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Fundamental Concepts
CHAPTER 1
PowerPoint Presentation by
LuAnn BeanProfessor of AccountingFlor ida Institute of Technology
© 2012 Cengage Learn ing. All Rights Reserved. May not be c opied, sc anned, or duplicated, in whole or in part, ex c ept for use as permi tted in a l icense
d is tributed wi th a c erta in produc t or serv ic e or o therwis e on a password-protected websi te for c las s room use.
Managerial Accounting 11E
Maher/Stickney/Weil 2
1 Distinguish between managerial and financial accounting.
LEARNING OBJECTIVE
3
How did cost information help Domino’s Pizza
survive?
Domino’s dropped its 6-inch pizza when they discovered it
was losing money.
LO 1
MANAGERIAL APPLICATION
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FINANCIAL ACCOUNTING: Definition
Reports to users (shareholders, creditors, financial analysts, etc.)
outside the organization.
LO 1
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MANAGERIAL ACCOUNTING: Definition
Reports results of activities to insiders (managers, etc.).
LO 1
Click the button to skip Exercise 6
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EXERCISE 6
Press “Enter” or click left mouse button for answer.
Managerial accounting is used for
a) Decision making
b) Planning
c) Control
d) All of the above
LO 1
d) All of the above
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2Understand how managers can use accounting information to implement strategies.
LEARNING OBJECTIVE
8
When a product is a “commodity” how do you
compete to achieve/maintain profitability?
Compete by differentiatingyourself from competition. Focus
on order fulfillment, cutting costs, etc.
LO 2
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EXAMPLES OF DIFFERENTIATION
General Electric: created an accounting system to track costs subject to learning phenomenon.
Shelter-Us: accounting system tracks costs of shelter.
LO 2
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Can/should the financial or tax accounting systems be used for
managerial accounting purposes?
NO! The objectives and therefore the information
available for decision making is different.
LO 2
Click the button to skip Questions from text.
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QUESTIONS
Press “Enter” or click left mouse button for answer.
Which questions are relevant to managerial accounting?a) What can I sell this old computer for?
b) What did the old computer cost?
c) How much will I get for the old computer if I trade it and pay cash for a new one?
d) What value does this old computer have as a backup if I buy a new one?
e) What is the computer’s book value?
f) What is the computer’s cost basis for tax purposes?
LO 2
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QUESTIONS
Press “Enter” or click left mouse button for answer.
Which questions are relevant to financial or tax accounting?a) What can I sell this old computer for?
b) What did the old computer cost?
c) How much will I get for the old computer if I trade it and pay cash for a new one?
d) What value does this old computer have as a backup if I buy a new one?
e) What is the computer’s book value?
f) What is the computer’s cost basis for tax purposes?
LO 2
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3 Identify the key financial players in the organization.
LEARNING OBJECTIVE
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Who are the key financial players in the
corporation?
Key financial players are Financial Vice President,
Controller, Treasurer, Cost Accountants/Managers, and
Internal Audit.
LO 3
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EXHIBIT 1.1
LO 3
The financial areas of the corporation
report to the President through the Financial VP.
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FINANCIAL PROFESSIONALS¯Financial VP: in charge of all accounting and
finance¯ Controller: manages cost and managerial
accounting¯Treasurer: manages cash flows; raises cash¯Cost accountants/managers: analyze,
manage costs¯Internal audit: provides auditing, consulting
services
LO 3
Click the button to skip Exercise 7
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EXERCISE 7
Press “Enter” or click left mouse button for answer.
The controller oversees:
a) Production processes
b) Management of cash
c) Providing accounting information to managers
LO 3
c) Providing accounting information to managers
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4Understand managerial accountants’ professional environment and ethical responsibilities.
LEARNING OBJECTIVE
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What is the ethical and regulatory framework for managerial accountants?
The ethical and regulatory framework is made up of
standards boards, professional organizations, and professional
certifications.
LO 4
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ETHICAL, REGULATORY FRAMEWORK
¯Standard setting¯Cost Accounting Standards Board sets cost accounting
standards¯ Professional organizations
¯ Institute of Management Accounts (IMA) sponsors professional certifications
¯Certifications¯Certified Management Accountant (CMA)¯Certified Public Accountant (CPA)¯Canadian certifications
¯Chartered Accountant (CA)¯Certified General Accountant (CGA)
LO 4
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WHITE COLLAR CRIME
Many managers have spent time in jail for activities (e.g., price fixing, sharing information) to benefit their companies, not themselves.
LO 4E!!!
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PREVENTING WHITE COLLAR CRIME
¯Sarbanes-Oxley Act¯Passed in the aftermath of the Enron scandal¯Includes
¯Making CEOs and CFOs sign and accept responsibility for financial statements
¯Making CEOs and CFOs responsible for the company’s system of internal controls
¯Creating the Public Company Accounting Oversight Board to oversee public auditors
LO 4
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What helped J&J respond quickly to the
Tylenol poisoning incident?
The J&J Credo guided management’s response
“Responsibility to healthcare, customers, employees, and
shareholders.”
LO4
MANAGERIAL APPLICATION
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5 Master the concept of cost.
LEARNING OBJECTIVE
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COST: Definition
Is a sacrifice of resources.
LO 5
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TYPES OF COSTS¯Opportunity costs
¯ Is the forgone income from using an asset in its best alternative
¯Direct costs¯Relate directly to the cost object for which cost is to be
measured¯Indirect costs
¯Are indirectly related to the cost of a cost object¯Variable costs
¯Change in total as the level of activity changes¯Fixed costs
¯Do not change in total with changes in the level of activity
LO 5
Click the button to skip Exercise 8
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EXERCISE 8
Press “Enter” or click left mouse button for answer.
Zappa, a mechanic, left his $25,000-a-year job at Joe’s Garage to start his own body shop. Zappa now draws an annual salary of $15,000. Can you identify his opportunity costs?
LO 5
$25,000
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How do costs and expenses differ?
LO 5
While a cost is the sacrifice of resources, an expense is a “gone” asset.
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6Compare and contrast income statements prepared for managerial use and those prepared for external reporting.
LEARNING OBJECTIVE
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How do financial and managerial income statements differ?
LO 6
Managerial income statements present variable and fixed costs separately while financial income statements do not make this distinction.
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EXH
IBIT
1.3
EXHIBIT 1.2
Variable and fixed costs are presented
separately for managerial purposes.
LO 6
Variable and fixed costs lumped together
for financial purposes.
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7 Understand the concepts useful for managing costs.
LEARNING OBJECTIVE
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MANAGING COSTS
Effective cost control requires managers to understand how producing a product requires activities that generate costs.
LO 7
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ACTIVITY BASED MANAGEMENT (ABM): Definition
Examines activities and their associated costs as a means of developing efficiencies and reducing non-value-added
costs.
LO 7
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What are “non-value-added” activities?
LO 7
Non-value-added activities are activities that can be
eliminated without reducing a product’s service potential to
the customer.
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What are “value-added”activities?
LO 7
Value-added activities are activities that increase a product’s service to the
customer.
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VALUE CHAIN: Definition
Describes a linked set of activities that increase the
usefulness (value) of products/services of an
organization.
LO 7
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EXHIBIT 1.4
LO 7
Functions of the value chain help
management identify value-added
activities.
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How do strategicand tactical cost management
decisions differ?
LO 7
Strategic decisions choose between production
alternatives. Tactical decisions make a particular production
alternative more cost efficient.
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STRATEGY and VALUE CHAIN
Strategic cost analysis identifies parts of the value chain that generate most profits, enabling management to position their business at the best profit points.
LO 7
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STRATEGY and VALUE CHAIN: Winery Example
LO 7
Lone Tree Winery’s CFO conducted an analysis to help determine whether current strategy (producing and selling either grapes or wine to distributors) was working profitably. Data for analysis includes the following:Grapes to produce 14,000 cases of wineWeighted cost of capital, 10%Sale price grapes, $15 per caseSale price wine, $115 per case
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ECONOMIC DEPRECIATION: Definition
Measures decline in value of assets during a period
using either sales value or replacement cost.
LO 7
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COST OF CAPITAL: Definition
Is the amount a firm could earn on its assets by
putting them to their best alternative use.
LO 7
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LONE TREE WINERY: Grape and Wine Alternatives (per case)
Income ActivityTotal for Grapes
Total for Wine
Revenue $15.00 $80.00
Less
Cost of sales 15.00
Operating costs 11.43 50.71
Depreciation 1.00 6.43
Cost of capital (@ 10% 3.57 12.86
Economic loss $(1.00) $ (5.00)
LO 7
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LONE TREE WINERY: Estimated Profits (per case)
Income Activity Distributor RetailerRevenue $115 $ 150
Less
Cost of sales 80 115
Gross margin $ 35 $ 35
Operating costs total 20 30
Cost of capital (@ 10% 5 4
Economic profit $ 10 $ 1
LO 7
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LONE TREE ANALYSIS
Lone Tree’s losses raise the following questions.
¯Does Lone Tree sell their wine for less than other wineries?
¯Should Lone Tree’s owners sell the vineyards?
LO 7
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8Describe how managerial accounting supports modern production environments.
LEARNING OBJECTIVE
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KEY DEVELOPMENTS IN MANAGERIAL ACCOUNTING
¯Integrated information systems¯Tie managerial accounting, financial reporting, customer
databases, supply chain management and other databases together
¯Examples: ERPS, SAP¯Web hosting
¯Allows companies to focus on core competencies while outsourcing portions of information systems
¯Just-in-Time (JIT) and lean production¯Eliminate inventory between production departments and
focus on quality and efficiency
LO 8
Continued
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KEY DEVELOPMENTS IN MANAGERIAL ACCOUNTING (cont.)¯Total quality management (TQM)
¯Measures product reliability and service delivery as well as profitability while attempting excelling in all dimensions
¯Theory of constraints (TOC)¯ Identifies the weakest part of the process chain (constraint)
and attempts to improve it¯Benchmarking and continuous improvement
¯Benchmarking: continuous process of measuring products, services, activities against best performance levels, engaging in continuous improvement
¯Fads
LO 8
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9Understand the importance of effective communication between accountants and users of managerial accounting information.
LEARNING OBJECTIVE
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INFORMATION
Information is not free. Management must consider costs and benefits of information when designing an optimal accounting system.
LO 9
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10Understand the ethical standards that make up the Institute of Management Accountants’ Code of Ethics (Appendix 1.1)
LEARNING OBJECTIVE
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The Institute of Management Accountants promulgated the following standards of ethical conduct for management accountants.
1. COMPETENCE - ongoing development of their knowledge and skills in preparing complete reports with relevant and reliable information.
2. CONFIDENTIALITY – do not disclose confidential information acquired in the course of their work, except when authorized.
3. INTEGRITY - Avoid actual or apparent conflicts of interest.
4. OBJECTIVITY - Communicate information fairly and objectively.
LO 10
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RESOLUTION OF ETHICAL CONFLICT1. Discuss such problems with the immediate superior except when
it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level.
2. If the immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners.
3. Clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action.
4. If the ethical conflict still exists after exhausting all levels of internal review, the management accountant may have no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.
LO 10
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Measuring
Product Costs
CHAPTER 2
Managerial Accounting 11E
Maher/Stickney/Weil
© 2012 Cengage Learn ing. All Rights Reserved. May not be c opied, sc anned, or duplicated, in whole or in part, ex c ept for use as permi tted in a l icense
d is tributed wi th a c erta in produc t or serv ic e or o therwis e on a password-protected websi te for c las s room use.
PowerPoint Presentation by
LuAnn BeanProfessor of Accounting
Flor ida Institute of Technology
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EXHIBIT 2.8
Where are we on the value chain in CHAPTER 2?
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1 Understand the nature of manufacturing
costs.
LEARNING OBJECTIVE
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DIRECT MATERIALS: Definition
Can be easily traced directly to a product.
LO 1
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DIRECT LABOR: Definition
Is labor of workers who transform materials into a
finished product.
LO 1
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MANUFACTURING OVERHEAD: Definition
Includes all other costs of transforming the materials
to a finished product.
LO 1
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How are materials, labor not directly traceable to a product
categorized?
All costs, including materials and labor, not directly traceable to a
product are categorized as Manufacturing Overhead.
LO 1
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2Explain the need for recording costs by
department and assigning costs to
products.
LEARNING OBJECTIVE
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RESPONSIBILITY CENTER: Definition
Is any organizational unit with its own manager or
managers.
LO 2
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Responsibility center
(department)
Records costs &assigns to products
Direct materials
Direct labor
Overhead
Management comparescosts to standards
LO 2
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3Understand how the
Work-in-Process account both describes the
transformation of inputs into outputs in a company
and accounts for costs incurred in the process.
LEARNING OBJECTIVE
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ACCOUNTING SYSTEM PURPOSES
1) To record costs by responsibility for performance evaluation and control.
2) To assign manufacturing costs to units produced for product costing.
LO 3
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BASIC COST FLOW EQUATIONLO 3
Beginning + Transfers = Transfers + EndingBalance In Out Balance
BB + TI = TO + EB*
*Recall from financial accounting:
Beginning Balance + Additions - Withdrawals = Ending Balance
Click the button to skip Exercise 1968
EXERCISE 19
Press “Enter” or click left mouse button for answer.
Mark Landman’s accountant resigned and left the books in a mess. Mark is trying to compute unknown values in inventory
accounts of three stores. Can you help him?
LO 3
Midwest BB =
Midwest Northeast Southeast
BB $ 60,000
TI $200,000 200,000 $160,000
TO 180,000 220,000 150,000
EB 60,000 40,000
$40,000
?
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EXERCISE 19
Press “Enter” or click left mouse button for answer.
Mark Landman’s accountant resigned and left the books in a mess. Mark is trying to compute unknown values in inventory
accounts of three stores. Can you help him?
LO 3
Northeast EB =
Midwest Northeast Southeast
BB $ 60,000
TI $200,000 200,000 $160,000
TO 180,000 220,000 150,000
EB 60,000 40,000
$40,000?
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EXERCISE 19
Press “Enter” or click left mouse button for answer.
Mark Landman’s accountant resigned and left the books in a mess. Mark is trying to compute unknown values in inventory
accounts of three stores. Can you help him?
LO 3
Southeast BB =
Midwest Northeast Southeast
BB $ 60,000
TI $200,000 200,000 $160,000
TO 180,000 220,000 150,000
EB 60,000 40,000
$30,000
?
71
How did the Gravins Division manager
commit fraud?
The manager overstated ending inventory to improve his profit.
LO 3
MANAGERIAL APPLICATION
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How did top management catch the
fraud?
Top management caught the fraud when they realized that recorded
inventory had outgrown the freezer where it was stored.
LO 3
MANAGERIAL APPLICATION
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4 Compare and contrast normal costing and
actual costing.
LEARNING OBJECTIVE
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Name two approaches to determining overhead cost.
Two approaches to determining overhead cost are: (1) normal costing and (2) actual costing
LO 4
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COMPARING NORMAL and ACTUAL COSTING
¯Normal costing advantages¯Smoothes seasonal and other fluctuations that
don’t relate directly to activity levels¯More timely than actual because of estimating
process
LO 4
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USING NORMAL COSTING
¯Select a cost driver (allocation base) to apply overhead
¯Estimate dollar amount of overhead and level of activity for period
¯Compute predetermined (normal) overhead rate
¯Apply overhead to production
LO 4
Click the button to skip Example
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EXAMPLEPlantimum Builders manually assembles small modular
homes. Using prior year data, Plantimum estimated variable manufacturing overhead at $100,000, 50,000 direct labor hours, and $50,000 fixed manufacturing overhead.
What is Plantimum’s variable overhead rate?
LO 4
$100,000 / 50,000 dlh = $2.00 per direct labor hour
$ 50,000 / 50,000 dlh = $1.00 per direct labor hourWhat is Plantimum’s fixed overhead rate?
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EXAMPLEActual direct labor hours for the month was 4,500.How much variable overhead did Plantimum charge to
production for the month?
LO 4
4,500 dlh X $2.00 per direct labor hour = $9,000
4,500 dlh X $1.00 per direct labor hour = $4,500
How much fixed overhead did Plantimum charge to production for the month?
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5Know various
production methods and the different
accounting systems each requires.
LEARNING OBJECTIVE
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COST SYSTEMS
¯An effective cost system must have¯Decision focus: meets needs of decision makers¯Different costs for different purposes
¯Variable costing for decision making¯Full absorption for financial reporting
¯Cost-benefit test: benefits from cost system must exceed its costs
LO 5
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COST SYSTEMS: Examples
¯Job costing¯For custom production jobs¯Users: accounting and consulting firms, health care
organizations¯Process costing
¯For standardized production¯Users: drink makers (e.g., Coca Cola, etc.)
¯Operation costing¯A hybrid of job and process combined¯Users: Levi Strauss, Dell
LO 5
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6 Compare and contrast job costing and process
costing systems.
LEARNING OBJECTIVE
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PLANTIMUM PRODUCTION
Plantimum produced 3 modular homes during the month. Plantimum wonders whether they should use job order costing or process costing? What do you think?
Continued
LO 6
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PLANTIMUM PRODUCTION COSTS: Using Job Order
JobsDirect
LaborDirect
MaterialsOverhead($3/dlh)
TotalCost
Job #1001 $ 8,000 $20,800 $1,200 $30,000Job #1002 6,000 18,100 900 25,000
Job #1003 5,000 11,250 750 17,000
$19,000 $50,150 $2,850 $72,000
LO 6
Continued
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PLANTIMUM PRODUCT COSTING: Using Process
LO 6
Unit costs =
Total manufacturing costs / Units produced
(DL + DM + Overhead) / 3
($19,000 + $50,150 + $2,850) / 3
Average unit cost is $24,000 per modular house
Continued
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Which costing method, job order or process costing, do you think Plantimum
should use if record keeping costs for job order generally exceed record
keeping costs for process? Is there a cost benefit?
LO 6
87
7Compare and contrast
product costing in service organizations to that in manufacturing
companies.
LEARNING OBJECTIVE
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COMPARING COST SYSTEMS
Nature of Production
Costing System Used
Heterogeneous Units
Each Unit Large
Job Costing
Homogeneous Units
Many Small Units
Continuous Process
Process Costing
LO 7
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8 Understand the concepts of customer
costing and profitability analysis.
LEARNING OBJECTIVE
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FLOW OF COSTS: A Service Company Example
LO 8
An accounting or consulting service firm collects costs by job or client and uses an accounting method similar to that used in manufacturing.
The flow of costs accounted for include:Materials and overhead costs are transferred into Work-in-
Process accounts for each job.Work-in-Process costs are transferred to Cost of Services Billed.
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FLOW OF COSTS REPORTING
The income statement reports: Revenue- Cost of services billed= Gross Margin- Expenses (e.g., unbilled direct labor,
underapplied overhead, marketing expenses)= Operating Profit
LO 8
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9 Identify ethical issues in job costing.
LEARNING OBJECTIVE
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MISREPRESENTING COSTS
Often costs are improperly assigned to jobs (or research, or defense contracts, etc.). Sometimes employees are encouraged to understate or misrepresent job costs. Because many of these events have been discovered, funding agencies and other payers now require audits of financial records.
LO 9E!!!
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10Recognize components
of just-in-time (JIT) production methods and
understand how accountants adapt
costing systems to them.
LEARNING OBJECTIVE
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CHARACTERISTICS OF JIT:(Just- in-Time Inventory)
JIT inventory methods attempt to obtain materials just in time for production or sale¯Reduces/eliminates inventory and carrying costs¯Leads to immediate correction of defective units¯Helps expose production problems¯Relies on high-quality materials, production¯Charges all costs directly to cost of goods sold
LO 10
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What happens to inventory leftover after costs are charged to cost of goods sold in a JIT
system?
Cost of leftover inventory is “backflushed,” i.e., taken out of cost of goods sold and put into
finished goods inventory.
LO 10
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How is spoilage treated in a JIT system?
Normal spoilage is a cost of work done. Abnormal
spoilage is expensed in the period.
LO 10
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11Know how to compute end-of-period inventory
book value using equivalent units of
production (Appendix 2.1).
LEARNING OBJECTIVE
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What are equivalent units?
Equivalent units (E.U.) represent the translation of
partially completed work into equivalent whole units.
LO 11
100
1. Summarize the Flow of Physical Units2. Compute Equivalent Units (For example, two
units, each 50 percent complete, represent one equivalent unit.)
3. Summarize Costs to Be Accounted For4. Compute Unit Costs for the Current Period5. Compute the Cost of Goods Completed and
Transferred Out of Work-in-Process and the Cost of Ending Work-in-Process Inventory
LO 11
The five steps required to compute product costs, the cost of ending Work-in- Process
Inventory, and the cost of finished goods using equivalent units are:
101
12Understand the flow of
production costs through accounts in a
manufacturing company (Appendix 2.2).
LEARNING OBJECTIVE
102
Costs flow from basic records of materials purchases, labor costs, and overhead costs to
Work-in-Process Inventory accounts that show the cost of ongoing work. When products are complete, they and their costs are transferred to Finished Goods Inventory. When sold, the
cost of the products is transferred out of Finished Goods Inventory to Cost of Goods Sold.