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Cost Accounting - UMass Amherst
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Manufacturing Cost Terms, Concepts, and
Classifications(a(((A review of background
concepts previously covered in ACCTG 222 or the equivalent.
The Income Statement
Merchandising and manufacturing firms use a
“classified” income statement format:
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
The Income Statement
Merchandising and manufacturing firms use a
“classified” income statement format:
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
Note that the expenses are grouped into product costs and
period costs.
The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
Classifications of Costs
DirectMaterialDirect
MaterialDirectLaborDirectLabor
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftenclassified as follows:
Selling andAdministrative
Period Costs
Manufacturing Cost Flows
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw Materials
Work in Process: A Closer Look
Raw Materials
Payroll
Factory Overhead
Direct materials used
Direct labor costs incurred
Manufacturing overhead applied
Work in Process
Cost of goodsCompleted, toFinished Goodsinventory
Manufacturing Overhead: A closer look
Manufacturing Overhead
Actual Overhead
Costsincurred
OverheadApplied toProduction
Any difference represents over- or under-Applied overhead
Applied to Work in Process,Based on a pre-determined
Overhead rate.
Pre-determined overheadRate:
Budgeted total manufacturing OHBudgeted driver level (e.g., DLH)
= Overhead applied per driver unit
Direct materials used $ 1,000
Direct labor cost 2,000
Overhead applied 4,000
Total manufacturing costs $ 7,000
Add: Beginning work-in-process
Less: Ending work-in-process
2,500
1,500
Cost of goods manufactured (completed) $ 8,000
Add: Beginning finished goods 3,000
Less: Ending finished goods 2,000
Cost of goods sold $ 9,000
Cost of Goods Sold, Manufacturing Firm
Sales revenues $ 15,000
Less: Cost of goods sold 9,000
Gross Margin $ 6,000
Less: Selling and administrative expenses 3,000
Operating income (pre-tax) $ 3,000
Gross margin %: $6,000/$15,000 = 40%
Return on sales %: $3,000/$15,000 = 20%
Operating Income Statement, Manufacturing Firm
Cost terminology:
•Product (inventoriable) vs. period costs
•Fixed vs. variable costs
•Gross margin vs. contribution margin
•Direct vs. indirect costs
•Differential costs (and benefits)
•Sunk costs
•Opportunity costs
Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you werenot attending college,you could be earning$65,000 per year. Your opportunity costof attending college for one year is $65,000.
The End
Handout 1 (a): Cost flows
In manufacturing
Handout 1(a) Manufacturing cost flows; disposition of over/under applied overhead
Speedy Company provides the following information for October:
Beginning inventories:
Materials $ 2,000
Work-in-Process $ 4,000
Finished Goods $ 6,000
Materials purchased $12,000
Materials used $10,000
Direct manufacturing labor $12,000
Cost of goods manufactured (completed)* $ 38,000
Cost of Goods Sold* $ 40,000
Actual manufacturing overhead $ 25,200
In addition, you learn that the direct labor wage rate is $30 per hour, and that manufacturing
overhead is allocated at $50 per direct labor hour.
* These costs are measured before any adjustment for over- or under-allocated manufacturing
overhead.
Required: Determine the following amounts:
(a) Direct labor hours during October __________
(b) Manufacturing overhead allocated to production during October (before any
adjustment for over- or under-allocated overhead) $ __________
(c) Under- or over-allocated manufacturing overhead during October $ __________
(d) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead
is written-off to Cost of Goods Sold $ __________
(e) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold
(d) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is
written-off to Cost of Goods Sold $ __________
$ 40,000 + $5,200 = $ 45,200
(e) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold
Account:
Ending balance
Proportion
Allocation
Work in process $ 8,000 8/52 $ 800 Finished goods $ 4,000 4/52 $ 400 Cost of sales $40,000 40/52 $ 4,000 Total $52,000 52/52 $ 5,200
(d) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is
written-off to Cost of Goods Sold $ __________
$ 40,000 + $5,200 = $ 45,200
(e) Speedy’s Cost of Goods Sold for October, if the under- (over-) allocated overhead is prorated based on the ending balances in Work-in-Process, Finished Goods, and Cost of Goods Sold
Account:
Ending balance
Proportion
Allocation
Work in process $ 8,000 8/52 $ 800 Finished goods $ 4,000 4/52 $ 400 Cost of sales $40,000 40/52 $ 4,000 Total $52,000 52/52 $ 5,200
Provide journal entries to record the disposition of the under-allocated
overhead for cases (d) and (e) above.
Handout 1 (b): Income Statement
format for manufacturing
firms
Handout 1(b) Manufacturing cost flows; inventory changes and percentage relations Prepare a Statement of Cost of Goods Manufactured (Completed) and a Classified Income Statement based upon the following information: Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
Vertical Analysis Item: % Sales 100 Cost of sales 60 Gross Margin 40 Selling and Admin.
20
Operating income
20
Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
Vertical Analysis Item: % Sales 100 Cost of sales 60 Gross Margin 40 Selling and Admin.
20
Operating income
20
Item: $ Sales $ 200,000 Cost of sales 120,000 Gross Margin 80,000 Selling and Admin.
40,000
Operating income $ 40,000
Return on sales 20% Operating income $40,000 Gross margin percent 40% Cost of goods completed $150,000 Finished goods ending inventory $70,000 Change in work-in-process inventory (increase) $50,000 Direct materials used $20,000 Factory overhead (applied at 200% of direct labor) $120,000 Materials purchased $25,000 Materials ending inventory $30,000 Work-in-process ending inventory $65,000
To begin, provide a vertical (percentage) analysis of the income statement, and determine the implied dollar amounts. Given the Cost of Sales amount, show all cost and revenue flows in T-Accounts.
Vertical Analysis Item: % Sales 100 Cost of sales 60 Gross Margin 40 Selling and Admin.
20
Operating income
20
Item: $ Sales $ 200,000 Cost of sales 120,000 Gross Margin 80,000 Selling and Admin.
40,000
Operating income $ 40,000
Statement of Cost of Goods Manufactured
Direct materials used $ 20,000 Direct labor $ 60,000 Manufacturing overhead $120,000 WIP Inventory, beginning $ 15,000 Total available $215,000 Less: WIP inventory, end $ 65,000 Cost of Goods Manufactured
$150,000
Finished Goods, beginning $ 40,000 Total available $190,000 Less: Finished Goods, end $ 70,000 Cost of sales $120,000
Handout 1 (c): Multiple choice
items re: manufacturing
cost flows
Handout 1(c) Multiple choice, manufacturing cost flows
1. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are $47,000, the manufacturing overhead is: A. $152,000 B. $11,750 C. $21,250 D. $9,500
Handout 1(c) Multiple choice, manufacturing cost flows
1. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct labor is $38,000 and if direct materials are $47,000, the manufacturing overhead is: A. $152,000 B. $11,750 C. $21,250 D. $9,500
Labor is 80 % of conversion cost, and overhead is ¼ of
labor.
¼ ($38,000) = $9,500
2. During the month of July, direct labor cost totaled $12,000 and direct labor cost was 30% of prime cost. If total manufacturing costs during July were $86,000, the manufacturing overhead was: A. $46,000 B. $40,000 C. $28,000 D. $74,000
2. During the month of July, direct labor cost totaled $12,000 and direct labor cost was 30% of prime cost. If total manufacturing costs during July were $86,000, the manufacturing overhead was: A. $46,000 B. $40,000 C. $28,000 D. $74,000
Total prime cost is $40,000 ($12,000 / .30), and overhead is $46,000 ($86,000 - $40,000).
3. Using the following data for a recent period, calculate the beginning finished goods inventory:
The beginning finished goods inventory was: A. $24,000 B. $23,000 C. $7,000 D. $12,000
3. Using the following data for a recent period, calculate the beginning finished goods inventory:
The beginning finished goods inventory was: A. $24,000 B. $23,000 C. $7,000 D. $12,000
Cost of sales is $23,000 and cost of goods manufactured is $16,000, so the finished
goods inventory decreased by $7,000. The beginning inventory is $12,000 ($5,000 +
$7,000)
4. The following data are for a recent period's operations:
The cost of goods manufactured was: A. $115,275 B. $284,725 C. $275,275 D. $124,725
4. The following data are for a recent period's operations:
The cost of goods manufactured was: A. $115,275 B. $284,725 C. $275,275 D. $124,725
The finished goods inventory decreased by $4,725, so the cost of goods sold ($280,000) exceeds the cost of goods manufactured by
$4,725;
$280,000 - $4,725 = $275,275.
5. The cost of goods manufactured for October at Toule Manufacturing Corporation was $907,000. The following changes occurred in Toule inventory accounts during October:
What was Toule's cost of goods sold for October? A. $869,000 B. $886,000 C. $928,000 D. $945,000
5. The cost of goods manufactured for October at Toule Manufacturing Corporation was $907,000. The following changes occurred in Toule inventory accounts during October:
What was Toule's cost of goods sold for October? A. $869,000 B. $886,000 C. $928,000 D. $945,000
The cost of goods sold is less than the cost of goods manufactured ($907,000) by $38,000.
$907,000 – 38,000 = $869,000.
6. Last year there was no change in either the raw materials or the work in process beginning and ending inventories. However, finished goods, which had a beginning balance of $25,000, increased by $15,000. If the manufacturing costs incurred totaled $600,000 during the year, the cost of goods available for sale must have been: A. $585,000 B. $600,000 C. $610,000 D. $625,000
6. Last year there was no change in either the raw materials or the work in process beginning and ending inventories. However, finished goods, which had a beginning balance of $25,000, increased by $15,000. If the manufacturing costs incurred totaled $600,000 during the year, the cost of goods available for sale must have been: A. $585,000 B. $600,000 C. $610,000 D. $625,000
Because the work in process did not change,
manufacturing costs incurred equals cost of goods manufactured. Total available for sale equals
beginning inventory ($25,000) plus cost of goods manufactured ($600,000).