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Lecture 2

BUS 202 Lecture 2: Out+02+202+2017+Completed

20 Pages
68 Views
Spring 2017

Department
Business
Course Code
BUS 202
Professor
Joseph D' Adamo
Lecture
2

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University of Rhode Island
BUS 202 Managerial Accounting 2016 - 2017
Joseph M. D’Adamo
Course Outline #2: Manufacturing Cost Concepts and Terminology
Page 1 of 20
I. Manufacturing Companies
A. Manufacturing Product Costs vs. Manufacturing Period Costs
Direct Materials (DM) Selling, General & Administrative Expenses
Direct Labor (DL) Interest Expense
Manufacturing Overhead (OH) Income Tax Expense
INVENTORIABLE COSTS SAME AS MERCHANDISERS
1. Manufacturing Inventories = Product Cost on SFP/BS reported as Current Assets
a. Raw Materials Inventory (RM) Stores
Raw Materials Inventory: Cost of materials on hand such as cloth, plastic, wood, etc.
b. Work In-Process Inventory (WIP) Factory
Work In-Process Inventory: Cost (DM, DL, and OH) of partially-completed goods on hand
c. Finished Goods Inventory (FG)
Finished Goods Inventory: Cost (DM, DL, and OH) of completed goods held for sale on hand
2. Manufacturing Cost of Goods Sold Expense on CIS
Cost of Goods Sold: Cost (DM, DL, and OH) of finished goods sold and delivered (ownership transferred)
Course Outline #2: Manufacturing Cost Concepts and Terminology
Page 2 of 20
B. Categories of Manufacturing Product Costs
1. Direct vs. Indirect Manufacturing Product Costs
a. Definition of a Direct Cost
Direct Cost: A cost that can be traced to a cost object because a cause-and-effect relationship exists
Traceability: The ability to cost-effectively observe, measure, and assign the effects of specific costs to specific
cost objects
Direct Manufacturing Product Costs: Costs of production inputs that can be traced and assigned to specific outputs
(products) because:
a cause-and-effect relationship exists between the production inputs and the specific products output
the costs can be cost-effectively traced and assigned to the specific products because the benefit of
the product cost information exceeds the cost of the system to measure and report the information
DIRECT MFG COSTS = DM + DL = PRIME COSTS
Example: A shirt manufacturer used 5,000 yards of cloth to complete a production run of 2,000 dress shirts.
Cost-Effectively Traced and Assigned
Cause Effect
Cloth Input Easy to Measure and Report Shirts Output
5,000 Yards 2,000 Dress Shirts
Cost of Yards Input Significant Amount of Product Cost Cost per Shirt Output
Benefit of Information > Cost of Information
Course Outline #2: Manufacturing Cost Concepts and Terminology
Page 3 of 20
b. Definition of an Indirect Cost
Indirect Cost: A cost that cannot be practically traced to a cost object
Indirect Manufacturing Product Costs: Costs of production inputs and factory operations that are classified as
overhead and allocated to specific outputs (products) in rational manner because:
a cause-and-effect relationship does not exist between the costs and the specific products output
the costs cannot be cost-effectively traced to the products
INDIRECT MFG COSTS = MANUFACTURING or FACTORY OH
Factory = Manufacturing = Production
Example:
During the last week of July 2016, McGrew-Hall, a book publisher, manufactured 5,000 financial accounting texts
and 8,000 managerial accounting texts. The company incurred the following production costs during that week:
Cost of Paper Used
DIRECT
Direct Materials
Cost of Polishing Supplies Used
INDIRECT
Overhead: Indirect Materials
Wages of Production Line Employees
DIRECT
Direct Labor
Wages of Production Runners
INDIRECT
Overhead: Indirect Labor
Production Manager Salary
INDIRECT
Overhead
1. Identify the production costs above that McGrew-Hall directly traced and assigned to the financial
accounting texts vs. the managerial accounting texts.
$110,000 DM + $31,785 DL = $141,785
2. Identify the production costs that McGrew-Hall included in overhead and allocated to the financial
accounting texts vs. the managerial accounting texts in a rational manner.
$1,800 + $8,500 + $2,000 = $12,300 OH

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Description
University of Rhode Island BUS 202 Managerial Accounting 2016 - 2017 Joseph M. D’Adamo Course Outline #2: Manufacturing Cost Concepts and Terminology Page 1 of 20 I. Manufacturing Companies A. Manufacturing Product Costs vs. Manufacturing Period Costs Direct Materials (DM) Selling, General & Administrative Expenses Direct Labor (DL) Interest Expense Manufacturing Overhead (OH) Income Tax Expense INVENTORIABLE COSTS SAME AS MERCHANDISERS 1. Manufacturing Inventories = Product Cost on SFP/BS reported as Current Assets a. Raw Materials Inventory (RM) Stores Raw Materials Inventory: Cost of materials on hand such as cloth, plastic, wood, etc. b. Work In-Process Inventory (WIP) Factory Work In-Process Inventory: Cost (DM, DL, and OH) of partially-completed goods on hand c. Finished Goods Inventory (FG) Finished Goods Inventory: Cost (DM, DL, and OH) of completed goods held for sale on hand 2. Manufacturing Cost of Goods Sold  Expense on CIS Cost of Goods Sold: Cost (DM, DL, and OH) of finished goods sold and delivered (ownership transferred) Course Outline #2: Manufacturing Cost Concepts and Terminology Page 2 of 20 B. Categories of Manufacturing Product Costs 1. Direct vs. Indirect Manufacturing Product Costs a. Definition of a Direct Cost Direct Cost: A cost that can be traced to a cost object because a cause-and-effect relationship exists Traceability: The ability to cost-effectively observe, measure, and assign the effects of specific costs to specific cost objects Direct Manufacturing ProductCosts: Costsof production inputsthatcanbetraced and assignedto specificoutputs (products) because:  a cause-and-effect relationship exists between the production inputs and the specific products output  the costs can be cost-effectively traced and assigned to the specific products because the benefit of the product cost information exceeds the cost of the system to measure and report the information DIRECT MFG COSTS = DM + DL = PRIME COSTS Example: A shirt manufacturer used 5,000 yards of cloth to complete a production run of 2,000 dress shirts. Cost-Effectively Traced and Assigned Cause Effect Cloth Input Easy to Measure and Report Shirts Output 5,000 Yards 2,000 Dress Shirts Cost of Yards Input Significant Amount of Product Cost Cost per Shirt Output Benefit of Information > Cost of Information Course Outline #2: Manufacturing Cost Concepts and Terminology Page 3 of 20 b. Definition of an Indirect Cost Indirect Cost: A cost that cannot be practically traced to a cost object Indirect Manufacturing Product Costs: Costs of production inputs and factory operations that are classified as overhead and allocated to specific outputs (products) in rational manner because:  a cause-and-effect relationship does not exist between the costs and the specific products output  the costs cannot be cost-effectively traced to the products INDIRECT MFG COSTS = MANUFACTURING or FACTORY OH Factory = Manufacturing = Production Example: During the last weekofJuly2016, McGrew-Hall, a book publisher,manufactured5,000 financial accounting texts and 8,000 managerial accounting texts. The company incurred the following production costs during that week: Cost of Paper Used $110,000 DIRECT Direct Materials Cost of Polishing Supplies Used $1,800 INDIRECT Overhead: Indirect Materials Wages of Production Line Employees $31,785 DIRECT Direct Labor Wages of Production Runners $8,500 INDIRECT Overhead: Indirect Labor Production Manager Salary $2,000 INDIRECT Overhead 1. Identify the production costs above that McGrew-Hall directly traced and assigned to the financial accounting texts vs. the managerial accounting texts. $110,000 DM + $31,785 DL = $141,785 2. Identify the production costs that McGrew-Hall included in overhead and allocated to the financial accounting texts vs. the managerial accounting texts in a rational manner. $1,800 + $8,500 + $2,000 = $12,300 OH Course Outline #2: Manufacturing Cost Concepts and Terminology Page 4 of 20 2. Two Types of Direct Manufacturing Product Costs a. Direct Materials (DM) Direct Materials: Cost of the physical materials used to manufacture products that can be cost-effectively traced to specific units of production; purchased and stored as Raw Materials Inventory prior to use in the manufacturing process b. Direct Labor (DL) Direct Labor: Costof the physical labor used to manufacture products that can be cost-effectivelytraced to specific units of production c. Prime Costs = DM + DL Prime Costs: Direct costs used to manufacture products; they are the primary product costs d. Cost Behavior of Direct Manufacturing Product Costs 1) Definition Cost Behavior: Reaction of a total cost in response to a change in the volume of an activity 2) Two Broad Types of Cost Behaviors Variable Costs vs. Fixed Costs Variable Cost: A cost that varies IN TOTAL for a period with changes in the volume but remains constant on a PER UNIT basis DM and DL are always Variable Costs Fixed Cost: A cost that remains constant IN TOTAL for a period but varies on a PER UNIT basis with changes in volume Course Outline #2: Manufacturing Cost Concepts and Terminology Page 5 of 20 Example: McGrew-Hall incurs an average of $2.445 of direct labor costs per accounting book published and pays the production manager a salary of $8,000 per month. Compute the total and per unit direct labor and production manager salary costs for July and August 2016 when McGrew-Hall produced 60,000 and 75,000 accounting books respectively. Use the amounts to determine the behaviors of the costs. July 2016 August 2016 Accounting Books Produced 60,000 units 75,000 units Volume Increased Total Cost Cost per Unit Total Cost Cost per Unit Direct Labor $146,700 $2.445 $183,375 $2.445 Total Cost Varies (Increased) Jul: 60,000 X $2.445 =$146,700 Aug: 75,000 X $2.445 =$183,375 Cost per Unit Constant VARIABLE COST Total Cost Cost per Unit Total Cost Cost per Unit Production Manager Salary $8,000 $0.133 $8,000 $0.107 Jul: $8,000 ÷ 60,000 =$0.133 Total Cost Constant Cost per Unit Varies (Decreased) Aug: $8,000 ÷ 75,000 =$0.107 FIXED COST Course Outline #2: Manufacturing Cost Concepts and Terminology Page 6 of 20 3. Indirect Manufacturing Product Costs = Manufacturing Overhead = Factory Overhead Manufacturing Overhead: All costs incurred to operate the factory plus indirect materials, indirect labor and other labor-related costs that must be allocated to specific outputs (products) in rational manner because they cannot be cost-effectively traced and assigned directly Manufacturing or Factory or Production a. Indirect Materials Indirect Materials: Materials and supplies used to manufacture products that cannot be cost-effectively traced to specific units of production because: 1) there is no cause-and effect relationship or 2) the materials cost is immaterial to the product b. Indirect Labor Indirect Labor: Cost of factory workers who do not directly work on specific products c. Labor-Related Costs Idle Time: Cost of labor incurred for downtime due to product-line changes or required repairs Overtime Premium: Additional costs incurred when employees work overtime; the half-time when time-and-a half is paid; assigned to all products NOT the products worked on during OT Example: A production line worker earns $10 per hour for a standard work week of 40 hours and receives time-and-one- half for any hours over 40 worked during a week. Calculate the total wages earned and the amounts recorded as direct labor and overtime premium in a 43-hour work week. Regular Pay: 43 hours X $10 per hour = $430 Direct Labor Overtime Premium: 3 OT hours X $10 X ½ = 15 Manufacturing OH Total Wages Earned: $445 Course Outline #2: Manufacturing Cost Concepts and Terminology Page 7 of 20 d. Conversion Costs = DL + OH Conversion Costs: Costs incurred to convert raw materials into finished products e. Nature of Manufacturing Overhead  Manufacturing Overhead = Factory Overhead ≠ Corporate Overhead  Variety of Sources such as factory utilities, depreciation, etc.  Often Difficult to Measure on short-term basis without estimates f. Cost Behaviors of Indirect Manufacturing Product Costs Variable Overhead Costs: Indirect materials, non-salaried indirect laborers, utilities, and units-of output factory depreciation are examples of variable overhead costs Fixed Overhead Costs: Salaried-indirect laborers, factory depreciation (other than units-of-output), factory insurance, and factory real estate taxes MANUFACTURING OH is ALLOCATED to SPECIFIC PRODUCTS ESTIMATED Course Outline #2: Manufacturing Cost Concepts and Terminology Page 8 of 20 ILLUSTRATION OF FLOW OF MANUFACTURING PRODUCT COSTS Purchases of Raw Materials from Suppliers Cost (Purchase Price) of materials plus freight-in less purchases returns and purchases discounts WAREHOUSE Raw Materials (RM) Inventory Direct Materials Enter into Production FACTORY  Work In-Process (WIP) Direct Labor Inventory  Cost of Goods Manufactured Manufacturing Overhead Costs Materials, labor and overhead All factory-related costs plus indirect materials, assigned to completed units indirect labor, and factory payroll-related costs leaving the factory WAREHOUSE Finished Goods (FG) Inventory Inventoriable Costs (DM, DL & OH) All manufacturing costs (product costs) are reported as current assets on the balance sheet in inventories (RM, WIP & FG) until the goods are sold and delivered to customers to earn revenues. Goods owned by manufacturer Balance Sheet Goods sold and delivered to customers Ownership transferred to customers Income Statement Manufacturing costs (product costs) leave the balance sheet as expenses that are reported as cost of goods sold in the comprehensive income statement when the goods are sold and delivered to customers to earn revenues. Sales Revenue – Cost of Goods Sold = Gross Profit Course Outline #2: Manufacturing Cost Concepts and Terminology Page 9 of 20 C. Basic Accounting Records 1. Product Costs Reported on Balance Sheet as Inventories RM + WIP + FG Raw Materials Inventory Beg. RM Inv. A FACTORY Net Purchases DM entered into Work In-Process + Freight-in Production  Inventory Beg. WIP Inv. COGMfg End. RM Inv.  DM from RM (Asset on B/S) DM, DL, OH Finished Goods B  DL Incurred Costs to Inventory Complete Units Beg. FG Inv.  OH Applied End. WIP Inv. DM, DL, OH DM, DL, OH (Asset on B/S) C Cost of Goods Cost of Manufactured Goods Sold (Expense on IS) End. FG Inv. (Asset on B/S) EXPENSED Inventoriable Costs 2. Product Costs IncurredRM + WIP + FG A Materials Purchased  Recorded in RM Inventory as received  DM  as Transferred into factory B  DL  Recorded in WIP Inventory  as Incurred  OH  as Applied (estimated) C DM, DL, OH in WIP  Transferred to FG Inventory as goods completed Expense Course Outline #2: Manufacturing Cost Concepts and Terminology Page 10 of 20 Exercise: Lakshmi Cooking Supplies Manufacturing Corp. manufactures and sells an extensive selection of cooking equipment and utensils. In its balance sheet at December 31, 2015, the Company reported: Inventories: Raw Materials $82,700 Work In-Process 70,900 Finished Goods 352,000 Total Cost $505,600 ASSET on B/S During January 2016, Lakshmi Cooking Supplies Manufacturing Corp. engaged in manufacturing activities and incurred product costs: NP o Received raw materials purchased on credit from suppliers for $88,000 plus $2,000 of freight- in charges DM o Transferred materials costing $96,500 to the factory DL o Incurred payroll costs of $61,900 for direct labor workers OH o Allocated $67,200 of manufacturing overhead to production o Completed units at a total cost (DM, DL, OH) of $125,500 that were transferred from the COGMfg factory to the warehouse COGS o Sold goods with a total cost (DM, DL, OH) of $264,000 a) Enter the cost data into the T-accounts and compute their balances at January 31, 2016. WAREHOUSE FACTORY WAREHOUSE Raw Materials Work In-Process Finished Goods Inventory Inventory Inventory 1/1 1/1 1/1 2016 82,700 2016 70,900 2016 352,000 DM NP 90,000 96,500 96,500 COGMfg DL 61,900 125,500 125,500 264,000 COGS OH 67,200 1/31 1/31 1/31 2016 76,200 2016 171,000 2016 213,500 Product Costs on the Balance Sheet = RM Inventory + WIP Inventory + FG Inventory Product Costs on the Balance Sheet = $76,200 + $171,000 + $213,500 = $460,700 Product Costs on the Income Statement = Cost of Goods Sold Course Outline #2: Manufacturing Cost Concepts and Terminology Page 11 of 20 II. External Reporting of Manufacturing Product Costs PERIODIC INVENTORY A. Schedule of Cost of Goods Manufactured From WIP to FG Step #1: 1. Compute the Direct Materials Used in Production RM  WIP PERIODIC INVENTORY + Beginning Raw Materials Inventory Cost of raw materials on hand at the beginning of the Current Asset on Prior-Year B/S period carried over from the end of the previous period + Net Purchases of Raw Materials Cost of materials purchased during the period including P – PR – PD + FI = NPRM freight-in less purchase returns and purchase discounts = Raw Materials Available for Use Cost of raw materials that could have been used during the period to manufacture goods - Ending Raw Materials Inventory Cost of raw materials on hand at the end of the period that Current Asset on Current-Year B/S were NOT used in the production process during the
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