Lec_03_ACCG304_Cost_Acctg_Cycle

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					ACCG304 Lecture 3:

The Cost Accounting Cycle
Lecture Objective
To gain an understanding of the transaction processing procedures relevant to a manufacturing concern and to generate accounting reports disclosing information about production and trading operations.

Lecture Outline 3.1 3.2 3.3
The Production Process.

Physical Production Flows and Cost Accounting.

The Accounting System: • Input Cost Accounts • Processing Cost Account • Output Cost Accounts • Using the Ledger System • Cost Accounting Cycle

3.4

One Ledger System.

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3.1 The Production Process
The production process involves converting inputs into output.

INPUT

PROCESS

OUTPUT

The core business of a manufacturer deals with: Input The acquisition of raw materials, labour and necessary manufacturing capacity. The conversion of the raw materials whereby the raw materials are altered in shape, form or constitution by the production processes into finished goods. The company being dependent upon the sale of the finished goods as part of its core business for the generation of revenue.

Process

Output

Manufacturing operations dealing with raw material conversion may be classified into two broad areas: • • Job Order Production Process Production

Most production operations, be it Job Order or Process production may be classified into one of the following categories: • Extractive - Applies to mining and agricultural industries. • Analytical - The process of breaking down raw materials into separate and distinct products. For example, the refining of crude oil. • Synthetic - This is the opposite of analytical in that the raw material is combined with other raw materials to produce a new material. Examples of synthetic production include processed food products, chemicals – polyster). • Shaping or Conditioning - Where the raw material used is placed in a mould or die to give it shape or form. Plastics, motor vehicle manufacture and carpentry. • Assembly or Fabrication – utilising many processed component parts in the final assembly of the finished product. Motor vehicle and computer industry.

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In a manufacturing organisation the flow of costs in the accounting system mirrors the physical flow of production and may be represented as follows:

Materials

Indirect

Direct

Overhead

Work in Process

Finished Goods

Cost of Good Sold

Indirect

Direct

Labour

Note:

Direct Materials + Direct Labour + Direct Material +

Direct Labour Factory Overhead Direct Labour + Factory Overhead

= Prime cost = Conversion Cost = Manufacturing Cost

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3.2 Physical Production Flows and Cost Accounting
There are four major physical resource flows in the manufacturing cycle which may be summarised as follows: 1. 2. 3. 4. Raw Material Acquisition Raw Material Processing Production of Finished Goods Sale of Finished Goods Where the outflow and inflow of resources are respectively expressed: • at cost price represented by the Cost of Goods Sold • at selling price which includes the cost plus profit margin.

Each resource flow involves both Physical and Monetary elements: • Physical elements include the actual materials, time and resources required to convert a raw material into a finished product. • Monetary elements mirror the physical process and attempt to measure the costs associated with the physical process. Diagrammatically it may be represented as shown below: Raw Material Acquisition Purchase, Inspection and Storage

Raw Material Processing Raw materials used (cost) and their conversion using Direct labour (cost) Factory Overhead (cost)

Cost of Goods Manufactured Finished goods awaiting sale to customers measured by their cost of production

Sale of Goods Goods sold to customers measured by both cost and selling price

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3.3 The Ledger System Input Cost Accounts
Raw Materials Control
• Direct Material which is charged to work In Process and, • Indirect Material which is charged to Factory Overhead Control

Labour Control
• Direct labour which is charged to Work In Process and • Indirect labour which is charged to Factory Overhead Control

Factory Overhead Control
To record actual overhead incurred including indirect materials, indirect labour and all other indirect factory costs.

Factory Applied Overhead
To record the amount of overhead applied to production using a predetermined overhead rate.

Processing Cost Account
Work In Process ( W. I. P. )
To keep track of production with the costs of Direct Material, Direct Labour and Applied Factory Overhead being accumulated for each production order.

Output Cost Accounts
Finished Goods
When production is completed, it is transferred from Work In Process (the production account) to Finished Goods.

Cost Of Goods Sold
As the name implies this account is used to keep track of the cost of finished goods that have been sold or delivered to customers.

THERE ARE 7 MAJOR CONTROL ACCOUNTS IN THE FACTORY LEDGER.

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3.4 Journal Entries
The following journal entries summarise manufacturing operations.
TRANSACTION 1 2 3 4 Purchase of Raw Materials Issue of Direct Materials Issue of Indirect Materials Incurrence of Direct and Indirect Labour costs. Payment of Salaries and Wages to employees Debit Credit Debit Credit Debit Credit Debit Debit Credit Debit Credit Credit Credit Debit Credit Credit JOURNAL ENTRY Stores Control Accounts Payable Work in Process Stores Control Factory Overhead Control Stores Control Work in Process Factory Overhead Control Accrued Payroll Accrued Payroll Cash Taxation Withholdings Other Withholdings (Union Fees etc) Factory Overhead Control Accrued WC Insurance Accrued Payroll Tax

5

6

Employer Related Payroll Costs (i) Workers Compensation (ii) Payroll Tax

7

Actual Factory Overhead Incurred (i) On Credit (deferred payment) Depreciation of factory plant and equipment Insurance Expired Debit Factory Overhead Control Credit Accounts Payable Debit Factory Overhead Control Credit Accumulated Depreciation Debit Factory Overhead Control Credit Prepaid Insurance Debit Work in Process Credit APPLIED Factory Overhead Debit Finished Goods Credit Work in Process Debit Cost of Goods Sold Credit Finished Goods Debit Credit Debit Debit Credit Debit Credit Credit Accounts Receivable Sales Revenue APPLIED Factory Overhead Cost of Goods Sold Factory Overhead Control APPLIED Factory Overhead Cost of Goods Sold Factory Overhead Control

(ii)

(iii) 8

Application of OVERHEAD to production (using a predetermined overhead rate) Completed Production Recording SALES at : (i) Cost Price

9 10

(ii) 11

Selling (Retail) Price

Accounting for UNDERAPPLIED Overhead (Actual overhead exceed Applied Overhead) Accounting for OVERAPPLIED Overhead (Actual overhead is less than Applied Overhead)

12

The results of manufacturing and trading operations are represented / summarised in the following financial statements:

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Manufacturing Statement Direct Materials – Usage

Direct Labour

Applied Factory Overhead Current Manufacturing Cost

Add: Work In Process @ Start Total Manufacturing Cost Incurred

Less: Work in Process @ End Cost of Goods Manufactured

Cost of Goods Sold Summary Opening Stock – Finished Goods Add: Cost of Goods Manufactured Cost of Goods Available for Sale

Less: Closing Stock Finished Goods UNADJUSTED Cost of Goods Sold +/- Under / Over Applied Overhead COST OF GOODS SOLD

Income Statement
Sales Less Cost of Goods Sold Gross Profit Less Expenses

Net Profit

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Lecture Demonstration Exercise 1:

Belltory Manufacturing Company had the following inventories on June 1, 2001: Raw Materials Work in Process Finished Goods $14,000 $15,200 $15,000

The following information relates to June operations: • Materials purchased on account • Materials requisitioned for production: Direct 18,000 Indirect 2,000 • Total payroll incurred during June amounted to $34,000 distributed as follows: Direct Labour 24,000 Indirect Labour 10,000

$22,000

20,000

34,000 • The payroll due to employees was paid after deducting 30 per cent for Income Tax withheld. • Factory overhead is applied to production at the rate of 75 per cent of direct labour cost. • Overhead incurred (in addition to indirect material and indirect labour) amounted to $6,000 comprising: Depreciation of plant $2,700 Expired insurance 600 Other "Incurred" 2,900 6,200 • Production completed during the period was costed at $64,000. • Goods costing $70,000 were sold at a mark-up on cost of 50 per cent during June.

Required :

Prepare Journal entries to reflect the above production cost flows.

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Journal Entries Details Debit Credit Details Debit Credit

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Manufacturing Statement Direct Materials – Usage

Direct Labour

Applied Factory Overhead Current Manufacturing Cost

Add: Work In Process @ Start Total Manufacturing Cost Incurred

Less: Work in Process @ End Cost of Goods Manufactured

Cost of Goods Sold Summary Opening Stock – Finished Goods Add: Cost of Goods Manufactured Cost of Goods Available for Sale

Less: Closing Stock Finished Goods UNADJUSTED Cost of Goods Sold +/- Under / Over Applied Overhead COST OF GOODS SOLD

Income Statement
Sales Less Cost of Goods Sold Gross Profit Less Expenses

Net Profit

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Lecture Demonstration Exercise 2:
At the beginning of September, the Benning Manufacturing Company had the following inventories in hand: Raw materials Work in Process Finished Goods $35,000 $40,000 $25,000

During September, the following transactions took place: (a) (b) (c) (d) (e) (f) (g) (h) (i) Materials purchased on account $48,500 Direct materials issued to production: $62,000 Indirect materials and factory supplies used during the month: $6,000 Payroll incurred during the month amounted to $50,000 of which $40,000 was considered to be direct labour and the balance was classified as indirect labour. Payroll tax and workers compensation insurance were 3% and 5% of gross wages respectively. Sundry manufacturing expenses were paid amounting to $12,600. Factory overhead is applied to production at the rate of 80% of direct labour cost. Cost of production completed during the month amounted to $155,000 and the balance of finished goods in the warehouse at the end of September totalled $20,000. Customers were billed $225,000 for sales made during September.

Required: 1. Prepare journal entries to record the above transaction. 2. Prepare a manufacturing statement, cost of goods sold summary and income statement for October.

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Journal Entries

Details

Debit

Credit

Details

Debit

Credit

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Manufacturing Statement Direct Materials – Usage

Direct Labour

Applied Factory Overhead Current Manufacturing Cost

Add: Work In Process @ Start Total Manufacturing Cost Incurred

Less: Work in Process @ End Cost of Goods Manufactured Cost of Goods Sold Summary Opening Stock – Finished Goods Add: Cost of Goods Manufactured Cost of Goods Available for Sale

Less: Closing Stock Finished Goods UNADJUSTED Cost of Goods Sold +/- Under / Over Applied Overhead COST OF GOODS SOLD

Income Statement
Sales Less Cost of Goods Sold Gross Profit Less Expenses

Net Profit


				
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