16-1

COST ACCOUNTING: A BUSINESS PARTNER

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005

Cost Accounting: Basic Framework

Management accounting and assigning decision-making authority.
Accounting systems help to identify who has authority over assets.
Accounting information supports planning and decision-making. Accounting reports provide a means of monitoring, evaluating, and rewarding performance.
McGraw-Hill/Irwin

16-2

The McGraw-Hill Companies, Inc., 2005

Management Accounting Systems Framework

Top Management

16-3

Budget: Future Plans

Actual Results: Current

Performance Evaluation: Past

Assign Decision-Making
McGraw-Hill/Irwin

Support Decision-Making

Evaluate Decision-Making
The McGraw-Hill Companies, Inc., 2005

Comparing Financial Accounting and Management Accounting

16-4

Financial Accounting Management Accounting Provide information about the Provide information for Purpose financial position and planning, evaluating, and performance of the company. rewarding performance. Balance sheet, income Types of statement, and statement of Various, non-standard reports. Reports cash flows. Standards GAAP None Reporting Usually, the company taken A component of the Entity as a whole. company's value chain. Time Usually a year, quarter, or a Any period. Periods month. Investors, creditors, and other Management, customers, and Users external parties. others in the value chain.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2005

Accounting for Manufacturing Operations

The cost to produce a unit of product includes: Direct material Direct labor Manufacturing overhead
McGraw-Hill/Irwin

16-5

The McGraw-Hill Companies, Inc., 2005

16-6

Direct Materials
Raw materials & component parts that become an integral part of finished products.

Can be traced directly and conveniently to products.

If materials cannot be traced directly to products, the materials are considered indirect and are part of manufacturing overhead.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2005

16-7

Direct Labor
Includes the payroll cost of direct workers.

Direct labor hours

Wage rate

Those employees who work directly on the goods being manufactured.

The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2005

16-8

Manufacturing Overhead
All manufacturing costs other than direct materials and direct labor.

Includes:

Indirect materials. Indirect labor. Machinery and equipment costs. Cost of regulatory compliance.
McGraw-Hill/Irwin

Does not include selling or general and administrative expenses.

The McGraw-Hill Companies, Inc., 2005

Flow of Physical Goods in Production

Direct Materials Purchased Direct Materials Used

16-9

Finished Goods

Direct Labor

Manufacturing Overhead

Goods Sold
MegaLoMart

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005

Accounting for Manufacturing Operations

Manufacturing costs are often combined as follows:
Direct Materials Direct Labor

16-10

Manufacturing Overhead

Prime Cost
McGraw-Hill/Irwin

Conversion Cost
The McGraw-Hill Companies, Inc., 2005

16-11

Product Costs Versus Period Costs

Product Costs (manufacturing costs)
Balance Sheet

as incurred

Current assets and inventory Income Statement Revenue COGS Gross profit Expenses Net income.

When goods are sold.

Period Costs (operating expenses and income taxes.)

McGraw-Hill/Irwin

as incurred

The McGraw-Hill Companies, Inc., 2005

Inventories of a Manufacturing Business

16-12

Raw materials - inventory on hand and available for use.

Finished goodscompleted goods awaiting sale.

McGraw-Hill/Irwin

Work in process partially completed goods.

The McGraw-Hill Companies, Inc., 2005

Flow of Costs Associated With Production

Direct materials purchased Materials Inventory $$$ $$$ Direct materials used

16-13

Work in Process Inventory

$$$ $$$

Direct labor & Manufacturing Overhead

Cost of goods manufactured

Finished Goods Inventory $$$ $$$

Cost of Goods Sold $$$

The McGraw-Hill Companies, Inc., 2005

McGraw-Hill/Irwin

Flow of Costs Associated With Production

16-14

Pure-Ice Inc. had $52,000 of inventory in direct materials inventory on January 1, 2005. During the year, Pure-Ice purchased $586,000 of additional direct materials. At December 31, 2005, $78,000 of the direct materials were still on hand.

How much direct material was placed into production during 2005?
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2005

Flow of Costs Associated With Production

Beginning materials inventory Materials purchased Materials available to be placed into production Materials placed into production Ending materials inventory

16-15

+ = =

52,000 586,000 638,000

? ?
$ 78,000

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005

Flow of Costs Associated With Production

Beginning materials inventory Materials purchased Materials available to be placed into production Materials placed into production Ending materials inventory

16-16

+ = =

52,000 586,000 638,000 560,000

78,000

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005

Flow of Costs Associated With Production

In addition to the direct materials, PureIce incurred $306,000 of direct labor cost during 2005. Manufacturing overhead for 2005 was $724,000. Pure-Ice started 2005 with $132,000 in work in process. During 2005, units costing $1,480,000 were transferred to finished goods inventory.

16-17

What is the ending balance in work in process at December 31, 2005?

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2005

Flow of Costs Associated With Production

Beginning work in process inventory $ 132,000 + Manufacturing costs added 1,590,000 = Total costs in process during the year $ 560,000 1,722,000 Direct Materials CostLabor Direct of goods 306,000 completed during the Manufacturing year (1,480,000) Overhead 724,000 = Ending work in Total costs added process inventory ?

16-18

during the year

$ 1,590,000

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005

Flow of Costs Associated With Production

Beginning work in process inventory Manufacturing costs added Total costs in process during the year Cost of goods completed during the year Ending work in process inventory

16-19

132,000 1,590,000 1,722,000

+ =

(1,480,000) $ 242,000
The McGraw-Hill Companies, Inc., 2005

McGraw-Hill/Irwin

Determining the Cost of Finished Goods Manufactured

A schedule of the cost of finished goods manufactured is prepared to provide managers with an overview of manufacturing activities during a period.
McGraw-Hill/Irwin

16-20

The McGraw-Hill Companies, Inc., 2005

CONQUEST, INC. Schedule of the Cost of Finished Goods Manufactured For the Year Ended December 31, 2005

16-21

Work in process inventory, beg. Manufacturing cost assigned to production: Direct materials Direct labor Manufacturing overhead

30,000

150,000 300,000 360,000 810,000 840,000 (40,000) 800,000

Total manufacturing costs Total cost of all work in process during the year Less: Work in process inventory, end of year Cost of finished goods manufactured
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005

Beginning finished goods inventory Add: Cost of finished goods CONQUEST, INC. manufactured during the year Schedule of the Cost of Finished Goods Manufactured Cost of finished goods For the Year Ended December 31, 2005 available for sale Work in process inventory, beg. $ 30,000 Less: Ending finished goods Manufacturing cost assigned to production: inventory Direct Materials $ 150,000 Cost of goods sold Direct Labor 300,000
Manufacturing overhead Total manufacturing costs Total cost of all work in process during the year Less: Work in process inventory, end of year Cost of finished goods manufactured 360,000 810,000 840,000 (40,000) 800,000

16-22

$ 150,000

800,000 950,000 168,000 $ 782,000

The cost of goods completed during the period is used to compute COGS for the period.
The McGraw-Hill Companies, Inc., 2005

McGraw-Hill/Irwin

16-23

The income statement is prepared using established financial accounting procedures.

CONQUEST, INC. Income Statement For the Year Ended December 31, 2005 Sales Cost of goods sold Gross profit on sales Operating expenses Income from operations Less: Interest expense Income before income taxes Income tax expense Net income $ 1,300,000 782,000 $ 518,000 400,000 $ 118,000 18,000 $ $ 100,000 30,000 70,000

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005

16-24

End

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2005