CHAPTER CHAPTER 1111

PowerPoint Author:LuAnn Bean, Ph.D., CPA, CIA, CFE

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Cost of Materials Available for Use

Balance SheetIncome

StatementRaw

MaterialsWork-in-Process

FinishedGoods

• Materials Used• Labor• Overhead

EndingInventory

Total Mfg.Costs

Incurred

EndingInventory

Cost of Goods Mfd.

EndingInventory

Cost of GoodsSold

Cost Flow in Cost Flow in Manufacturing CompaniesManufacturing Companies

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Service companies do not have

work-in-process and finished

goods inventory accounts

where costs are stored before

being transferred to a cost of

goods sold account.

Cost Flow in Service Cost Flow in Service CompaniesCompanies

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Manufacturing Overhead

DirectMaterial

Manufacturing Cost Flow

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All other manufacturing costsAll other manufacturing costs

Manufacturing Manufacturing OverheadOverhead

Materials used to support the production process. Examples: Lubricants and cleaning

supplies used in an automobile assembly plant.

IndirectLabor

IndirectMaterial

OtherCosts

Cost of personnel who do not work directly on the product. Examples: Maintenance workers,

janitors and security guards.

Examples: Depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time.

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•Direct Labor

•Indirect Material

•OverheadApplied to

Work inProcess

If actual and applied manufacturing overhead are

not equal, a year-end adjustment is required. •Indirect

Labor

•Direct Labor

•Overhead Applied

•IndirectLabor

Wages Payable Work-in-Process

Mfg. Overhead

•Direct Material

Manufacturing Cost Flow

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•Cost ofGoodsMfd.

Finished Goods

•Cost ofGoodsSold

•Cost ofGoodsMfd.

Cost of Goods Sold

•Cost ofGoodsSold

Work-in-Process•Direct

Material•Direct Labor

•Overhead Applied

Manufacturing Cost Flow

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Using a predetermined rate makes itUsing a predetermined rate makes itpossible topossible to estimateestimate total job costs sooner.total job costs sooner.

Actual overheadActual overhead for the period is notfor the period is notknown until the end of the period.known until the end of the period.

Flow of Overhead Flow of Overhead CostsCosts

$$

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Estimated total manufacturingoverhead cost for the period

Estimated total units in theallocation base for the period

POHR =

A predetermined overhead rate (POHR), used to A predetermined overhead rate (POHR), used to apply overhead to products, is determined before the apply overhead to products, is determined before the

period begins.period begins.

Flow of Overhead Flow of Overhead CostsCosts

$40,320

12,000 jewelry boxesPOHR = = $3.36

per box

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Overhead applied = POHR × Actual activity

Actual amount of theallocation base such as

units produced, direct labor hours, or machine hours.

Based on estimates, and determined

before the period begins.

Flow of Overhead Flow of Overhead CostsCosts

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Spending variance$3,080 unfavorable

Volume variance$672 unfavorable

$43,400 $40,320 $39,648

Actual Overhead Overhead Overhead Incurred Budget Applied

Total variance is $3,752 unfavorable, theamount of underapplied overhead.

Analyzing Analyzing Underapplied Underapplied OverheadOverhead

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Schedule of Cost of Goods Schedule of Cost of Goods Manufactured and SoldManufactured and Sold

Ventra Manufacturing Company

Schedule of Cost of Goods Manufactured and Sold

Direct Raw Material Used 25,960$

Direct Labor 33,040

Actual Manufacturing Overhead 43,400

Total Manufacturing Costs 102,400

Plus Beginning Work-in-Process Inventory 0

Total Work-in-Process Inventory 102,400

Less Ending Work-in-Process Inventory 8,360

Cost of Goods Manufactured 94,040

Plus Beginning Finished Goods Inventory 836

Cost of Goods Available for Sale 94,876

Less Ending Finished Goods Inventory 7,524

Cost of Goods Sold 87,352$

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Hokai Company incurs the followingcosts to produce 2,000 units of inventory:

Hokai Company incurs the followingcosts to produce 2,000 units of inventory:

Let’s see what happens to costsif Hokai increases production.

Let’s see what happens to costsif Hokai increases production.

Motive to OverproduceMotive to OverproduceAbsorption CostingAbsorption Costing

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Now let’s compute income at the three levelsof production if Hokai sells 2,000 units.

Now let’s compute income at the three levelsof production if Hokai sells 2,000 units.

Motive to OverproduceMotive to OverproduceAbsorption CostingAbsorption Costing

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Level of Production 2,000 3,000 4,000Sales @ $20 per unit × 2,000 units 40,000$ 40,000$ 40,000$ Cost of Goods Sold $15 per unit × 2,000 units 30,000 $13 per unit × 2,000 units 26,000 $12 per unit × 2,000 units 24,000 Gross Margin 10,000$ 14,000$ 16,000$

Internally, many companies use variable costingto motivate managers to increase profitability

without motivating them to overproduce.

Internally, many companies use variable costingto motivate managers to increase profitability

without motivating them to overproduce.

Motive to OverproduceMotive to OverproduceAbsorption CostingAbsorption Costing

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Variable CostingVariable Costing

Net income is not affected by production increases.Net income is not affected by production increases.

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End of Chapter 11End of Chapter 11