chapter 2a
DESCRIPTION
Cost Accounting - UMass AmherstTRANSCRIPT
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Manufacturing Cost Terms, Concepts, and
Classifications(a(((A review of background
concepts previously covered in ACCTG 222 or the equivalent.
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The Income Statement
Merchandising and manufacturing firms use a
“classified” income statement format:
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
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The Income Statement
Merchandising and manufacturing firms use a
“classified” income statement format:
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
Note that the expenses are grouped into product costs and
period costs.
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The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
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The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
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Classifications of Costs
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows:
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Selling andAdministrative
Period Costs
Manufacturing Cost Flows
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw Materials
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Work in Process: A Closer Look
Raw Materials
Payroll
Factory Overhead
Direct materials used
Direct labor costs incurred
Manufacturing overhead applied
Work in Process
Cost of goodsCompleted, toFinished Goodsinventory
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Manufacturing Overhead: A closer look
Manufacturing Overhead
Actual Overhead
Costsincurred
OverheadApplied toProduction
Any difference represents over- or under-Applied overhead
Applied to Work in Process,Based on a pre-determined
Overhead rate.
Pre-determined overheadRate:
Budgeted total manufacturing OHBudgeted driver level (e.g., DLH)
= Overhead applied per driver unit
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Direct materials used $ 1,000
Direct labor cost 2,000
Overhead applied 4,000
Total manufacturing costs $ 7,000
Add: Beginning work-in-process
Less: Ending work-in-process
2,500
1,500
Cost of goods manufactured (completed) $ 8,000
Add: Beginning finished goods 3,000
Less: Ending finished goods 2,000
Cost of goods sold $ 9,000
Cost of Goods Sold, Manufacturing Firm
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Sales revenues $ 15,000
Less: Cost of goods sold 9,000
Gross Margin $ 6,000
Less: Selling and administrative expenses 3,000
Operating income (pre-tax) $ 3,000
Gross margin %: $6,000/$15,000 = 40%
Return on sales %: $3,000/$15,000 = 20%
Operating Income Statement, Manufacturing Firm
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Cost terminology:
•Product (inventoriable) vs. period costs
•Fixed vs. variable costs
•Gross margin vs. contribution margin
•Direct vs. indirect costs
•Differential costs (and benefits)
•Sunk costs
•Opportunity costs
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Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you werenot attending college,you could be earning$65,000 per year. Your opportunity costof attending college for one year is $65,000.
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The End
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Handout 1 (a): Cost flows
In manufacturing
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Handout 1(a) Manufacturing cost flows; disposition of over/under applied overhead
Speedy Company provides the following information for October:
Beginning inventories:
Materials $ 2,000
Work-in-Process $ 4,000
Finished Goods $ 6,000
Materials purchased $12,000
Materials used $10,000
Direct manufacturing labor $12,000
Cost of goods manufactured (completed)* $ 38,000
Cost of Goods Sold* $ 40,000
Actual manufacturing overhead $ 25,200
In addition, you learn that the direct labor wage rate is $30 per hour, and that manufacturing
overhead is allocated at $50 per direct labor hour.
* These costs are measured before any adjustment for over- or under-allocated manufacturing
overhead.
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Required: Determine the following amounts:
(a) Direct labor hours during October __________
(b) Manufacturing overhead allocated to production during October (before any
adjustment for over- or under-allocated overhead) $ __________
(c) Under- or over-allocated manufacturing overhead during October $ __________
(d) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead
is written-off to Cost of Goods Sold $ __________
(e) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold
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(d) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is
written-off to Cost of Goods Sold $ __________
$ 40,000 + $5,200 = $ 45,200
(e) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold
Account:
Ending balance
Proportion
Allocation
Work in process $ 8,000 8/52 $ 800 Finished goods $ 4,000 4/52 $ 400 Cost of sales $40,000 40/52 $ 4,000 Total $52,000 52/52 $ 5,200
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(d) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is
written-off to Cost of Goods Sold $ __________
$ 40,000 + $5,200 = $ 45,200
(e) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold
Account:
Ending balance
Proportion
Allocation
Work in process $ 8,000 8/52 $ 800 Finished goods $ 4,000 4/52 $ 400 Cost of sales $40,000 40/52 $ 4,000 Total $52,000 52/52 $ 5,200
Provide journal entries to record the disposition of the under-allocated
overhead for cases (d) and (e) above.
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Handout 1 (b): Income Statement
format for manufacturing
firms
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Handout 1(b) Manufacturing cost flows; inventory changes and percentage relations Prepare a Statement of Cost of Goods Manufactured (Completed) and a Classified Income Statement based upon the following information: Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
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Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
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Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
Vertical Analysis Item: % Sales 100 Cost of sales 60 Gross Margin 40 Selling and Admin.
20
Operating income
20
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Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
Vertical Analysis Item: % Sales 100 Cost of sales 60 Gross Margin 40 Selling and Admin.
20
Operating income
20
Item: $ Sales $ 200,000 Cost of sales 120,000 Gross Margin 80,000 Selling and Admin.
40,000
Operating income $ 40,000
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Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
Vertical Analysis Item: % Sales 100 Cost of sales 60 Gross Margin 40 Selling and Admin.
20
Operating income
20
Item: $ Sales $ 200,000 Cost of sales 120,000 Gross Margin 80,000 Selling and Admin.
40,000
Operating income $ 40,000
Statement of Cost of Goods Manufactured
Direct materials used $ 20,000 Direct labor $ 60,000 Manufacturing overhead $120,000 WIP Inventory, beginning $ 15,000 Total available $215,000 Less: WIP inventory, end $ 65,000 Cost of Goods Manufactured
$150,000
Finished Goods, beginning $ 40,000 Total available $190,000 Less: Finished Goods, end $ 70,000 Cost of sales $120,000
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Handout 1 (c): Multiple choice
items re: manufacturing
cost flows
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Handout 1(c) Multiple choice, manufacturing cost flows
1. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are $47,000, the manufacturing overhead is: A. $152,000 B. $11,750 C. $21,250 D. $9,500
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Handout 1(c) Multiple choice, manufacturing cost flows
1. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are $47,000, the manufacturing overhead is: A. $152,000 B. $11,750 C. $21,250 D. $9,500
Labor is 80 % of conversion cost, and overhead is ¼ of
labor.
¼ ($38,000) = $9,500
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2. During the month of July, direct labor cost totaled $12,000 and direct labor cost was 30% of prime cost. If total manufacturing costs during July were $86,000, the manufacturing overhead was: A. $46,000 B. $40,000 C. $28,000 D. $74,000
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2. During the month of July, direct labor cost totaled $12,000 and direct labor cost was 30% of prime cost. If total manufacturing costs during July were $86,000, the manufacturing overhead was: A. $46,000 B. $40,000 C. $28,000 D. $74,000
Total prime cost is $40,000 ($12,000 / .30), and overhead is $46,000 ($86,000 - $40,000).
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3. Using the following data for a recent period, calculate the beginning finished goods inventory:
The beginning finished goods inventory was: A. $24,000 B. $23,000 C. $7,000 D. $12,000
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3. Using the following data for a recent period, calculate the beginning finished goods inventory:
The beginning finished goods inventory was: A. $24,000 B. $23,000 C. $7,000 D. $12,000
Cost of sales is $23,000 and cost of goods manufactured is $16,000, so the finished
goods inventory decreased by $7,000. The beginning inventory is $12,000 ($5,000 +
$7,000)
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4. The following data are for a recent period's operations:
The cost of goods manufactured was: A. $115,275 B. $284,725 C. $275,275 D. $124,725
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4. The following data are for a recent period's operations:
The cost of goods manufactured was: A. $115,275 B. $284,725 C. $275,275 D. $124,725
The finished goods inventory decreased by $4,725, so the cost of goods sold ($280,000) exceeds the cost of goods manufactured by
$4,725;
$280,000 - $4,725 = $275,275.
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5. The cost of goods manufactured for October at Toule Manufacturing Corporation was $907,000. The following changes occurred in Toule inventory accounts during October:
What was Toule's cost of goods sold for October? A. $869,000 B. $886,000 C. $928,000 D. $945,000
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5. The cost of goods manufactured for October at Toule Manufacturing Corporation was $907,000. The following changes occurred in Toule inventory accounts during October:
What was Toule's cost of goods sold for October? A. $869,000 B. $886,000 C. $928,000 D. $945,000
The cost of goods sold is less than the cost of goods manufactured ($907,000) by $38,000.
$907,000 – 38,000 = $869,000.
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6. Last year there was no change in either the raw materials or the work in process beginning and ending inventories. However, finished goods, which had a beginning balance of $25,000, increased by $15,000. If the manufacturing costs incurred totaled $600,000 during the year, the cost of goods available for sale must have been: A. $585,000 B. $600,000 C. $610,000 D. $625,000
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6. Last year there was no change in either the raw materials or the work in process beginning and ending inventories. However, finished goods, which had a beginning balance of $25,000, increased by $15,000. If the manufacturing costs incurred totaled $600,000 during the year, the cost of goods available for sale must have been: A. $585,000 B. $600,000 C. $610,000 D. $625,000
Because the work in process did not change,
manufacturing costs incurred equals cost of goods manufactured. Total available for sale equals
beginning inventory ($25,000) plus cost of goods manufactured ($600,000).