Edmonds FMAC10 Chap11 PPT

CHAPTER 11
Product Costing
in Service and
Manufacturing
Entities
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Chapter Opening
Service and product costing systems supply
information about the cost of providing
services or making products.
Financial Reporting Managerial
Companies are Accounting
required by generally Managers need to
accepted accounting know the cost of
principles (GAAP) to providing services or
report service and making products so
product costs in their they can plan
published financial company operations.
statements.
11-2
Learning Objective 11-1
Compare the accounting treatment of
material and labor costs for a manufacturing
versus a service company.
11-3
Cost Flow in
Manufacturing Companies
Labor Material Manufacturing
Overhead
Product
Costs
11-4
Manufacturing Inventory
Accounts
Most manufacturing companies accumulate
product costs in three distinct inventory
accounts:
• (1) Raw Materials Inventory, which includes
lumber, metals, paints, and chemicals that will
be used to make the company’s products;
• (2) Work in Process Inventory, which
includes partially completed products; and
• (3) Finished Goods Inventory, which includes
completed products that are ready for sale.
11-5
Manufacturing Cost Flow
11-6
Cost Flow in Service
Companies
Service companies do not have
Work in Process and Finished
Goods Inventory accounts
where costs are stored before
being transferred to a Cost of
Goods Sold account.
11-7
Manufacturing Cost Flow
Illustrated
To illustrate how manufacturing costs flow through
ledger accounts, consider Ventra Manufacturing
Company, which makes mahogany jewelry boxes that it
sells to department stores.
11-8
Event 1—Purchase of Raw
Materials
• Ventra paid $26,500 cash to purchase raw
materials.
11-9
Event 2—Place Raw
Materials into Production
• Ventra placed $1,100 of raw materials into
production.
11-10
Event 3—Paid Cash to Purchase
Production Supplies
• Ventra paid $2,000 cash to purchase
production supplies (glue, nails, sandpaper).
11-11
Event 4—Paid Production
Workers
• Ventra paid production workers $1,400
cash.
11-12
Allocate overhead cost between inventory
and cost of goods sold.
11-13
Flow of Overhead Costs
Using a predetermined overhead rate
makes it possible to estimate total job costs
sooner.
Actual overhead for the period is not

known until the end of the period.
11-14
Manufacturing Overhead
Account
• If more overhead has
At the time estimated been applied than was
overhead is added to the actually incurred, the
Work in Process Inventory account balance
account, a decrease is represents the amount of
recorded on the right side overapplied overhead.
of a temporary account
• If less overhead was
called Manufacturing
applied than was incurred,
Overhead.
the account balance is
underapplied overhead.
Under- and overapplied overhead are often

allocated directly to Cost of Goods Sold. 11-15
Flow of Product Costs
11-16
Event 5—Recognized Estimated
Manufacturing Overhead Costs
• Ventra recognized $1,680 of estimated
manufacturing overhead costs at the end of
January.
11-17
Event 6—Transferred the Total
Cost from WIP to Finished Goods
• Ventra transferred the total cost of the 500 jewelry
boxes made in January ($1,100 materials + $1,400
labor + $1,680 estimated overhead = $4,180 cost
of goods manufactured) from Work in Process to
Finished Goods
11-18
Event 7—Transferred the Cost
from Finished Goods to COGS
• Ventra transferred the cost of 400 sold jewelry
boxes from Finished Goods Inventory to Cost of
Goods Sold.
• Cost per unit is $8.36 ($5,016 / 600 boxes)
• Cost of goods sold = 400 × $8.36 = $3,344
11-19
Event 8—Recognized Sales
Revenue
• Ventra recognized $5,600 ($14 per unit ×
400 units) of sales revenue for the cash sale
of 400 jewelry boxes.
11-20
Event 9—Paid Cash for
Manufacturing Overhead Costs
• Ventra paid $1,200 cash for manufacturing
overhead costs including indirect labor,
utilities, and rent.
Manufacturing overhead is $480 overapplied ($1,680 applied -

$1,200 actual) at the end of January. Any difference between
actual and applied overhead remaining at year-end will be
closed to cost of goods sold.
11-21
Summary of January Events
11-22
Manufacturing Cost Flow Events for
February through December Part One
11-23
Manufacturing Cost Flow Events for
February through December Part Two
11-24
Product Cost Flow for Year 2
11-25
Underapplied Overhead
11,800 boxes manufactured × $3.36 POHR
• Actual overhead is $43,400.
• Applied overhead is $39,648.
• Overhead is underapplied by $3,752.
• Underapplied overhead will be closed to
COGS.
11-26
Analyzing Underapplied
Overhead
Spending variance Volume variance

$3,080 unfavorable $672 unfavorable
Total variance is $3,752 unfavorable, the

amount of underapplied overhead. 11-27
Prepare a schedule of cost of goods
manufactured and sold.
11-28
Year 2 Schedule of Cost of Goods
Manufactured and Sold
11-29
Year 2 Computation of Actual
Computation of Actual Manufacturing Overhead

Indirect Labor, Rent, and Utilities $ 31,700
Supplies 1,700
Depreciation of Manufacturing Equipment 10,000
Actual Manufacturing Overhead $ 43,400
11-30
Relationship to the Balance Sheet
Reported in the current assets

section of the balance sheet.
11-31
Financial Statements—
Income Statement
11-32
Financial Statements—
Balance Sheet
11-33
Distinguish between absorption and variable
costing.
11-34
Motive to Overproduce
with Absorption Costing
Hokai Company incurs the following
costs to produce 2,000 units of inventory:
Let’s see what happens to costs

if Hokai increases production.
11-35
Cost per Unit with
Absorption Costing
Now let’s compute income at the three levels

of production if Hokai sells 2,000 units.
11-36
Absorption Costing Income
Statements
Internally, many companies use variable costing

to motivate managers to increase profitability
without motivating them to overproduce.
11-37
Variable Costing Income
Statements
Net income is not affected by production increases.
11-38

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CHAPTER 11

Actual overhead for the period is not

Under- and overapplied overhead are often

Manufacturing overhead is $480 overapplied ($1,680 applied -

Spending variance Volume variance

Total variance is $3,752 unfavorable, the

Computation of Actual Manufacturing Overhead

Reported in the current assets

Let’s see what happens to costs

Now let’s compute income at the three levels

Internally, many companies use variable costing

Net income is not affected by production increases.

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