Accounting for Manufacturers Chapter 10 A200 Survey of Accounting University of Tennessee Fall 2015 2 Business Activity Differences Service Businesses Ch 1 3 provide services to customers do not buy or sell goods report no inventory on the balance sheet report no cost of sales expense on the income statement Merchandising Businesses Ch 4 buy finished goods from manufacturers and sell them to customers report Merchandise Inventory on the balance sheet report Cost of Merchandise Sold expense on the income statement Manufacturing Businesses Ch 10 buy the elements to make goods DM DL and FOH and sell them to customers report Raw Materials Inventory Work in Process Inventory and Finished Goods Inventory on the balance sheet report Cost of Goods Sold expense on the income statement 3 General Cost Rules recall Ch 7 All costs are recorded as either Asset on Balance Sheet Capitalize cost if the item will be used in the future to help generate revenue Current asset if it will be used within one year Long term asset if it will be used in longer than one year Expense on Income Statement Expense cost if the item is used up in the current period to help generate revenue 4 Ch 10 Manufacturing Cost Terms Period Costs Product Costs Capitalized as an Asset Inventory on the Balance Sheet Selling Expenses costs supporting product sales this period Direct Materials cost Direct Labor cost Expense on the Income Statement Conversion Costs Factory Overhead cost Total Manufacturing Costs Cost of Goods Sold COGS Expense the DM DL and FOH cost of the goods sold in the current period Administrative Expenses costs of running the office this period 5 Ch 10 Manufacturing Cost Flow Job Order Costing Manufacturing businesses accumulate product costs a To help them set a price for goods that will generate profit we will study pricing in Ch 12 b To control operations costs by department or process compare actual costs to budgeted costs c To develop financial statements cost of ending inventory on balance sheet cost of goods sold on income statement Job Order Cost Systems accumulate product costs in total and by job individual product or product type 6 Ch 10 Manufacturing Cost Flow How do the Goods move Warehouse Production floor when materials are purchased Showroom when work begins when product on product is completed No longer here when product is sold How do the Costs move Balance Sheet RM Inventory Beg Bal Purchases Issuances End Bal xx xx xx xx Income Statement WIP Inventory Beg Bal DM DL FOH xx COGM End Bal xx xx xx xx xx FG Inventory Beg Bal xx COGM xx COGS xx End Bal End Bal xx COGS Beg Bal COGS xx 0 xx Ch 10 Manufacturing Cost Terms Cost of Materials Direct Materials is the cost of materials that are a a significant portion of the total cost of the product b easily traced to the final product c integral to the product Indirect Materials is the cost of materials that are a not a significant portion of the total cost of the product b not easily traced to the final product Direct Materials cost increases Work In Process Inventory directly Indirect Materials cost increases Factory Overhead 7 8 Ch 10 Manufacturing Cost Terms Cost of Factory Labor Direct Labor is the cost of labor that is a a significant portion of the total cost of the product b easily traced to the final product c integral to the product Indirect Labor is the cost of labor that is a not a significant portion of the total cost of the product b not easily traced to the final product Direct Labor cost increases Work In Process Inventory directly Indirect Labor cost increases Factory Overhead 9 Ch 10 Manufacturing Cost Terms Cost of Factory Overhead FOH costs are product costs that are not Direct Materials or Direct Labor a b c Indirect Materials cost Indirect Labor cost including overtime and idle time Other costs of operating the factory Factory Overhead costs are gathered in the FOH account They then increase Work In Process Inventory 10 Ch 10 Manufacturing Cost Flow WoodLine Company manufactures custom cabinets March 2015 is the company s first month of operations Transaction 1 During March WoodLine purchased on account 225 000 of raw materials STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Liabilities Raw Materials Inventory Accounts Payable 225 000 225 000 Equity 11 Ch 10 Manufacturing Cost Flow Transaction 2 During March WoodLine began work on three different cabinet orders Job 101 2 240 units 102 1 400 units and 103 310 units It transferred 175 000 of materials to production Direct materials cost was 160 000 Job 101 80 000 Job 102 68 750 and Job 103 11 250 Indirect materials cost was 15 000 STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Raw Materials Inventory Work in Process Inventory Factory Overhead 175 000 160 000 15 000 Liabilities Equity 12 Ch 10 Manufacturing Cost Flow Transaction 3 During March WoodLine incurred 216 000 of direct labor cost Job 101 102 000 Job 102 86 000 and Job 103 10 000 and 42 000 of indirect labor cost It had not yet paid the employees INCOME STATEMENT STATEMENT OF CASH FLOWS BALANCE SHEET Assets and STATEMENT OF RETAINED EARNINGS Work in Process Inventory Factory Overhead 216 000 42 000 Liabilities Wages Payable 258 000 Equity 13 Ch 10 Manufacturing Cost Flow Transaction 4 During March WoodLine incurred on account 8 000 of other factory overhead costs and 163 000 of selling and administrative expense STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Factory Overhead 8 000 Liabilities Accounts Payable 171 000 Equity Retained Earnings 163 000 163 000 S A Expense 14 Ch 10 Manufacturing Cost Flow Transaction 5 WoodLine applied the factory overhead costs to jobs Job 101 10 000 Job 102 50 250 and Job 103 4 750 INCOME STATEMENT STATEMENT OF CASH FLOWS BALANCE SHEET Assets and STATEMENT OF RETAINED EARNINGS Work in Process Inventory Factory Overhead 65 000 65 000 Liabilities Equity 15 Ch 10 Manufacturing Cost Flow Job Order Costing WoodLine Company computed cost per unit for each job as follows Job 101 Job 102 Total Job 103 Work in Process DM Cost Trans 2 DL Cost Trans 3 FOH Cost Trans 5 80 000 120 000 10 000 68 750 86 000 50 250 11 250 10 000 4 750 160 000 216 000 65 000 Total Mfg Cost 210 000 205 000 26 000 441 000 of units 2 240 u 1 400 u 310 u Cost per unit 93 75 u 146 43 u 83 87 u WoodLine s cabinet prices will be set based on cost Ch 12 16 Ch 10 Manufacturing Cost