Accounting Systems for
Manufacturing Businesses
CHAPTER 10
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Learning Objectives
After studying this chapter, you should be able to:
• Describe the differences between financial and
managerial accounting
• Distinguish the activities of a manufacturing
business from those of a merchandising or
service business
• Define and illustrate materials, factory labor, and
factory overhead costs
• Describe cost accounting systems used by
manufacturing businesses
(Continued…)
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Learning Objectives
After studying this chapter, you should be able to:
•Describe and illustrate a job order cost accounting
system
•Use job order cost information for decision making
•Describe the flow of costs for a service business
that uses a job order cost accounting system
•Describe just-in-time manufacturing practices
•Describe and illustrate the use of activity-based
costing in a service business
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Learning Objective 1
Describe the differences between
financial and managerial accounting
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Managerial Accounting
• Focuses on recording and reporting information
for use by _________________ in decision
making
• Helps the management to make decisions such
as:
• What should be the selling price of a product?
• Which alternative should the company choose?
• What is the cost of manufacturing a product?
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Financial and Managerial
Accounting
____________________
____________________
____________________
__________________________
_____________________
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Learning Objective 2
Distinguish the activities of a
manufacturing business from those of a
merchandising or service business
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Nature of Manufacturing Businesses
• Service firms earn revenue from ______
_____________
• Merchandising firms earn revenue from ______
_______________________
• Manufacturing firms• Earn revenue from ___________ and _____
_________ goods
• Have three inventories: ________, _________,
and __________
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Learning Objective 3
Define and illustrate materials, factory
labor, and factory overhead costs
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Illustrative Example
• Costs can provide an immediate benefit or a
benefit that is deferred to future periods
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Direct Materials Cost
• Includes the cost of materials that is an integral part of the
____________
• Forms a significant portion of the total cost of the product
• For Quixote’s Guitars: cost of the wood used in producing
each guitar will be the __________
• The cost of materials that are not an integral part of the
finished product are called ___________
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Direct Labor Cost
• The cost of employee wages who are directly involved in
converting materials into ____________
• For Quixote Guitars: wages of the employees who operate
the saws/cutting machines and assemble the guitars
• Labor costs that do not enter directly into the manufacture
of a product are called ______________
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Factory Overhead Cost
• Costs other than ____________ and ____________
incurred in the manufacturing process
• For Quixote Guitars: machine depreciation, factory
supplies, factory insurance, lighting the factory, and many
others
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Analysis and Reporting Terms:
Prime and Conversion Costs
• Prime Costs: __________ and _________ costs
• Conversion Costs: ________ and _________
costs
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Financial Reporting Terms:
Product Costs and Period Costs
• Product Costs:
__________,
__________,
___________
• Period Costs:
__________
__________
__________
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Learning Objective 4
Describe cost accounting systems used
by manufacturing businesses
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Cost Accounting Systems
• Objective: accumulate _________
• Used to establish _______, _________, and
develop ___________
• Two main types:
• _______ cost systems
• _______ cost systems
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Job Order vs. Process Cost Systems
• Job Order
• Costs are accumulated by _______
• Used for custom products or companies with a
large variety of products
• Service firms often use __________ systems
• Process
• Costs are accumulated by _______ or _______
• Used for products that are not distinguishable
from each other during a continuous production
process
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Learning Objective 5
Describe and illustrate a job order cost
accounting system
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Job Order Cost System for Quixote
Guitars
__________
__________
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Materials
• Accounting for the purchase of materials on
credit
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Materials Cost Flows
• Labor information
and cost flows
(time tickets) for
Quixote Guitars
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Requisitioning Materials
• Flow of materials from the storeroom to
production
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Direct Labor Cost Flows
• Labor
information and
cost flows (time
tickets) for
Quixote Guitars
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Factory Labor
• Two primary objectives of time tickets:
• Determine the correct amount to pay ________
for each pay period
• Properly allocate factory labor costs to ______
_____ and ______________
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Factory Overhead Cost
• Includes all manufacturing costs other than
__________ and __________
• Comes from various sources, including factory
depreciation, indirect materials, indirect labor,
and factory utilities
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Allocating Factory Overhead
• Overhead gets assigned to jobs through
________________
• The measure used to allocate overhead is called
an ___________
• Should be a measure that reflects the _______ or
_____ of overhead
• Examples: direct labor hours, machine hours, or
direct material dollars
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Predetermined Factory Overhead Rate
• Overhead may be applied using a
______________________
__________________________
______________________
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Predetermined Factory Overhead Rate
– Quixote Guitars
• Assume Quixote Guitars estimates $50,000 of
total factory overhead for the year and the
activity base to be 10,000 direct labor hours
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Why Use Predetermined Rates?
• For ______ information
• Waiting until the end of a period when overhead
costs are known would be accurate, but not
timely for ___________
• Many companies use __________ costing which
allocates overhead costs using multiple
predetermined rates
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Applying Factory Overhead to Work in
Process
• Overhead costs
are applied to
work in process
using job sheets
and the
predetermined
rate
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Applying Factory Overhead to Work in
Process
• The $4,250 of applied overhead is recorded as a
transfer out of factory overhead into work-inprocess
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Actual Overhead vs. Applied Overhead
• Actual factory overhead costs incurred will likely
differ from the amount _______
• Over-applied overhead occurs when the amount
applied ________ actual costs
• Under applied overhead occurs when the
amount applied _________ actual costs
• Large under-/over-applied balances need to be
investigated
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Disposal of Factory Overhead Balance
• The balance in factory overhead is carried
forward from month to month, but needs to be
closed out at the __________
• One approach is to transfer the balance to cost
of goods sold
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Work in Process
• Costs incurred
for various jobs
are
accumulated on
__________
and they
represent work
in process
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Completion of Job 71
• When Job 71 was completed, total
manufacturing costs were transferred out of the
work in process account and into the finished
goods account
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Finished Goods Ledger for Quixote
Guitars
• Finished goods is a ________ account
comprised of individual finished goods
subsidiary ledgers
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Sales and Cost of Goods Sold (COGS)
• Manufacturing business sales are treated the
same as merchandising business sales
• Assume Quixote Guitars sold 40 guitars for $850
each (cost was $500 each)
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Period Costs
• ______ used in generating ______ during the
current period
• Not involved in the manufacturing process
• Two categories:
• ________ expenses– marketing the product and
delivering it to customers
• ________ expenses– administration of the
business (not related to manufacturing or selling)
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Selling Expenses and Administrative
Expenses
______
___________
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Accounting for Selling and
Administrative Expenses
• Assume Quixote Guitars has sales salaries of
$2,000 and office salaries of $1,500
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Summary of Cost Flows for Quixote
Guitars
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December Income Statement for
Quixote Guitars
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Learning Objective 6
Use job order cost information for decision
making
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Cost Evaluation and Control
• Job order cost systems can be used to evaluate
an organization’s cost performance
• Job 63 used 100 more board feet of wood to
manufacture the same number of guitars. Why?
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Job Order Costing for Decision Making
• Possible reasons for the extra use of materials
for Job 63:
•
•
•
•
_________________
_________________
_________________
_________________
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Learning Objective 7
Describe the flow of costs for a service
business that uses a job order cost
accounting system
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Job Order Cost Systems for Service
Businesses
• Useful for ______ and _______ operations
• Focus is on direct labor and overhead and are
accumulated in a _____________ account
• When jobs are completed, the ____________ is
transferred to a cost of services account (similar
to COGS)
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Job Order Cost Systems for Service
Businesses
• A _________________ is not necessary since
revenues are recorded only after the service has
been provided
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Learning Objective 8
Describe just-in-time manufacturing
practices
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Just-In-Time Practices
• Manufacturing approaches are changing as
companies need to produce products with high
quality, low cost, and instant availability
• Focuses on reducing ____, _____ and
eliminating poor quality within manufacturing
processes
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Just-In-Time versus Traditional
Manufacturing
____________
____________
________________________
____________________
_____________
_________________
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Reducing Inventory
• As the water level
(inventory) in the
river drops, the
rocks (production
problems)
become visible
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Reducing Lead Times
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Reducing Setup Time
Setup equipment to
make brown bags
Setup equipment to
make sky blue bags
Setup equipment to
make basic white
bags
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Emphasizing Product-Oriented Layout
• Product-oriented layout :
__________________
__________________
________________
• Process-oriented layout:
___________________
___________________
__________________
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Emphasizing Employee Involvement
• Grants employees responsibility and authority to
__________
• Employees are often ________ to perform any
operation within a product cell
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Emphasizing Pull Manufacturing
• Products manufactured only as they are needed
by the ________
• Traditional manufacturing emphasizes ____
manufacturing
• ______: the Japanese system of pull
manufacturing
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Emphasizing Zero Defects
• Eliminate ____________
• Six Sigma approach to ____ defects
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Emphasizing Supply Chain
Management
• __________
__________ (EDI)
• ___________
_____________ (RFID)
• _____________
_____________ (ERP)
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Learning Objective 9
Describe and illustrate the use of activitybased costing in a service business
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Activity-Based Costing (ABC)
• Uses _______________ rates to allocate factory
overhead more accurately than using a
_________________ rate
• Costs are initially accounted for in _______ –
each cost pool has its own rate
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Activity-Based Costing (ABC)
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Overhead Allocation Using Activity
Based Costing
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Profitability Report Using Activity Based
Costing
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End of Chapter 10
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