18-1
CHAPTER 18
MANAGERIAL
ACCOUNTING
CONCEPTS/JOB COSTING
Compare Managerial and
Financial Accounting
18-2
Financial accounting
provides information
for external use.
Managerial accounting
provides information
for internal use.
Creditors and investors
Managers
Compare Managerial and
Financial Accounting
Financial Accounting

Uses historical data

Presents summary data

Complies with GAAP
(Generally Accepted
Accounting Principles)
18-3
Managerial Accounting

May use estimates of
future (e.g., budgeting)

More detailed data

Flexible format, cost/
benefit analysis
determines proper level
of information
18-4
Ethical Issues
Competence
Confidentiality
Institute of Management Accountants
Standards of Ethical Conduct
Integrity
Objectivity
18-5
Manufacturing Cost Concepts
Cost is a financial
measure of resources
used or given up to
achieve an objective.
Product costs are the costs a
company assigns to units produced.
(i.e., costs which relate to or attach
to the product)
18-6
Product Cost Components
Direct
Material
Direct
Labor
Product Costs
Manufacturing
Overhead
18-7
Product Cost Components
Direct Materials
Materials that are clearly
and easily traced to a
particular product
 Example: Wood used to
manufacture a high-quality
dining room table

18-8
Product Cost Components
Direct Labor
Labor cost of
employees working to
convert materials into
finished goods
 Labor cost clearly
traceable to, or readily
identifiable with, the
finished product
 Example: Wages paid
to carpenter

18-9
Product Cost Components
Manufacturing Overhead

All manufacturing costs
except direct material
and direct labor

Manufacturing costs that
cannot be traced directly
to specific units
produced

Example: Indirect labor
such as furniture
designer
18-10
Product Cost Components
Manufacturing Overhead - other examples
- Indirect labor: Janitors, Supervisors, Materials
storeroom personnel, Cost accountant
- Indirect materials: Oil, Nails, Glue
- Other indirect costs:
– Repairs and maintenance on factory
buildings and equipment
– Payroll taxes and fringe benefits for
manufacturing employees
– Depreciation on factory buildings and
equipment
– Insurance and taxes on factory property
and inventories
– Utilities for factory buildings
18-11
Product Costs
Why are product
costs often called
inventoriable costs?
Because the costs remain
in inventory until the
product is sold, at
which time they become
an expense called
cost of goods sold.
18-12
Period Costs
• Nonmanufacturing costs which relate
to or attach to the period
• Can be classified as
• Selling costs
• Administrative costs
Period costs are
expensed in the
period incurred.
Period costs are
never inventoried
with the product.
18-13
Period Costs
Selling Costs
Costs incurred to obtain customer orders
and to deliver finished goods to customers
(e.g., advertising and shipping)
Administrative Costs
Nonmanufacturing costs of staff support and
administrative functions (e.g., accounting, data
processing, personnel, research and development)
18-14
Question
The primary distinction between product
and period costs is . . .
a. Product costs are expensed in the period
incurred.
b. Product costs are directly traceable to
product units.
c. Product costs are inventoriable.
d. Period costs are inventoriable.
18-15
Question
The primary distinction between product
and period costs is . . .
a. Product costs are expensed in the period
incurred.
b. Product costs are directly traceable to
product units.
c. Product costs are inventoriable.
c.
d. Period costs are inventoriable.
18-16
Ways to Classify Costs
1
Product
Costs
2
Direct
Materials
Direct Labor
3
4
Manufacturing
Costs
Either
Manufacturing
Overhead
Period
Costs
Selling
Administrative
fixed
or
NonManufacturing
Costs
Variable
Costs
Financial Reporting by
Manufacturing Companies
Raw
Materials
Work in
Process
Manufacturing
Inventory
Classifications
Finished
Goods
18-17
Financial Reporting by
Manufacturing Companies
Raw
Materials
Materials
waiting to be
processed
Work in
Process
Partially complete
products
Material to which
some labor and/or
overhead have
been added
Finished
Goods
Completed
products
for sale
18-18
18-19
Balance Sheet Presentation
MERCHANDISER
Current Assets




Cash
Receivables
Prepaid Expenses
Merchandise
Inventory
MANUFACTURER
Current Assets




Cash
Receivables
Prepaid Expenses
Inventories
Raw Materials
Work in Process
Finished Goods
18-20
Question
What type of account is the manufacturing
work in process account?
a. Income statement expense account.
b. Balance sheet inventory account.
c. Temporary clearing account for direct
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
18-21
Question
What type of account is the manufacturing
work in process account?
a. Income statement expense account.
b. Balance sheet inventory account.
c. Temporary clearing account for direct
c.
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
18-22
Manufacturing Cost Flows
Direct Material
Direct Labor
Manufacturing
Overhead
Work in
Process
Finished
Goods
Cost of
Goods
Sold
18-23
Cost of Goods Manufactured
Cost of all goods completed during a
period and transferred from work in
process to finished goods
18-24
Cost of Goods Manufactured
Cost of all goods completed during a
period and transferred from work in
process to finished goods
+
+
=
+
–
=
Direct Materials Used
Direct Labor
Manufacturing Overhead
Cost to Manufacture
Beginning Work in Process
Ending Work in Process
Cost of Goods Manufactured
18-25
Cost of Goods Sold
Cost of the items sold to customers
during a period
18-26
Cost of Goods Sold
Cost of the items sold to customers
during a period
+
=
–
=
Beginning Finished Goods
Cost of Goods Manufactured
Cost of Goods Available for Sale
Ending Finished Goods
Cost of Goods Sold
18-27
Income Statement Presentation
–
=
–
=
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Operating Income
p.
688
18-28
Types of Cost Systems
Process
Costing
Job
Costing
 Used for production of small,
identical, low-cost items
 Mass produced in automated
continuous production process
 Costs cannot be directly traced to
each unit of product
18-29
Types of Cost Systems
Process
Costing
Job
Costing
Typical process cost applications:
 Petrochemical refinery
 Paint manufacturer
 Paper mill
18-30
Types of Cost Systems
Process
Costing
Job
Costing
 Used for production of large,
unique, high-cost items
 Built to order rather than mass
produced
 Many costs can be directly traced
to each job
18-31
Types of Cost Systems
Process
Costing
Job
Costing
 Typical job order cost applications
 Custom furniture manufacturing
 Building construction
 Also used in service industry
 Hospitals
 Accounting and law firms
18-32
Job Order Costing
Direct
material
THE JOB
Direct
labor
18-33
Job Order Costing
Manufacturing
Overhead (OH)
Applied to each
job based on
activity causing
the OH
Direct
material
THE JOB
Direct
labor
18-34
Job Order Costing
Manufacturing
Overhead (OH)
Applied to each
job based on
activity causing
the OH
Synonyms for “Applied” Overhead
Assigned
Distributed
Allocated
Absorbed
18-35
Job Order Costing
I see some journal
entries for job costing
on the horizon!
18-36
Job Order Costing
Typical Accounting Entries
(pp. 690 - 693)
 To record purchase of materials
Raw Materials Inventory
Accounts Payable
 To record use of materials
Work in Process Inventory
Manufacturing Overhead
Materials Inventory
(Debit)
(Credit)
(Debit)
(Debit)
(Credit)
18-37
Job Order Costing
Payroll Accounting Entry
(Not discussed in text)
To record payment to employees
Payroll Summary
Wages Payable
Various Taxes Withheld
(Debit)
(Credit)
(Credit)
18-38
Job Order Costing
Typical Accounting Entries
(pp. 690 - 693)
 To record labor costs
Work in Process Inventory
Manufacturing Overhead
Payroll Summary
(Debit)
(Debit)
(Credit)
 To apply overhead to jobs
Work in Process Inventory
Manufacturing Overhead
(Debit)
(Credit)
18-39
Job Order Costing
Typical Accounting Entries
(pp. 690 - 693)
 To record completion of jobs
Finished Goods Inventory
Work in Process Inventory
(Debit)
(Credit)
18-40
Job Order Costing
Typical Accounting Entries
(pp. 690 - 693)
 To record sales
Accounts Receivable
Sales
(Debit)
(Credit)
 To record cost of goods sold
Cost of Goods Sold
(Debit)
Finished Goods Inventory
(Credit)
18-41
Job Cost Flows
Raw Materials
Mfg. O/H
WIP
FG
CGS
18-42
Job Cost Flows
Raw Materials
Material
Purchases
Mfg. Overhead
Work in Process
18-43
Job Cost Flows
Raw Materials
Material
Direct
Purchases Material
Mfg. Overhead
Work in Process
Direct
Material
18-44
Job Cost Flows
Raw Materials
Material
Direct
Purchases Material
Indirect
Material
Mfg. Overhead
Actual
Overhead
Costs
Work in Process
Direct
Material
18-45
Job Cost Flows
Payroll Summary
Incurred
Mfg. Overhead
Actual
Overhead
Costs
Work in Process
Direct
Material
18-46
Job Cost Flows
Payroll Summary
Incurred
Direct
Labor
Mfg. Overhead
Actual
Overhead
Costs
Work in Process
Direct
Material
Direct
Labor
18-47
Job Cost Flows
Payroll Summary
Incurred
Direct
Labor
Indirect
Labor
Mfg. Overhead
Actual
Overhead
Costs
Work in Process
Direct
Material
Direct
Labor
18-48
Job Cost Flows
Payroll Summary
Incurred
Direct
Labor
Indirect
Labor
Mfg. Overhead
Actual
Overhead
Overhead Applied to
Costs
Work in
Process
Work in Process
Direct
Material
Direct
Labor
Overhead
18-49
Job Cost Flows
Work in Process
Finished Goods
Direct
Material
Direct
Labor
Overhead
Cost of Goods Sold
18-50
Job Cost Flows
Work in Process
Direct
Material
Direct
Labor
Overhead
Cost of
Goods
Mfg.
Finished Goods
Cost of
Goods
Mfg.
Cost of Goods Sold
18-51
Job Cost Flows
Work in Process
Direct
Material
Direct
Labor
Overhead
Cost of
Goods
Mfg.
Finished Goods
Cost of
Goods
Mfg.
Cost of Goods Sold
Cost of
Goods
Sold
Cost of
Goods
Sold
18-52
Applying Overhead
A predetermined overhead rate (POHR)
is used to apply costs to jobs.
18-53
Applying Overhead
Established
before the
period begins
Based on
estimated OH cost
and estimated
activity level
A predetermined overhead rate (POHR)
is used to apply costs to jobs.
18-54
Applying Overhead
Estimated total overhead for the period
POHR =
Estimated total activity for the period
Established
before the
period begins
Based on
estimated OH cost
and estimated
activity level
A predetermined overhead rate (POHR)
is used to apply costs to jobs.
18-55
Applying Overhead
Estimated total overhead for the period
POHR =
Estimated total activity for the period
This activity
is called the
cost driver
18-56
Applying Overhead
Estimated total overhead for the period
POHR =
Estimated total activity for the period
The cost driver is assumed
to be a causal factor in
overhead incurrence.
Examples:
Units produced
Direct labor hours
Direct labor cost
Machine hours
This activity
is called the
cost driver
18-57
Applying Overhead
Tell me again how
we use the POHR to
apply overhead
to jobs.
18-58
Applying Overhead
Tell me again how
we use the POHR to
apply overhead
to jobs.
We multiply the POHR
times the number of
cost driver activity units
incurred for the job.
18-59
Applying Overhead
I don’t get it!
Show me an
example.
We multiply the POHR
times the number of
cost driver activity units
incurred for the job.
18-60
Applying Overhead
Example
If FishCo budgets overhead at $200,000 and
estimates its cost driver activity to be 25,000
direct labor hours for 1999, what is the POHR
per direct labor hour?
a.
b.
c.
d.
$10.00 per hour
$ 6.00 per hour
$ 8.00 per hour
$12.00 per hour
18-61
Applying Overhead
Example
If FishCo budgets overhead at $200,000 and
estimates its cost driver activity to be 25,000
direct labor hours for 1999, what is the POHR
per direct labor hour?
a.
b.
c.
d.
$10.00 per hour
$ 6.00 per hour
$ 8.00 per hour
$12.00 per hour
Estimated Overhead
Estimated Activity
$200,000
25,000 hours
POHR = $8.00 per hour
18-62
Applying Overhead
Example
If FishCo actually worked 24,000 direct labor
hours for 1999, what amount of overhead
would be applied to jobs in work in process?
a.
b.
c.
d.
$200,000
$192,000
$208,000
$196,000
18-63
Applying Overhead
Example
If FishCo actually worked 24,000 direct labor
hours for 1999, what amount of overhead
would be applied to jobs in work in process?
a.
b.
c.
d.
$200,000
$192,000
$208,000
$196,000
24,000 hours
× $8.00 per hour
= $192,000
18-64
Applying Overhead
Reasons for using a
predetermined overhead rate
Overhead is not
incurred uniformly
during the year.
Actual overhead rate
might vary from
month to month.
Predetermined rate
makes it possible to
estimate job costs sooner.
18-65
Applying Overhead
The POHR is based
on estimates.
What happens if
actual results differ
from the estimates?
18-66
Applying Overhead
The POHR is based
on estimates.
What happens if
actual results differ
from the estimates?
The result will be either
underapplied or overapplied
overhead and we
will adjust Cost of Goods
Sold at the end of the period.
Here, let me show you.
18-67
Applying Overhead
Overhead is
overapplied
Actual
overhead
costs
incurred
Overhead
applied to
Work in Process
(POHR × Activity)
18-68
Applying Overhead
Overhead is
underapplied
Overhead
applied to
Work in Process
Actual
overhead
costs
incurred
(POHR × Activity)
18-69
Applying Overhead
Adjustments for
underapplied or overapplied overhead
Theoretically, we should adjust all accounts
affected by misapplied overhead:
Work in
Process
Finished
Goods
Cost of
Goods Sold
18-70
Applying Overhead
Adjusting Cost of Goods Sold for
underapplied or overapplied overhead
Overhead is:
Cost of Goods
Sold is:
Adjustment will:
Applied overhead <
actual overhead
Underapplied
Too low
Increase Cost
of Goods Sold
Applied overhead >
actual overhead
Overapplied
Too high
Decrease Cost
of Goods Sold
18-71
Applying Overhead
Manufacturing Overhead
Actual
Overhead
Costs
Incurred
Overhead
Applied to
Work in Process
(Debit bal.)
(Credit bal.)
Underapplied
Overhead
Overapplied
Overhead
18-72
Applying Overhead
Manufacturing Overhead
Actual
Underapplied
Balance
Applied
Cost of Goods Sold
18-73
Applying Overhead
Manufacturing Overhead
Actual
Cost of Goods Sold
Applied
Underapplied
Underapplied
Balance
Balance
18-74
Applying Overhead
Manufacturing Overhead
Actual
Applied
Overapplied
Balance
Cost of Goods Sold
18-75
Applying Overhead
Manufacturing Overhead
Actual
Cost of Goods Sold
Applied
Overapplied
Overapplied
Balance
Balance
Applying Overhead
Question
FishCo had actual manufacturing overhead
costs of $180,000. FishCo applied $192,000
of manufacturing overhead to jobs based on
a POHR of $8.00 per direct labor hour.
FishCo’s manufacturing overhead is:
a.
b.
c.
d.
$12,000 overapplied.
$12,000 underapplied.
$96,000 overapplied.
$96,000 underapplied.
18-76
Applying Overhead
Question
FishCo had actual manufacturing overhead
costs of $180,000. FishCo applied $192,000
of manufacturing overhead to jobs based on
a POHR of $8.00 per direct labor hour.
FishCo’s manufacturing overhead is:
a.
a.
b.
b.
c.
c.
d.
d.
$12,000 overapplied.
$12,000 underapplied.
$96,000 overapplied.
$96,000 underapplied.
18-77
18-78
Applying Overhead
Question
FishCo had actual manufacturing overhead
costs of $180,000. FishCo applied $192,000
of manufacturing overhead to jobs based on
a POHR of $8.00 per direct labor hour.
FishCo’s manufacturing overhead is:
a.
b.
c.
d.
$12,000 overapplied.
overhead
$12,000 Applied
underapplied.
actual overhead
$96,000 Less
overapplied.
Overapplied overhead
$96,000 underapplied.
$ 192,000
180,000
$ 12,000
Applying Overhead
Question
Assume that FishCo's overhead was
$10,000 overapplied. This amount
would result in an adjustment that
would decrease cost of goods sold
by $10,000.
a. True
b. False
18-79
Applying Overhead
Question
Assume that FishCo's overhead was
$10,000 overapplied. This amount
would result in an adjustment that
would decrease cost of goods sold
by $10,000.
a. True
a.
b. False
b.
18-80
Applying Overhead
Question
Assume that FishCo's overhead was
$10,000 overapplied. This amount
would result in an adjustment that
would decrease cost of goods sold
by $10,000.
a. True
b. False
If overhead is overapplied, cost
of goods sold is too high. The
adjustment will decrease cost of
goods sold.
18-81
18-82
Have a great spring break!
18-83
THE END