Manufacturing Costs PDF

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MANUFACTURING OVERHEAD COSTS: Recall that all manufacturing costs other than direct materials and direct labor are classified as manufacturing overhead costs. These costs are entered directly into the manufacturing overhead account as they are incurred. In short, all actual manufacturing overhead costs are debited to the manufacturing overhead account as they are incurred. APPLY MANUFACTURING OVERHEAD: - Because actual manufacturing overhead costs are charged to the manufacturing overhead account rather than to work in process, it begs the question how are manufacturing overhead costs assigned to work in process? The answer is they are assigned by using the predetermined overhead rate which is calculated by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base. For example if we assume that machine hours is that allocation base the overhead cost would be applied to jobs by multiplying the predetermined overhead rate by the number of machine hours to each job. THE CONCEPT OF A CLEARING ACCOUNT: The manufacturing overhead account operates as a clearing account. As we have noted actual manufacturing overhead costs are debited to the account as they are incurred through they ear. When jobs are completed (or at the end of an accounting period), overhead costs is applied to the jobs using the predetermined overhead rate - work in process is debited and manufacturing overhead is credited. This sequence of events is illustrated below: Manufacturing overhead ( a clearing account) Actual over costs are charged to this account as they are incurred throughout the period. Overhead is applied work in process using the predetermined overhead rate As we emphasized earlier, the predetermined overhead rate is based entirely on estimated of what the level of activity and overhead costs are expected to be, and it is established before they ears begins.

As a result, the overhead cost applied during a year will almost certainly turn out to be more or less than the actual overhead cost incurred. We can conclude from exhibit 3-5 that the cost of a completed job consists of the actual direct materials cost of the job, the actual direct labor cost of the job and the manufacturing overhead cost applied to the job. Pay particular attention to the following subtle but important point: Actual overhead costs are not charged to jobs; actual overhead costs do not appear on the job cost sheet nor they not appear in the work in process account. Only the applied overhead cost, based on the predetermined overhead rate, appears on the jobs cost sheet and in the work in process account.

NONMANUFACTURING COSTS: In addition, to manufacturing costs, companies also incur selling and administrative costs These costs should be treated as period expenses and charged directly to the income statement. Non- manufacturing costs should not be going into the manufacturing overhead account. Salaries expenses- credited Salaries and wages payable - debit Depreciation expense- credited Accumulated depreciation- debited Advertising expense- credited Other selling and administrative expense- credited Accounts payable -debited The amount in entire 8 through 10 are recorded directly into expense accounts they have no effect on product costs The same will be true of another other selling and administrative expense incurred during an april including sales commision, depreciation, sale equipment, rent on office facilities, insurance on facilities and related costs. COST OF GOODS MANUFACTURED: When a job has been completed the finished output is transferred from the production departments to the finished goods warehouse.

By this time the accounting department will have charged the job with direct materials and direct labor cost and manufacturing overhead will have applied using the predetermined overhead rate. A transfer of cost is made within the costing system that parallels the physical transfer of goods to the finished goods warehouse. The costs of the located jobs are transferred out of the work in process and into the finished goods account. The sum of all amounts transferred between these two accounts represents the cost of goods manufactured for the period. Finished goods - credited Work in process- debited COGS: As completed jobs are shipped to customers, their accumulated costs are transferred from finished goods to COGS. If an entire job is shipped at one time, then the entire cost appearing on the job cost sheet is transferred to COGS sold. However sometimes a portion of the unit involved in particular job will be immediately sold In these situations, the unit product cost must be used to determine how much product cost should be removed from finished goods and charged to COGS. Accounts receivable- credited Sales- debited Cost of goods sold (COGS)- credited Finished goods- debited LO3-2: use the accounts to show the flow of costs in a job order costing system. Journal entries Raw materials- credited Accounts payable- debited Work in process- credited Manufacturing overhead- credited

Raw materials- debited Work in process- credited Manufacturing overhead - credited Salaries and wages payable - debited Manufacturing overhead - credited Accounts payable - debited Manufacturing overhead- credited Property taxes payable- debited Prepaid insurance- debited Manufacturing overhead- credited Accumulated depreciation- debited Work in process- credited Manufacturing overhead-debited Salaries expense- credited Salaries and wages payable -debited Depreciation expense- credited Accumulated depreciation- debited Advertising expense- credited Other selling and administrative expense- credited Accounts payable - debited Finished goods- credited Work in process-debited Accounts receivable- credited Sales- debited COGS - credited Finished goods- debited

SCHEDULE OF COGS MANUFACTURED AND COG sold -

Prepare schedules of to of goods manufactured and cost of goods sold and an income statement.

The schedule of COGS manufactured contains three (3) elements of product costs: 1. Direct materials 2. Direct labor 3. Manufacturing overhead And it summarizes the portion of those costs that remain in ending work in process inventory and that are transferred out of work in process into finished goods. The schedule of COGS contain three elements of product costs 1. Direct materials 2. Direct labor 3. Manufacturing overhead And it summarizes the portions of those costs that reiman in ending finished goods inventory and that are transferred out of finished goods into COGS. Raw materials used in production= beginning raw materials inventory + purchases of raw materials - ending raw materials inventory. EXHIBIT 3-8: Schedules of COGS manufactured and COGS sold Cost of goods manufactured Direct materials Beginning raw materials inventory Add: purchases of raw materials Total raw materials available Deduct: ending raw materials inventory Raw materials used in production= total Deduct: indirect materials included in manufacturing overhead Direct labor Manufacturing overhead applied to work in process Total manufacturing costs Add: beginning work in process inventory Deduct: ending work in process inventory Cost of goods manufactured COST OF GOODS SOLD: Beginning finished goods inventory Add: cost of goods manufactured Cost of goods available for sale Deduct; ending finished goods inventory Unadjusted cost of goods sold

Add: underapplied overhead Adjusted cost of goods sold Note that the underapplied overhead is added to cost of goods sold. If overhead were overapplied it would be deducted from COGS Total manufacturing costs are computed using the following equation: Total manufacturing costs = direct materials + direct labor + manufacturing overhead applied to work in process You should note that this equation includes manufacturing overhead applied to work in process rather than actual manufacturing overhead costs. The actual manufacturing overhead costs incurred during the period are not added to the work in process account. The third equation included in the schedule of COGS manufactured related to computing the cost of goods manufactured. COST OF GOODS MANUFACTURED= total manufacturing costs + beginning work in process inventory - ending work in process inventory The cost of goods manufactured represent the cost of the goods completed during the period and transferred from work in process to finished goods. The schedule of cost of goods sold show relies on the following equation to compute the unadjusted cost of goods sold: Unadjusted cost of goods sold= beginning finished goods inventory + COGS manufactured - ending finished goods inventory. The next section of the chapter takes a closer look at why COGS sold needs to be adjusted for the amounts of underapplied or overapplied overhead. INCOME STATEMENT COMPONENTS -sales Cogs Gross margin Selling and administrative expenses: Salaries expenses Depreciation expense Advertising expense

Other expense Net operating income UNDERAPPLIED AND OVERAPPLIED OVERHEAD- A CLOSER LOOK: (compute underapplied or overapplied overhead cost and prepare the journal entry to lose the balance in manufacturing overhead to the appropriate accounts) This section explains how to compute underapplied and overapplied overhead and how to dispose of any balance remaining in the manufacturing overhead accounts at the end of a period. COMPUTE UNDERAPPLIED AND OVERAPPLIED OVERHEAD: -

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Because the predetermined overhead rate is established before the period begins and is based entirely on estimated data, the overhead cost applied to work in process will generally differ from the amount of overhead cost actually incurred.

The difference between the overhead cost applied to work in process and the actual overhead costs of a period is called either underapplied overhead or overapplied overhead.

What is the cause of underapplied or overapplied overhead? Basically the method of applying overhead to jobs using a predetermined overhead assumes that actual overhead costs will be proportional to the actual amount of the allocation base incurred during the period. If for example the predetermined overhead rate is 6 dollars per machine hour then it assumed that actual overhead incurred will be 6 dollars for every machine hours that is actually worked. If for example, the predetermined overhead rate is 6 dollars per machine then it assumes that actual overhead cost incurred will be 6 dollars for every machine hours that is actually worked.

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There are at least two reasons why this may not be true. first , much of the overhead often consists of fixed costs that do not change as the number of machine hours incurred goes up or down. Second, spending on one hand items may or may not be under control

If individuals who are responsible for overhead costs do a good job those costs should be less than were expected at the beginning of the period.

If they do a poor job, those costs will be more than expected. -

Now assume that because of unexpected changes in overhead spending and unit sales, the actual overhead cost incurred and the actual amount of the allocation base used during the year is as follows.

Estimated manufacturing overhead cost/ estimated total amount of the allocation base= predetermined overhead rate Predetermined overhead rate x actual total amount of the allocation base= manufacturing overhead applied. Actual manufacturing overhead cost- manufacturing overhead applied= underapplied (overapplied) manufacturing overhead. Once we have quantified the amount of underapplied or overapplied overhead, the corresponding amount remaining in the manufacturing overhead account at the end of a period must be disposed of in one or two ways: 1. It can be closed to COGS 2. It can be closed proportionally to work in process, finished goods and COGS...