Managerial Accounting Test 1

Purchase and Issue of Materials Journal Entry

During month, company purchased on account 60,000 dollars in raw materials

Debit: Raw Materials- 60,000

Credit: Accounts Payable- 60,000

Issue of Direct and Indirect Materials Journal Entry

Authorize withdrawing $52,000 in raw materials for use in production; $50,000 of direct materials and $2,000 indirect materials

Debit: Work in Process- $50,000

Debit: Manufacturing Overhead- $2,000

Credit: Raw Materials- $52,000

Direct materials/ labor go to…

Work in Process

Indirect materials/ labor go to…

Manufacturing Overhead

Labor Cost Journal Entry

employee time tickets included $60,000 for direct labor and $15,000 for indirect labor

Debit: Work in Process- $60,000

Debit: Manufacturing OH- $15,000

Credit: Salaries and Wages Payable- $75,000

Depreciation on factory equipment Journal Entry

Debit: Manufacturing OH- $18,000

Credit: Accumulated Depreciation- $18,000

Manufacturing Overhead Costs Journal Entry

Corporation incurred factory costs during April

Debit: MOH- $40,000

Credit: Accts Payable- $40,000

Accrued Property Taxes and Expired Prepaid Insurance Journal Entry

Debit: MOH- $20,000

Credit: Property Taxes Payable- $13,000

Credit: Prepaid Insurance- $7,000

Common costs

• type of indirect cost incurred to support a number of cost objects

Direct materials

• raw materials that are integral part of product and can be conveniently traced directly to it

• seat installed in an aircraft

Direct Labor

• labor costs conveniently traced to individual units of product

• ex: wages paid to automobile assembly workers

Manufacturing Overhead

• includes all MANUFACTURING costs except direct material and direct labor costs

• indirect

• includes indirect materials and indirect labor

• ex: depreciation of manufacturing equipment, utility costs, property taxes, insurance premiums incurred to operate a manufacturing facility

Activity base (cost driver)

• measure of what causes incurrence of variable cost

• like units produced, units sold, machine hours, labor hours

• 
  

Committed Fixed Cost

• type of fixed cost

• multiyear planning horizon; cannot be easily adjusted in short term

Discretionary Fixed Cost

• type of fixed cost

• arise from annual decisions; easily reduced in the short term

Variable Cost PER UNIT

• stays constant while total variable cost is variable

Fixed Cost PER UNIT

• is variable while total fixed cost is constant

Relevant range

• for fixed cost is range of activity over which graph of cost is flat

• **assume relevant rage always (I think)

Mixed cost

• contains both variable and fixed elements

• y= a+bx

• y- total mixed cost

• a- total fixed cost

• b- the variable cost per unit of activity (slope of the line)

• x- the level of activity

Cost Classification for Decision Making

• differential costs and revenues

• opportunity costs

• sunk costs

Differential/ Incremental Costs

• difference in cost between any two alternatives

• can be either fixed or variable

Differential Revenue

• difference in revenue between two alternatives

Opportunity Cost

• potential benefit that is given up when one alternative is selected over another

Sunk Cost

• cost that has already been incurred and cannot be changed by any decision made now or in the future

• irrelevant and should be ignored

Traditional Income Statement Format

• Sales- COGS= gross margin

• Gross margin- selling and admin expense= net operating income

• used primarily for external reporting

Contribution Income Statement Format

• Sales- Variable expenses= contribution margin

• Contribution margin- fixed expenses= net operating income

• used primarily by management (we’ll be talking about this format often in class)

• Acronym could be: S (Sananth) V (Very) C (Crazy) F (Fine)

Calculate COGS Merchandiser

beg inventory + purchases (Goods available for sale)

- ending inventory

Job-Order Costing Systems Are Used When…

• many different products are produced each period

• products are manufactured to order

• unique nature of each order requires allocating costs to each job and maintaining cost records for each job

• companies that use it would be like Bechtel

Direct Costs and Direct Materials in Job Costing System

• charged costs to each job as work is performed

Manufacturing Overhead in Job Costing System

• allocated to all jobs rather than directly traced to each job

Manufacturing Overhead Calculation in Job-Costing System

Actual Use of Allocation Base x POHR

Allocation Base

• direct labor hours, direct labor dollars, machine hours

• used to assign manufacturing overhead to individual jobs

Predetermined Overhead Rate (POHR) Calculation

estimated total manufacturing overhead cost for the coming period/ estimated total units in allocation base for coming period

The Need for a POHR

• actual overhead is not known until end of the period

• actual overhead costs can fluctuate seasonally

Allocation base in POHR must-

-drive the overhead cost to improve job cost accuracy

Plantwide overhead rate

• a single predetermined overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours

Activity-Based Costing

• creating overhead rates based on the activities that it performs

The adjustment for underapplied overhead

• increases COGS

• decreases net operating income

The adjustment for overapplied overhead

• decreases COGS

• increases net operating income

Prime vs Conversion cost

prime costs- direct material and direct labor

conversion cost- direct labor and manufacturing overhead

Absorption Costing

• costing method that includes all manufacturing costs- direct materials, direct labor, and both variable and fixed MOH- in cost of product

Normal Costing

• costing system in which overhead costs are applied to job by multiply a POHR by actual amount of allocation base incurred by the job

Apply Manufacturing Overhead to Work in Process Journal Entry

Debit: Work in Process- 90,000

Credit: Manufacturing Overhead- 90,000 (applied overhead was calculated to be 90,000)

Transferring Completed Jobs from Work in Process to Finished Goods

Debit: Finished Goods- 158,000

Credit: Work in Process- 158,000

Unit Product Cost

total cost/ units

Transferring Finished Goods to Cost of Goods Sold: Journal Entry

750 of 1,000 gold medals shipped to customers by end of month for total sales revenue of 225,000; total cost of job was 158,000 and 1,000 units were produced, the unit product cost was 158 dollars

1st journal entry

Debit: AR 225,000

Credit: Sales 225,000

2nd journal entry

Debit: COGS 118,500

Credit: Finished Goods 118,500

unit product cost x units actually shipped

158 × 750= 118,500

Schedule of Cost of Goods Manufactured

• summarizes the portions of costs remaining in Work In Process inventory and transferred out to Finished Goods

Schedule of Cost of Goods Sold

• summarizes costs remaining in ending Finished Goods inventory and transferred out to Cost of Goods Sold

Manufacturer COGS Calculation

Beg Finished Goods Inventory

+COGS Manufactured

=Goods available for sale

- Ending Finished Goods Inventory

Raw Materials Used in Production Formula

Beg Raw Materials in inventory + purchase of raw material - ending raw materials inventory

Schedule of COGS Manufactured

Beg Work in Process Inventory

+Direct Materials used in production (Raw materials used in production - indirect materials used in production)

+Direct Labor

+MOH applied to work in process

= total manufacturing costs

- ending work in process inventory

= cost of goods manufactured

Schedule of COG Sold

Beg finished goods inventory

+COG Manufactured

-Ending finished goods inventory

=unadjusted COG sold

+add underapplied overhead or subtract overapplied overhead

= adjusted COGS :)

Overapplied/Underapplied Overhead

• difference between the overhead cost applicatied to Work in Process and the actual overhead costs of a period

Two methods for disposing of underapplied and overapplied overhead

1. close out to cost of goods sold

2. allocate btw work in process, finished goods, and cost of goods sold

Allocate overhead to work in process, finished goods, and cost of goods to dispose of underapplied and overapplied overhead

• overhead applied to each account

• divide by the overapplied or underapplied amount to find the allocation percentages

• multiple the percentages to the overhead applied to each account

• (check notebook and chapter 3 slides at the end)

Process costing

• product homogenous

• single product is produced on continuous basis for long period of time

• unit costs computed by department

• work in process assigned to EACH department

Issuing Raw Materials to Processing Department A and Department B Journal Entry

Debit: Work in Process- Dept A

Debit: Work in Process- Dept B

Credit: Raw Materials (putting materials into work in process)

Flow of Labor Costs in Processing Department Journal Entry

Debit: Work in Process- Dept A

Debit: Work in Process- Dept B

Credit: Salaries and Wages Payable

Flow of Manufacturing Overhead Costs Journal Entry form

Debit: Work in Process- Dept A

Debit: Work in Process- Dept B

Credit: Manufacturing Overhead

Transfer from one process department to another (from A to B)

Debit: Work in Process- Dept B

Credit: Work in Process- Dept A

Transfer from work in process in one department to finished goods journal entry

Debit: Finished Goods

Credit: Work in Process- Dept B

Transfer from finished goods to cost of goods sold journal entry

Debit: Cost of Goods Sold
Credit: Finished Goods

Process Costing Computations (Two methods)

• weighted average method

• FIFO method

Weighted average method for process costing

• no distinction between work done in prior and current periods

• equivalent units of production for department is number of units transferred to next department (or finished goods) plus the equivalent units in the department’s ending work in process inventory

Conversion Costs in Process Costing

• combines labor and MOH costs

Equivalent units (Step 1)

• defined as the product of number of partially completed units and percentage completion of those units

• units completed and transferred + # of partially completed units remaining in work in process x percentage completion

Compute Cost per Equivalent Unit (Step 2)

(cost of beginning WIP inventory + cost added to period)/equivalent units of production

Assign Costs (Step 3)

• equivalent units in ending WIP x cost per equivalent unit

• completed units transferred x cost per equivalent unit

Cost Reconciliation Report

• total cost to be accounted for = total cost accounted for

• Costs to be accounted for:

  • cost of beg WIP inventory

  • +cost added to production during period

  • = total cost to be accounted for

• Cost accounted for:

  • Cost of ending WIP inventory

  • +cost of units transferred out

  • =total cost accounted for

Process Costing Formula to remember

• beg inventory units of production + units started into production or transferred in = units in ending WIP inventory + units completed and transferred out

Underapplied Overhead (Closing to COGS)

• actual overhead greater than applied overhead

• COGS understated; net income too high

• Debit: COGs

• Credit: difference between actual and applied overhead

Overapplied Overhead (Closing to COGS)

• applied overhead greater than actual overhead

• COGS overstated; net income too low

• Debit: diff between actual and applied overhead

• Credit: COGs