SURVEY OF ACCOUNTING
Chapter 10
PowerPoint Presentation by
Gail B. Wright
Professor of Accounting
Bryant University
CARL S. WARREN
© Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
LEARNING OBJECTIVES
When you finish this
chapter, you should be
able to
2
LEARNING OBJECTIVES
1. Distinguish activities of manufacturer from
merchandising or service firm.
2. Define, illustrate materials, labor, factory
overhead costs.
3. Describe accounting systems used by
manufacturing businesses.
4. Describe, illustrate job order cost system.
Continued
3
LEARNING OBJECTIVES
5. Use job order cost information for decision
making.
6. Diagram flow of costs for a service business that
uses job order cost system.
7. Describe just-in-time manufacturing
8. Describe, illustrate activity-based costing in a
service business.
4
LEARNING OBJECTIVE
1
Distinguish activities
of manufacturer from
merchandising or
service firm.
5
LO 1
MANUFACTURING FIRM
DIFFERENCES
 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 3 inventories: materials, work-in-process, finished
goods
6
LEARNING OBJECTIVE
2
Define, illustrate
materials, labor,
factory overhead
costs.
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LO 2
EXHIBIT 1
Goodwell Printing
Co. has 2
departments
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LO 2
GOODWELL PRESS
Costs
Cost is payment or commitment to pay cash
for future revenues
Manufacturing costs
Direct materials
Direct labor
Manufacturing overhead
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LO 2
What are these
manufacturing costs?
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LO 2
DIRECT MATERIALS COSTS
Cost of direct materials is cost of raw
materials used in the manufacture of a
product
Goodwell Printing
Paper
Book covers
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LO 2
DIRECT LABOR COSTS
Direct labor is
Labor used to convert materials into product
Goodwell Printing
Wages of employees who operate printing
presses
12
LO 2
FACTORY OVERHEAD COSTS
Factory overhead is costs other than
materials, labor incurred in manufacturing
process
Machine depreciation
Factory insurance
13
LEARNING OBJECTIVE
3
Describe accounting
systems used by
manufacturing
businesses.
14
LO 3
What are 2 manufacturing
cost accounting systems?
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LO 3
COST ACCOUNTING SYSTEMS
Job order costing
Costs accumulated by job for
Custom products, large variety of products
Levi Strauss
Process costing
Costs accumulated by department, process
Oil refineries
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LEARNING OBJECTIVE
4
Describe, illustrate
job order cost system.
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LO 4
EXHIBIT 2
Illustration of 3 perpetual inventories, ending in cost
of goods sold.
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LO 4
EXHIBIT 3
Materials accounted &
requisitioned for each
job.
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ACCOUNTING FOR
MATERIALS
Cash
Flows
Balance
Sheet
Assets
= Liabilities
Materials
= A/P
10,500
= 10,500
LO 4
Income
Statement
+
Equity
Receiving report #196 documents
materials purchased.
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LO 4
REQUISITIONING MATERIALS
Cash
Flows
Balance
Sheet
Assets
= Liabilities
Income
Statement
+
Equity
Materials WIP =
-13,000
13,000
Materials requisitioned for
conversion.
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LO 4
DIRECT LABOR
Cash
Flows
Balance
Sheet
Assets
= Liabilities
WIP
= Wages Pay
11,000
=
Income
Statement
+
Equity
11,000
Direct labor cost from time cards
of job assigned to work-in-
process.
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LO 4
FACTORY OVERHEAD:
Examples
Examples of factory overhead
Indirect materials
Indirect labor
Factory utilities
Factory depreciation
Factory overhead allocated based on
activity driver at predetermined rate
Direct labor, direct materials
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ACCUMULATING FACTORY
OVERHEAD COSTS
Cash
Flows
Balance
Sheet
Assets
= Liabilities
Mat O/H
LO 4
Income
Statement
+
Equity
A/D = Wages Pay Util Pay
-500 4,600 -1,200=
2,000
900
Factory overhead is accumulation
of indirect costs of manufacturing
process.
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LO 4
PREDETERMINED OVERHEAD
RATE
Goodwell Printers estimates total factory overhead to be
$50,000 and direct labor (activity base) to be 10,000 direct
labor hours.
Predetermined O/H rate = Est. O/H costs/ Est. activity base
Predetermined O/H rate = $50,000/10,000 = $5 per direct labor
hour
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ACCUMULATING FACTORY
OVERHEAD COSTS
Cash
Flows
Balance
Sheet
Assets
= Liabilities
WIP
O/H
4,250
-4,250
LO 4
Income
Statement
+
Equity
Factory overhead assigned to
work-in-process inventory based
on 850 direct labor hours.
26
DISPOSING OF EXCESS
OVERHEAD COSTS
Cash
Flows
Balance
Sheet
Assets
= Liabilities
O/H
LO 4
Income
Statement
+
Equity
Ret Earn
-150
-150
Excess overhead costs charged to
cost of goods sold expense.
-150 CGS
27
LO 4
JOB #71
Costs to complete Job #71
28
LO 4
ACCOUNTING FOR JOB #71
Cash
Flows
Balance
Sheet
Assets
= Liabilities
WIP
Fin. Goods
-10,250
10,250
Income
Statement
+
Equity
Completed job transferred from
WIP to finished goods.
29
LO 4
EXHIBIT 6
Job costs
transferred to WIP
control sheet
30
LO 4
EXHIBIT 7
Finished goods ledger account
31
LO 4
SALE
Cash
Flows
Balance
Sheet
Assets
= Liabilities
A/R Fin. Goods =
28,000 -20,000
Income
Statement
+
Equity
Ret Earn
8,000
Sale of finished goods costing
$20,000 for $28,000.
28,000 Sales
-20,000 CGS
32
LO 4
PERIOD COSTS
Period costs are non-manufacturing costs
33
LEARNING OBJECTIVE
5
Use job order cost
information for
decision making.
34
LO 5
BASIS FOR DECISION MAKING
When 2 jobs for the same product have
different costs, what is the problem?
Inexperienced labor?
Poor quality materials?
Tools need repair?
Carelessness?
Incorrect instructions?
35
LO 5
EXHIBIT 10
36
LEARNING OBJECTIVE
6
Diagram flow of costs
for a service business
that uses job order
cost system.
37
LO 6
EXHIBIT 11
Job costs in service industry
38
LEARNING OBJECTIVE
7
Describe just-in-time
manufacturing.
39
LO 7
EXHIBIT 12
Just in time (JIT) reduces costs, requires new approach.
40
LEARNING OBJECTIVE
8
Describe, illustrate
activity-based costing
in a service business.
41
LO 8
EXHIBIT 13
Hopewell Hospital accumulates costs by specific activities.
42
LO 8
USING ACTIVITY BASED
COSTING
Assigning costs based on different activities is basis of
patient billing. Helps manage costs.
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CHAPTER 10
THE END
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