Sunday, April 7, 2019
Product costing and cost accumulation in a batch production environment Essay Example for Free
Product be and cost accumulation in a batch yield environs EssayAs production takes place, manufacturing cost atomic number 18 tracked in the Work-in-Process Inventory account. Every product is made up of troika cost comp wiznts drive materials, direct labor, and manufacturing smash-up. After products are completed, the corresponding cost leaves the Work-in-Process account and is debited to the Finished-Goods account. (A merchandising unswerving buys its goods already completed and directly debits the items cost to Merchandise Inventory.)When units are change, the Finished-Goods Inventory account is credited and price of Goods Sold is debited. A product-costing remains must be adapted to match the environment in which it ope calculates.A job-order costing system is used in an industry where products are made individually, or in relatively small batches, and one product or batch is readily distinguishable from the other.Candidates for job-costing systems would be utili sation homebuilding, custom printing, custom furniture construction, legal cases, medical cases, audits, and research projects.A fulfill-costing system is employed in an environment at the other end of the continuum the mass production of like units. Users might include manufacturers of chemicals, gasoline, and microchips. This way out is discussed richly in Chapter 4.4.ACCUMULATING COSTS IN A JOB-ORDER COSTING SYSTEMA job-cost record is used to hoard up the unquestionable direct materials, veridical direct labor, and apply manufacturing command processing overhead time costs for each job. The recording of costs on this record and in the general ledger is triggered by various source documents.Material require forms authorize the transfer of direct materials from the warehouse to production. In many firms, the requisitions are based on a bill of materials that lists all of the materials (e.g., parts) needed.Supply compassthe flow of all goods, redevelopments, and culture into and out of the organization. The supply chain a good deal has ramifications for materials, as manufacturers plump with vendors to achieve improved delivery schedules and reductions in material cost.Time records are used to gather the amount of direct labor worked on a specific job.Manufacturing overhead is entered on the job-cost record in the form of apply (i.e., estimated) overhead. Source documents, such as invoices for factory insurance and schedules for factory depreciation, trigger a general-ledger entry that debits the Manufacturing Overhead account.5. hit APPLICATIONOverhead accounting involves a number of steps. Chapter 3 focuses on the final step the practical finish of overhead to jobs and products.Although overhead cannot be directly traced to the product, the use of an application ramble should allocate an equitable amount of cost to each job (known as overhead application). whole tone 1 Set a predetermined overhead rate at the beginning of the accounting pe riod. This is through by dividing the periods estimated (budgeted) overhead by the periods estimated number of cost-driver units.Step 2 Use the predetermined overhead rate to apply an equitable portion of overhead to each job. As the actual number of cost-driver units used on a job becomes known, it is multiplied by the predetermined overhead rate.Actual overhead costs incurred during the grade are debited to the Manufacturing Overhead control account. In contrast, applied overhead is debited to Work-in-Process Inventory and credited to Manufacturing Overhead.The year-end end between actual and applied amounts is known as over-or underapplied overhead. This figure is adjusted in the process of closing the Manufacturing Overhead account to zero by eitherCharging or crediting the amount to cost of goods sold. This admission is acceptable if the over- or underapplication is small or if most of the products made during the period have been sold.Prorating the amount among work in proc ess, sunk goods, and cost of goods sold.Teaching percentage point Emphasize that under- and overapplied overhead is the difference between actual and applied overhead, not actual and budgeted overhead. The budgeted figure is used solely in the determination of the predetermined rate.6. blanket(a) ILLUSTRATION OF JOB COSTINGAs noted earlier, the Work-in-Process Inventory account contains charges for direct materials used, direct labor, and applied manufacturing overhead.Period costs are expensed and not charged to Manufacturing Overhead.A sale requires dickens daybook entries one to record the sales revenue and another to transfer the goods cost from Finished-Goods Inventory to Cost of Goods Sold.Teaching Tip Although the text illustration appears relatively complicated, it is simply presenting the details that accompany the flow of goods (and costs) from work in process, to finished goods, to cost of goods sold.7.FINANCIAL SCHEDULES FOR MANAGERSThe schedule of cost of goods man ufactured details the activity in the Work-in-Process account (beginning balance, direct materials used, direct labor, applied overhead, and ending balance).The schedule of cost of goods sold details the activity in the Finished- Goods Inventory account. It is equivalent to the cost-of-goods-sold schedule as shown in financial accounting courses for merchandising companies, except the purchases amount is replaced with cost of goods manufactured.8.FURTHER ASPECTS OF OVERHEAD APPLICATIONActual and normal costingAccountants p impact predetermined application rate, which are used in a normal-costing system. Such rates help to smooth product costs over magazine and abandon users to cost products/jobs upon completion.In contrast, users of actual-costing systems derive an actual overhead rate at the end of the accounting period. Product-cost information to management is therefore delayed.Choosing an appropriate cost driverDirect labor has been a very gross and appropriate cost driver. P ast processes were labor intensive, and products incurring more labor often produced higher amounts of manufacturing overhead.Today, many processes are automated and less dependent on labor. Thus, firms now use machine hours, process time, throughput (cycle) time (the average amount of time to convert raw materials into finished goods), and other measures as cost drivers. undivided vs. multiple overhead ratesCompanies commonly use multiple (rather than single) application rates. With computerized accounting systems, multiple rates are easily generated, thus lowering the cost of producing highly accurate information.A single overhead rate is commonly known as a plantwide rate multiple rates are often known as departmental rates.Two-stage cost allocationStage one Overhead is first compile in production departments. This frequently requires the allocation of service department costs to production departments.Stage two As a final step, production department costs are assigned to indivi dual jobs and products via overhead application.9.PROJECT COSTINGProject costing refers to job costing in a nonmanufacturing environment. Jobs in this case refer to cases, contracts, and/or programs.Costing involves tracking the direct, easily traceable costs and subdividing them by project. Overhead is then applied by using a predetermined rate, with a possible application base being a projects direct professional labor cost.Technology such as bar coding may be used to track appropriate costs to projects, although this is just one of many possible applications. Service providers, along with manufacturers, are also making use ofElectronic data interchange (EDI), which involves the electronic transfer of information from one organization to another by using a computer-to-computer interface.Extensible markup language (XML), which is web-based and allows users to share incorporate data such as product order lists and price data.Teaching OverviewI begin the topic of job costing by expl aining that students should not expect to apply a so-called standard system to any real-world company, because cost systems must be designed to meet a firms unique needs. However, the two traditional system models, job order and process costing, give users the ability to build-in various modifications for use in actual situations.The major difficulty that students encounter in job costing is the concept of manufacturing overhead. The first area needing clarification is terminology, that is to sayEstimated = budgetedApplied = allocatedIncurred = actualThe second area in need of clarification is the sequence of procedures for overhead application calculating predetermined overhead rates, using the rates, and adjusting the over- or underapplied amount. This problem stems from the fact that students are doing textbook assignments where all the information is given simultaneously. Therefore, the question arises, Why use an imperfect predetermined overhead rate when I have all the total ly correct, actual data in the next paragraph? It is utile to be on the lookout for this line of thinking when discussing homework assignments and to remind students how and when information becomes available in the real world. (I suspect this is a problem mainly for undergraduates with limited work experience.)Based on many years of teaching, I also find that students struggle with the journal entries required to handle a sale. Two entries are needed one to transfer the cost of units sold from finished goods to cost of goods sold another is needed to record revenue. Students often forget one or the other or render some creativity, creating a new account entitled Profit on Sale. Be sure to expend a few extra minutes with this issue.After the preceding issues have been handled, students generally are kind of interested in job-costing concepts, particularly those who have worked in a family business or who plan to find their own business. Students are also interested in job costi ng in a service enterprise (discuss something as basic as the activities of a sports agent who represents clients across the country) and the impact of changing manufacturing techniques (such as the acquisition of new, state-of-the-art production technology) on product-costing procedures.I recommend Exercise 3-35 (manufacturing overhead) and Problem 3-46 (job costing and journal entries) as lecture demonstration problems.