Slide 1Business Activity DifferencesSlide 3Ch. 10: Manufacturing Cost TermsCh. 10: Manufacturing Cost Flow – Job Order CostingCh. 10: Manufacturing Cost FlowCost Flow FormulasCh. 10: Manufacturing Cost TermsCh. 10: Manufacturing Cost TermsCh. 10: Manufacturing Cost TermsCalculating and Applying OverheadSlide 12Slide 13Slide 14Slide 15Ch. 10: Manufacturing Cost Flow: Applying FOH costs to jobsCh. 10: Manufacturing Cost Flow: Applying FOH costs to jobsCh. 10: Manufacturing Cost Flow - Applying FOH costs to jobsSlide 19Ch. 10: Manufacturing Cost Flow – Job Order CostingSlide 21Slide 22Slide 23Ch. 10: Manufacturing Cost Flow – Financial StatementsCh. 10: Manufacturing Cost Flow – Financial StatementsAccounting for ManufacturersChapter 10A200 – Survey of AccountingUniversity of Tennessee2Business 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. xxCost Flow FormulasCost of Goods Sold Raw Materials InventorySales Beginning RM InventoryLess: Gross Profit Plus: Purchased Materials=COGS Less: Materials Used in ProductionDirect and Indirect Materials Ending Raw Materials InventoryDirect Materials Cost Work in Process InventoryBeginning Materials Balance Beginning WIPPlus: Materials Purchased Plus: Direct MaterialsLess: Indirect Materials Plus: Direct LaborLess: Materials Inventory Plus: Factory Overhead=Direct Materials Cost Less: Amt. Transfd. to FG (COGM)=Ending WIP InventoryDirect Labor CostTotal Manufacturing Costs for the PeriodLess: Direct Materials Cost Finished Goods InventoryLess: Factory Overhead Beginning FG Inventory=Direct Labor Cost Plus: Amt. Transf. to FG (COGM)Less: COGS=Ending FG Inventory78Ch. 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 productExample: Fabric used to make a dressIndirect 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 productExample: Supplies used in the warehouse where dresses are madeIndirect Materials cost is part of Factory Overhead cost9Ch. 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. is easily traced to the final productc. is integral to the productExample: Employee responsible for hand sewing a dressIndirect Labor is the cost of labor that is: a. not a significant portion of the product costsb. not easily traced to the final productExample: Wages paid to warehouse nightly cleaning crewIndirect Labor cost is part of Factory Overhead cost10Ch. 10: Manufacturing Cost TermsCost of Factory Overhead FOH costs: All product costs incurred during the manufacturing process except for direct materials or direct laborComponents of FOH:a. Indirect Materials costb. Indirect Labor cost c. Other costs of operating the factory that are not traceable to a given productSince 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 insuranceCalculating and Applying Overhead 1. Calculate a Predetermined Overhead Rate based on