McGraw-Hill/Irwin
Chapter 9
Recording and
Evaluating
Conversion
Process Activities
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

9-2
What are the Primary Activities in the Conversion Process?
• Schedule production
• Obtain raw materials (internal transfer)
• Use labor and manufacturing resources to convert raw materials into finished goods
• Store finished goods until sold (internal transfer)

9-3
Which of the Conversion Process
Activities are Accounting Events?
• Obtain raw materials
 Increase work-in-process inventory
 Decrease direct materials inventory
• Use labor and overhead
 Increase work-in-process inventory
• Store finished goods
 Increase finished goods inventory
 Decrease work-in-process inventory

9-4
What is the Basic Flow of Information in the Conversion Process?
• Customer places an order and production is scheduled
• Raw materials are requisitioned and recorded
• Labor is used and recorded
• Cost record prepared and goods are manufactured
• Goods are finished and recorded

9-5
What are the Manufacturing
Inventory Accounts?
• Direct materials inventory
 Current asset (similar to Merchandise
Inventory for a merchandising company):
Cost of direct materials on hand
 Increases when purchases of direct materials are made (Chapter 8)
 Decreases when direct materials are requisitioned into production

9-6
Inventories Continued
• Work-in-process inventory
 Current asset: Cost of products that have been started but not completed
 Increases when direct materials are requisitioned into production
 Increases when direct labor is used in production
 Increases when manufacturing overhead is applied to production
 Decreases when products are finished

9-7
Inventories Continued
• Finished goods inventory
 Current asset: Cost of products that have been finished but not sold
 Increases when products are finished
 Decreases when products are sold (Chapter
10)

9-8
How do Costs Flow through the
Inventory Accounts?
Beginning direct materials inventory
+ Purchases of direct materials
= Cost of direct materials available for use
Direct materials issued into production
= Ending direct materials inventory

9-9
Cost Flows Continued
Beginning work-in-process inventory
+ Direct materials issued into production
+ Direct labor used in production
+ Applied manufacturing overhead
= Cost of goods in process
Cost of goods manufactured
= Ending work-in-process inventory

9-10
Cost Flows Continued
Beginning finished goods inventory
+ Cost of goods manufactured
= Cost of goods available for sale
Cost of goods sold
= Ending finished goods inventory

9-11
How does the Manufacturing
Overhead Application Process Work?
• Beginning of period
 Estimate overhead for each cost pool
• Unit-related
• Batch-related
• Product-sustaining
• Facility-sustaining
 Estimate cost drivers for each cost pool
 Divide estimated overhead by estimated cost driver = predetermined overhead rate

9-12
Overhead Application Continued
• During period
 Apply overhead to production as the cost driver is used
 Record actual overhead as incurred
• End of period
 Compare total applied overhead to total actual overhead
 Close the overhead account to Cost of Goods
Sold (difference between applied and actual)

9-13
What are Variances?
• Difference between the standards and the actual prices or quantities
• Direct labor variances
 Direct labor price variance
 Direct labor usage variance
• Direct material variances
 Direct material price variance
 Direct material usage variance
 Direct material inventory variance

9-14
How are Direct Labor Variances
Calculated?
• Direct labor price variance
 (SP – AP) * AH
 Tells us whether we paid more or less for labor than anticipated (budgeted)
• Direct labor usage variance
 (AH – SHa) * SP
 Tells us whether we worked more or less hours than planned given the number of units produced

9-15
How are Direct Material Variances
Calculated?
• Direct materials price variance
 (AP – SP) * AQp
 Tells us whether we paid more or less for direct materials than anticipated (budgeted)
• Direct materials usage variance
 (AQu – SQa) * SP
 Tells us whether we used more or less direct materials than planned given the number of units produced
• Direct materials inventory variance
 (AQp – AQu) * SP
 Tells us whether inventory levels are increasing or decreasing