Manufacturing Companies

There are 3 major categories of manufacturing costs:

There are 3 major categories of manufacturing costs:

Direct MaterialsRaw material,

parts, and components that can be observed

being used to make a specific product.

Direct MaterialsRaw material,

parts, and components that can be observed

being used to make a specific product.

Direct LaborThe cost of

paying employees who convert direct materials into

finished product.

Direct LaborThe cost of

paying employees who convert direct materials into

finished product.

Manufacturing Overhead

Manufacturing Overhead

Indirect materialIndirect material

Indirect laborIndirect labor

Other overheadOther overhead

Manufacturing Companies

Prime Costs include:Prime Costs include:

Direct MaterialsDirect Materials Direct LaborDirect Labor Manufacturing Overhead

Manufacturing Overhead

Manufacturing Companies

Conversion Costs include:Conversion Costs include:

Direct MaterialsDirect Materials Direct LaborDirect Labor Manufacturing Overhead

Manufacturing Overhead

Nonmanufacturing Costs are all the costs not used to produce products.

Nonmanufacturing Costs are all the costs not used to produce products.

Stages of Production and the Flow of Costs

Stages of Production and the Flow of Costs - Example

What is Ending What is Ending Inventory in Inventory in February?February?

What is Ending What is Ending Inventory in Inventory in February?February?

Axel Electronics makes toasters. On Axel Electronics makes toasters. On February 1, Axel has $15,000 of raw February 1, Axel has $15,000 of raw material on hand. Axel’s purchase material on hand. Axel’s purchase

and transfers to the production floor and transfers to the production floor are indicated below.are indicated below.

Axel Electronics makes toasters. On Axel Electronics makes toasters. On February 1, Axel has $15,000 of raw February 1, Axel has $15,000 of raw material on hand. Axel’s purchase material on hand. Axel’s purchase

and transfers to the production floor and transfers to the production floor are indicated below.are indicated below.

Axel Electronics makes toasters. On Axel Electronics makes toasters. On February 1, Axel has $15,000 of raw February 1, Axel has $15,000 of raw material on hand. Axel’s purchase material on hand. Axel’s purchase

and transfers to the production floor and transfers to the production floor are indicated below.are indicated below.

Axel Electronics makes toasters. On Axel Electronics makes toasters. On February 1, Axel has $15,000 of raw February 1, Axel has $15,000 of raw material on hand. Axel’s purchase material on hand. Axel’s purchase

and transfers to the production floor and transfers to the production floor are indicated below.are indicated below.

Stages of Production and the Flow of Costs - Example

Now let’s look at Now let’s look at Work-in-Process.Work-in-Process.

Now let’s look at Now let’s look at Work-in-Process.Work-in-Process.

Stages of Production and the Flow of Costs - Example

What is the What is the amount of cost amount of cost transferred to transferred to

Finished Goods in Finished Goods in February?February?

What is the What is the amount of cost amount of cost transferred to transferred to

Finished Goods in Finished Goods in February?February?

On February 1, Axel had WIP of $30,000 on the factory floor.

During February, Axel paid $92,000 in direct labor wages. Overhead is applied

at 150% of direct labor. On 2/28,

$22,000 is still in WIP.

On February 1, Axel had WIP of $30,000 on the factory floor.

During February, Axel paid $92,000 in direct labor wages. Overhead is applied

at 150% of direct labor. On 2/28,

$22,000 is still in WIP.

Stages of Production and the Flow of Costs - Example

On February 1, Axel had WIP of $30,000 on the factory floor.

During February, Axel paid $92,000 in direct labor wages. Overhead is applied

at 150% of direct labor. On 2/28,

$22,000 is still in WIP.

On February 1, Axel had WIP of $30,000 on the factory floor.

During February, Axel paid $92,000 in direct labor wages. Overhead is applied

at 150% of direct labor. On 2/28,

$22,000 is still in WIP.

Now let’s Now let’s look at look at

Finished Finished Goods.Goods.

Now let’s Now let’s look at look at

Finished Finished Goods.Goods.

Transferred Transferred to Finished to Finished

GoodsGoods

Stages of Production and the Flow of Costs - Example

On February 1, Axel had Finished Goods of $125,000 on hand. At the end of February, a physical inventory count revealed

$96,000 in Finished Goods still on hand.

What was Cost of Goods Sold for February?

On February 1, Axel had Finished Goods of $125,000 on hand. At the end of February, a physical inventory count revealed

$96,000 in Finished Goods still on hand.

What was Cost of Goods Sold for February?

Stages of Production and the Flow of Costs - Example

On February 1, Axel had Finished Goods of $125,000 on hand. At the end of February, a physical inventory count revealed

$96,000 in Finished Goods still on hand.

What was Cost of Goods Sold for February?

On February 1, Axel had Finished Goods of $125,000 on hand. At the end of February, a physical inventory count revealed

$96,000 in Finished Goods still on hand.

What was Cost of Goods Sold for February?

ProcessCosting

Job OrderCosting

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.

Basic Cost Accounting Procedures

Typical job order cost applications:

Special-order printing Building construction

Also used in service industry Hospitals Law firms

Basic Cost Accounting Procedures

ProcessCosting

Job OrderCosting

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.

Basic Cost Accounting Procedures

ProcessCosting

Job OrderCosting

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

Basic Cost Accounting Procedures

ProcessCosting

Job OrderCosting

THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate (POHR)

Job Order Costing

The primary document for tracking the costs

associated with a given job is the job cost sheet.

Let’s investigate

Job Order Costing

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Cost

Accumulate direct labor

costs by means of a

work record, such as a time ticket, for each

employee.

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed 3-5-X9

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$

Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on

direct labor hours (DLH).