16-1. 16-2 cost accounting involves: measuring, recording, reporting … product costs. accounts...

16-2

Cost Accounting involves:

Measuring, Recording, Reporting …

product costs.

Accounts are fully integrated into the general ledger.

Perpetual inventory system provides up-to-date information.

Two basic types: (1) job order cost system (2) process cost system.

Cost Accounting SystemsCost Accounting Systems

16-3

Job Order Cost System

Costs assigned to each job / batch. Key feature: Each job has distinguishing characteristics.

Measures costs for each job completed –

not for set time periods.


16-4

Costs assigned to dept / process

for a specified period of time. Used for large volume, similar products are produced.

(cereal, gasoline, twinkies, ice cream).

Costs accumulated for a time period –

(week or month).

Process Cost System


16-5

Costs accumulate in “INVENTORY” (control) accounts that

parallel to the physical flow of the materials and labor.

•Material costs first go to Raw Materials Inventory

•Manufacturing costs assigned to Work in Process Inventory

•Completed cost (job) transfer to Finished Goods Inventory.

When sold, cost is “expensed” to Cost of Goods Sold.

Job Order Cost FlowJob Order Cost Flow

16-6

A control account is a summary account within a general ledger that accumulates the details of an account in a subsidiary ledger

400 400

100 100

100 100Mary's A / R Judy's A / R

Control (or Controlling) Accounts

Accounts Receivable Revenue

Accounts Receivable Subsidiary LedgerBob's A / R Joe's A / R

16-8


ExpenseAssets

16-9

Raw Material Costs

Illustration: Company buys:

2,000 batteries (Stock #AA) at $5 each … $10,000

800 modules (Stock #Mod) at $40 each .. $32,000


Jan 04 Raw Materials Inventory 42,000

Accounts Payable 42,000

16-10

Illustration: Company incurs $32,000 of factory labor costs

(includes BOTH direct labor wages (machine operators)

AND … indirect labor wages (factory janitor and factory manager).


Factory Labor Costs

Jan Factory Labor 32,000

Cash (or Wages Payable) 32,000

16-11

Product Costs: Costs related to mfg process are

accumulated in Mfg (Factory) Overhead.

Period Costs: Costs unrelated to manufacturing

process are expensed.


Manufacturing Overhead Costs

16-12

Jan Rent Expense (CORP OFFICE) 1,000

Cash 1,000

Jan Mfg Overhead (FACTORY Rent) 2,000

Cash 2,000

Company paid JAN rent of:•$ 2,000 for Factory Building •$ 1,000 for Corporate Offices

Period Cost

Product Cost

16-13


Illustration: entry for manufacturing overhead in Company is:


Jan Factory Overhead 13,600

Accum Deprec (Factory Machines) 3,000

Factory Utilities 10,000

Factory Property Taxes 600

16-15

Assigning Manufacturing Costs to:Work-In-Process Inventory (W-I-P)


16-16

Manufacturing costs assigned to W-I-P with

Debits to Work in Process Inventory

Credits to Raw Materials Inventory

Factory Labor

Manufacturing

Overhead


16-17


Illustration 16-5

16-18

Assigning Raw Material Costs

Illustration: Wallace uses $24,000 of direct materials and $6,000

of indirect materials in January, the entry is:

LO 3


Jan Work In Process Inventory 24,000

Manufacturing Overhead 6,000

Raw Materials Inventory 30,000

16-19

Illustration 16-7


16-20

Illustration: $32,000 total factory labor cost consists of $28,000 of

direct labor and $4,000 of indirect labor, the entry is:


Assigning Factory Labor Costs



Factory Labor 32,000

16-21

Relates to production operations as a whole.

Cannot be assigned to specific jobs

based on actual costs incurred.

Companies assign to work in process and to specific jobs

on an estimated basis through the use of a …


Predetermined Overhead Rate


16-22

Based on the relationship between estimated annual overhead costs and expected annual operating activity

Expressed in terms of an activity base such as

► Direct labor costs

► Direct labor hours

► Machine hours



16-23

Established at the beginning of the year.

May use a single, company-wide predetermined rate.

May use a different rate for each department and each department may have a different activity base.

Formula is



16-24

This means that for every dollar of direct labor, company will

ALSO assign __________ of manufacturing overhead to a job.

So if Direct Labor = $45,000 how much ADDITIONAL cost will

be added for manufacturing overhead … ANOTHER $45,000 …

(DL + Mfg OH = 45,000 + 45,000 = 90,000)

Illustration: Using direct labor as activity base … assume that the

company expects annual overhead costs to be $200,000 and direct

labor costs for the year to be $200,000, compute overhead rate.

$200,000 $200,000 = 100%

1 dollar



16-25

So if Direct Labor = $100,000 how much ADDITIONAL cost will

be added for manufacturing overhead … ANOTHER $150,000 …

Is the 150,000 OH ACTUAL or APPLIED (as in estimated)




$450,000 $300,000 = 150%


Manufacturing Overhead Costs (Mfg OH)

16-26

This means that for every dollar of direct labor, company will

assign __________ of manufacturing overhead to a job.




$280,000 $350,000 = 80%

80 cents



16-27

Illustration: Company applies manufacturing overhead to work in

process when it assigns direct labor costs. Calculate the amount of

applied overhead assuming direct labor costs of $28,000.

$28,000 x 80% = $22,400

The following entry records this application.





16-28

Illustration: When a job is finished, Company transfer its total cost

to finished goods inventory.


Assigning Costs to Finished Goods

Jan Finished Goods Inventory 39,000

Work In Process Inventory 39,000

16-29

Illustration: On January 31 company sells on account Job 101.

The job cost $39,000, and it sold for $50,000. The entries are:


Assigning Costs to Cost of Goods Sold

Jan Accounts Receivable 50,000

Sales Revenue 50,000

Cost of Goods Sold 39,000

Finished Goods Inventory 39,000

Gross Profit: 50,000 – 39,000 = 11,000Subtract PERIOD costs (selling-admin) to get:

Net Profit

16-30 LO 5


Summary Illustration 16-15

16-31

Under- or Overapplied Overhead

A debit balance in manufacturing overhead means

that overhead is underapplied.

A credit balance in manufacturing overhead means

that overhead is overapplied.

Illustration 16-19

Reporting Job Cost DataReporting Job Cost Data

16-32

Any Year-End Balance in manufacturing overhead is

eliminated by adjusting cost of goods sold.

Underapplied overhead is debited to COGS

Overapplied overhead is credited to COGS



16-33

Illustration: Wallace has a $2,500 credit balance in Manufacturing

Overhead at December 31. The adjusting entry for the over-applied

overhead is:

Dec. 31 Manufacturing Overhead 2,500

Cost of Good Sold 2,500



16-1. 16-2 cost accounting involves: measuring, recording, reporting … product costs. accounts...

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