determining both total cost and the unit cost of each product.- Consisting of accounting for the various manufacturing costs.. The important feature: the use of perpetual inventory syste
MANAGERIAL ACCOUNTING
Managerial Accounting provides economic and financial information for managers and other internal users (managers and officers).
Managers’ activities and responsibilities can be classified into three broad functions:
1 Planning: requires managers to look ahead and to establish objectives
(maximizing short-term profits and market share, maintaining a commitment to environmental protection, etc.)
2 Directing: involves coordinating a company’s diverse activities and human resources to produce a smooth-running operation This function relates to implementing planned objectives and providing necessary incentives to motivate employees
3 Controlling: the process of keeping the company’s activities on track.
Manufacturing consists of activities and processes that convert raw materials into finished goods.
1 Direct Material: cost of raw material ( Example: flour in the baking of bread, syrup in the bottling of soft drinks, and steel in the making of automobiles.)
- Indirect Material: physical association with the finished product is too small or not physically a part of finished product (polishing ink, ribbons, )
2 Direct Labor: the work of factory employees that can be physically and directly associated with converting raw materials into finished goods ( Example: Bottlers at Coca-Cola, Bakers at Sara Lee)
- Indirect Labor: factory timekeepers, maintenance people,
3 Manufacturing Overhead: costs that are indirectly associated with the manufacture of the finished product.
- Product costs: costs that are a necessary and integral part of producing the finished product
- Period costs: costs that are matched with the revenue of a specific time period rather than included as part of the cost of a salable product Period costs include selling and administrative expenses.
Income Statement: Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
Cost of Goods Manufactured: formula
Just-in-time Inventory (JIT):
- Goods are manufactured or purchased just in time for sale.
- Companies can save much costs as the level of inventories is kept at low levels. Total quality management (TQM):
- Reduce defects in finished products, with the goal of zero defects.
- Allocates overhead based on each product’s use of particular activities in making the product
- Uses both financial and non-financial measures to evaluate all aspects of a company’s operations in an integrated fashion.
Problem 1: An analysis of the accounts of Roberts Company reveals the following manufacturing cost data for the month ended June 30, 2020.
Costs incurred: raw materials purchases $54,000, direct labor $47,000, manufacturing overhead $19,900 The specific overhead costs were: indirect labor $5,500, factory insurance $4,000, machinery depreciation $4,000, machinery repairs $1,800, factory utilities $3,100, and miscellaneous factory costs $1,500 Assume that all raw materials used were direct materials.
Instruction a Prepare a cost of goods manufactured schedule for the month ended June 30, 2020. b Show the presentation of the ending inventories on the June 30, 2020, balance sheet.
Roberts Company Cost of goods sold manufactured schedule For the Month Ended June 30, 2020
Total raw materials available for use $63,000
Less: Raw materials inventory, June 30,
Total cost of work in process $121,800
Less: Work in process, June 30, 2017 $7,000
Roberts CompanyBalance SheetJune 30, 2020
Problem 2: Ohno Company specializes in manufacturing a unique model of bicycle helmet The model is well accepted by consumers, and the company has enough orders to keep the factory production at 10,000 helmets per month (80% of its full capacity) Ohno’s monthly manufacturing cost and other expense data are as follows.
Raw materials (plastics, polystyrene, etc.) 80,800
Wages for assembly line workers 59,700
Miscellaneous materials (glue, thread, etc.) 1,470
Property taxes on factory building 420
(a) Prepare an answer sheet with the following column headings Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings Total the dollar amounts in each of the columns.
(b) Compute the cost to produce one helmet.
Wages for assembly line workers $59,700
Property taxes on factory building $420
Total cost of production = direct materials + direct labor + manufacturing overhead 80,800 + 59,700 + 23,930 = 164,430
JOB ORDER COSTING
- Measuring, recording, and reporting product costs (determining both total cost and the unit cost of each product).
- Consisting of accounting for the various manufacturing costs The important feature: the use of perpetual inventory systems (provides immediate, up-to-date information on the cost of a product).
There are two basic types of cost accounting systems:
- The costs are assigned to departments or processes for the specified period of time, manufacture a large volume of similar products.
- The costs are to each job or to each batch of goods (manufacture of a jet by Boeing, the production of a movie by Disney)
- An important feature each job or batch has its own distinguishing characteristic
- Aim: to compute the costs per job.
The flow of costs (direct material, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials
- Raw materials costs: debit the cost of the materials to Raw Materials Inventory
- Factory labor costs: companies debit labor costs to Factory Labor as they incur those costs.
2 A job cost sheet to assign costs to work in process
1 Debits made to Work in Process Inventory
2 Credits made to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
3 Determine the predetermined overhead rate.
3 Prepare entries for manufacturing and service jobs completed and sold
Assigning costs to finished goods: Finished Goods Inventory is a control account It controls individual finished goods records in a finished goods subsidiary ledger.
Assigning costs to Cost of goods sold:
Summary of Job Order Cost Flow:
- Underapplied manufacturing overhead indicates that the overhead assigned to work in process is less than the overhead incurred
- Overapplied overhead indicates that the overhead assigned to work in process is greater than the overhead incurred.
5 Advantages and Disadvantages of Job Order Costing
- Job order costing provides more useful information to determine the profitability of particular projects and for estimating costs when preparing bids on future jobs.
- Job order costing requires a significant amount of data entry as the distinguishing characteristic of each separated job A common problem of all costing system is how to allocate overhead to the finished product Overhead often represents more than 50% of a product’s cost, and this cost is difficult to allocate meaningfully to the product Thus, the accuracy of the job order cost system is largely dependent on the accuracy of the overhead allocation process
Problem 1: Tombert Decorating uses a job order cost system to collect the cost of its interior decorating business Each client's consultation is treated as a separate job Overhead is applied to each job based on the number of decorator hours incurred Listed below are data for the current year.
The company uses Operating Overhead in place of Manufacturing Overhead
Instructions a Compute the predetermined overhead rate. b Prepare the entry to apply the overhead for the year. c Determine whether the overhead was under or overapplied and by how much.
Predetermined overhead rate = Estimated overhead costs
Dec.31 Service contact in process (40,500 * $24)
The ending balance of the Operating Overhead = 982,000 - 972,000 = $10,000 (underapplied)
Problem 2: Barnes Company uses a job order cost system The following data summarize the operations related to production for October:
B Materials requisitioned, $290,100, of which $8,150 was for general factory use.
C Factory labor used, $489,500 of which $34,200 was indirect.
D Other costs incurred on account for factory overhead, $600,000; selling expenses, $150,000; and administrative expenses,
E Prepaid expenses expired for factory overhead were $18,000; for selling expenses, $6,000; and for administrative expenses,
F Depreciation of office building was $30,000; of office equipment,
G Factory overhead costs applied to jobs, $711,600.
Journalize the entries to record the summarized operations.
PROCESS COSTING
1 Discuss the uses of a process cost system and how it compares to a job order system.
- Uses of a process cost systems: Apply cost to similar products that are mass- produced in a continuous fashion (Ex: The production of cereal, steel, oil, soft- drink, etc).
JOB ORDER COST vs PROCESS COST SYSTEMS:
- The manufacturing cost elements (Direct Materials, Direct Labor, Manufacturing Overhead)
- The accumulation of the costs of material, labor, and overhead.
In both job costing and process costing systems, costs initially flow to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead These systems then consistently allocate these costs to Work in Process, Finished Goods Inventory, and Cost of Goods Sold.
2 Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs.
- Debit Raw Materials Inventory (when purchasing raw materials): All raw materials issued for production are a materials cost to the producing department.
- Debit Factory labor (when factory labor incurred): Labor costs for the Machining Department include the wages of employees who shape, hone, and drill the raw materials.
- Debit Manufacturing Overhead (when overhead cost incurred): The objective in assigning overhead in a process cost system is to allocate the overhead costs to the production departments on an objective and equitable basis
● Refinements on the weighted-average method:
- Conversion costs are the sum of labor costs and overhead costs.
- In computing equivalent units, the beginning work in process is not part of the equivalent-units-of-production formula.
- Two equivalent unit compu- tations: one for materials, and the other for conversion costs.
4 Prepare a production cost report (4 steps).
Step 1: Compute the physical unit flow.
Step 2: Compute the equivalent units of production.
Step 3: Compute unit production costs.
Step 4: Prepare a cost reconciliation schedule.
Problem 1: Selected information from Skylar Studios shows the following:
Record the acquisition of raw materials as a debit to Raw Materials Inventory and a credit to Accounts Payable.* **Direct Labor Incurred:** Debit Wages Payable and credit Wages Expense to reflect actual labor costs.* **Depreciation Expense:** Debit Depreciation Expense and credit Accumulated Depreciation to allocate asset value over its useful life.* **Raw Materials Used:** Debit Work in Process Inventory and credit Raw Materials Inventory for raw materials consumed in production.* **Overhead Applied:** Debit Work in Process Inventory and credit Manufacturing Overhead to distribute indirect costs based on machine hours.* **Transfer to Department 2:** Debit Work in Process Inventory (Dept 2) and credit Work in Process Inventory (Dept 1) to record the movement of unfinished goods.
Problem 2: Complete this production cost report
Units to be accounted for:
Material units Conversion units Total
Cost to be accounted for
Total cost to be accounted for
End work in process - materials (25,000*$0.3)
End work in process - conversion (6,250*$0.8)
End work in process - total 12,500
COST-VOLUME-PROFIT
1 Explain variable, fixed, and mixed costs and the relevant range.
Cost behavior analysis is the study of how specific costs respond to changes in the level of business activity.
- Costs that vary in total directly and proportionately with changes in the activity level.
- A variable cost may also be defined as a cost that remains the same per unit at every level of activity.
- Costs that remain the same in total regardless of changes in the activity level (Ex: property taxes, insurance, rent, supervisory salaries, and depreciation on buildings and equipment).
- On a per unit basis, the cost of rent will decline as activity increases
- The range that the company expects to operate.
- Relevant range is also called the normal or practical range.
- Costs that contain both a variable- and a fixed-cost element Mixed costs, therefore, change in total but not proportionately with changes in the activity level.
2 Apply the high-low method to determine the components of mixed costs.
The High-Low Method is a method for allocating fixed costs and variable costs.* Variable cost per unit is calculated as the change in total variable costs divided by the change in activity level.* Fixed costs are calculated as the total cost at a given activity level minus the total variable costs at that activity level.
Fixed cost = Total Cost - Variable Cost * Q
3 Prepare a CVP income statement to determine contribution margin.
Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company’s profits
● The following assumptions underlie each CVP analysis. a The behavior of both costs and revenues is linear throughout the relevant range of the activity index. b Costs can be classified accurately as either variable or fixed. c Changes in activity are the only factors that affect costs. d All units produced are sold. e When more than one type of product is sold, the sales mix will remain constant That is, the percentage that each product represents of total sales will stay the same Sales mix complicates CVP analysis because different products will have different cost relationships In this chapter, we assume a single product.
When these assumptions are not valid, the CVP analysis may be inaccurate.
4 Compute the break-even point using three approaches.
5 Determine the sales required to earn target net income and determine margin of safety.
Target net income determines the sales necessary to achieve this specified level of income.
Margin of Safety is the difference between actual or expected sales and sales at the break-even point
Problem 1: Kerr Manufacturing sells a single product with a selling price of $600 with variable costs per unit of $360 The company’s monthly fixed expenses are
What is the company’s break-even point in units?
What is the company’s break-even point in dollars?
Prepare a contribution margin income statement for the month of January when they will sell 500 units.
How many units will Kerr need to sell in order to realize a target profit of $120,000? What dollar sales will Kerr need to generate in order to realize a target profit of
Construct a contribution margin income statement for the month of June that reflects
$600,000 in sales revenue for Kerr Manufacturing.
Problem 2: Jakarta Company is a service firm with current service revenue of
$400,000 and 40% contribution margin Its fixed costs are $80,000 Maldive Company has current sales of $6,610,000 and a 45% contribution margin Its fixed costs are $1,800,000 a) What is the margin of safety for Jakarta and Maldive? b) Compare the margin of safety in dollars between the two companies Which is stronger? c) Compare the margin of safety in percentage between the two companies Now, which one is stronger?
Break-even sales of Jakarta Company = ¿ cost
40 %=$200000 Margin of safety for Jakarta = Sales - Break-even sales= 400000 - 200000 0000
Margin of Safety percentage for Jakarta = Margin of safety∈dollars
Break-even sales of Maldive Company = ¿ cost
45 % =$4000000 Margin of safety for Maldives = Sales - Break-even sales= 6610000 - 4000000= 2610000
Margin of Safety percentage for Maldive = Margin of safety∈dollars
66100009.5 % b) Based on dollars, Maldive appears to be the stronger of the two companies in this situation because they have a margin of safety of $2,610,000 whereas Jarkata has a margin of safety of only $200,000. c) Based on margin of safety percentages, Jakarta appears to be the more secure of the two organizations because their percentage margin of safety is higher, meaning that they can lose up to 50% of their overall sales before they have to worry about reaching the break-even point, whereas Maldive only have 39.5% of sales that they can lose.
BUDGETARY PLANNING
A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms.
- Companies can obtain historical data on revenues, costs, and expenses from the accounting records These data are helpful in formulating future budget goals.
- The budget and the administration of the budget: are entirely management responsibilities.
1 It requires all levels of management to plan ahead and formalize goals on a recurring basis.
2 It provides definite objectives for evaluating performance at each level of responsibility.
3 Create an early warning system for potential problems
4 Facilitates the coordination of activities within the business
5 It results in greater management awareness of the entity’s overall operations
6 It motivates personnel throughout the organization to meet planned objectives.
- Effective budgeting depends on a sound organizational structure
- Budgets based on research and analysis result in realistic goals
- Acceptance by all levels of management
● LENGTH OF THE BUDGET PERIOD
- A budget may be prepared for any period of time
- The most common budget period is one year.
- Different budgets may cover different time period
- Past performance is often the starting point from which future budget goals are formulated.
- The budget is developed within the framework of a sales forecast
Participative budgeting - each level of management participate
- lower-level managers have more detailed knowledge of their specific area, are able to provide more accurate budgetary estimates
- Perceive budget process as fair due to involvement of lower level management
- time-consuming (and thus more costly)
- foster budgetary “gaming” through budgetary slack.
● BUDGETING AND LONG-RANGE PLANNING
● The Master Budget: The master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period.
The master budget contains two classes of budgets
- Operating budgets are the individual budgets that result in the preparation of the budgeted income statement These budgets establish goals for the company’s sales and production personnel.
- financial budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures Include the capital expenditure budget, the cash budget, and the budgeted balance sheet.
+ The sales budget is prepared first
+ Every other budget depend on sale budget
The sales budget is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price:
Total sale = Expected unit sale x unit selling price
+ The production budget shows the number of units of a product to be produced to meet anticipated sales demand.
+ Derived from sale budget + desire change in ending finished goods inventory + Realistic ending inventory
The desired ending inventory is again a key component in the budgeting process
● Direct Labor Budget: unit from production budget
Like the direct materials budget, the direct labor budget contains the quantity (hours) and cost of direct labor necessary to meet production requirements.
The manufacturing overhead budget shows the expected manufacturing overhead costs for the budget period.
● Selling and Administrative Expense Budget
- Distinguish between fixed and variable costs
- Get units from Sale budget
The budgeted income statement is the important end-product of the operating budgets This budget indicates the expected profitability of operations for the budget period The budgeted income statement provides the basis for evaluating company performance.
The cash budget shows anticipated cash flows
The most important financial budget The cash budget contains three sections (cash receipts, cash disbursements, and financing)
+ The cash receipts section includes expected receipts from the company’s principal source(s) of revenue: Expected revenue from the company's financial resources
Expected interest & dividends receipt: from planned sales of investments, plant assets, and the company’s capital stock.
+ The cash disbursements section: Expect cash payment from DM, DL, MOH và selling and administrative expenses.
+ The financing section shows expected borrowings and the repayment of the borrowed funds plus interest
❗❗❗❗❗ Caution: Depreciation expense is non-cash expense.
The budgeted balance sheet is a projection of the financial position at the end of the budget period This budget is developed from the budgeted balance sheet for the preceding year and the budgets for the current year
Problem 1: Healthy Measures Inc.produces a bath and Gym version of its popular electronic scale The anticipated unit sales for the scales by sales region are as follows:
The finished goods inventory estimated for March 1, for the Bath and Gym scale models is 11,800 and 8,100 units, respectively The desired finished goods inventory for March 31 for the Bath and Gym scale models is 15,000 and 7,500 units, respectively.
Prepare a production budget for the Bath and Gym scales for the month ended March 31
Problem 2: The controller of MingWare Ceramics Inc wishes to prepare a cost of goods sold budget for September The controller assembled the following information for constructing the cost of goods sold budget: