ch10lecturenotes

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Chapter 10 Lecture Notes
1. Financial Accounting versus Managerial Accounting
2. Acting ethically is where integrity and credibility prevail; issues where professional judgments must
be made arise often.
3. Service companies have only period costs.
o Period costs are incurred and expensed in the same accounting period.
o Unit cost per service = Total service costs/Total number of services provided
4. Merchandising companies have both product and period costs.
o Inventoriable product costs are held in inventory until sold.
o Beginning Inventory + Net Purchases + Freight In – Ending Inventory = Cost of Goods Sold
o Unit cost per item = Total cost of goods sold/Total number of items sold
5. Manufacturing companies maintain three kinds of inventory:
o Materials inventory
o Work in process inventory
o Finished goods inventory
6. Three components of manufacturing costs or inventoriable product costs are:
o Direct materials
o Direct labor
o Manufacturing overhead

Indirect materials

Indirect labor
 Other indirect costs
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1. Managers use cost information to plan and control the cost of resources, and to price products.
o
Job Order Costing

o
accumulates costs for each job
Process Costing

accumulates the costs of each process needed to complete the product
2. A job cost record is used in job order costing to accumulate the three types of costs:
o
Direct materials
o
Direct labor
o
Manufacturing overhead
3. Costs flow through several accounts in a job order costing system:
o
Work in process inventory → Finished goods inventory → Cost of goods sold
4. A materials requisition sends the signal to the warehouse to bring materials into production
5. Job order costing requires that manufacturing overhead be allocated
o
Assign overhead to specific jobs:

Step 1: Compute the predetermined manufacturing overhead rate
=

Step 2: Allocate manufacturing overhead costs to jobs as products are manufactured
=

Total estimated manufacturing overhead costs
Total estimated quantity of the manufacturing overhead allocation base
Predetermined manufacturing
overhead rate (from Step 1)
X
Actual quantity of the allocation
base used by each job
Record the allocated overhead (from Step 2) with a debit to Work in process inventory and a credit
to Manufacturing overhead
o
Adjust underallocated or overallocated overhead at year-end by closing out the remaining balance in the
Manufacturing overhead account to Cost of goods sold

Underallocated overhead will result in a credit to Manufacturing overhead and a debit to Cost of
goods sold at year-end

Overallocated overhead will result in a debit to Manufacturing overhead and a credit to Cost of
goods sold at year-end
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7. Accounting for the completion and sale of finished goods
o
Job Cost Record
Direct materials
→
Direct labor
Work in process
inventory
Costs
incurred on job
→
Finished goods
inventory
Cost of
completed job
→
Costs of goods
sold
Cost of
job when sold
Manufacturing overhead
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1. Process costing systems have multiple Work-in-Process Inventory accounts—one for each process or
department.
o
Equivalent units of production are a way of expressing partially completed units in terms of completed
units.
2. Production cost report is prepared in four steps:
o
Summarize the flow of physical units.
o
Compute output in terms of equivalent units of production.
o
Compute the cost per equivalent unit of production.
o
Assign costs to units completed and units in process.
3. Required journal entries in a process costing system
o
Costs incurred during period are added to EACH Work-in-Process Inventory account
o
Costs transferred to the next department are deducted from the department transferred from and added to
the department transferred to
o
Costs transferred from the last department—transferred using a debit to Finished Goods Inventory
o
Goods are sold—cost is credited to Finished Goods Inventory and debited to Cost of Goods Sold
4. Production cost reports are used to make decisions
o
Controlling costs
o
Evaluating performance
o
Pricing products
o
Identifying most profitable products
o
Preparing financial statements
5. Production cost report preparation for the FIFO method (Appendix 20A)
o Prior period costs are not merged with current period costs
o Equivalent units of production (EUP) must be calculated for:

Units in beginning inventory completed in current period

Units started and completed during current period

Units started and still in process at end of current period
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The topic of this chapter is process costing, which is a sharp contrast to the previous chapter on job-order costing.
Managers need to assign costs to products to facilitate external financial reporting and internal decision making.
There are similarities and differences between the two methods: job-order costing and process costing. The flow
of costs through the manufacturing accounts is basically the same for process and job-order costing. Nonetheless,
there is a key fundamental difference between the two systems. Job-order costing systems trace and apply
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manufacturing costs to jobs. Process costing systems trace and apply manufacturing costs to departments.
Explain that the journal entries for job-order and process costing are similar, with the exception of the specific
Work-in-Process Inventory account for each department under process costing.
Equivalent units are defined as the product of the number of partially completed units and the percentage
completion of those units. Explain that the equivalent units simply restate the ending work in process inventory
as if it were comprised of a smaller number of fully completed units. There are two ways to calculate equivalent
units. The FIFO method is covered in the appendix. The weighted-average method is included within the main
portion of the chapter.
The preparation of a production cost report is the focus of the chapter. The first step of the process is to calculate
the equivalent units. Explain that there will most likely be differences in the equivalent unit calculations between
materials and conversion costs, as materials are usually added at the beginning of production, while conversion
costs are added during the period. The treatment of beginning inventory under the weighted-average method
often puzzles students, since work done in the prior periods is included in the equivalent units. Explain that this is
called the weighted-average method precisely because it averages together beginning inventory and work
performed in the current period. Costs and units are treated consistently. Both the equivalent units and the costs
that go into the unit cost calculations under the weighted-average method include amounts already in beginning
inventory.
The next step of the production cost report is to compute the cost per equivalent unit. The formulas to do this are
for direct materials and conversion costs, are: Cost per EUP for direct materials = Total Direct Materials
Costs/Equivalent Units of Production for Direct Materials and Cost per EUP for conversion costs = Total
Conversion Costs/Equivalent Units of Production for Conversion Costs. The final step in the preparation of the
production cost report is to assign costs to units. This needs to be done for units that are completed and for units
that are still in process.
The chapter wraps up with an illustration of the journal entries that are used in a process costing system and also
an explanation of the various decisions that can be made with a production cost report.
The appendix to the chapter discusses the FIFO method. The FIFO method (generally considered more accurate
than the weighted-average method) differs from the weighted-average method in two ways: (1) the computation
of equivalent units and (2) the way in which the costs of beginning inventory are treated. The only difference in
the equivalent unit calculations between the weighted-average and FIFO methods is that the equivalent units in
beginning inventory are included in the weighted-average method. Emphasize again that under the weightedaverage method, the costs already in beginning inventory will be added to the costs incurred during the period to
arrive at unit costs. To be consistent, equivalent units already in beginning inventory must be added to the
equivalent units for work performed during the period.
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