Slide 1Business Activity DifferencesSlide 3Ch. 10: Manufacturing Cost TermsCh. 10: Manufacturing Cost Flow – Job Order CostingCh. 10: Manufacturing Cost FlowCh. 10: Manufacturing Cost TermsCh. 10: Manufacturing Cost TermsCh. 10: Manufacturing Cost TermsSlide 10Slide 11Slide 12Slide 13Slide 14Ch. 10: Manufacturing Cost Flow – Job Order CostingSlide 16Slide 17Ch. 10: Manufacturing Cost Flow – Financial StatementsCh. 10: Manufacturing Cost Flow – Financial StatementsAccounting for ManufacturersChapter 10A200 – Survey of AccountingUniversity of TennesseeFall 20152Business Activity DifferencesService 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 statementManufacturing 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, andFinished Goods Inventory on the balance sheet- report Cost of Goods Sold expense on the income statementGeneral Cost Rules(recall Ch. 7)All costs are recorded as either: Asset on Balance SheetCapitalize cost if the item will beused in the future to helpgenerate 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 StatementExpense cost if the item is usedup in the current period to helpgenerate revenue34Ch. 10: Manufacturing Cost TermsProduct CostsCapitalized as an Asset (Inventory) on the Balance Sheet:Direct Materials costDirect Labor cost Conversion Costs Factory Overhead cost = Total Manufacturing CostsCost of Goods Sold (COGS) Expense: theDM, DL, and FOH cost of the goods sold in the current periodPeriod Costs Expense on the Income Statement Selling Expenses: costs supporting product sales this periodAdministrative Expenses: costs ofrunning the office this periodCh. 10: Manufacturing Cost Flow – Job Order CostingManufacturing 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 statementJob Order Cost Systems accumulate product costs in total and by job (individual product or product type)56Ch. 10: Manufacturing Cost FlowHow do the Goods move? Warehouse Production floor Showroom No longer herewhen materials when work begins when product when product are purchased on product is completed is soldHow do the Costs move? Balance Sheet Income Statement RM Inventory WIP Inventory FG Inventory COGS Beg. Bal. xx Beg. Bal. xx Beg. Bal. xx Beg. Bal. 0 + Purchases xx + DM xx + COGM xx + COGS xx - Issuances (xx) + DL xx - COGS (xx) + FOH xx = End. Bal. xx = End. Bal. xx - COGM (xx) = End. Bal. xx = End. Bal. xx7Ch. 10: Manufacturing Cost TermsCost of MaterialsDirect 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 productc. integral to the productIndirect 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 productDirect Materials cost increases Work In Process Inventory directly.Indirect Materials cost increases Factory Overhead.8Ch. 10: Manufacturing Cost TermsCost of Factory LaborDirect 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 productc. integral to the productIndirect Labor is the cost of labor that is: a. not a significant portion of the total cost of the productb. not easily traced to the final productDirect Labor cost increases Work In Process Inventory directly.Indirect Labor cost increases Factory Overhead.9Ch. 10: Manufacturing Cost TermsCost of Factory Overhead FOH costs are product costs that are not Direct Materials or Direct Labora. Indirect Materials costb. Indirect Labor cost (including overtime and idle time)c. Other costs of operating the factory:Factory Overhead costs are gathered in the FOH account.They then increase Work In Process Inventory.Ch. 10: Manufacturing Cost FlowWoodLine 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 BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityRaw Materials Inventory =Accounts Payable225,000 = 225,00010Ch. 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 FLOWSBALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityRaw Materials InventoryWork in Process InventoryFactory Overhead(175,000) 160,000 15,00011Ch. 10: Manufacturing Cost FlowTransaction #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. STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityWork in Process InventoryFactory OverheadWagesPayable216,000 42,000 = 258,00012Ch. 10: Manufacturing Cost FlowTransaction #4: During March, WoodLine incurred on account $8,000