Download Work-in-Process Inventory

6-1
Chapter 6
Product Costing and
the Manufacturing
Environment
Prepared by
Douglas Cloud
Pepperdine
University
6-2
Objectives
1. Understand the inventory requirements and
After studying
this
the related inventory
measurement
issues of
chapter, you and
should
service, merchandising,
manufacturing
organizations. be able to:
2. Explain the basic conceptual framework of
inventory costing for financial reporting.
3. Describe the manufacturing environment as it
relates to product costing systems.
Continued
6-3
Objectives
4. Explain the operation of a basic job costing
system.
5. Explain the operation of a basic process
costing system.
6-4
These financial reporting concepts include
some fundamental techniques and prototype
is the
approaches that managers Financial
can applyreporting
to a
process and
of preparing a
variety of manufacturing settings
firm’s financial statements
specific products.
in accordance with GAAP.
Financial
Accounting
6-5
INVENTORY COSTS IN VARIOUS
ORGANIZATIONS
Organization
Service
Merchandising
Asset
Expense
Supplies
Inventory
Supplies
Expense
Merchandise
Inventory
Cost of
Goods Sold
Supplies
Inventory
Supplies
Expense
Continued
6-6
INVENTORY COSTS IN VARIOUS
ORGANIZATIONS
Organization
Asset
Raw
Materials
Inventory
Manufacturing
Work-in
Process
Inventory
Expense
Finished
Goods
Inventory
Cost of
Goods Sold
Manufacturing
Supplies
Inventory
Office
Supplies
Inventory
Office
Supplies
Expense
6-7
Product Costs for
Financial Reporting
Raw materials used
Manufacturing supplies used
Production employees’ wages
Depreciation on plant
Expired insurance on plant
Production supervisors’ salaries
Plant maintenance
Plant utilities
Production equipment rent
Plant office supplies used
These
costs are
assigned
to the
asset
inventory
These
costs are
expensed
when
inventory
is sold
6-8
Period Costs for
Financial Reporting
Nonfactory office supplies used
General and administrative
salaries
Depreciation on showroom
Expired insurance on showroom
President’s salary
Showroom maintenance
Nonfactory office utilities
Nonfactory office rent
These items
are expensed
as incurred
6-9
THREE PRODUCT COSTS
Factory Overhead
Cost of the primary
raw materials used in
production
Direct Labor
Wages earned by
production employees
for the actual time spent
working on the product
Work-in-Process
Inventory
Finished Goods
Inventory
Cost of Goods Sold
Factory Overhead
All other
manufacturing costs
6-10
A Closer Look At
Manufacturing Overhead
Possibly the biggest challenge in
measuring the cost of a product is
determining the amount of overhead
incurred to produce it.
6-11
Problems Resulting From Measuring
Product Cost Using Actual Overhead
Actual manufacturing overhead
cost may not be known until
days or weeks after the end of
the period, delaying the
calculation of unit product cost.
6-12
Problems Resulting From Measuring
Product Cost Using Actual Overhead
Also, some costs that are seasonal are not
incurred each period, thus making the
actual cost of product produced in one
month greater than that of another, even
though nonseasonal costs may have been
identical for both months.
6-13
Problems Resulting From Measuring
Product Cost Using Actual Overhead
Another point… When there is
a significant amount of fixed
overhead, the costs assigned to
products will vary from period
to period, depending on the
overall volume of activity.
6-14
Using Predetermined Overhead Rates
To overcome these
problems, most firms
use a predetermined
manufacturing overhead
rate to assign
manufacturing overhead
costs to products.
6-15
Using Predetermined Overhead Rates
A predetermined overhead rate based on
direct labor hours
Predetermined
manufacturing
overhead rate
per direct
labor hour
=
Predicted total manufacturing
overhead cost for the year
Predicted total direct labor
hours for the year
6-16
Using Predetermined Overhead Rates
Manufacturing
overhead
assigned to
Work-In-Process
Inventory
=
Actual direct
labor hours
x
Predetermined
manufacturing
overhead rate
per direct labor
hour
6-17
Using Predetermined Overhead Rates
Using a predetermined manufacturing
overhead rate based on direct labor hours,
we can compute the assignment of overhead
to Work-in-Process Inventory.
6-18
Using Predetermined Overhead Rates
Late in 2004, Harmon Manufacturing Company
predicted a 2005 activity level of 25,000 direct labor
hours with manufacturing overhead totaling $187,500.
Predetermined
manufacturing
overhead rate
per direct
labor hour
=
Predicted total manufacturing
overhead cost for the year
Predicted total direct labor
hours for the year
6-19
Using Predetermined Overhead Rates
Late in 2004, Harmon Manufacturing Company
predicted a 2005 activity level of 25,000 direct labor
hours with manufacturing overhead totaling $187,500.
$7.50 per direct
labor hour
=
$187,500
25,000 direct-labor hours
6-20
Using Predetermined Overhead Rates
If 2,000 direct labor hours were used in September,
what would be the applied overhead?
2,000 x $7.50 = $15,000
6-21
The Manufacturing Environment
In process
manufacturing, a
single product (or a
closely related set of
products) is
produced on a
continuous basis
6-22
The Manufacturing Environment
In job order
production,
products are
manufactured in
singles units or in
batches of
identical units.
6-23
The Manufacturing Environment
The production order
contains a job’s
unique identification
number and assigns a
unique identification
number to a job
6-24
The Manufacturing Environment
Job Cost Sheet
Direct Materials
July 1
3
100 lbs. @ $ 0.25 = $ 25
75 oz. @ $1.40 =
105
Direct Labor
July 1
3
3 hrs. @ $10.00 = $ 30
7 hrs @ $10.00 =
70
Factory Overhead
July 7 10 dlh x $2
=
$ 20
A job-cost sheet is a
document used to
accumulate the cost
for a specific job in a
job-cost system
6-25
Production Files and Records
A file is simply a
collection of
related records.
A record is a
related set of
alphabetic and/or
numeric data items.
6-26
Basic Production Records
Raw Materials Inventory Record
Part No________________
Date
Purchased
Unit
Total
Units Cost
Cost
Description_________________
Issued
Unit
Units Cost
Total
Cost
Balance
Unit Total
Units Cost Cost
6-27
Basic Production Records
Finished Goods Inventory Record
Product No________________ Description____________________
Date
Received From
Factory
Unit
Total
Units Cost
Cost
Sold
Unit
Units Cost
Total
Cost
Balance
Unit Total
Units Cost Cost
6-28
Basic Production Records
Bill of Materials
Raw Materials Requirements Per Unit of Product
Product No________________ Description___________________
Part
Number
Description
Quantity
Per Unit
6-29
Basic Production Records
Operations List
Production Operations and Times Per Unit of Product
Product No_______________ Description___________________
Department
Number
Operation
Description
Machine/Labor
Requirements
Set-up
Time
Operating
Time
6-30
Job Cost System Records
(Production Order)
Production Order
Job No.___________________ Start Date __________________
Product No_________ Description_________________ Quantity_____
Raw Materials
Part Number
Description
Continued
Total
Quantity
6-31
Job Cost System Records
(Production Order)
Operations
Department
Number
Operation
Description
Labor/Machine
Requirements
Start
Time
Stop
Time
Total
Time
Authorized by ___________________ Date ________________
6-32
Job Cost System Records
(Job Cost Sheet)
Job-Cost Sheet
Job No.___________________ Start Date __________________
Product No_________ Description_________________ Quantity_____
Raw Materials Cost
Date
Department
Requisition
Number
Continued
Description
Total
Cost
6-33
Job Cost System Records
(Job Cost Sheet)
Conversion Costs: Direct Labor or Machine
Work Ticket
Date Department
Number
Description
Continued
Total
Time
Total
Cost
6-34
Job Cost System Records
(Job Cost Sheet)
Applied Overhead
Date
Department
Total Cost of Job
Unit Cost
Basis of Application
Total
Cost
6-35
Job Cost System Records
(Material Requisition Form)
Materials Requisition Form
Requisition No. _________ Job No. _______ Date _______________
Department __________________
Part
Number
Description
Total
Quantity
Unit
Cost
Total
Cost
Issued by________________ Received by __________________
6-36
Job Cost System Records
(Work Ticket)
Work Ticket
Work Ticket No. _________ Date_________________
Department______________________ Job. No. _____
Time Started _________ Time Completed __________
Employee/Machine Operator _____________________
Office Use
Total Time ______ Rate ______ Total Cost ________
6-37
Impact of Computers on
Manufacturing
Automatic
identification systems
(AIS) allow inventory
and production
information to be
entered into a
computer without
writing or keying.
6-38
Impact of Computers on
Manufacturing
Computer-aided
design (CAD)
involves the use of
computers to
design products.
6-39
Impact of Computers on
Manufacturing
Computer-aided manufacturing
(CAM) involves the use of computers
to control machine operations.
6-40
Impact of Computers on
In their advanced stages, factories
Manufacturing
utilizing flexible manufacturing
systems and computer-integrated
manufacturing are sometimes referred
Flexible manufacturing
“lights-out factories” because
systems (FMS) areto
anas
extension
Computer-integrated
of computer-aided
they can be operated in the dark.
manufacturing (CIM) is the
manufacturing techniques
extension of CAD, CAM,
through a seriesultimate
of
and FMS concepts to a completed
manufacturing operations.
automated and computercontrolled factory.
6-41
Basic Manufacturing Cost Flows
Raw Materials
Beginning balance $ xx
(1) Purchases
xx
Total available
xx
Accounts Payable
(1) Increase
$ xx
Step 1: The cost of purchased
raw materials and
manufacturing supplies
are recorded in Raw
Materials and
Manufacturing
Supplies, respectively.
6-42
Basic Manufacturing Cost Flows
Raw Materials
Beginning balance $ xx
(1) Purchases
xx
Total available
xx
(2) Direct materials -xx
Ending balance
$ xx
Step 2: As primary raw
Work-in-Process
materials are Inventory
Beginning
balance
$ xx
requisitioned
to the
Current manufacturing costs:
factory, direct
(2) Direct materials
xx
materials are
transferred from
Raw Materials to
Work-in-Process.
6-43
Basic Manufacturing Cost Flows
Step 3: Direct labor costs are assigned to
Wages PayableWork-in-Process
on the basis
of
Work-in-Process
Inventory
to balance
processing raw
(3) Current employeetime devoted
Beginning
$ xx
earnings
$ materials.
xx
Current
manufacturing
costs:
Other
labor costs
Direct materials
$xx
associated(2)
with
production
(3) Direct labor
xx
employees are initially assigned
to Manufacturing Overhead.
Indirect labor to
Manufacturing Overhead
(NEXT SLIDE)
6-44
Basic Manufacturing Cost Flows
Manufacturing Overhead
Beginning balance
Current:
(3) Indirect labor
$ xx
$xx
6-45
Basic Manufacturing Cost Flows
Steps
4, 5,
Manufacturing
Supplies
and 6: Other production
$ xx related costs are also assigned to
xx Manufacturing Overhead.
Manufacturing Overhead
Beginning balance
(1) Purchases
Total available
xx
(4) Issued
-xx
Ending balance
$ xx
Accumulated Depreciation:
Factory Assets
(5) Increase
+xx
Other Payables
(6) Increase
+xx
Beginning balance
Current:
(3) Indirect materials
$xx
(4) Manufacturing. Supplies xx
(5) Depreciation
xx
(6) Miscellaneous
xx
Total
$ xx
-xx
$ xx
6-46
Basic Manufacturing Cost Flows
Manufacturing Overhead
Beginning balance
$ xxWork-in-Process Inventory
Current:
Beginning balance
$ xx
(3) Indirect materials
$xx Current manufacturing costs:
(4) Manufacturing. Supplies xx
(2) Direct materials
$xx
(5) Depreciation
xx
(3) Direct labor
xx
(6) Miscellaneous
xx
-xxApplied overhead
(7)
xx
Total
$ xx
Steps 7: Costs assigned
to Manufacturing
(7) Applied overhead
-xx
Ending balance
xx periodically
Overhead$are
reassigned (applied) to Work-inProcess.
6-47
Basic Manufacturing Cost Flows
Steps 8: When products are completed,
Work-in-Process
theirInventory
accumulated production
Beginning balance
$ xx on a job cost
costs are totaled
Current manufacturing costs:
sheet and
transferred from
(2) Direct materials
$xx
Work-in-Process
to Finished
(3) Direct labor
xx
Finished
Goods Inventory
(7) Applied overheadGoods Inventory.
xx
+xx
Total work-in-process
(8) Cost of goods mfg.
Ending balance
Beginning
balance
$ xx
(8)-xx
Cost of goods mfg.
Total
$ xxavailable
$ xx
-xx
xx
6-48
Basic Manufacturing Cost Flows
Finished Goods Inventory
Beginning balance
(8) Cost of goods mfg.
Total available
(9) Cost of goods sold
Ending balance
$ xx
-xx
xx
-xx
$ xx
Cost of Goods Sold
(9) Cost of goods sold $xx
Steps 9: Later when the products are
sold, their costs are transferred
from Finished Goods Inventory
to Cost of Goods Sod.
6-49
Examine Exhibit 6-6 in the textbook
for a possible pattern of cost flows
Exhibit
6-7
for a factory containing only
machine-intensive manufacturing
operations.
6-50
Job Costing
A critical concept in job costing is the
relationship between the job cost sheets
and the account Work-in-Process
Job
JobCost
CostSheet
Sheet
6-51
Job Costing
 When
costs are assigned to work-in-process the
costs are also assigned to job cost sheets
 When jobs are completed the costs are
determined by looking at the sheet for the
completed job. That amount is transferred from
work-in-process to finished goods inventory
 The balance in work-in-process is equal to the
costs assigned to the jobs in process
6-52
Job Costing
Job 425
Job 426 Job 427
Total
Beginning balance $58,600 $51,300 $
0 $109,900
Current costs:
Direct materials
4,800 3,600 23,500 31,900
Direct labor
6,000 9,000 10,000 25,000
Applied overhead 2,400 3,600
4,000 10,000
Total
$71,800 $67,500 $37,500 $176,800
This information is used to determine the total
cost of goods manufactured.
6-53
Job Costing
Job 428
Job 429 Job 430
Total
Beginning balance $
0 $
0 $
0 $
0
Current costs:
Direct materials
22,400 10,000
8,200 40,600
Direct labor
9,450 3,800
2,800 16,050
Applied overhead 3,780 1,520
1,120
6,420
Total
$35,630 $15,320 $12,120 $63,070
This information indicates ending
balance in Work in Process Inventory
6-54
Job Costing
Review
The job-cost sheets for completed jobs
provide the cost of each job, allowing
management to properly cost and price the
job.
The job-cost sheets for incomplete jobs
should sum to the ending balance in the
Work-in-Process Inventory account.
6-55
STATEMENT OF COST OF GOODS
MANUFACTURED
Fox Brothers, Inc.
Statement of Cost of Goods Manufactured
For the Month Ending August 31, 2004
Current manufacturing costs:
Cost of materials placed in production:
Raw materials, 8/1/04
$36,000
Purchases
30,000
Total available
$66,100
Raw materials, 8/31/04
-11,800 $54,300
Direct labor
34,450
Manufacturing overhead
13,780 $102,530
Work-in-Process, 8/1/04
109,900
Total costs in process
$212,430
Transfer to the
Work-in-Process, 8/31/04
- 35,630
income statement
Cost of goods manufactured
$176,800
6-56
INCOME STATEMENT
Fox Brothers, Inc.
Income Statement
For the Month Ending August 31, 2004
Sales
Cost of goods sold:
From the
Finished goods inventory, 8/1/04
statement of
Cost of goods manufactured
cost of goods
Total goods available for sale
manufactured
Finished goods inventory, 8/31/04
Gross profit
Selling and administrative expenses
Net income
$400,000
$75,000
176,800
$251,800
-37,500
214,300
$185,700
- 90,000
$ 95,700
6-57
Process Costing
If products are produced in a
continuous manufacturing
environment, where production
does not have a distinct beginning
The cost of a single unit is equal
and end, it is necessary to use a
to the total product costs
process costing system.
assigned a “process” or
“department” during an
accounting period divided by the
number of units produced.
6-58
Cost of Production Report
A cost of production report is
the key document. It is a useful
way of organizing and
accounting for costs in a process
costing environment.
A cost of production report contains--
 Summary of units in process
 Equivalent units
 Total costs to be account for
and cost per equivalent unit
 Accounting for total cost
6-59
Cost of Production Report
Assume 90 units in the ending
inventory are 40 percent
complete. The equivalent units
are determined as follows:
90 units in ending inventory x 0.40 = 36
6-60
Cost of Production Report
Micro System Co.
Cost of Production Report
For the Month Ending July 31, 2004
Summary of units in process:
Beginning
Units started
In process
Completed
Ending
4,000
36,000
40,000
-35,000
5,000
Top
6-61
Cost of Production Report
Equivalent units in process:
Units completed
Plus equivalent units in end. inv.
Equivalent units in process
Materials Conversion
35,000
5,000
40,000
Total cost to be accounted for and
cost per equivalent units/process: Materials
Work-in-Process, beginning
$ 16,000
Current cost
144,000
Total cost in process
$160,000
Equivalent units in process
 40,000
Cost per equivalent unit in process $ 4.00
35,000
1,000
36,000
Middle
Conversion Total
$ 9,000 $ 25,000
108,900
252,900
$117,900 $277,900
 36,000
$ 3.275 $ 7.275
6-62
Cost of Production Report
Matches
total cost
in process
Bottom
Accounting for total cost
Transferred out (35,000 x $7.275)
Work-in-Process, ending:
Materials
Conversion (1,000 x $3.275)
Total cost accounted for
$254,625
$20,000
3,275
23,275
$277,900
6-63
The flow of Costs Through Work-inProcess Inventory is as follows:
Work-in-Process Inventory
Beginning balance
Current manufacturing costs:
Direct materials
$144,000
Direct labor
62,200
Applied overhead
46,700
Total
Cost of goods manufactured
Ending balance
$ 25,000
252,900
$277,900
-254,625
$ 23,275
6-64
Chapter 6
The
End
6-65