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Purchase of Raw Material

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					Managerial Accounting
    Chapter Two
      Job Costs


                        JMS
Cost accounting involves the:
    Measuring,
         Recording, and
               Reporting of product costs.
Determines both the total cost and unit cost of each
product.
Accuracy is critical to company success.
Helps determine 1) which product(s) to produce, 2) the
amount to produce, and 3) price to charge.
Improves effectiveness of employee performance evaluations.
  Needed: Accounts for various manufacturing
  costs.
  Such accounts are fully integrated into the
  general ledger system.


Requires: perpetual inventory system
to provide immediate, up-to-date information on
 the cost of a product.
Two basic types of cost accounting systems:




                                              Chapt 3
   Costs are assigned to each job or batch

   A job may be for a specific order

   A key feature:
    Each job or batch has its own distinguishing
        characteristics (each is identifiable)

   The objective: to compute the cost per job

   Measures costs for each job completed - not
    for set time periods
   Cost flow parallels physical flow of the
    materials as they are manufactured.

                         How?
     Manufacturing costs are assigned (debited) to
      Work in Process Inventory.

     Cost of completed jobs are transferred to
      Finished Goods Inventory.

     When units are sold, the cost is transferred to
      Cost of Goods Sold (expensed).
Manufacturing Costs


    Selling Costs


        Administrative Costs
Direct Costs
               The Material and Labor needed to
               actually make the product(s)


Indirect Costs - (Mfg Overhead)
             Other costs needed to
             support manufacturing
               Such as:
                     Building
                     Maintenance
                     Equipment
Manufacturing Costs
    Direct Costs
    Indirect Costs

    Selling Costs


         Administrative Costs
   Costs must be expensed in the same period that the
    related revenues are recorded.
   Costs must be expensed in the same period that the
    related revenues are recorded.

      As in a Merchandising Business . . .
      The cost of products sold must be
      recorded in the same period as the sale.

             Product Costs = the costs to manufacture
             products. These costs become part of the
             product and are expensed when it is sold.
Manufacturing Costs
    Direct Costs
    Indirect Costs

    Selling Costs


         Administrative Costs
Direct Material   + Direct Labor
                                         What did the
                                         Finished Goods
                                         cost to make???

                              +
                         Manufacturing
                         Overheads
                                         =
   Manufacturing Costs
           Direct Costs
           Indirect Costs

Notice this:
Direct Costs in a product are usually straight
forward. They are measurable!

Indirect costs to products is usually more difficult.
They must be Allocated.
             Manufacturing Costs
                 Indirect Costs


How do you allocate manufacturing overheads
            to products or jobs?
   The first step is to ESTIMATE the total Manufacturing
    Overheads for the period.
   The second step is to ESTIMATE the total units to be
    produced in the period.
 Estimated Overhead Costs

Estimated Units to be Produced

              =
Predetermined Overhead Rate
If every item produced were
identical we could allocate a
fixed amount to each item.

But . . .

That is rarely the case.
   Therefore, we allocate (apply) overheads based on
    some measure of relative effort put into each item
    (activity base). Common activity bases include:

    • Direct Labor Hours
    • Direct Labor Dollars
    • Machine Hours
Vektek, Inc. thinks machine hours is the best
activity base for its manufacturing overhead.
The estimate of annual overhead costs for its
jobs was $615,000. The company incurred
actual overhead costs totaling $630,000. The
budgeted machine hours for the year totaled
20,000. How much is the predetermined
overhead rate?
a. $30.75 per machine hour
b. $31.50 per machine hour
c.   $31.50 per job
d. $0.75 per job
Vektek, Inc. thinks machine hours is the best
activity base for its manufacturing overhead.
The estimate of annual overhead costs for its
jobs was $615,000. The company incurred
actual overhead costs totaling $630,000. The
budgeted machine hours for the year totaled
20,000. How much is the predetermined
overhead rate?
a. $30.75 per machine hour
b. $31.50 per machine hour
c.   $31.50 per job
d. $0.75 per job
Vektek, Inc. used 1,000 hours of machine time
to process Job No. B12 during the. How much
manufacturing overhead should be applied to
Job No. B12?
a. $630
b. $30,750
c.   $31,500
d. $615
Vektek, Inc. used 1,000 hours of machine time
to process Job No. B12 during the. How much
manufacturing overhead should be applied to
Job No. B12?
a. $630
b. $30,750
c.   $31,500
d. $615
        Predetermined Overhead Rate
   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.

   The formula for a predetermined overhead rate is
The concept of applying overheads to production
based on some activity base is used for both

          Job Cost and

          Process Cost systems.
Let’s review job cost Journal Entries


 The entries are similar for
    ◦ Material
    ◦ Labor
    ◦ Manufacturing Overhead

 But they are NOT identical
             Flow of Material Costs

Step 1 (Journal Entry   1   )       WIP

Purchase Material




     Raw Material

 Direct                         Finished Goods
Materials
$85,000
                    1

Raw Materials                85,000
 Accounts Payable                     85,000
    Purchase Raw Materials
                Flow of Material Costs
Step 2 (Journal Entry   2   )                     WIP
Raw material is issued to a job            Direct
based on the job’s specific          Dr   Materials
                                          $80,000
requirements.


        Raw Material

    Direct        Direct                   Finished Goods
                                Cr
   Materials     Materials
   $85,000       $80,000
                     1

Raw Materials                85,000
 Accounts Payable                     85,000
    Purchase raw materials
                     2

WIP                          80,000
 Raw Materials                        80,000
    Issued material to WIP
                Flow of Material Costs
Step 2 (Journal Entry   2   )                         WIP
A related entry is to issue raw            Direct
material for indirect production Dr       Materials
                                          $80,000
needs (grease, cleaning supplies).


        Raw Material

    Direct        Direct                  Manufacturing O/H
                                Cr
   Materials     Materials
   $85,000       $80,000             Dr
                                          Indirect
                                          Materials
                 Indirect                  $2,000
                                Cr
                 Materials
                  $2,000
                      1

Raw Materials                   85,000
 Accounts Payable                        85,000
    Purchase raw materials
                      2
WIP                             80,000
 Raw Materials                           80,000
    Issued material to WIP
                      3

Manufacturing Overheads          2,000
 Raw Materials                            2,000
     Issued indirect material
                                    Labor is similar.
Factory Labor          1

Raw Materials                 90,000
  Wages
  Accounts Payable                     90,000
      June mfg payroll
                          2
WIP                           85,000
  Factory Labor
 Raw Materials                         85,000
      Dir. labor to WIP
                          3

Manufacturing Overheads        5,000
 Factory Labor
 Raw Materials                          5,000
     Indir. labor to O/H
                      1

Manufacturing O/H         133,000
 Accounts Payable                   133,000

                      2

WIP                       140,000
  Manufacturing O/H              140,000
            Flow of Manufacturing Costs

 Work-In Process              Finished Goods
 Direct        Finished     Finished
Materials       Goods        Goods
$80,000        $250,000     $250,000
 Direct
 Labor
$85,000

 Factory
Overhead
                             Cost of Goods Sold
$140,000


Balance
$45,000
            Flow of Manufacturing Costs

 Work-In Process                 Finished Goods
 Direct        Finished        Finished     Goods
Materials       Goods           Goods        Sold
$80,000        $250,000        $250,000    $210,000
 Direct
 Labor
$85,000
                     Prepare
 Factory
Overhead
                     these 2
                     entries    Cost of Goods Sold
$140,000
                                Goods
Balance                          Sold
$45,000                        $210,000
            Flow of Manufacturing Costs

 Work-In Process              Finished Goods
 Direct        Finished     Finished       Goods
Materials       Goods        Goods          Sold
$85,000        $250,000     $250,000      $210,000
 Direct
 Labor                       Balance
$100,000                     $40,000

 Factory
Overhead
                             Cost of Goods Sold
$140,000
                              Goods
Balance                        Sold
$75,000                      $210,000
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet




                                 Income Statement


Period Costs
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet
  Materials
 Purchases

   Direct
   Labor

  Factory
 Overhead                        Income Statement


Period Costs
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet
  Materials
 Purchases

   Direct
   Labor

   Factory
  Overhead                       Income Statement


Period Costs
 Selling and
Administrative
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet
  Materials          Raw
 Purchases        Materials
                  Inventory
   Direct
   Labor

   Factory
  Overhead                       Income Statement


Period Costs
 Selling and
Administrative
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet
  Materials          Raw
 Purchases        Materials
                  Inventory
   Direct
   Labor           Work in
                   Process
   Factory        Inventory
  Overhead                       Income Statement


Period Costs
 Selling and
Administrative
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet
  Materials          Raw
 Purchases        Materials
                  Inventory
   Direct                        Cost of Goods
   Labor                         Manufactured
                   Work in
                   Process
   Factory        Inventory
  Overhead                       Income Statement
                   Finished
                    Goods
Period Costs      Inventory
 Selling and
Administrative
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet
                  Materials        Product costs
  Materials
 Purchases        Inventory      flow through the
                                 balance sheet to
   Direct                           the income
                   Work in
   Labor                             statement
                   Process
                  Inventory
   Factory
  Overhead                       Income Statement
                   Finished
                    Goods            Cost of
Period Costs      Inventory        Goods Sold

 Selling and
Administrative
Manufacturing Cost Flows and Classifications
   Costs
Product Costs    Balance Sheet
  Materials          Raw
 Purchases        Materials
                  Inventory      Period costs flow
   Direct                          directly to the
   Labor           Work in       income statement
                   Process
   Factory        Inventory
  Overhead                       Income Statement
                   Finished
                    Goods            Cost of
Period Costs      Inventory        Goods Sold

 Selling and                       Selling and
Administrative                    Administrative
               Goodwell Printers
               Income Statement
     For the Month Ended January 31, 2010

Sales                                  $400,000
Cost of goods sold                      210,000
Gross profit                           $190,000
Operating expenses:
   Selling expenses          $80,000
   Administrative expenses    50,000
Total operating expenses               130,000
Net income                             $ 60,000
 Beginning raw materials inventory was
$32,000. During the month, $276,000 of
raw material was purchased. A count at the
end of the month revealed that $28,000 of
raw material was still present. What is the
cost of direct material used?
   a.   $276,000
   b.   $272,000
   c.   $280,000
   d.   $ 2,000
 Beginning raw materials inventory was
$32,000. During the month, $276,000 of
raw material was purchased. A count at the
end of the month revealed that $28,000 of
raw material was still present. What is$the
                     Beg. raw materials        32,000
cost of direct material used?
                   + Raw materials
                        purchased             276,000
   a.   $276,000 = Raw materials available
   b.   $272,000 – Endinguse in production $ 308,000
                        for
                             raw materials
   c.   $280,000       inventory              28,000
   d.   $ 2,000 = Raw materials used
                        in production       $ 280,000
 Direct materials used in production totaled
$280,000. Direct Labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
   a.   $555,000
   b.   $835,000
   c.   $655,000
   d.   Cannot be determined.
 Direct materials used in production totaled
$280,000. Direct Labor was $375,000 and
factory overhead was $180,000. What were
                    Direct Materials    $ 280,000
                  + costs incurred for the
total manufacturingDirect Labor           375,000
                  + Mfg. Overhead         180,000
month?            = Mfg. Costs Incurred
   a.   $555,000      for the Month    $ 835,000

   b.   $835,000
   c.   $655,000
   d.   Cannot be determined.
 Beginning work in process was
$125,000. Manufacturing costs incurred
for the month were $835,000. There
were $200,000 of partially finished goods
remaining in work in process inventory at
the end of the month. What was the cost
of goods manufactured during the
month?
   a.   $1,160,000
   b.   $ 910,000
   c.   $ 760,000
   d.   Cannot be determined.
 Beginning work in process was
$125,000. Manufacturing costs incurred
for the month were $835,000. There
were $200,000 of partially finished goods
remaining in work in process inventory at
                        What was
the end of the month.Beginning work in the cost
of goods manufactured during the
                         process inventory  $ 125,000
                    + Mfg. costs incurred
month?                   for the period       835,000

   a.   $1,160,000
                    = Total work in process
                         during the period  $ 960,000
   b.   $ 910,000 – Ending work in
   c.   $ 760,000 = Cost of goods
                         process inventory    200,000


   d.   Cannot be determined.
                         manufactured       $ 760,000
 Raw Materials Inventory –
   a general ledger account
   a control account that summarizes the
        detailed data regarding specific inventory
        accounts in the subsidiary ledger.
   The subsidiary ledger consist of individual
    records for each item of raw materials.
     May be accounts or manually/mechanically prepared
      cards
     May be kept as computer data files
   May be recognized daily
     For example, machinery repairs, indirect materials, and indirect
      labor.

   May also be recorded periodically through
    adjusting entries
     For example, property taxes, depreciation, and insurance.
     The summary entry for Wallace Manufacturing Company is:
 RM is assigned to a job when materials are issued.
 A materials requisition slip - the written
  authorization for issuing raw materials.
 May be either directly used on a job or may be
     indirect materials.
   Job cost sheet
     Used to record the costs of a specific job.
     Used to determine the total and unit costs of
      a completed job.
The sum of the direct materials columns of the job cost sheets
  should equal the direct materials debited to Work in Process
                           Inventory.
The sum of the manufacturing overhead columns of the job
    cost sheets should equal the manufacturing overhead
     debited (i.e., applied) to Work in Process Inventory.
 The balance in Work in Process Inventory
should equal the sum of the costs shown on
   the job cost sheets of unfinished jobs.
When a job is completed, the costs
 are summarized and the Journal
 Entry to transfer the product from
 WIP to FG is:
   Inventory remains in Finished Goods Inventory
    until it is sold.
   Cost of goods sold is recognized when a sale
    occurs.
    Example:
    On January 31 Wallace Manufacturing sells Job No. 101, costing
    $39,000, for $50,000. The entries are:
   The cost of goods manufactured schedule now shows
    manufacturing overhead applied rather than actual
    overhead costs.
   Applied overhead is added to direct materials and direct
    labor to determine total manufacturing costs
   A debit balance in manufacturing overhead
    means that overhead is underapplied.
      Overhead assigned to work in process is less
       than overhead incurred.
   A credit balance in manufacturing overhead
    means that overhead is overapplied.
      Overhead assigned to work in process is
       greater than overhead incurred.
   Any year-end balance in Manufacturing
    Overhead is eliminated by adjusting cost of
    goods sold.
       Underapplied overhead is debited to CGS
       Overapplied overhead is credited to CGS

    Example:
    Wallace Mfg. has a $2,500 credit balance in Manufacturing
    Overhead at December 31. The adjusting entry for the
    overapplied overhead is
   Harrell Company uses a predetermined overhead rate
    based on direct labor hours to apply manufacturing
    overhead to jobs. At the beginning of the year the
    company estimated its total manufacturing overhead
    cost at $400,000 and its direct labor-hours at
    100,000 hours. The actual overhead cost incurred
    during the year was $350,000 and the actual direct
    labor hours incurred on jobs during the year was
    90,000 hours. The manufacturing overhead for the
    year would be:
              a) $10,000 under applied.
              b) $10,000 over applied.
              c) $50,000 under applied.
              d) $50,000 over applied.
   Harrell Company uses a predetermined overhead rate
    based on direct labor hours to apply manufacturing
    overhead to jobs. At the beginning of the year the
    company estimated its total manufacturing overhead
    cost at $400,000 and its direct labor-hours at
    100,000 hours. The actual overhead cost incurred
    during the year was $350,000 and the actual direct
    labor hours incurred on jobs during the year was
    90,000 hours. The manufacturing overhead for the
    year would be:
              a) $10,000 under applied.
              b) $10,000 over applied.
              c) $50,000 under applied.
              d) $50,000 over applied.

				
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