Statements + Important Formulas + Journal Entries

Schedule of COG Manufactured

Beg WIP Inventory

Direct materials:

Beg raw materials inventory

Add: Purchases of raw materials

Total Raw materials available

Less: Ending raw materials inventory

Direct materials used in production

Deduct: Indirect materials included in manufacturing overhead

Direct Labor

Manufacturing Overhead

Total manufacturing costs added to production

Total manufacturing costs to account for

Less: Ending work in process inventory

Cost of goods manufactured (total manufacturing costs to account for - ending work in process inventory)

Schedule of COGS

Beg finished goods inventory

Add: Costs of goods manufactured

Cost of goods available for sale

Less: Ending finished goods inventory

Unadjusted cost of goods sold

Less: Overapplied overhead

Adjusted cost of goods sold

Traditional Income Statement

Sales (Rev.)

COGS

Gross Margin

S&A Expense:

Selling expenses (Both Variable & Fixed)

Administrative expense (Both Variable & Fixed)

Net Operating Income

Contribution Income Statement

Sales (Rev.)

Variable Exp.:

COGS

Selling Exp.

Admin Exp.

Contribution Margin

Fixed Exp.:

Selling Exp.

Admin Exp.

Net Operating Income

Applied Overhead =

POHR x Actual allocation base

POHR Formula =

Estimated MOH Cost / Estimated Units of the allocation base for the period (Cost driver)

Estimated MOH Cost =

Estimated total overhead costs / estimated total allocation base

MOH Formula =

Total Estimated Overhead Cost / Total Allocation Base

Average Variable Cost Formula =

Raw material cost + Direct labor cost + variable manufacturing overhead / number of units produced

Raw materials purchased on account $325,000

Debit:

• Raw materials $325,000

Credit:

• Accounts payable $325,000

Raw materials used in production, $290,000 (80% direct materials and 20% indirect materials).

Debit:

• WIP (290,000 × 80%)

• MOH (290,000 × 20%)

Credit:

• Raw materials $290,000

Labor cost accrued in the factory, $180,000 (one-third direct labor and two-thirds indirect labor).

180,000 / 3 = 60,000

Debit:

• WIP = $60,000

• MOH = $120,000

Credit:

• Wages & Salaries payable = $180,000

Depreciation recorded on factory equipment, $75,000.

Debit:

• MOH $75,000

Credit:

• Accumulated depreciation $75,000

Other manufacturing overhead costs incurred on account, $62,000.

Debit:

• MOH $62,000

Credit:

• Accounts Payable $62,000

Manufacturing overhead cost was applied to production on the basis of 15,000 machine-hours actually worked.

Debit:

• WIP $300,000

Credit

• MOH $300,000

The completed job for 16,000 custom-made machined parts was moved into the finished goods warehouse on January 31 to await delivery to the customer. (In computing the dollar amount for this entry, remember the cost of a completed job consists of direct materials, direct labor, and applied overhead.)

Debit:

• Finished Goods $592,000

Credit:

• WIP $592,000

Job Order Costing

A costing system used in situations where many different products, jobs, or services are produced each period.

• When we buy something, we incur it (direct)

• Property tax (indirect). not when it is incurred, we estimate it based on what we think we’ll be incurring in the future. Based on the POHR.

Absorption costing

A costing method that includes all manufacturing costs direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

Allocation Base

A measure of activity such as direct labor-
hours or machine-hours that is used to assign costs to cost
objects.

• Always linear (make more cookies, need/use more sugar.

• Ex: Machine hours, direct labor hours, etc.

Predetermined Overhead Rate (POHR)

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period.

• Computed before the period begins in 4 Steps:

  • Est. total amount of allocation base

  • Est. total fixed manufacturing overhead cost for coming period and variable MOH cost per unit of allocation base.

  • Y=a+bx to est. total MOH

Overhead application

The process of assigning overhead costs to specific jobs using the following formula:

Overhead applied to a particular job =
Predetermined overhead rate × Amount of allocation base incurred by the job

Normal costing

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Job cost sheet

A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job.

Raw materials

Include any materials that go into the final product.

Work in process

Consists of units of production that are only partially complete and will require further work before they are ready for sale to customers.

Finished goods

Consist of completed units of product that have not been sold to customers.

Cost of goods manufactured

Includes the manufacturing costs associated with the goods that were finished during the period.

Average Fixed Manufacturing Cost per unit product

Total fixed overhead x number of units produced

Total fixed manufacturing overhead

Average fixed manufacturing overhead cost per unit x number of units produced

y= a + b(x). What does each letter stand for?

Y = The estimated total manufacturing overhead cost.
a = The estimated total fixed manufacturing overhead cost.
b = The estimated variable manufacturing overhead cost per unit of the allocation base.
X = The estimated total amount of the allocation base.

Identify reasons for entries

1) Actual manufacturing overhead costs incurred for the year.

2) Overhead cost applied to Work in Process for the year.

3) Cost of goods manufactured for the year.

4) Cost of goods sold for the year.

If we have an underapplied overhead, would net operating income be higher or lower than it should be?

Net operating income would be higher than it should be.

If we have an underapplied overhead, would gross margin will be higher or lower than it should be?

Lower