CHAPTER CHAPTER 1111
PowerPoint Author:LuAnn Bean, Ph.D., CPA, CIA, CFE
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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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