Accounting for Manufacturers Chapter 10 A200 Survey of Accounting University of Tennessee 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 Cost Flow Formulas Cost of Goods Sold Raw Materials Inventory Sales Beginning RM Inventory Less Gross Profit Plus Purchased Materials COGS Less Materials Used in Production Direct and Indirect Materials Ending Raw Materials Inventory Direct Materials Cost Work in Process Inventory Beginning Materials Balance Beginning WIP Plus Materials Purchased Plus Direct Materials Less Indirect Materials Plus Direct Labor Less Materials Inventory Plus Factory Overhead Direct Materials Cost Less Amt Transfd to FG COGM Ending WIP Inventory Direct Labor Cost Total Manufacturing Costs for the Period Less Direct Materials Cost Finished Goods Inventory Less Factory Overhead Beginning FG Inventory Direct Labor Cost Plus Amt Transf to FG COGM Less COGS Ending FG Inventory 7 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 Example Fabric used to make a dress 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 Example Supplies used in the warehouse where dresses are made Indirect Materials cost is part of Factory Overhead cost 8 9 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 is easily traced to the final product c is integral to the product Example Employee responsible for hand sewing a dress Indirect Labor is the cost of labor that is a not a significant portion of the product costs b not easily traced to the final product Example Wages paid to warehouse nightly cleaning crew Indirect Labor cost is part of Factory Overhead cost 10 Ch 10 Manufacturing Cost Terms Cost of Factory Overhead FOH costs All product costs incurred during the manufacturing process except for direct materials or direct labor Components of FOH a Indirect Materials cost b Indirect Labor cost c Other costs of operating the factory that are not traceable to a given product Since Factory Overhead Costs FOH are not directly related to any individual product FOH costs must be applied to jobs products using a predetermined rate We must apply at an estimated rate as the above costs can t be directly traced to specific units see slide 15 Examples include salaries of production supervisors depreciation on factory equipment factory utilities factory rent factory supplies factory insurance Calculating and Applying Overhead 1 2 3 4 11 Calculate a Predetermined Overhead Rate based on Budgeted Estimated Data See Step 1 on Slide 16 Charge Actual FOH to the FOH temporary asset account See Slide s 13 15 Calculate the applied amount of FOH using the Predetermined Overhead Rate See Step 2 on Slides 16 then transfer out of FOH into WIP See Slide 19 Balance shortage in the FOH temporary asset account is defined as Over Under Applied overhead Because this is a temporary account any remaining balance must be eliminated See Slide 17 and 23 Note the important distinction between charging actual FOH and applying FOH Charging actual FOH involves actual amounts and the entry may be recorded as 1 Increase FOH 2 Increase FOH 3 Increase FOH Increase Payable Decrease Raw Materials Decrease Cash Applying FOH involves using a predetermined FOH rate based on estimates and the entry is recorded as Increase WIP Decrease FOH If the estimates equal actual amounts the balance in the temporary FOH asset account will be eliminated by transfer to WIP If estimates differ from actual which almost always is the case we have over or under applied FOH and must make 12 Ch 10 Manufacturing Cost Flow WoodLine Company manufactures custom cabinets March 2012 is the company s first month of operations Transaction 1 During March WoodLine