Cost Accounting Systems

1
Cost Accounting Systems

• Chapter 2

2
Cost Accounting Systems

• Purpose is to accumulate costs related to
  products manufactured or services performed
• Two primary systems
• Job order cost system
• Accumulates cost for individual, identifiable
  jobs
• Used for custom work, finite jobs, etc.
• Process cost system
• Accumulates cost for a period of time
• Used for continuous production

3
Product-Costing Systems
Job order costing
Process costing

• Distinct units or batches
• Relatively high unit value
• Ability to trace direct costs
• Often priced differently
• Accumulated by job

• Homogeneous units
• Relatively low unit value
• Not feasible to trace costs to individual units
• Accumulated by process and time period

4
Manufacturing Cost Flows
Raw Materials Inventory
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
Factory Labor
Overhead
5
Manufacturing Cost Flows
6
Manufacturing Cost Flows

• Journal entries
• Accumulation of costs
• Purchase of raw materials
• Incurrence of factory labor
• Incurrence of overhead
• Assignment of costs
• Use of raw materials in production
• Use of factory labor
• Application of overhead to production
• Goods are completed
• Goods are sold

7
Manufacturing Cost Flows

• Debit the account if
• Cost is being added to the account
• Cost being transferred in
• Account is being increased
• Credit the account if
• Cost is being removed from the account
• Cost is being transferred out
• Account is being reduced

8
Manufacturing Cost Flows

• Accumulation of costs
• Purchase of raw materials
• Raw materials inventory 117,000
• Accounts payable 117,000
• Incurrence of factory labor (87,000 direct
  labor, 58,000 Indirect labor)
• Factory labor 145,000
• Factory wages payable 128,000
• Employer payroll taxes payable 17,000

9
Manufacturing Cost Flows

• Accumulation of costs
• Incurrence of overhead
• Manufacturing overhead 8,500
• Payroll taxes payable 8,500
• (employers share of payroll taxes)
• Manufacturing overhead 58,000
• Factory labor 58,000
• (indirect labor)

10
Manufacturing Cost Flows

• Manufacturing overhead 29,000
• Accumulated depreciation 29,000
• (equipment and building depreciation)
• Manufacturing overhead 38,000
• Property taxes payable 38,000
• (property taxes on building and equipment)
• Manufacturing overhead 37,900
• Accounts payable 37,900
• (repairs and maintenance services)

11
Manufacturing Cost Flows

• Manufacturing overhead 17,600
• Accounts payable 17,600
• (utilities)
• Manufacturing overhead 18,000
• Prepaid insurance 18,000
• (expiration of prepaid insurance on building and
  equipment)

12
Manufacturing Cost Flows

• Assignment of costs
• Use of raw materials in production
• Work in process inventory 112,600
• Manufacturing overhead 5,000
• Raw materials inventory 117,600
• Use of factory labor
• Work in process inventory 87,000
• Factory labor 87,000

13
Manufacturing Cost Flows

• The problem with overhead
• Overhead is an indirect cost
• Cannot be accurately identified with a cost
  object
• Allocated based on predetermined overhead rate
• Overhead assigned to job equals

Predetermined overhead rate
Estimated overhead cost Estimated activity

Predetermined overhead rate
Actual activity related to the job
X
14
Manufacturing Cost Flows

• Application of overhead
• In this example, assume overhead is applied at a
  rate of 2.50 for every 1.00 of direct labor
  cost
• Work in process inventory 217,500
• Factory overhead 217,500
• (2.50 87,000 of direct labor cost)

15
Manufacturing Cost Flows

• Goods are completed
• Finished goods inventory 412,700
• Work in process inventory 412,700
• Goods are sold
• Cost of goods sold 412,000
• Finished goods inventory 412,000

16
The Problem with Overhead

• Over-applied overhead
• Amount applied exceeds actual overhead cost
• Reduce (credit) cost of goods sold and increase
  (debit) factory overhead account for the
  difference
• Under-applied overhead
• Amount applied is less than actual overhead cost
• Increase (debit) cost of goods sold and decrease
  (credit) factory overhead account for the
  difference

17
Manufacturing Cost Flows

• To adjust for over-applied overhead
• Factory overhead 5,500
• Cost of goods sold 5,500
• (212,000 actual overhead vs. 217,500
  applied)

18
(No Transcript)