18-1

CHAPTER 18
MANAGERIAL
ACCOUNTING
CONCEPTS/JOB COSTING

18-2
Compare Managerial and
Financial Accounting

Managerial accounting
provides information
for internal use.

Financial accounting
provides information
for external use.
Creditors and investors Managers
18-3
Financial Accounting
B Uses historical data
B Presents summary data
B Complies with GAAP
(Generally Accepted
Accounting Principles)
Managerial Accounting
B May use estimates of
future (e.g., budgeting)
B More detailed data
B Flexible format, cost/
benefit analysis
determines proper level
of information
Compare Managerial and
Financial Accounting
18-4
Ethical Issues
Integrity Objectivity
Confidentiality Competence
Institute of Management Accountants
Standards of Ethical Conduct
18-5
Manufacturing Cost Concepts
Product costs are the costs a
company assigns to units produced.
(i.e., costs which relate to or attach
to the product)
Cost is a financial
measure of resources
used or given up to
achieve an objective.
18-6
Product Cost Components
Product Costs
Manufacturing
Overhead
Direct
Material
Direct
Labor
18-7
Direct Materials
+ Materials that are clearly
and easily traced to a
particular product
+ Example: Wood used to
manufacture a high-quality
dining room table
Product Cost Components
18-8
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
Product Cost Components
18-9
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
Product Cost Components
18-10
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
Product Cost Components
18-11
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.
Product Costs
18-12




Period costs are
expensed in the
period incurred.
Period costs are
never inventoried
with the product.
Nonmanufacturing costs which relate
to or attach to the period
Can be classified as
Selling costs
Administrative costs
Period Costs
18-13
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)
Period Costs
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.
d. Period costs are inventoriable.
a.
b.
c.
d.
18-16
Ways to Classify Costs
1

Product
Costs


Period
Costs
2
Direct
Materials
Direct Labor
Manufacturing
Overhead

Selling
Administrative
3

Manufacturing
Costs


Non-
Manufacturing
Costs
4


Either
fixed
or
Variable
Costs

18-17
Raw
Materials
Finished
Goods
Work in
Process
Financial Reporting by
Manufacturing Companies
Manufacturing
Inventory
Classifications
18-18
Completed
products
for sale
Materials
waiting to be
processed
Partially complete
products
Material to which
some labor and/or
overhead have
been added
Raw
Materials
Finished
Goods
Work in
Process
Financial Reporting by
Manufacturing Companies
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
material and direct labor.
d. Holding account for manufacturing
overhead and direct labor.
a.
b.
c.
d.
18-22
Manufacturing Cost Flows
Direct Labor
Manufacturing
Overhead
Direct Material
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
Process
Costing
Job
Costing
Types of Cost Systems
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill
18-30
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
Types of Cost Systems
18-31
Process
Costing
Job
Costing
+ Typical job order cost applications
Custom furniture manufacturing
Building construction
+ Also used in service industry
Hospitals
Accounting and law firms
Types of Cost Systems
18-32
Job Order Costing
THE JOB
Direct
material
Direct
labor
18-33
Job Order Costing
THE JOB
Direct
material
Direct
labor
Manufacturing
Overhead (OH)
Applied to each
job based on
activity causing
the OH
18-34
Manufacturing
Overhead (OH)
Applied to each
job based on
activity causing
the OH
Job Order Costing
Synonyms for Applied Overhead
Assigned
Distributed
Allocated
Absorbed
18-35
I see some journal
entries for job costing
on the horizon!
Job Order Costing
18-36
Typical Accounting Entries
(pp. 690 - 693)
0To record purchase of materials
Raw Materials Inventory (Debit)
Accounts Payable (Credit)
OTo record use of materials
Work in Process Inventory (Debit)
Manufacturing Overhead (Debit)
Materials Inventory (Credit)
Job Order Costing
18-37
Payroll Accounting Entry
(Not discussed in text)
To record payment to employees
Payroll Summary (Debit)
Wages Payable (Credit)
Various Taxes Withheld (Credit)
Job Order Costing
18-38
Typical Accounting Entries
(pp. 690 - 693)
OTo record labor costs
Work in Process Inventory (Debit)
Manufacturing Overhead (Debit)
Payroll Summary (Credit)
OTo apply overhead to jobs
Work in Process Inventory (Debit)
Manufacturing Overhead (Credit)
Job Order Costing
18-39
Job Order Costing
Typical Accounting Entries
(pp. 690 - 693)
OTo record completion of jobs
Finished Goods Inventory (Debit)
Work in Process Inventory (Credit)
18-40
Typical Accounting Entries
(pp. 690 - 693)
OTo record sales
Accounts Receivable (Debit)
Sales (Credit)
OTo record cost of goods sold
Cost of Goods Sold (Debit)
Finished Goods Inventory (Credit)
Job Order Costing
18-41
Job Cost Flows
WIP Raw Materials
Mfg. O/H
FG
CGS
18-42
Work in Process Raw Materials
Material
Purchases
Mfg. Overhead
Job Cost Flows
18-43
Work in Process Raw Materials
Material
Purchases
Direct
Material
Direct
Material



Mfg. Overhead
Job Cost Flows
18-44
Work in Process Raw Materials
Material
Purchases
Direct
Material
Indirect
Material
Direct
Material



Mfg. Overhead
Actual
Overhead
Costs
Job Cost Flows
18-45
Work in Process Payroll Summary
Incurred
Direct
Material



Mfg. Overhead
Actual
Overhead
Costs
Job Cost Flows
18-46
Work in Process Payroll Summary
Incurred
Direct
Labor
Direct
Material
Direct
Labor

Mfg. Overhead
Actual
Overhead
Costs
Job Cost Flows
18-47
Work in Process Payroll Summary
Incurred
Direct
Labor
Indirect
Labor
Direct
Material
Direct
Labor

Mfg. Overhead
Actual
Overhead
Costs
Job Cost Flows
18-48
Work in Process Payroll Summary
Incurred
Direct
Labor
Indirect
Labor
Direct
Material
Direct
Labor
Overhead
Mfg. Overhead
Actual
Overhead
Costs
Overhead
Applied to
Work in
Process
Job Cost Flows
18-49
Work in Process
Direct
Material
Direct
Labor
Overhead
Finished Goods
Cost of Goods Sold
Job Cost Flows
18-50
Work in Process
Direct
Material
Direct
Labor
Overhead
Cost of
Goods
Mfg.
Finished Goods
Cost of
Goods
Mfg.
Cost of Goods Sold
Job Cost Flows
18-51
Work in Process
Direct
Material
Direct
Labor
Overhead
Cost of
Goods
Mfg.
Finished Goods
Cost of
Goods
Sold
Cost of
Goods
Mfg.
Cost of Goods Sold
Cost of
Goods
Sold
Job Cost Flows
18-52
Applying Overhead
A predetermined overhead rate (POHR)
is used to apply costs to jobs.
18-53
Applying Overhead
A predetermined overhead rate (POHR)
is used to apply costs to jobs.
Established
before the
period begins
Based on
estimated OH cost
and estimated
activity level
18-54
Applying Overhead
A predetermined overhead rate (POHR)
is used to apply costs to jobs.
POHR =
Estimated total overhead for the period
Estimated total activity for the period
Established
before the
period begins
Based on
estimated OH cost
and estimated
activity level
18-55
Applying Overhead
POHR =
Estimated total overhead for the period
Estimated total activity for the period
This activity
is called the
cost driver
18-56
Applying Overhead
POHR =
Estimated total overhead for the period
Estimated total activity for the period
This activity
is called the
cost driver
The cost driver is assumed
to be a causal factor in
overhead incurrence.
Examples:
Units produced
Direct labor hours
Direct labor cost
Machine hours
18-57
Tell me again how
we use the POHR to
apply overhead
to jobs.
Applying Overhead
18-58
We multiply the POHR
times the number of
cost driver activity units
incurred for the job.
Tell me again how
we use the POHR to
apply overhead
to jobs.
Applying Overhead
18-59
We multiply the POHR
times the number of
cost driver activity units
incurred for the job.
I dont get it!
Show me an
example.
Applying Overhead
18-60
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. $10.00 per hour
b. $ 6.00 per hour
c. $ 8.00 per hour
d. $12.00 per hour
Applying Overhead
Example
18-61
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. $10.00 per hour
b. $ 6.00 per hour
c. $ 8.00 per hour
d. $12.00 per hour
Estimated Overhead
Estimated Activity
$200,000
25,000 hours
POHR = $8.00 per hour
Applying Overhead
Example
18-62
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. $200,000
b. $192,000
c. $208,000
d. $196,000
Applying Overhead
Example
18-63
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. $200,000
b. $192,000
c. $208,000
d. $196,000
24,000 hours
$8.00 per hour
= $192,000
Applying Overhead
Example
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
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.
Applying Overhead
The POHR is based
on estimates.
What happens if
actual results differ
from the estimates?
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
Actual
overhead
costs
incurred
Overhead
applied to
Work in Process
(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
Cost of Goods
Overhead is: 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
Adjusting Cost of Goods Sold for
underapplied or overapplied overhead
18-71
Manufacturing Overhead
Actual
Overhead
Costs
Incurred
Overhead
Applied to
Work in Process


(Debit bal.)
Underapplied
Overhead
(Credit bal.)
Overapplied
Overhead
Applying Overhead
18-72
Manufacturing Overhead Cost of Goods Sold
Actual Applied
Underapplied
Balance
Applying Overhead
18-73
Manufacturing Overhead Cost of Goods Sold
Actual Applied
Underapplied
Balance
Underapplied
Balance
Applying Overhead
18-74
Manufacturing Overhead Cost of Goods Sold
Actual Applied
Overapplied
Balance
Applying Overhead
18-75
Manufacturing Overhead Cost of Goods Sold
Actual Applied
Overapplied
Balance
Overapplied
Balance
Applying Overhead
18-76
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.
FishCos manufacturing overhead is:

a. $12,000 overapplied.
b. $12,000 underapplied.
c. $96,000 overapplied.
d. $96,000 underapplied.
Applying Overhead
Question
18-77
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.
FishCos manufacturing overhead is:

a. $12,000 overapplied.
b. $12,000 underapplied.
c. $96,000 overapplied.
d. $96,000 underapplied.
Applying Overhead
Question
a.
b.
c.
d.
18-78
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.
FishCos manufacturing overhead is:

a. $12,000 overapplied.
b. $12,000 underapplied.
c. $96,000 overapplied.
d. $96,000 underapplied.
Applied overhead 192,000 $
Less actual overhead 180,000
Overapplied overhead 12,000 $
Applying Overhead
Question
18-79
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
Applying Overhead
Question
18-80
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
Applying Overhead
Question
a.
b.
18-81
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.
Applying Overhead
Question
18-82
18-83
THE END