Managerial Accounting- Chapter 4

Textbook: Managerial Accounting by Charles E Davis & Elizabeth Davis. This class is at BHSU in the USA. This is only chapter 4, preparing for exam 2.

Merchandising Firms

Businesses that acquire inventory for resale without altering its form. They have inventory costs and selling/administrative costs.

Manufacturing Firms

Businesses that produce goods for sale. Costs incurred in manufacturing become inventory costs. They also have selling/administrative costs.

Product Costs

Costs incurred to acquire raw materials and convert them into finished goods. Recorded as inventory (asset) first, then expensed as cost of goods sold.

Direct Materials

Raw materials that can be directly traced to or easily identified with the final product.

Direct Labor

Wages and benefits paid to workers directly involved in transforming raw materials into finished products.

Direct Labor Hours

Labor time that can be directly traced to a specific product.

Manufacturing Overhead

Indirect production costs that cannot be easily traced to a specific product, such as electricity, factory insurance, and security.

Indirect Materials

Supplies and materials used in production that cannot be classified as direct materials.

Indirect Labor

Wages paid to workers who support production but do not directly work on the product.

Nonmanufacturing Costs

Costs that are not related to production, such as selling and administrative expenses.

Selling Costs

Costs associated with the storage, sale, and delivery of finished goods.

General and Administrative Costs

Costs related to the general management of the company, benefiting the business as a whole.

Raw Materials Inventory

Account used to record the cost of raw materials purchased and used in production.

Supplies Inventory

Account used to track the cost of indirect materials used in production.

Work in Process Inventory

Account that tracks costs of products that are started but not yet completed.

Finished Goods Inventory

Account that records the cost of completed products ready for sale.

Cost of Goods Manufactured

The total cost of products that are completed during a given period.

Flow of Inventory in Manufacturing

Inventory moves from raw materials to work in process to finished goods before being sold.

Journal Entry - Purchase of Raw Materials

DEBIT Raw Materials Inventory; CREDIT Accounts Payable or Cash.

Journal Entry - Direct Materials Used in Production

DEBIT Work in Process Inventory; CREDIT Raw Materials Inventory.

Journal Entry - Direct Labor Used in Production

DEBIT Work in Process Inventory; CREDIT Wages Payable or Cash.

Journal Entry - Incurring Overhead Costs

DEBIT Manufacturing Overhead Control; CREDIT Various Accounts (e.g., Indirect Materials, Indirect Labor, Depreciation).

Journal Entry - Transferring Overhead to Work in Process

DEBIT Work in Process Inventory; CREDIT Manufacturing Overhead Control.

Journal Entry - Transferring Finished Goods

DEBIT Finished Goods Inventory; CREDIT Work in Process Inventory.

Journal Entry - Sale of Goods (Revenue)

DEBIT Cash or Accounts Receivable; CREDIT Sales Revenue.

Journal Entry - Sale of Goods (Cost)

DEBIT Cost of Goods Sold; CREDIT Finished Goods Inventory.

Job Order Costing

Costing system where product costs are accumulated by batch or customer. Used by both manufacturers and service businesses.

Job Cost Sheet

Document summarizing costs for a particular job, used in job order costing.

Materials Requisition Slip

Document authorizing the release of direct materials from inventory to production.

Bills of Materials

A detailed list of raw materials needed to create a single unit of product.

Time Ticket

Document recording an employee’s labor time spent on a specific job.

Overhead Application

The process of allocating manufacturing overhead costs to jobs.

Applied Overhead

The amount of manufacturing overhead allocated to a job based on a predetermined rate.

Reasons for Overhead Allocation

Overhead costs are not always known at the time of production. Some costs are seasonal and need to be spread out. Many overhead costs are fixed and must be allocated across all production.

Predetermined Overhead Rate

Rate used to allocate overhead costs, calculated as: Predetermined Overhead Rate = Estimated Overhead Costs ÷ Estimated Activity Level.

Applying Overhead to Jobs

Overhead applied to a job is calculated as: Applied Overhead = Predetermined Overhead Rate × Actual Activity Level.

Underapplied Overhead

Occurs when too little overhead is assigned to products, leading to understated inventory costs.

Overapplied Overhead

Occurs when too much overhead is assigned to products, leading to overstated inventory costs.

Journal Entry - Closing Underapplied Overhead

DEBIT Cost of Goods Sold; CREDIT Manufacturing Overhead.

Journal Entry - Closing Overapplied Overhead

DEBIT Manufacturing Overhead; CREDIT Cost of Goods Sold.

Prorating Overhead

When the amount of underapplied or overapplied overhead is large, it is allocated to Work in Process, Finished Goods, and Cost of Goods Sold accounts.

Steps for Prorating Overhead

Add ending balances of Work in Process, Finished Goods, and Cost of Goods Sold. Calculate each account’s percentage of the total. Multiply percentages by the underapplied/overapplied amount.

Actual Overhead

The real overhead costs incurred by a company during the period.

Estimated Overhead

The forecasted overhead costs a company expects to incur, used for setting predetermined overhead rates.