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin

11-2

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.

Chapter Opening


11-3

Learning Objective

LO1LO1

To describe the natureand treatment of

product cost informationfor manufacturing and

service companies


11-4

Raw Materials

Finished Goods

Work-in-Process(WIP)

Materials waiting to be processed.

Partially complete products – material to

which some labor and/or overhead has

been added.

Completed products awaiting sale.

Cost Flow in Manufacturing Companies


11-5

Cost of Purchases

Balance SheetIncome

StatementRaw

MaterialsWork-in-Process

FinishedGoods

• Materials Used• Labor• Overhead

EndingInventory

Total Mfg.Costs

Incurred

EndingInventory

Cost of Goods Mfd.

EndingInventory

Cost of GoodsSold

Cost Flow in Manufacturing Companies


11-6Cost Flow in Service Companies

Service Companies

Banks Hotels

AttorneysHospitals

PublicAccountants

InsuranceFirms

Airlines

PlumbingCompanies


11-7

Service companies do not have

work-in-process and finished

goods inventory accounts

where costs are stored before

being transferred to a cost of

goods sold account.

Cost Flow in Service Companies


11-8

Learning Objective

LO2LO2

To demonstrate theflow of materials and

labor costs for amanufacturing company


11-9

TheProduct

Manufacturing Overhead

DirectLabor

DirectMaterial

Manufacturing Cost Flow


11-10

Cost of wages and fringebenefits for personnel who work

directly on manufactured products.

Direct Labor

Example:Wages paid to an

automobile assemblyworker.

Example:Wages paid to an

automobile assemblyworker.


11-11

Direct Material

Example:Steel used tomanufacture

the automobile.

Example:Steel used tomanufacture

the automobile.

Raw material that is used to make,and can be conveniently

traced, to the finished product.


11-12

All other manufacturing costs


Materials used to support the production process.

Examples: Lubricants and cleaning supplies used in an automobile assembly plant.

IndirectLabor

IndirectMaterial

OtherCosts


11-13


Cost of personnel who do not work directly on

the product. Examples: Maintenance workers, janitors and security

guards.

IndirectLabor

IndirectMaterial

OtherCosts



11-14


Examples: Depreciation on plant and equipment,

property taxes, insurance, utilities,

overtime premium, and unavoidable idle time.

IndirectLabor

IndirectMaterial

OtherCosts



11-15

Let’s examine the cost flows in a manufacturing

company. We will use T-accounts and start with

materials.



11-16

Work-in-ProcessRaw Materials

Mfg. Overhead

•MaterialPurchases

•Direct Material

•Direct Material

•Indirect Material




11-17

Next let’s add labor costs and

applied manufacturing overhead to the job-order cost flows. Are you

with me?



11-18

•Direct Labor


•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.

•IndirectLabor

•Direct Labor

•Overhead Applied

•IndirectLabor

Wages Payable Work-in-Process

Mfg. Overhead

•Direct Material



11-19

Now let’s complete the

goods and sell them. Still with

me?



11-20

•Cost ofGoodsMfd.

Finished Goods

•Cost ofGoodsSold

•Cost ofGoodsMfd.

Cost of Goods Sold

•Cost ofGoodsSold

Work-in-Process•Direct

Material•Direct Labor

•Overhead Applied



11-21

Let’s look atthe January

transactions of Ventra

Manufacturing Company.



11-22



11-23

Ventra pays $26,500 cash to purchase raw materials.

26,500

CashBal. 64,500

26,500

Raw MaterialsBal. 500

= Liabilities + Equity Rev. – Exp. = Net Inc. Cash Flow

Cash + Materials + Equity

(26,500) + 26,500 = NA + NA NA – NA = NA (26,500) OA

Assets



11-24

Ventra places $1,100 of raw materials into production in the process of making jewelry boxes.

1,100

Work-in-ProcessBal. 0

Raw Materials

26,500

Bal. 500 1,100


Materials + WIP + Equity

(1,100) + 1,100 = NA + NA NA – NA = NA NA

Assets



11-25

Ventra pays $2,000 cash to purchase production supplies.

Production SuppliesCash

26,500Bal. 64,500 2,000 2,000


Cash + Production

Supplies + Equity

(2,000) + 2,000 = NA + NA NA – NA = NA (2,000) OA

Assets



11-26

Ventra pays production workers $1,400 cash.

26,500

CashBal. 64,500

2,000 1,100

Work-in-ProcessBal. 0

1,400 1,400


Cash + WIP + Equity

(1,400) + 1,400 = NA + NA NA – NA = NA (1,400) OA

Assets



11-27

Learning Objective

LO3LO3

To assign estimatedoverhead costs to

inventory andcost of goods sold


11-28

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.

$$

Flow of Overhead Costs


11-29

Estimated total manufacturingoverhead cost for the period

Estimated total units in theallocation base for the period

POHR =

A predetermined overhead rate (POHR), used to apply overhead to products, is determined before the period begins.


$40,320

12,000 jewelry boxesPOHR = = $3.36

per box


11-30

Overhead applied = POHR × Actual activity

Actual amount of theallocation base such as

units produced, direct labor hours, or machine hours.

Based on estimates, and determined before

the period begins.



11-31

Ventra applies $1,680 of estimated manufacturing overhead costs at the end of the month of January.

Applied


Actual

1,680

1,680

1,100

Work-in-Process

1,400

Bal. 0

Applied overhead = 500 boxes × $3.36 per box = $1,680


Mfg. OH + WIP + Equity

(1,680) + 1,680 = NA + NA NA – NA = NA NA

Assets



11-32

Learning Objective

LO4LO4

To account forcompletion andsale of products


11-33

Ventra transfers the total cost of 500 jewelry boxes from work-in-process to finished goods.

1,100

Work-in-Process

1,400 1,680

Bal. 0

4,180

4,180

Finished GoodsBal. 836

100 boxes @ $8.36

Unit cost = $4,180 ÷ 500 boxes = $8.36 per box


WIP + Fin. Goods + Equity

(4,180) + 4,180 = NA + NA NA – NA = NA NA

Assets



11-34

Ventra recognizes cost of goods sold for 400 jewelry boxes sold to customers.

Finished Goods

4,180

Bal. 836

Cost of Goods Sold 3,344 3,344

400 boxes @ $8.36 per box = $3,344

Assets = Liabilities + Equity Rev. – Exp. = Net Inc. Cash Flow

Fin. Goods + Ret. Earnings

(3,344) = NA + (3,344) NA – 3,344 = (3,344) NA



11-35

Ventra recognizes $5,600 of sales revenue for the cash sale of 400 boxes.

Revenue 5,600

400 boxes @ $14.00 per box = $5,600

26,500

CashBal. 64,500

2,000 1,400

5,600

Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow

5,600 = NA + 5,600 5,600 – NA = 5,600 5,600 OA



11-36

Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc.

Cash26,500Bal. 64,500 2,000 1,400

5,600

Applied


Actual

1,680 1,200

1,200


Cash + Mfg. OH + Equity

(1,200) + 1,200 = NA + NA NA – NA = NA (1,200) OA

Assets



11-37

Ventra pays $1,200 cash for actual manufacturing overhead costs including indirect labor, utilities, rent, etc.

Manufacturing overhead is $480 overapplied at the end of

January. Any difference between actual and applied overhead remaining at year end will be closed to cost of

goods sold.

Manufacturing overhead is $480 overapplied at the end of

January. Any difference between actual and applied overhead remaining at year end will be closed to cost of

goods sold.

Applied


Actual

1,680 1,200



11-38

At the end of the year,

Ventra has the following

account balances:



11-39



11-40

Supplies: $2,000 purchased, $1,700 used.

See Cost of GoodsManufactured and

Sold Schedule



11-41

Explanation of Manufacturing

Overhead balance follows.



11-42

Applied


Actual39,64843,400

3,752

Manufacturing overhead is $3,752 underapplied.

11,800 boxes manufactured × $3.36 POHR

Analyzing Underapplied Overhead


11-43

Applied


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



11-44

Spending variance$3,080 unfavorable

Volume variance$672 unfavorable

$43,400 $40,320 $39,648

Actual Overhead Overhead Overhead Incurred Budget Applied

Total variance is $3,752 unfavorable, theamount of underapplied overhead.



11-45

Learning Objective

LO5LO5

To prepare aschedule of cost of

goods manufacturedand sold


11-46

Schedule of Cost of Goods Manufactured and Sold

Ventra Manufacturing Company


Direct Raw Material Used 25,960$

Direct Labor 33,040

Actual Manufacturing Overhead 43,400

Total Manufacturing Costs 102,400

Plus Beginning Work-in-Process Inventory 0

Total Work-in-Process Inventory 102,400

Less Ending Work-in-Process Inventory 8,360

Cost of Goods Manufactured 94,040

Plus Beginning Finished Goods Inventory 836

Cost of Goods Available for Sale 94,876

Less Ending Finished Goods Inventory 7,524

Cost of Goods Sold 87,352$


11-47




Direct Labor 33,040












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$


11-48




Direct Labor 33,040












Computation of Actual Manufacturing Overhead

Indirect Labor, Rent, and Utilities 31,700$

Supplies 1,700

Depreciation of Manufacturing Equipment 10,000

Actual Manufacturing Overhead 43,400$


11-49




Direct Labor 33,040












Reported in the current assets section of the balance sheet.


11-50

Learning Objective

LO6LO6

To prepare financialstatements for a

manufacturing company


11-51


Income Statement

For the Year Ended December 31, 2005

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$

Financial Statements


11-52

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 Depreciation 20,000 Book Value Manufacturing Equipment 20,000 Total Assets 117,084$

Stockholder's Equity Common Stock 76,000 Retained Earnings 41,084 Total Stockholders' Equity 117,084$

Ventra Manufacturing CompanyBalance Sheet

As of December 31, 2005



11-53



11-54

Cash Outflows for Production of Inventory: Raw Material Purchases 26,500$ Direct Labor 33,040 Supplies 2,000 Indirect Labor, Rent, Utilities 31,700 Total 93,240$


From Schedule of Cost ofGoods Manufactured and Sold


11-55

Learning Objective

LO7LO7

To distinguishbetween absorptionand variable costing


11-56

Hokai Company incurs the followingcosts to produce 2,000 units of inventory:

Hokai Company incurs the followingcosts to produce 2,000 units of inventory:

Let’s see what happens to costsif Hokai increases production.

Let’s see what happens to costsif Hokai increases production.

Motive to OverproduceAbsorption Costing


11-57

Now let’s compute income at the three levelsof production if Hokai sells 2,000 units.

Now let’s compute income at the three levelsof production if Hokai sells 2,000 units.



11-58

Level of Production 2,000 3,000 4,000Sales @ $20 per unit × 2,000 units 40,000$ 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.

Internally, many companies use variable costingto motivate managers to increase profitability

without motivating them to overproduce.



11-59

Variable Costing

Net income is not affected by production increases.Net income is not affected by production increases.


11-60

End of Chapter 11

chapter 11 product costing in service and manufacturing entities

Documents

manufacturing companies

mcgrawhill companies

goods cost of goods

overhead slide

product manufacturing

cost of wages

applied manufacturing

manufacturing costs