Ch 5 Summary.docx

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University of Waterloo
Accounting & Financial Management
AFM 481
Grant Russell

Chapter 5 – Job Costing 3 types of business 1. Service – no products costs, no inventory 2. Merchandising – buy inventory to sell so they have merchandise costs and sometimes leftover inventory if they don’t sell everything a. Need to prepare a schedule of cost of goods sold b. COGS = beginning merch. inventory + purchases – ending merch. inventory 3. Manufacturing – buy raw materials to make them into finished goods so they can have left over inventories in raw materials and finished goods a. Need to prepare a schedule of cost of goods sold and cost of goods manufactured b. COGM = DM + DL + mfg ohead = Mfg costs + beginning WIP – ending WIP c. COGS = beginning FG inventory + COMG – ending FG inventory Recap - Product costs – costs related to making/purchasing a product; aka manufacturing or inventoriable costs - Period costs – operating costs; not related to making or purchasing a product; (ex – admin costs S&A expenses) Cost of goods sold Three components: 1. direct materials 2. direct labour 3. mfg overhead (all indirect expenses – utilities, amortization, plant insurance, etc) Prime costs = DM + DL Conversion costs = DL + mfg overhead Flow: DEBIT (raw materials) Purchases of raw materials and costs of operation CREDIT (raw materials) DM used (this is then split to direct/indirect) DEBIT (WIP inventory) Direct DM used + Direct DL + Mfg overhead* DEBIT (Mfg Overhead – expense) Indirect DM CREDIT (WIP inventory) Cost of goods mfg’ed DEBIT (FG inventory) Cost of goods mfg’ed CREDIT (MFG Ovehread) Mfg overhead allocation* Finished goods: Beg. Inventory + COGM – COGS *Mfg overhead is assigned to the product based on a rate Assigning Product Costs to Individual Goods/Services Product costs Includes DM and DL and costs related to the mfg facility Excludes cost of operating activities not directly related – S&A Process costing Allocate both direct and overhead costs to continous-flowp rocessing lines (used for mass produced products) Direct and indrect costs are traced and allocated to production departments, then to units Job Costing Assign costs to custm proucts/services DM an dDL traced to individual jobs, production overhead allocated Job Costing in Mfging costs of balance sheet income statement Product costs (DM + DL + overhead) → WIP inventory → FG inventory → COGS Period costs (sales, other S&A) → operating expenses Assigning Direct Costs Source documents: manual/electronic records with info about transactions & events Used to trace and calculate costs Recorded in a subsidiary ledger for each job Job cost record – all the costs traced and assigned to a specific job Allocating Overhead 1. Identify the relevant cost object – a job (individual product or batch of products) 2. Identify one or more overhead cost pools and allocation bases a. Overhead costs accumulated in one or more cost pools b. Allocation base chosen to assign overhead costs to cost objects 3. For each overhead cost pool, calculate an overhead allocation rate a. (Actual costing) Actual allocation rate = actual ohead costs / actual quantity of allocation base b. (Normal costing) Estimated allocation rate = est. oheadd costs / est. quantity of allocati
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