Ch 3 Comm 305 Managerial Accounting

Valve 7 is assembled from components already being used on the high-volume products . The bulk of any factory’s overhead costs are associated with ordering parts, keeping track of them, inspecting them, and setting up to produce components. For parts and components ordered or fabricated in large volumes, the per-unit impact of these transaction costs is modest. Therefore, specialized products assembled from high-volume components will have low production contra asset account costs even if shipping volume is not high. The sidebar “Allocating Costs under an Activity-Based System” shows how a company might calculate and assign the support costs of a common manufacturing overhead function—raw materials and parts control. The principles and methods, while illustrated in a conventional manufacturing setting, are applicable to any significant collection of corporate resources in the manufacturing or service sector.

The managers of a diversified company thought they were making money, but a consulting firm found that the company had seriously underestimated costs. Raw materials costs are assigned when the materials are issued by the storeroom. Work in Process Inventory is debited for direct materials used, Manufacturing Overhead is debited for indirect materials used, and Raw Materials Inventory is credited. Process account is referred to as a control account because it summarizes the detailed data regarding specific jobs contained in the job cost sheets. Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.

Designing An Activity

(L.O. 5) When a job is completed, the total cost is debited to Finished Goods Inventory and credited to Work in Process Inventory. Finished Goods Inventory is a control account that controls individual finished goods records in a finished goods subsidiary ledger. 4B Compute predetermined overhead rates, apply overhead, and calculate under- or overapplied overhead. 4A Compute predetermined overhead rates, apply overhead, and calculate under- or overapplied overhead.

This is usually done on a proportionate basis using an actual or estimated allocation rate. Dividing the overhead cost by an allocation base, such as labour cost, labour hours and machine hours, typically creates this rate. Adjustments must be made for under or over applied overhead costs that occur if an estimated allocation rate is used.

V v Products are manufactured to order. 3 -2 Types of Product Costing Systems Process Costing Job-order Costing v v A company produces overapplied manufacturing overhead exists when overhead assigned to work in process is many units of a single product. V The identical nature of each unit of product enables assigning the same average cost per unit.

In addition, if a specific number of raw materials were requisitioned to be used in production, this would be subtracted from raw materials inventory and transferred to the WIP Inventory. Raw materials inventory can include both direct and indirect materials. Beginning and ending balances must also be used to determine the amount of direct materials used. Let’s also examine the following raw materials T-account. 1,900 direct labor hours were used during the month at a total cost of $30,400.

Equipment Products, Inc., produces large ladders made of a specialized metal material. The master budget shows the following standards information and indicates the company expected adjusting entries to produce and sell 4,000 units for the month of May. Company management has asked you to investigate the cause of the fixed overhead spending variance calculated in requirement a.

Solution Manual For Managerial Accounting Tools For Business Decision Making 6th Edition By Weygandt Kimmel And Kieso

Let’s look more closely at the manufacturer of hydraulic valves mentioned earlier. Under the new system, which traces overhead costs directly to factory support activities and then to products, the range in overhead cost per unit widened dramatically—from $4.39 to $77.64. With four low- to medium-volume products , the overhead cost estimate increased by 100% or more. For the two highest volume products , the overhead cost declined.

• In general, the job costing system is used only when the products manufactured vary from one another, as is the case with our customised products.
• Assume Hal’s Heating produced 320 furnaces during January.
• Overapplied manufacturing overhead exists when overhead assigned to work in process is less than overhead incurred and there is a credit balance in Manufacturing Overhead at the end of a period.
• A debit balance is an unfavorable balance resulting from more direct materials being used than the standard amount allowed for the good output.
• If you’re a blue jean manufacturer, for example, your material costs and the labor costs you incur can be easily tracked.

A standard quantity of 8 yards of material is expected to be used for each sleeping bag produced. During September, Outdoor Products, Inc., purchased 45,000 yards of material for $238,500 and used 39,000 yards to produce 5,100 sleeping bags. Fiber Optic, Inc., investigates all variances above 10 percent of the flexible budget. The flexible budget for direct materials is $50,000.

Ch 3 Comm 305 Managerial Accounting

During the month, the company purchased 330,000 pounds of material for $2,277,000 and used 295,800 pounds in production. A total of 25,520 labor hours were worked during the month at a cost of $313,896.

A comparison of the percentages above with those using only overhead suggests that total manufacturing costs and overhead were not in the same proportions in each account. This difference is the inaccuracy in the problem resulting from using total manufacturing costs. The rationale for deducting the beginning work in process and finished goods inventories from the cost of goods sold is to permit the allocation to be based on costs from the current period. By doing so, the 39.25% in the Rand Company example reflects only costs from April and thus corresponds to the period in which the underapplied overhead occurred.

Estimated total overhead for the year was $760, 000 and estimated direct labor hours were 20, 000. What would be recorded as the cost of job WR 53? 3 -20 Quick Check Job WR 53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. As shown in the following figure, when a finished job is sold to the customer, the cost of that job is transferred from Finished Goods inventory to Cost of Good Sold. Cost of Goods Sold is an income statement account. If only a portion of the units associated with a particular job are shipped, then the unit cost figure from the job cost sheet is used to determine the amount of the journal entry. The company purchased 45,000 yards of material during the month for $5.30 per yard.

About 20% of the valves generated 80% of total revenues, a typical ratio for multiproduct organizations. Of even greater interest, 60% of the products generated 99% of the revenues. Nonetheless, management remained enthusiastic about the 40% of its products that generated only 1% of revenues. According to its cost system, these specialty items had the best gross margins. These simplistic approaches are no longer justifiable—especially given the plummeting costs of information technology. They can also be dangerous. Intensified global competition and radically new production technologies have made accurate product cost information crucial to competitive success.

Cost Classification Problems

Fixed overhead, for example, might include manager salaries, which remain constant when production levels fluctuate. Finally, mixed overhead costs are those that are both partially variable and partially fixed. Some utilities, for instance, might be mixed costs if they have a connection fee as well as a usage fee . Consequently, determining the type of overhead cost requires examining whether and to what extent costs are dependent on production levels. The application rate that will be used in a coming period, such as the next year, is often estimated months before the actual overhead costs are experienced. Often, the actual overhead costs experienced in the coming period are higher or lower than those budgeted when the estimated overhead rate or rates were determined. At this point, do not be concerned about the accuracy of the future financial statements that will be created using these estimated overhead allocation rates.

Determining Direct Labor And Manufacturing Overhead

Some companies aren’t even aware that they’re relying on distorted information about their costs, margins, and profits. The accounting systems they’re using were designed for companies that manufactured a narrow range of products, and for whom materials and direct labor represented the most significant costs. But today, product lines and marketing channels have proliferated. Factory support and overhead—not direct labor—represent the biggest costs.

Manufacturing And Job Order Essay

A debit balance is an unfavorable balance resulting from more direct materials being used than the standard amount allowed for the good output. Activity-based costing is not designed to trigger automatic decisions. It helps managers make better decisions about product design, pricing, marketing, and retained earnings balance sheet mix, and encourages continual operating improvements. Likewise, activity-based costing can change how managers evaluate new process technologies. Managers in the building supplies company we described took several profit-enhancing steps after receiving the revised cost data by distribution channels.

Test Bank For Managerial Accounting Tools For Business Decision Making 4th Edition By Weygandt Ch 02

To properly allocate overhead, you need to change your cost assignment process. The catering company should track the cost to take each order, generate an invoice, fill each order and load the truck. If 2 clients generate the most costs, they should be allocated more of the overhead. Overhead costs are expenses that cannot be directly traced to a product or service. If you’re a manufacturer, for example, you may incur costs to lease your factory. You also incur utility costs to heat and cool your production facility.