Slide 1

Slide 2

Product Costing Designed to meet core competencies #1 and #3 for Shawnee Community College.

Slide 3

Directions NEXT BACK This module is to be used with your textbook to help you learn the material. Use the controls at the bottom of the screen to go forward and back in the module. If you see the button, it means that the slide will play an audio discussion. At the end of the module, take the self- scoring quiz to check your understanding. DIRECTIONS

Slide 4

Product Costing for a manufacturer Some of the things youll learn about in this lesson are: Dealing with product cost information How costs flow through ledger accounts Calculating & assigning overhead costs Financial statements of a manufacturer Absorption and Variable costing

Slide 5

Raw Materials The physical materials used to make the products Work-in-Process The account that collects all product costs Finished Goods As products are finished, their costs are moved here Manufacturing Companies have 3 Inventory Accounts ALL ARE ASSET ACCOUNTS

Slide 6

Lets do some entries for a new company, Pearson Frames Jan. 1: Pearson issued $5,000 of common stock. The entry is a debit to Cash and a credit to Common Stock CashCommon Stock 5,000

Slide 7

Jan. 2: Pearson purchased $1,200 of direct raw materials. The entry is a debit to Raw Materials and a credit to Cash Cash Raw Materials 1,200

Slide 8

Jan. 3: $900 of raw materials are put into production. The entry is a debit to Work-in-Process and a credit to Raw Materials Work-in-ProcessRaw Materials 900

Slide 9

Jan. 20: Paid production workers. Total hours worked were 120 @ $8 per hour. The entry is a debit to Work-in-Process and a credit to Cash Work-in-ProcessCash 960

Slide 10

Jan. 21: Purchased $160 of production supplies. The entry is a debit to Production Supplies and a credit to Cash Production SuppliesCash 160

Slide 11

Manufacturing Overhead is a temporary asset account The debit side is the increase side - its where ACTUAL overhead is recorded. The credit side is the decrease side - its where APPLIED overhead is recorded. Manufacturing Overhead Account

Slide 12

Manufacturing Overhead ACTUALAPPLIED (Increase)(Decrease) Manufacturing Overhead Account

Slide 13

Jan. 21: Paid $1,560 for annual insurance policy on the facility. The entry is a debit to Manufacturing Overhead and a credit to Cash Manufacturing OverheadCash 1560

Slide 14

Jan. 23: Paid $610 for rental of manufacturing facility and equipment. The entry is a debit to Manufacturing Overhead and a credit to Cash Manufacturing OverheadCash 610

Slide 15

Total Estimated Overhead for the year Cost Driver = Allocation Rate allocation rate predetermined overhead rate The allocation rate is also called the predetermined overhead rate because it is determined before actual overhead costs are known. Predetermined Overhead Rate Calculating Predetermined Overhead Rate

Slide 16

Predetermined Overhead Rate cost driver allocation rate Predetermined Overhead Rate for Pearson: Total Overhead costs for the year are ESTIMATED to be $12,750. Pearson uses direct labor hours as a cost driver. Labor hours for the year are ESTIMATED to be 1,500. So, the calculation of the allocation rate is: 12750 1500 = $8.50 per direct labor hour allocation rate cost driver To APPLY the overhead, multiply allocation rate by cost driver. From slide 8, Pearson paid for 120 direct labor hours. The calculation is 120 x $8.50 = $1,020.

Slide 17

Jan. 30: Recorded applied overhead for the month The entry is a debit to Work-in-Process and a credit to Manufacturing Overhead Manufacturing OverheadWork-in-Process 1,020

Slide 18

Jan. 30: Completed work on 576 frames that were started this month. (Transfer the total cost of these frames from Work-in-Process to Finished Goods.) The entry is a debit to Finished Goods and a credit to Work-in-Process Finished GoodsWork-in-Process 2,880

Slide 19

Calculating Product Cost PER UNIT We find total product cost by adding the debit side of Work-in- Process. cost per unit When products are finished, cost per unit must be calculated. The calculation is: cost per unit Total product cost # units finished = cost per unit Cost per unit for Pearson Total product cost $2,880 # units 576 = $5.00 cost per unit When products are transferred or sold, the cost of the # of total units transferred or sold must be calculated cost per unit Multiply cost per unit by the # transferred or sold to get the amount for the entry Pearson sold 500 frames. The calculation is: 500 x $5.00 = $2,500

Slide 20

Jan. 30: Sold 500 frames @ $9.00 each 2 entries are required for a sale transaction. Finished GoodsCost of Good Sold 2,500 The first entry transfers the frames sold from Finished Goods to Cost of Goods Sold. We just calculated that the cost of 500 frames is $2,500. The entry is a debit to Cost of Goods Sold and a credit to Finished Goods The second entry records the revenue. Calculate by multiplying the # units sold by the unit sales price. 500 x $9.00 = $4,500 The entry is a debit to Cash and a credit to Revenue RevenueCash 4,500

Slide 21

You have just learned how to do the entries and calculations for a manufacturer. Now well look at some statements used by a manufacturer. First is the Cost of Goods Manufactured and Sold. A description of each line on the statement is in parenthesis.

Slide 22

Slide 23

Now, lets look at the Variable Costing Income Statement Variable Absorption 3 big differences between the Variable Costing Income Statement and the standard Absorption version: Variable 1 - the Variable version only includes Cost of Goods Sold information for the units SOLD, not units produced. Variable Contribution Margin 2 - the Variable version splits costs into variable and fixed costs, and calculates a Contribution Margin. Variable 3 - The Variable version is only used internally.

Slide 24

We have learned the entries for physical events in a manufacturing facility, but there are some internal events that occur that also need to be recorded. On the next slides, we will look at adjusting entries and closing entries for a manufacturer. Adjusting entries for a manufacturer: Production Supplies adjustment

Slide 25

Dec. 31: The Production Supplies account has a balance of $660, but a physical count only shows $150 worth of supplies on hand. The entry is a debit to Manufacturing Overhead and a credit to Production Supplies Manufacturing OverheadProduction Supplies 1,560 610 8,900 510 Adjusting entries for a manufacturer: Production Supplies adjustment 1,020 11,135 660 Adjusted Bal 150

Slide 26

Analyzing the Manufacturing Overhead account At the end of an accounting period, the Overhead account must be analyzed to determine if overhead was overapplied or underapplied during the period. Since the debit side is the Actual side, if it has a debit balance, the account is Underapplied. Since the credit side is the Applied side, if it has a credit balance, the account is Overapplied. An entry is made to leave the Overhead account with a Zero balance; the other part of the entry is to Cost of Goods Sold. Manufacturing Overhead Credit entryDebit balance Manufacturing Overhead Debit entryCredit balance

Slide 27

Dec. 31: Manufacturing Overhead account has a Credit balance of $575, meaning it was overapplied. ANY balance is moved to COGS. The entry is a debit to Manufacturing Overhead and a credit to Cost of Goods Sold Cost of Goods Sold 575 Adjusting entries for a manufacturer: Manufacturing Overhead Adjustment Manufacturing Overhead 1,560 610 8,900 510 575 1,020 11,135 2,500 24,500 Adjusted Bal $0

Slide 28

Closing the temporary Owners Equity accounts At the end of an accounting period, the temporary Owners Equity accounts must be closed. For our manufacturing examples, the temporary OE accounts are Sales Revenue, Cost of Goods Sold, and GSA Expenses. For our manufacturing examples, the permanent OE accounts are Common Stock and Retained Earnings. Common Stock is reserved for recording owner investments, so the temporary OE accounts are closed into the Retained Earnings account. The closing entry leaves the temporary OE accounts with Zero balances, with the balances being transferred to Retained Earnings.

Slide 29

Closing the temporary Owners Equity accounts Temporary OE accounts with debit balances are credited for the amount of their balances to leave them with Zero balances. Temporary OE accounts with credit balances are debited for the amount of their balances to leave them with Zero balances. Retained Earnings receives ONE entry for the difference of the accounts. Debit 48,600 Sales Revenue Bal 48,600 End Bal $0 Retained Earnings Bal 0 End Bal $16,085 Credit 16,085 Cost of Goods Sold Bal 26,425 End Bal $0 Credit 26,425 GSA Expenses Bal 6,090 End Bal $0 Credit 6,090 Debit 48,600 Credit 26,425 Credit 6,090 Credit 16,085 to balance entry

Slide 30

What do you want to do? Exit Lesson Start Over Go to Quiz

Slide 31

Keep in mind that this presentation is NOT a complete resource for this chapter. You are expected to read the chapter in your textbook for the full presentation of the material. For More Information