Accounting Systems for
Manufacturing Businesses
Chapter 10
Managerial Accounting
• Focuses on recording and reporting information
for use by a company’s management in decision
making.
• It 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?
Financial and Managerial Accounting
Differences
Nature of Manufacturing Businesses
• Service firms earn revenue from
providing services.
• Merchandising firms earn revenue from
selling merchandise inventory.
• Manufacturing firms– Earn revenue from manufacturing and
selling finished goods.
– Have three inventories: materials, work in
process, and finished goods.
– Have manufacturing and nonmanufacturing costs
Manufacturing Costs
Direct
Materials
Direct
Labor
The Product
Manufacturing
Overhead
Prime and Conversion Costs
• Prime Costs: direct
material, direct labor
costs
• Conversion Costs: direct
labor and factory overhead
costs
Nonmanufacturing Costs
Marketing and
Selling Cost
Administrative
Cost
R&D
Costs necessary to get the
order and deliver the
product.
All executive,
organizational, and
clerical costs.
Product Costs Versus Period
Costs
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Cost of Good Sold
Inventory
Period costs are not
included in product
costs. They are
expensed on the
income statement.
Expense
Sale
Balance
Sheet
Income
Statement
Income
Statement
Indicate whether each of the following costs of the Proctor &
Gamble Company would be classified as direct materials cost,
direct labor cost, or factory overhead cost:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Depreciation on the St. Bernard (Cincinnati) soap plant.
Wages paid to Packing Department employees.
Maintenance supplies.
Packaging materials.
Plant manager salary of the Lima, Ohio, liquid soap plant.
Pulp for towel and tissue products.
Wages of Making Department employees.
Scents and fragrances.
Depreciation on disposable diaper converting machines.
Salary of process engineers.
Which of the following items are properly classified as part of
factory overhead for John Deere & Co.?
a. Plant manager’s salary at Greeneville, Tennessee, turf care
products plant.
b. Depreciation on Moline, Illinois, headquarters building.
c. Property taxes on Klemme, Iowa, components plant.
d. Chief financial officer’s salary.
e. Steel plate.
f. Sales incentive fees to dealers.
g. Amortization of patents on a new welding process.
h. Interest expense on debt.
i. Consultant fees for surveying production employee morale.
j. Factory supplies used in the Kenersville, North Carolina,
hydraulic excavator factory.
Classify the following costs for Ford Motor Company as either a
product cost or a period cost:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
Advertising.
Tires.
Assembly employees wages.
Salary of marketing executive.
Depreciation of Dearborn, Michigan, executive building.
CEO’s salary.
Plant manager’s salary.
Depreciation on Atlanta, Georgia, assembly plant.
Maintenance supplies.
Glass.
Property taxes on Kansas City, Missouri, assembly plant.
Shipping costs.
Travel costs used by sales personnel.
Utility costs used in executive building.
Stamping Department employee wages.
Steel.
Manufacturing Cost Flows
Costs
Material Purchases
Direct Labor
Balance Sheet
Inventories
Raw Material
Work in
Process
Manufacturing
Overhead
Finished
Goods
Selling and
Administrative
Income
Statement
Expenses
Period Expenses
Cost of
Goods
Sold
Selling and
Administrative
Balance Sheet
Merchandiser
Current assets
–
–
–
–
Cash
Receivables
Prepaid expenses
Merchandise inventory
Manufacturer
Current Assets
 Cash
 Receivables
 Prepaid Expenses
 Inventories
Raw Materials
Work in Process
Finished Goods
Pop Quiz 
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month revealed
that $28,000 of raw material was still present. What
is the cost of direct material used?
A.
$276,000
B.
$272,000
C.
$280,000
D.
$ 2,000
Pop Quiz 
Direct materials used in production totaled $280,000.
Direct labor was $375,000 and factory overhead was
$180,000. What were total manufacturing costs
incurred for the month?
A.
$555,000
B.
$835,000
C.
$655,000
D.
Cannot be determined.
Pop Quiz 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month were
$835,000. There were $200,000 of partially
finished goods remaining in work in process
inventory at the end of the month. What was the
cost of goods manufactured during the month?
A.
$1,160,000
B.
$ 910,000
C.
$ 760,000
D.
Cannot be determined.
Pop Quiz 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. And the ending
finished goods inventory was $150,000. What
was the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Types of Product Costing
Systems
Process
Costing
Job-order
Costing

A company produces many units of a single
product.

One unit of product is indistinguishable from
other units of product.

The identical nature of each unit of product enables
assigning the same average cost per unit.
Types of Product Costing
Systems
Process
Costing
Job-order
Costing

Many different products are produced each period.

Products are manufactured to order.

The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
Materials Requisition Form
Employee Time Ticket
Job Cost Sheet
Application of Overhead
• In a job-order costing system, the cost of a job
consists of:
1. Actual direct material costs traced to the job.
2. Actual direct labor costs traced to the job.
3. Manufacturing overhead applied to the job
using a predetermined overhead rate. Actual
overhead costs are not assigned to jobs.
Predetermined Overhead Rate Formula
The formula for computing a predetermined
overhead rate is:
Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
Predetermined Overhead Rate Formula
The company in the preceding example
applies overhead costs to jobs on the basis of
direct labor-hours. In other words, direct laborhours is the allocation base.
At the beginning of the year the company
estimated that it would incur $320,000 in
manufacturing overhead costs and would work
40,000 direct labor-hours. The company’s
predetermined overhead rate is:
$320,000
= $8 per DLH
40,000 DLHs
Application of Overhead to Jobs
The process of assigning overhead to jobs is
known as applying overhead.
In the preceding example, Job 2B47 required 27
direct labor-hours. Therefore, $216 of overhead
cost was applied to the job as follows:
Predetermined overhead rate ....................
Direct labor-hours required for Job 2B47....
Overhead applied to Job 2B47...................
$8 per DLH
× 27 DLHs
$216
Practice with Overhead
Actual manufacturing overhead
Budgeted machine hours
Budgeted direct labor hours
Budgeted direct labor rate
Budgeted manufacturing oh
Actual machine hours
Actual direct labor hours
Actual direct labor rate
POHR - Machine hours
POHR - direct labor hours
POHR - direct labor dollars
$340,000
10,000
20,000
$14
$364,000
11,000
18,000
$15
Pop Quiz 
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labor hours at
$15 per hour. Estimated total overhead for the
year was $760,000 and estimated direct labor
hours were 20,000. What would be recorded
as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
An Example
Goodwell Printers
Goodwell Printers, a producer of textbooks, has two jobs in
process during December, the last month of its fiscal year. Job 71,
a special order of 1,000 textbooks titled American History, was
started during November. By the end of November, $3,000 in
manufacturing costs had been recorded for the job. Job 71 was the
only job in process at the end of November. Job 72, an order for
4,000 textbooks titled Algebra, was started in December.
Goodwell Printers (cont)
a) On December 1, Goodwell Printers had $6,500 in raw materials
inventory. During the month the company purchased an
additional $10,500 in raw materials on account.
b) During December, $13,000 in raw materials was requisitioned
from the storeroom for use in production. $2,000 of the direct
materials requisitioned was used in Job 71, and $11,000 in Job
72.
c) During December, Goodwell Printers incurred 850 direct labor
hours on Jobs 71 (350 hours) and 72 (500 hours). The direct labor
costs were $11,000, divided into $3,500 for Job 71 and $7,500 for
Job 72.
d) The following factory overhead costs were incurred in December:
Utilities (heat, water and power)
$ 900
Indirect Material
500
Indirect Labor
2,000
Total
$3,400
Goodwell Printers (cont)
e) Goodwell recorded depreciation on factory equipment in the
amount of $1,200 in December.
f) Goodwell Printers applies manufacturing overhead to jobs on
the basis of direct labor hours. Prior to the beginning of this
fiscal year, Goodwell had estimated its total manufacturing
overhead for the year to be $50,000 and its total direct labor
hours for the same period to be 10,000.
g) Goodwell incurred Selling and Administrative salaries
expenses in the amount of $3,500 in December. There were no
other S&A expenses during the month.
h) Goodwell Printers completed Job 71 during December. The
beginning Finished goods inventory was $20,000, and
consisted of 2,000 textbooks of Engineering Mechanics.
i) The 2,000 textbooks of Engineering Mechanics were sold to
customers by the end of December at $14 each.
Goodwell Printers (cont)
Required
1. Prepare accounting entries to record the transactions for the
month.
2. Calculate the actual overhead and the over applied/under
applied for December.
3. Prepare an accounting entry to close the over applied/under
applied into cost of goods sold, assuming that the Factory
Overhead account had a negative balance of $200 through
November.
4. Prepare an income statement for Goodwell Printers for the
month ending December 31.
5. Compute an ending balance in each inventory account.
Overhead Application Example
RoseCo applies overhead based on direct- labor
hours. Total estimated overhead for the year is
$640,000. Total estimated labor cost is
$1,400,000 and total estimated labor hours are
160,000.
What is RoseCo’s predetermined overhead rate?
Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of
170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per directlabor hour, how much overhead was applied to all of RoseCo’s
jobs during the year?
Overapplied and Underapplied
Manufacturing Overhead - Summary
If Manufacturing
Overhead is . . .
Close to Cost
of Goods Sold
UNDERAPPLIED
INCREASE
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
DECREASE
Cost of Goods Sold
Pop Quiz 
Tiger, Inc. had actual manufacturing overhead
costs of $1,210,000 and a predetermined overhead
rate of $4.00 per machine hour. Tiger, Inc. worked
290,000 machine hours during the period. Tiger’s
manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
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?
Comparing Data from Job Cost Sheets
Cost Evaluation and Control (cont)
• Possible reasons for the extra use of
materials for Job 63:
– Inexperienced labor
– Poor quality materials
– Cutting tools needed repair
– Carelessness
– Incorrect instructions
Job Order Costing in a Service Business
John Meyer, CPA, does tax and audit work. He estimates his
overhead costs for the current year will be:
Wages paid to receptionist
Supplies
Depreciation on office equipment
Advertising
Rent and utilities
$17,000
8,000
2,000
1,300
4,000
$32,300
John uses direct labor hours to allocate overhead costs to jobs
performed for clients. He estimates that he will work 1,900 hours
conducting audits and preparing tax returns this year. John uses
$25 per hour for his wage rate when computing the cost of any
work performed for a client.
John spent 12 hours preparing a tax return for Sharon Ward. What
was the cost to prepare Sharon’s return?
Activity-Based Costing (ABC)
• Uses multiple overhead rates to allocate
factory overhead more accurately than
using a single, plant-wide rate.
• Costs are initially accounted for in cost
pools – each cost pool has its own rate.
Activity
Cost/
Budget
/
Estimated
Activity
Admitting
$720,000
/
4,000 admissions
=
$ 180
Radiological testing
$960,000
/
3,000 images
=
320
$1,600,000
/
8,000 hours
=
200
Pathological testing
$600,000
/
5,000 specimens
=
120
Dietary and laundry
$3,000,000
/
20,000 days
=
150
Operating room
Activity
= Rate
Cost Pools and Rates for Hopewell
Hospital
MARY WILSON
Activity
Admitting
ActivityBase

Usage
Activity
Rate
1 admission  $180 per admission
Activity
= Cost
=
$ 180
Radiological testing
2 images

320 per image
=
640
Operating room
4 hours

200 per hour
=
800
Pathological testing
1 specimen

120 per specimen
=
120
Dietary and laundry
7 days

150 per day
=
1,050
Total
$2,790
HOPEWELL HOSPITAL
Customer (Patient) Profitability Report
For the Period Ending December 31, 2004
Adcock,
Kim
Revenues
Birini,
Brian
Conway,
Don
Wilson,
Mary
$9,500
$21,400
$5,050
$3,300
$ 400
$1,000
$ 300
$ 200
180
180
180
180
Radiological testing
1,280
2,560
1,280
640
Operating room
2,400
6,400
1,600
800
Pathological testing
240
600
120
120
Dietary and laundry
4,200
14,700
1,050
1,050
Total patient costs
$8,700
$25,440
$4,530
$2,990
$ 800
$(4,040)
$ 520
$ 310
10-44
Less patient costs:
Drugs and supplies
Admitting
Income from operations