Acct 125 Chapter 10

ACCOUNTING
FUNDAMENTALS FOR
MANAGERS
University of Management and Technology
1901 North Fort Myer Drive
Arlington, VA 22209
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Website: www.umtweb.edu
South-Western 2004
Survey of Accounting, 2/e
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1 of 43
Chapter 10,
Task Force Clip Art

included in this electronic
presentation is used with
the permission of New
Vision Technology of
Nepean Ontario, Canada.
2 of 43
Chapter 10,
Chapter 10
Accounting Systems for
Manufacturing Businesses
South-Western 2004
Survey of Accounting, 2/e
3 of 43
Chapter 10,
Learning Objectives
1. Distinguish the activities
of a manufacturing
business from
After
studying
this
After
studying
this
those of a merchandise or service business.
chapter,
you
should
chapter,
you
should
2. Define and illustrate materials, factory
labor, and factory
be
overhead costs.
be able
able to:
to:
3. Describe accounting systems used by manufacturing
businesses.
4. Describe and illustrate a job order cost accounting system.
Continued
Continued
4 of 43
Chapter 10,
Learning Objectives
5. Use job order cost information for decision making.
6. Diagram the flow of costs for a service business that uses a
job order cost accounting system.
7. Describe just-in-time manufacturing.
8. Describe and illustrate the use of activity-based costing in a
service business.
5 of 43
Chapter 10,
Learning Objective
Distinguish the
activities of a
manufacturing
business from those of
a merchandise or
service business.
6 of 43
Chapter 10,
Merchandising
Merchandising
Reports:
Cost of merchandise sold
Merchandise inventory
Manufacturing
Manufacturing
Reports:
Cost of goods sold
Materials inventory
Work in process inventory
Finished goods inventory
7 of 43
Chapter 10,
Learning Objective
Define and
illustrate materials,
factory labor, and
factory overhead
costs.
8 of 43
Chapter 10,
Cost Classifications
Direct
Direct
Materials
Materials
Product
Product
Costs
Costs
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead
Period
Period
Costs
Costs
Selling
Selling
Expenses
Expenses
Administrative
Administrative
Expenses
Expenses
9 of 43
Chapter 10,
Manufacturing Costs
Direct Materials:
1. Enters directly into the product.
2. Is significant amount of total product cost.
Direct Labor:
1. Enters directly into manufacturing the product.
2. Is significant amount of total product cost.
Factory Overhead:
Cost other than direct materials cost and direct
labor cost incurred in the manufacturing of product.
10 of 43
Chapter 10,
Manufacturing Cost Flows and Classifications

Costs
Product Costs
Balance Sheet
Materials
Materials
Purchases
Purchases
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead
Income Statement
Period Costs
Selling
Sellingand
and
Administrative
Administrative
11 of 43
Chapter 10,

Costs
Product Costs
Materials
Materials
Purchases
Purchases
Balance Sheet
Materials
Materials
Inventory
Inventory
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead
Income Statement
Period Costs
Selling
Sellingand
and
Administrative
Administrative
12 of 43
Chapter 10,

Costs
Product Costs
Materials
Materials
Purchases
Purchases
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead
Balance Sheet
Materials
Materials
Inventory
Inventory
Work
Workin
in
Process
Process
Inventory
Inventory
Income Statement
Period Costs
Selling
Sellingand
and
Administrative
Administrative
13 of 43
Chapter 10,

Costs
Product Costs
Materials
Materials
Purchases
Purchases
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead
Period Costs
Balance Sheet
Materials
Materials
Inventory
Inventory
Work
Workin
in
Process
Process
Inventory
Inventory
Finished
Finished
Goods
Goods
Inventory
Inventory
Cost of Goods
Manufactured
Income Statement
Selling
Sellingand
and
Administrative
Administrative
14 of 43
Chapter 10,

Costs
Product Costs
Materials
Materials
Purchases
Purchases
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead
Period Costs
Balance Sheet
Materials
Materials
Inventory
Inventory
Work
Workin
in
Process
Process
Inventory
Inventory
Finished
Finished
Goods
Goods
Inventory
Inventory
Product
Productcosts
costs
flow
flowthrough
throughthe
the
balance
balancesheet
sheetto
to
the
theincome
income
statement
statement
Income Statement
Cost
Costof
of
Goods
GoodsSold
Sold
Selling
Sellingand
and
Administrative
Administrative
15 of 43
Chapter 10,

Costs
Product Costs
Materials
Materials
Purchases
Purchases
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead
Period Costs
Balance Sheet
Materials
Materials
Inventory
Inventory
Work
Workin
in
Process
Process
Inventory
Inventory
Finished
Finished
Goods
Goods
Inventory
Inventory
Selling
Sellingand
and
Administrative
Administrative
Period
Periodcosts
costsflow
flow
directly
to
the
directly to the
income
incomestatement
statement
Income Statement
Cost
Costof
of
Goods
GoodsSold
Sold
Selling
Sellingand
and
Administrative
Administrative
16 of 43
Chapter 10,
Learning Objective
Describe
accounting
systems used by
manufacturing
businesses.
17 of 43
Chapter 10,
Cost Accounting Systems

Job Order Cost System
1. Many different jobs are worked on during each
period and unit costs are computed by job.
2. Costs are accumulated using a job cost sheet.
Process Cost System
1. A single product is produced on a continuous
basis and unit costs are computed by
department.
2. Costs are accumulated and reported using a
departmental production report.
18 of 43
Chapter 10,
Learning Objective
Describe and illustrate

a job order cost
accounting system.
19 of 43
Chapter 10,
Materials Information and Cost Flows

Job 71
1,000 units of American History
Balance
Direct Materials
Direct Labor
Factory Overhead
Materials
Requisitions
$ 3,000
Job 72
4,000 units of Algebra
Direct Materials
Direct Labor
Factory Overhead
20 of 43
Chapter 10,
Materials Information and Cost Flows

Job 71
Balance
Direct Materials
Direct Labor
Factory Overhead
Materials
Requisitions
$ 3,000
2,000
Job 72
Direct Materials
Direct Labor
Factory Overhead
$11,000
21 of 43
Chapter 10,
Labor Information and Cost Flows

Job 71
Balance
Direct Materials
Direct Labor
Factory Overhead
Time
Tickets
$ 3,000
2,000
Job 72
Direct Materials
Direct Labor
Factory Overhead
$11,000
22 of 43
Chapter 10,
Labor Information and Cost Flows

Job 71
Balance
Direct Materials
Direct Labor
Factory Overhead
Time
Tickets
$ 3,000
2,000
3,500
Job 72
Direct Materials
Direct Labor
Factory Overhead
$11,000
7,500
23 of 43
Chapter 10,
Predetermined Factory Overhead Rates

Estimated total
factory overhead costs
Estimated activity base
Predetermined
= factory overhead rate
Activity base examples

1. Direct labor hours
2. Direct labor dollars
3. Machine hours
4. Direct materials
5. Other
24 of 43
Chapter 10,

Estimated total
Predetermined
= factory overhead rate
Why is the predetermined overhead rate calculated from

estimated numbers at the beginning of the period?
It is a tradeoff between accuracy and timeliness.
If a company waited until the end of an accounting period,
when all overhead costs are known, the allocated factory
overhead would be accurate but not timely.
25 of 43
Chapter 10,

Estimated total
$50,000 estimated
10,000 estimated
direct labor hours
Predetermined
factory overhead rate
26 of 43
Chapter 10,

Estimated total
$50,000 estimated
10,000 estimated
direct labor hours
Predetermined
$5 per direct
labor hour
27 of 43
Chapter 10,

Estimated total
$50,000 estimated
10,000 estimated
direct labor hours
Direct
Factory
Labor
Overhead
Hours
Applied
Job 71 350 x $5 = $1,750
Job 72 500 x $5 = $2,500
Predetermined
$5 per direct
labor hour
For each direct labor
hour worked, factory
overhead applied is $5.
28 of 43
Chapter 10,
Assigning Factory Overhead to Jobs

Job 71
Balance
Direct Materials
Direct Labor
Factory Overhead
Time Tickets
Predetermined
Overhead Rates
$ 3,000
2,000
3,500
Job 72
Direct Materials
Direct Labor
Factory Overhead
$11,000
7,500
29 of 43
Chapter 10,
Assigning Factory Overhead to Jobs

Job 71
Balance
Direct Materials
Direct Labor
Factory Overhead
Time Tickets
Predetermined
Overhead Rates
$ 3,000
2,000
3,500
1,750
Job 72
Direct Materials
Direct Labor
Factory Overhead
$11,000
7,500
2,500
30 of 43
Chapter 10,
Summary of Job Cost Sheets

Job 71
Balance
Direct Materials
Direct Labor
Factory Overhead
Total Job Cost
Total of debits to
Work in Process
$ 3,000
2,000
3,500
1,750
$10,250
Job 72
Direct Materials
Direct Labor
Factory Overhead
$11,000
7,500
2,500
$21,000
31 of 43
Chapter 10,
Goodwell Printers
Income Statement
For the Month Ended December 31, 2004
Sales
Cost of goods sold
Gross profit
Selling and admin. expenses:
Sales salaries expense
Office salaries expense
Total selling and admin.
expenses
Income from operations
$28,000
20,150
$ 7,850
$2,000
1,500
3,500
$ 4,350
32 of 43
Chapter 10,
Learning Objective
Use job order cost

information for
decision making.
33 of 43
Chapter 10,
Job 144
Item: 200 folding chairs
Materials
Quantity
(board feet)
Direct materials:
1,600
Wood
Direct materials per chair
Materials
Price
Materials
Amount
$3.50
$5,600
$28
34 of 43
Chapter 10,
Job 163
Item: 200 folding chairs
Materials
Quantity
(board feet)
Direct materials:
2,000
Wood
Direct materials per chair
Materials
Price
Materials
Amount
$3.50
$7,000
$35
35 of 43
Chapter 10,
Learning Objective
Diagram the flow of

costs for a service
business that uses a job
order cost accounting
system.
36 of 43
Chapter 10,
Flow of Costs Through a

Service Business
Work in Process
Wages Payable
Direct labor xxx
Indirect labor xxx
Direct labor
xxx Completed jobs xxx
Applied overhead xxx
Completed jobs (xxx)
Indirect labor
xxx
Supplies used
xxx
Applied overhead (xxx)
Supplies
Used
Factory
Overhead
Cost of Services
xxx
37 of 43
Chapter 10,
Learning Objective
Describe just-in-time
manufacturing.
38 of 43
Chapter 10,
Issue
Just-in-Time
Manufacturing
Traditional
Manufacturing
Inventory
Reduces inventory.
Increases inventory to buffer

or protect against process
problems.
Lead time
Reduces lead time.
Increases lead time as a

buffer against uncertainty.
Setup time
Reduces setup time.
Disregards setup time as an

improvement priority.
Production layout
Emphasizes product-oriented
layout.
Emphasizes process-oriented
layout.
Continued
Continued
39 of 43
Chapter 10,
Issue
Just-in-Time
Manufacturing
Traditional
Manufacturing
Role of the Employee
Emphasizes team-oriented
employee involvement.
Emphasizes work of
individuals, following
manager instructions.
Production scheduling policy
Emphasizes pull
manufacturing.
Emphasizes push
manufacturing.
Quality
Emphasizes zero defects.
Tolerates defects.
Suppliers
Emphasizes supplier
partnering.
Treats suppliers as armslength, independent entities.
40 of 43
Chapter 10,
Learning Objective
Describe and illustrate

the use of activitybased costing in a
service business.
41 of 43
Chapter 10,
ActivityBase
Usage
1 admission
2 images
4 hours
Pathological testing
Dietary and laundry
Activity
Admitting
Radiological testing
Operating room
Activity
Rate
$180 per admission
Activity
Cost
$ 180
320 per image
640
200 per hour
800
1 specimen
120 per specimen
120
7 days
150 per day
1,050
Total
$2,790
42 of 43
Chapter 10,
HOPEWELL HOSPITAL
Customer (Patient) Profitability Report
For the Period Ending December 31, 2004
Adcock,
Kim
Revenues
Birini,
Brian
Conway,
Don
Wilson,
Mary
$9,500
$21,400
$5,050
$3,300
$ 400
$1,000
$ 300
$ 200
180
180
180
180
Radiological testing
1,280
2,560
1,280
640
Operating room
2,400
6,400
1,600
800
Pathological testing
240
600
120
120
Dietary and laundry
4,200
14,700
1,050
1,050
Total patient costs
$8,700
$25,440
$4,530
$2,990
Income from operations
$ 800
$(4,040)
$ 520
$ 310
Less patient costs:

Drugs and supplies
Admitting
43 of 43
Chapter 10,

Acct 125 Chapter 10

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ACCOUNTING

Survey of Accounting, 2/e

Visit UMT online at www.umtweb.edu

Task Force Clip Art

Visit UMT online at www.umtweb.edu

Survey of Accounting, 2/e

Visit UMT online at www.umtweb.edu

Visit UMT online at www.umtweb.edu

Visit UMT online at www.umtweb.edu

Visit UMT online at www.umtweb.edu

Visit UMT online at www.umtweb.edu

Manufacturing Cost Flows and Classifications

Visit UMT online at www.umtweb.edu

Manufacturing Cost Flows and Classifications

Visit UMT online at www.umtweb.edu

Manufacturing Cost Flows and Classifications

Visit UMT online at www.umtweb.edu

Manufacturing Cost Flows and Classifications

Visit UMT online at www.umtweb.edu

Manufacturing Cost Flows and Classifications

Visit UMT online at www.umtweb.edu

Manufacturing Cost Flows and Classifications

Visit UMT online at www.umtweb.edu

Visit UMT online at www.umtweb.edu

Cost Accounting Systems

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Describe and illustrate

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Materials Information and Cost Flows

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Materials Information and Cost Flows

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Labor Information and Cost Flows

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Labor Information and Cost Flows

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Predetermined Factory Overhead Rates

= factory overhead rate

Activity base examples

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Predetermined Factory Overhead Rates

= factory overhead rate

Why is the predetermined overhead rate calculated from

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Predetermined Factory Overhead Rates

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Predetermined Factory Overhead Rates

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Predetermined Factory Overhead Rates

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Assigning Factory Overhead to Jobs

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Assigning Factory Overhead to Jobs

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Summary of Job Cost Sheets

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Use job order cost

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Diagram the flow of

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Flow of Costs Through a