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Cost Accounting

Involves the measuring, recording, and reporting of product costs (DM, DL, and OH).

Profitability

Accurate product costing is needed to determine product _____ and to prepare accurate financial statements.

Non-Manufacturing Costs

• SG&A or Operating Expenses

• Treatment: Expense in the period incurred

Manufacturing Costs

• DM, DL, and Manu. OH

• As costs are incurred, record as an asset and expense when inventory is sold

• The cost flow parallels the physical flow of the materials as they are converted into finished goods

Actual Costing

Assign actual DM Used, DL cost, and Manufacturing OH cost to each unit

Normal Costing

• Assign actual DM Used and DL cost to each unit

• Assign an allocated share of Manu. OH cost to each unit

Job Order Costing System

• DM Used, DL, and OH Applied are assigned to each job or batch

• A job may be for a specific order of inventory

• Use if: Customize orders or produce many, highly differentiated products

Job Cost Sheet

The form used in a job order costing system to record the costs related to a specific job on a daily basis.

Average Cost Per Unit

? = Total Product Costs for the Job / # of Units in the Job

Process Cost System

• DM Used, DL, and OH Applied assigned to each department or process

• Costs are accumulated by department for a specific time period (i.e., week, month, etc.); Compute average cost per unit for each dept.

• WIP Inventory by Department

• Use if: Have a continuous production process of homogenous products

• Ex: Cereal, Oil Refinery, Paint

Raw Material, Work In Process, Finished Goods

What are the 3 types of inventory that manufacturing companies report on their balance sheets?

Raw Materials

Direct and indirect materials that have been purchased but not yet used in production.

Work In Process (WIP)

Inventory that has been started in production but not yet completed.

Finished Goods (FG)

Inventory that has been completed in production but not yet sold.

True

True/False: The flow of Product Costs is WIP Inventory to FG Inventory to COGS

Direct Material Costs

Assign DM Used directly to each job (based on the material requisition form)

Bill of Materials

Shows the materials needed for a job.

Materials Requisition Form

Shows written authorization for materials to be taken from the store room and to be issued to production.

Direct Labor Costs

• Assign DL costs directly to each Job (based on the Time Tickets)

• Consists of gross earnings, employer payroll taxes on such earnings, and fringe benefits incurred by the employer for factory labor who works directly on the product

Manufacturing Overhead Costs (OH)

1. Determine the Predetermined Overhead Rate

2. Overhead is "Applied" (Assigned) to WIP inventory based on ACTUAL activity

3. The balance in the OH account is closed out to COGS

Total Job Cost

? = Beginning Costs + DM Used + DL + OH Applied

Predetermined Overhead Rate

? = Budgeted Total Manu. OH Costs / Budgeted Total Activity

Dept. OH Rate

? = Projected Total Dept. OH Cost / Projected Department Cost Driver

OH Applied

? = Predetermined OH Rate x Actual Activity

Underapplied

Manu. OH is ____ if Actual OH > OH Applied

Close it out:

Debit: COGS

Credit: Manu OH

Overapplied

Manu. OH is _____ if Actual OH < OH Applied

Close it out:

Debit: Manu. OH

Credit: COGS

Purchased

When Raw Material (Direct OR Indirect) are _____:

Debit: Raw Materials

Credit: Cash or Accts Payable

Used

When Direct Materials are _____:

Debit: WIP Inventory

Credit: Raw Material Inventory

Direct

When _____ Labor is recorded:

Debit: WIP Inventory

Credit: Cash or Wages Payable

Indirect

When _____ Labor is recorded:

Debit: Manufacturing OH

Credit: Cash or Wages Payable

Debit

You should _____ Manu. OH when Actual OH costs are incurred.

Credit

You should _____ Manu. OH to record OH Applied.

WIP

You should debit _____ Inventory when DM is Used, DL is Recorded, or OH is Applied.

FG

You should debit _____ Inventory when inventory is COMPLETED.

COGS

You should debit _____ when inventory is SOLD.

Job Order Costing

Which costing system is more costly to use? (Is due to record keeping)

Operation Costing System

• A hybrid system that employs elements from both job order and process costing

• Use if: Produce products that have some common characteristics and some unique characteristics

-Often assign DM to each batch and DL and OH by department

Equivalent Units (EU)

A measure of the work done during the period, expressed in fully completed units; this allows accountant to calculate cost per unit when some units are partially completed.

3 (DM, DL, and Manu. OH)

How many columns do you need when calculating Equivalent Units?

Cost of Production Report

-An internal document for management

-Shows production quantity and cost data for a department

-Provides basis for evaluating productivity and cost control of each department, setting prices, etc.

Job Order Costing

What type of costing method has the following features?

• Unique

• By job

• Upon completion of a job

• Total Cost of a Job / # units produced in the job

• One WIP Inventory

• Job Cost Sheet

Process Costing

What type of costing method has the following features?

• Homogenous

• By department

• Each period

• Total Manu. Costs / EU produced during the period

• WIP Inventory Account for each department

• Production Cost Report

Weighted Average Method

• Calculate average cost/EU--Average all costs (beginning and current) over all EU

• Most widely used method

Transferred-In Costs

Costs that were incurred in a previous process and brought into a later process as part of the product cost-->Requires a separate cost per equivalent unit calculation

Account for the Physical Flow of Units

What is step 1 in preparing a cost report?

Solve: Beginning WIP Units + Units Started = Ending WIP Units + Units Completed

Accumulate Costs

What is step 2 in preparing a cost report?

Solve: Beginning Costs + Current Costs = Total Costs