chapter 10 accounting systems for manufacturing businesses
TRANSCRIPT
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Chapter 10Chapter 10
Accounting Systems for Accounting Systems for Manufacturing BusinessesManufacturing BusinessesAccounting Systems for Accounting Systems for
Manufacturing BusinessesManufacturing Businesses
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Learning ObjectivesLearning Objectives
After studying this chapter, you should be able to… Distinguish the activities of a manufacturing business from those of a
merchandising or service business. Define and illustrate materials, factory labor, and factory overhead costs. Describe cost accounting systems used by manufacturing businesses. Describe and illustrate a job order cost accounting system. Use job order cost information for decision making. Describe the flow of costs for a service business that uses a job order cost
accounting system. Describe just-in-time manufacturing practices. Describe and illustrate the use of activity-based costing in a service
business
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Learning Objective 1Learning Objective 1
Distinguish the activities of a manufacturing business from those of a merchandising or service business
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Nature of Manufacturing Businesses
• Service firms earn revenue from providing services.• Merchandising firms earn revenue from selling
merchandise inventory.• Manufacturing firms…
– Earn revenue from manufacturing and selling finished goods.
– Have three inventories: materials, work in process, and finished goods.
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Learning Objective 2Learning Objective 2
Define and illustrate materials, factory labor, and factory overhead
costs
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Illustrative Example
• Costs can provide an immediate benefit or a benefit that is deferred to future periods
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Direct Materials Cost
• Include the cost of materials integral to the product • For Legend Guitars: wood, guitar strings, and guitar bridges• The cost of materials that are not an integral are called indirect
materials
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Direct Labor Cost
• The cost of employee wages who are directly involved in converting materials into the manufactured product.
• For Legend Guitars: wages of the employees who operate the saws/cutting machines and assemble the guitars.
• Labor costs that do not enter directly into the manufacture of a product are called indirect labor
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Factory Overhead Cost
• Costs other than direct materials cost and direct labor cost incurred in the manufacturing process.
• For Legend Guitars: machine depreciation, factory supplies, factory insurance, overtime/idle time, and many others…
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Analysis and Reporting Terms:Prime and Conversion Costs
• Prime Costs: direct material, direct labor
• Conversion Costs: direct labor and factory overhead.
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Financial Reporting Terms:Product Costs and Period Costs
• Product Costs: direct material, direct labor, factory overhead
• Period Costs: selling and administrative expenses
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Learning Objective 3Learning Objective 3
Describe cost accounting systems used by manufacturing businesses
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Cost Accounting Systems
• Objective: accumulate product costs• Used to establish prices, control operations, and
develop financials • Two main types:
– Job order cost systems (this chapter)– Process cost systems (next chapter)
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Job Order vs. Process Cost Systems
• Job Order– Costs are accumulated by job.– Used for custom products or companies
with a large variety of products.– Service firms often use job order systems.
• Process– Costs are accumulated by department or
process. – Used for products that are not
distinguishable from each other during a continuous production process.
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Learning Objective 4Learning Objective 4
Describe and illustrate a job order cost accounting system
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Job Order Cost System for Legend Guitars
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Materials
• Accounting for the purchase of materials on credit
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Materials information and cost flows for the wood received and issued to production by Legend Guitars
Materials Cost Flows
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Requisitioning Materials
• Flow of materials from the storeroom to production.
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Labor information and cost flows (time tickets) for Legend Guitars
Direct Labor Cost Flows
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Factory Labor
• Two primary objectives:– Determine the correct amount to pay each employee for each pay
period.– Properly allocate factory labor costs to factory overhead and individual
job orders.
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Factory Overhead Cost
• Includes all manufacturing costs other than direct materials and direct labor.
• Comes from various sources, including depreciation, indirect materials, indirect labor, and factory utilities.
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Allocating Factory Overhead
• Overhead gets assigned to jobs through cost allocation • The measure used to allocate overhead is called an activity
base– Should be a measure that reflects the consumption or use of overhead– Examples: direct labor hours, machine hours, or direct material dollars
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Predetermined Factory Overhead Rate
• Overhead may be applied using a predetermined factory overhead rate
Estimated Total Factory OverheadEstimated Total Factory OverheadEstimated Total Level of the Activity BaseEstimated Total Level of the Activity Base
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Predetermined Factory Overhead Rate – Legend Guitars
• Assume Legend Guitars estimates $50,000 of total factory overhead for the year and the activity base to be 10,000 direct labor hours.
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Why Use Predetermined Rates?
• For timely information• Waiting until the end of a period when overhead costs are
known would be accurate, but not timely for decision-making• Some companies use activity-based costing - it allocates
overhead costs using multiple predetermined rates
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Applying Factory Overhead to Work in Process
Overhead costs are applied to work in process using job sheets and the predetermined rate.
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Applying Factory Overhead to Work in Process
• The $4,250 of applied overhead is recorded as a transfer out of factory overhead into work in process.
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Actual Overhead vs. Applied Overhead
• Actual factory overhead costs incurred will likely differ from the amount applied
• Over-applied overhead occurs when the amount applied exceeds actual costs
• Under applied overhead occurs when the amount applied is less than actual costs
• Large under-/over-applied balances need to be investigated
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Disposal of Factory Overhead Balance
• The balance in factory overhead is carried forward from month to month, but needs to be closed out at the end of the year.
• One approach is to transfer the balance to cost of goods sold.
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Work in Process
Costs incurred for various jobs are accumulated on job cost sheets and these jobs sheets represent work in process
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Completion of Job 71
• When Job 71 was completed, total manufacturing costs were transferred out of the work in process account and into the finished goods account.
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Finished Goods Ledger for Legend Guitars
• Finished goods is a controlling account comprised of individual finished goods subsidiary ledgers.
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Sales and Cost of Goods Sold (COGS)
• Manufacturing business sales are treated the same as merchandising business sales.
• Assume Legend Guitars sold 40 guitars for $850 each (cost was $500 each).
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Period Costs
• Expenses used in generating revenue during the current period
• Not involved in the manufacturing process• Two categories:
– Selling – marketing the product and delivering it to customers.
– Administrative – administration of the business (not related to manufacturing or selling).
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Selling Expenses and Administrative Expenses
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Accounting for Selling and Administrative Expenses
• Assume Legend Guitars has sales salaries of $2,000 and office salaries of $1,500.
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Summary of Cost Flows for Legend Guitars
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December Income Statement for Legend Guitars
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Learning Objective 5Learning Objective 5
Use job order cost information for decision making
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• Job 63 used 100 more board feet of wood to manufacture the same number of guitars. Why?
Job order cost systems can be used to evaluate an organization’s cost performance
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Job Order Costing for Decision Making
• Possible reasons for the extra use of materials for Job 63:– Inexperienced labor– Poor quality materials– Cutting tools needing repair– Carelessness– Incorrect instructions
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Learning Objective 6Learning Objective 6
Describe the flow of costs for a service business that uses a job order cost accounting system
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Job Order Cost Systems for Service Businesses
• Useful for planning and controlling operations• Focus is on direct labor and overhead. They are accumulated
in a work in process account• When jobs are completed, the cost of the job is transferred to a
cost of services account (similar to COGS)
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Job Order Cost Systems for Service Businesses
• There isn’t a finished goods account since revenues are recorded after the service has been provided.
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Learning Objective 7Learning Objective 7
Describe just-in-time manufacturing practices
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Just-In-Time Practices
• Manufacturing approaches are changing as companies need to produce products with high quality, low cost, and instant availability.
• JIT focuses on reducing time, cost, and poor quality within manufacturing processes.
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Just-In-Time versus Traditional Manufacturing
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Reducing Inventory
As the water level in the river drops (inventory levels), the rocks (production problems) become visible
UntrainedUntrainedEmployeesEmployees
UnreliableUnreliableSuppliersSuppliers
MachineMachineBreakdownsBreakdowns
PoorPoorQualityQuality
RIVERRIVER(Inventory)(Inventory)
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Reducing Lead Times
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Reducing Set-Up Times
Set up equipment to make brown
bags
Set up equipment to make sky blue
bags
Set up equipment to make basic white
bags
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Emphasizing Product-Oriented Layout
• Product-oriented layout : manufacturing process organized around product
• Process-oriented layout: manufacturing process organized around process
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Emphasizing Employee Involvement
• Grants employees responsibility and authority to make decisions.
• Employees are often cross-trained to perform any operation within a product cell.
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Emphasizing Pull Manufacturing
• Products manufactured only as they are needed by the customer
• Kanban: the Japanese system of pull manufacturing• Traditional manufacturing emphasizes push manufacturing
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Emphasizing Zero Defects
• Eliminate poor quality• Six Sigma approach to zero defects
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Emphasizing Supply Chain Management
• Electronic Data Exchange (EDI)• Radio frequency identification
device (RFID)• Enterprise Resource Planning
(ERP)
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Learning Objective 8Learning Objective 8
Describe and illustrate the use of activity-based costing in a service
business
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Activity-Based Costing (ABC)
• Uses multiple overhead rates to allocate factory overhead more accurately than using a single, plant-wide rate.
• Costs are initially accounted for in cost pools – each pool has its own rate.
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Cost Pools and Rates for Hopewell Hospital
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Overhead Allocation Using Activity Based Costing
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Profitability Report Using Activity Based Costing
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End of Chapter 10End of Chapter 10