Product Cost Flows: MUST BUHS Fall 2020

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Product Cost Flows

MUST BUHS Fall 2020


Product Cost Flows
 Product Cost Flows
 The Contribution Format
 Unit Costs

MUST BUHS Fall 2020


Product Cost Flows

Work
Raw Materials In Process

Beginning raw Direct materials


materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production

MUST BUHS Fall 2020


Product Cost Flows

Work
Raw Materials In Process

Beginning raw Beginning work in


materials inventory process inventory
+ Raw materials Direct materials Prime Costs
purchased + Direct labor
= Raw materials + Mfg. overhead
available for use = Total manufacturing
Conversion Costs
in production costs
– Ending raw materials
inventory
= Raw materials used
in production

MUST BUHS Fall 2020


Product Cost Flows

Work
Raw Materials In Process

Beginning raw Beginning work in


materials inventory process inventory
+ Raw materials
purchased Direct materials
= Raw materials + Direct labor
available for use + Mfg. overhead
in production = Total manufacturing
– Ending raw materials costs
inventory
= Raw materials used
in production
MUST BUHS Fall 2020
Product Cost Flows

Work
Raw Materials In Process

Beginning raw Beginning work in


materials inventory + process inventory
+ Raw materials + + Total manufacturing
purchased = costs
= Raw materials = Total work in
available for use process for the
in production period
– Ending work in
process inventory
= Cost of goods
manufactured

MUST BUHS Fall 2020


Product Cost Flows
Work
In Process Finished Goods

Beginning work in Beginning finished


process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold

MUST BUHS Fall 2020


Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials

Direct Labor Work in


Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and


Administrative MUST BUHS Fall 2020 Administrative
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM
Purchased

Cost of Goods Sold


Wages Payable Factory Overhead

Total
Wages

DM Direct materials used in production


MUST BUHS Fall 2020
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM
Purchased
IM

Cost of Goods Sold


Wages Payable Factory Overhead

Total IM
Wages

IM Indirect materials used in production


MUST BUHS Fall 2020
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM
Purchased
IM DL

Cost of Goods Sold


Wages Payable Factory Overhead

Total DL IM
Wages

DL Direct labor used in production


MUST BUHS Fall 2020
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM
Purchased
IM DL

Cost of Goods Sold


Wages Payable Factory Overhead

Total DL IM
Wages
IL IL

IL Indirect labor used in production


MUST BUHS Fall 2020
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM
Purchased
IM DL

Cost of Goods Sold


Wages Payable Factory Overhead

Total DL IM
Wages
IL IL

OFOH

OFOH Other factory overhead costs incurred during production


MUST BUHS Fall 2020
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead

Total DL IM FOHA
Wages
IL IL Based on
predetermined
OFOH overhead rate

FOHA Factory overhead applied to work in process


MUST BUHS Fall 2020
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM COGM COGM
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead

Total DL IM FOHA
Wages
IL IL

OFOH

COGM Cost of goods manufactured and transferred to finished goods

MUST BUHS Fall 2020


Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM COGM COGM SOLD
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead SOLD

Total DL IM FOHA
Wages
IL IL

OFOH

SOLD Finished goods sold


MUST BUHS Fall 2020
Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods


Materials DM DM COGM COGM SOLD
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead SOLD

Total DL IM FOHA
Wages
IL IL Based on
predetermined
OFOH overhead rate

Summary of cost flows


MUST BUHS Fall 2020
Schedule of Cost of Goods Manufactured and Sold
TOP
Thomasville Furniture Industries, Inc.
Schedule of Cost of Goods Manufactured and Sold
For the Month Ended January 31, 200X

Direct Materials:
Beginning materials inventory $ 10,000
Purchase of materials 25,000
Total materials available $ 35,000
Deduct: Ending materials inventory - 12,000
Indirect materials used - 3,000
Direct materials used $ 20,000
Direct labor 70,000
Factory overhead applied 10,500
Total manufacturing costs incurred $100,500
MUST BUHS Fall 2020
Schedule of Cost of Goods Manufactured and Sold
BOTTOM

Total manufacturing costs incurred $100,500


Add: Beginning work in process 5,000
Total manufacturing costs to account for $105,500
Deduct: Ending work in process - 25,500
Cost of goods manufactured $ 80,000
Add: Beginning finished goods 5,000
Cost of goods available for sale $ 85,000
Deduct: Ending finished goods - 15,000
Normal cost of goods sold $ 70,000
Add: Underapplied overhead 500
Cost of goods sold (adjusted for underapplied
overhead) $ 70,500
MUST BUHS Fall 2020
Thomasville Furniture Industries, Inc.
Income Statement
For the Month Ended January 31, 200X
Sales $128,000
Cost of goods sold 70,500
Gross profit $57,500
Selling and admin. expenses:
Sales salaries expense$14,150
Office salaries expense18,500
Total selling and admin.
expenses 32,650
Income from operations $ 24,850

MUST BUHS Fall 2020


The Contribution Format

Used primarily for Used primarily by


external reporting. management.
MUST BUHS Fall 2020
Idle Time
Machine Material
Breakdowns Shortages

Power
Failures

The labor costs incurred


during idle time are ordinarily
treated as manufacturing
overhead.
MUST BUHS Fall 2020
Overtime
The overtime premiums for all factory
workers are usually considered to be part
of manufacturing overhead.

MUST BUHS Fall 2020


Labor Fringe Benefits

Fringe benefits include employer paid costs for


insurance programs, retirement plans,
supplemental unemployment programs, Social
Security, Medicare, workers’ compensation and
unemployment taxes.

Some companies Other companies treat


include all of these fringe benefit
costs in expenses of direct
manufacturing laborers as additional
overhead. direct labor costs.
MUST BUHS Fall 2020
Unit Costs
 Direct Material- determined as actual usage
of materials or by engineering estimates
(standard costs)
 Direct Labor- determined as actual usage of
materials or by engineering estimates
(standard costs)
 MOVH – common production costs assigned
to each unit
 Traditional
 ABC
 Unit cost = DM MUST
+ DL + MOVH per unit
BUHS Fall 2020
How to allocate indirect costs to
products MOVH
 Depends on the nature of products and
production system
 Traditional- direct labor hours (DLH);
number of units produced;
 Automation and computer technology have
increased the indirect costs in many
organizations
 Activity-Based Costing (ABC)- a procedure
that attempts to provide a more precise
indirect cost allocation
MUST BUHS Fall 2020
Numerical Example- Unit Cost
 THD Company produces 4,000 units of Product A
and 20,000 units of Product B each year.
 Direct Material for Product A is TL 10; Product B 15
 Total indirect product costs are TL 900,000, and
total direct labor hours(DLH) are 50,000.
 Product A requires 2.5 DLH and Product B requires
2.0 DLH to produce.
 Direct labor cost per hour TL 30

Continue
MUST BUHS Fall 2020
Numerical Example
Management at THD believes that indirect costs
are actually caused by the following five activities:
Estimated
Activity Costs
Machine setups 255,000 TL
Quality inspections 160,000 TL
Production orders 81,000 TL
Machine-hours worked 314,000 TL
Material receipts 90,000 TL
Total 900,000 TL

MUST BUHS Fall 2020


Unit Cost - Traditional
THD uses DLH as the basis
1.determine the allocation of MOVH per
unit = predetermined overhead
rate(PDOR) PDOR= Total Overhead/
Total DLH
2. determine MOVH per unit = PDOR x
DL Cost per hour
3. add DM,DL and MOVH per unit

MUST BUHS Fall 2020


PDOR and MOVH

Total Overhead 900,000 TL


Direct Labor Hours:
Product A - 2.5 DlH 10000
Product B - 2 DLH 40000
Total Direct Labor Hours 50000
Predetermined Overhead Rate 18 TL per DLH

Manufacturing Overhead per unit of A 2.5 DLH 45 TL per unit


Manufacturing Overhead per unit of B 2 DLH 36 TL per unit

MUST BUHS Fall 2020


Unit Costs – Traditional

UNIT COSTS Product A Product B


Direct Material 10 15
Direct Labor ( DLH x 30 TL / DLH) 75 60
Manufacturing Overhead 45 36
Unit Cost 130 111

MUST BUHS Fall 2020

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