ACCTG 2600 Lecture Notes - Lecture 6: Fiduciary, Income Statement, Financial Statement

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6 Feb 2017
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Purchases
Warehouse
Rent
Utilities
Machine Depreciation
Supervisors
Insurance
Overhead Costs
What I have today
Balance Sheet
What happened over a point in time
Income Statement
Those firms producing similar products or services can use a
process-costing accounting system.
§
When each job you are working on is specific.
On the other hand, if a company’s products/ services are unique,
they require a job-order accounting system.
Companies can be divided into two major types.
The Differences Between Job-Order and Process Costing
A job is one distinct unit or set of units.
Examples: printing, construction, furniture making, medical and
dental services, automobile repair, beautician services
Customized or built-to-order products fit into this category, as do services
that vary from customer to customer.
Characteristics of the Job-Order Environment
For job-order production systems, costs are accumulated by job.
This approach to assigning costs is called a job-order costing system.
Characteristics of the Job-Order Environment
Firms in process industries mass-produce large quantities of similar or
homogeneous products.
This approach to cost accumulation is known as a process-costing
system.
Food canning and manufacturing
Cement
Petroleum
Pharmaceutical and chemical manufacturing
Examples of process manufacturers include:
Process Production and Costing
Process firms accumulate production costs by process or by department
for a given period of time.
Unit costs = Process Costs ÷ Output
Unit costs are measured using the following equation:
Process Production and Costing
The Differences Between Job-Order and Process Costing
Two ways are commonly used to measure the costs associated with
production: actual costing and normal costing.
In an actual cost system, only actual costs of direct materials, direct
labor, and overhead are used to determine unit cost.
Defining Overhead Costs: Overhead items do not have the direct
relationship with units produced that direct materials and direct labor
do.
§Waiting until the end of the year to total the actual overhead
costs is typically unrealistic.
Uneven Overhead Costs: Many overhead costs are not incurred
uniformly throughout the year.
§Strict actual cost systems are rarely used because accurate
day-to-day unit cost information is needed on a timely basis.
Uneven Production: Distortions can occur when averages are
used with uneven production.
However, there are several issues involved in using actual costing:
Actual Costing
Normal costing solves the problems associated with actual costing.
A normal cost system determines unit cost by adding actual direct
materials, actual direct labor, and estimated overhead.
Overhead can be estimated by approximating the year’s actual overhead
at the beginning of the year and then using a predetermined rate
throughout the year to obtain the needed unit cost information.
Virtually all firms use normal costing.
Normal Costing (Standard Cost)
Nonprofit firms must track costs to be sure that they provide their services
in a cost-efficient way.
Ethical Decisions
Governmental agencies must track costs to use the funds wisely because they
have a fiduciary responsibility to taxpayers.
Ethical Decisions (cont.)
A cost accounting system that measures and assigns costs so that the unit cost
of a product or service can be determined which is a critical piece of
information for both manufacturing and service firms.
An important part of bidding and charging for services under Medicaid rules
impacts government agencies and is commonly tied to the critical
determination of unit cost.
Normal Costing and Estimating Overhead
In normal costing, overhead is estimated and applied to production. The basics
of overhead application can be described in three steps:
Step 1: Calculate the predetermined overhead rate
Step 2: Apply overhead to production throughout the year
Step 3: Reconcile the difference between the total actual overhead incurred
during the year and the total overhead applied to production.
Step 1: Calculating the
Predetermined Overhead Rate
The predetermined overhead rate is calculated at the beginning of the year
by dividing the total estimated annual overhead by the total estimated level of
associated activity or cost driver:
Overhead Rate = Estimated Annual Overhead ÷ Estimated annual activity
level
Notice that the predetermined overhead rate includes estimated amounts in
both the numerator and the denominator.
Step 1: Calculating the
Predetermined Overhead Rate (cont.)
This estimation is necessary because the predetermined overhead rate is
calculated in advance, usually at the beginning of the year.
Estimated overhead is the firms best estimate of the amount of overhead
(utilities, indirect labor, depreciation, etc.) to be incurred in the coming year.
The number of machine hours could be a good choice of activity level for
overhead of a company that has automated production.
Step 1: Calculating the
Predetermined Overhead Rate (cont.)
Estimates may be based on last year’s figures adjusted for anticipated changes
in the coming year.
Step 2: Applying Overhead to Production Throughout the Year
Once the overhead rate has been computed, the company can begin to apply
overhead to production.
Applied overhead is found by multiplying the predetermined overhead rate by
the actual use of the associated activity for the period:
Applied overhead = Predetermined overhead rate x Actual activity level
Step 2: Applying Overhead to Production Throughout the Year (cont.)
Once this is calculated, the total cost of product for the period is the actual
direct materials and direct labor, plus the applied overhead:
Total costs = Actual direct materials + Actual direct labor + Applied
overhead
Cornerstone 5.1:
Calculating The Predetermined Overhead
Rate and Applying Overhead to Production
Step 3: Reconciling Actual Overhead with Applied Overhead
Actual overhead: Costs are tracked throughout the year in the overhead
account.
Applied overhead: Costs are computed throughout the year and added to
actual direct materials and actual direct labor to get total product cost.
Remember that two types of overhead are recorded:
Step 3: Reconciling Actual Overhead with Applied Overhead
At the end of the year, however, it is time to reconcile any difference between
actual and applied overhead and to correct the cost of goods sold account to
reflect actual overhead spending.
Applied overhead will rarely equal actual overhead.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
The difference between actual overhead and applied overhead is called an
overhead variance.
If actual overhead is $400,000 for the year but $390,000 was applied to
production, we would say that the variance is underapplied overhead.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
If actual overhead is $400,000 for the year but $410,000 was applied to
production, we would say that the variance is overapplied overhead.
If overhead has been underapplied, then product cost has been understated.
If overhead has been overapplied, then product cost has been overstated.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
Something must be done with the overhead variance at year-end to report
costs at actual amounts on the financial statements.
Underapplied overhead is added to Cost of Goods Sold.
Overapplied overhead is subtracted from Cost of Goods Sold.
Generally, the entire overhead variance is assigned to Cost of Goods Sold,
since the amount is usually small or immaterial.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
If the overhead variance is material, or large, another approach would be
taken. That approach is, to allocate the variance among the ending balances of
Work in Process, Finished Goods, and Cost of Goods Sold.
Cornerstone 5.2:
Reconciling Actual Overhead
with Applied Overhead
Cornerstone 5.2:
Reconciling Actual Overhead
with Applied Overhead
Unit Costs in the Job-Order
System
The unit cost of a job is the total cost of the job (materials used on the job,
labor worked on the job, and applied overhead) divided by the number of units
in the job:
Unit cost = Total cost ÷ Number of units
Although the concept is simple, the practical reality of the computation can be
somewhat more complex because of the recordkeeping involved.
Chapter(5
Wednesday,* February*1,*2017
7:24*AM
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Purchases
Warehouse
Rent
Utilities
Machine Depreciation
Supervisors
Insurance
Supplies-Different than direct materials (glue, tape, etc.)
Overhead Costs
What I have today
Balance Sheet
What happened over a point in time
Income Statement
Those firms producing similar products or services can use a
process-costing accounting system.
§When each job you are working on is specific.
On the other hand, if a companys products/ services are unique,
they require a job-order accounting system.
Companies can be divided into two major types.
The Differences Between Job-Order and Process Costing
A job is one distinct unit or set of units.
Examples: printing, construction, furniture making, medical and
dental services, automobile repair, beautician services
Customized or built-to-order products fit into this category, as do services
that vary from customer to customer.
Characteristics of the Job-Order Environment
For job-order production systems, costs are accumulated by job.
This approach to assigning costs is called a job-order costing system.
Characteristics of the Job-Order Environment
Firms in process industries mass-produce large quantities of similar or
homogeneous products.
This approach to cost accumulation is known as a process-costing
system.
Food canning and manufacturing
Cement
Petroleum
Pharmaceutical and chemical manufacturing
Examples of process manufacturers include:
Process Production and Costing
Process firms accumulate production costs by process or by department
for a given period of time.
Unit costs = Process Costs ÷ Output
Unit costs are measured using the following equation:
Process Production and Costing
The Differences Between Job-Order and Process Costing
Two ways are commonly used to measure the costs associated with
production: actual costing and normal costing.
In an actual cost system, only actual costs of direct materials, direct
labor, and overhead are used to determine unit cost.
Defining Overhead Costs: Overhead items do not have the direct
relationship with units produced that direct materials and direct labor
do.
§Waiting until the end of the year to total the actual overhead
costs is typically unrealistic.
Uneven Overhead Costs: Many overhead costs are not incurred
uniformly throughout the year.
§Strict actual cost systems are rarely used because accurate
day-to-day unit cost information is needed on a timely basis.
Uneven Production: Distortions can occur when averages are
used with uneven production.
However, there are several issues involved in using actual costing:
Actual Costing
Normal costing solves the problems associated with actual costing.
A normal cost system determines unit cost by adding actual direct
materials, actual direct labor, and estimated overhead.
Overhead can be estimated by approximating the year’s actual overhead
at the beginning of the year and then using a predetermined rate
throughout the year to obtain the needed unit cost information.
Virtually all firms use normal costing.
Normal Costing (Standard Cost)
Nonprofit firms must track costs to be sure that they provide their services
in a cost-efficient way.
Ethical Decisions
Governmental agencies must track costs to use the funds wisely because they
have a fiduciary responsibility to taxpayers.
Ethical Decisions (cont.)
A cost accounting system that measures and assigns costs so that the unit cost
of a product or service can be determined which is a critical piece of
information for both manufacturing and service firms.
An important part of bidding and charging for services under Medicaid rules
impacts government agencies and is commonly tied to the critical
determination of unit cost.
Normal Costing and Estimating Overhead
In normal costing, overhead is estimated and applied to production. The basics
of overhead application can be described in three steps:
Step 1: Calculate the predetermined overhead rate
Step 2: Apply overhead to production throughout the year
Step 3: Reconcile the difference between the total actual overhead incurred
during the year and the total overhead applied to production.
Step 1: Calculating the
Predetermined Overhead Rate
The predetermined overhead rate is calculated at the beginning of the year
by dividing the total estimated annual overhead by the total estimated level of
associated activity or cost driver:
Overhead Rate = Estimated Annual Overhead ÷ Estimated annual activity
level
Notice that the predetermined overhead rate includes estimated amounts in
both the numerator and the denominator.
Step 1: Calculating the
Predetermined Overhead Rate (cont.)
This estimation is necessary because the predetermined overhead rate is
calculated in advance, usually at the beginning of the year.
Estimated overhead is the firms best estimate of the amount of overhead
(utilities, indirect labor, depreciation, etc.) to be incurred in the coming year.
The number of machine hours could be a good choice of activity level for
overhead of a company that has automated production.
Step 1: Calculating the
Predetermined Overhead Rate (cont.)
Estimates may be based on last year’s figures adjusted for anticipated changes
in the coming year.
Step 2: Applying Overhead to Production Throughout the Year
Once the overhead rate has been computed, the company can begin to apply
overhead to production.
Applied overhead is found by multiplying the predetermined overhead rate by
the actual use of the associated activity for the period:
Applied overhead = Predetermined overhead rate x Actual activity level
Step 2: Applying Overhead to Production Throughout the Year (cont.)
Once this is calculated, the total cost of product for the period is the actual
direct materials and direct labor, plus the applied overhead:
Total costs = Actual direct materials + Actual direct labor + Applied
overhead
Cornerstone 5.1:
Calculating The Predetermined Overhead
Rate and Applying Overhead to Production
Step 3: Reconciling Actual Overhead with Applied Overhead
Actual overhead: Costs are tracked throughout the year in the overhead
account.
Applied overhead: Costs are computed throughout the year and added to
actual direct materials and actual direct labor to get total product cost.
Remember that two types of overhead are recorded:
Step 3: Reconciling Actual Overhead with Applied Overhead
At the end of the year, however, it is time to reconcile any difference between
actual and applied overhead and to correct the cost of goods sold account to
reflect actual overhead spending.
Applied overhead will rarely equal actual overhead.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
The difference between actual overhead and applied overhead is called an
overhead variance.
If actual overhead is $400,000 for the year but $390,000 was applied to
production, we would say that the variance is underapplied overhead.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
If actual overhead is $400,000 for the year but $410,000 was applied to
production, we would say that the variance is overapplied overhead.
If overhead has been underapplied, then product cost has been understated.
If overhead has been overapplied, then product cost has been overstated.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
Something must be done with the overhead variance at year-end to report
costs at actual amounts on the financial statements.
Underapplied overhead is added to Cost of Goods Sold.
Overapplied overhead is subtracted from Cost of Goods Sold.
Generally, the entire overhead variance is assigned to Cost of Goods Sold,
since the amount is usually small or immaterial.
Step 3: Reconciling Actual Overhead with Applied Overhead (cont.)
If the overhead variance is material, or large, another approach would be
taken. That approach is, to allocate the variance among the ending balances of
Work in Process, Finished Goods, and Cost of Goods Sold.
Cornerstone 5.2:
Reconciling Actual Overhead
with Applied Overhead
Cornerstone 5.2:
Reconciling Actual Overhead
with Applied Overhead
Unit Costs in the Job-Order
System
The unit cost of a job is the total cost of the job (materials used on the job,
labor worked on the job, and applied overhead) divided by the number of units
in the job:
Unit cost = Total cost ÷ Number of units
Although the concept is simple, the practical reality of the computation can be
somewhat more complex because of the recordkeeping involved.
Chapter(5
Wednesday,* February*1,*2017 7:24*AM
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This preview shows pages 1-2 of the document.
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