Product Costing Designed to meet core competencies #1 and #3
for Shawnee Community College.
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Directions NEXT BACK This module is to be used with your
textbook to help you learn the material. Use the controls at the
bottom of the screen to go forward and back in the module. If you
see the button, it means that the slide will play an audio
discussion. At the end of the module, take the self- scoring quiz
to check your understanding. DIRECTIONS
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Product Costing for a manufacturer Some of the things youll
learn about in this lesson are: Dealing with product cost
information How costs flow through ledger accounts Calculating
& assigning overhead costs Financial statements of a
manufacturer Absorption and Variable costing
Slide 5
Raw Materials The physical materials used to make the products
Work-in-Process The account that collects all product costs
Finished Goods As products are finished, their costs are moved here
Manufacturing Companies have 3 Inventory Accounts ALL ARE ASSET
ACCOUNTS
Slide 6
Lets do some entries for a new company, Pearson Frames Jan. 1:
Pearson issued $5,000 of common stock. The entry is a debit to Cash
and a credit to Common Stock CashCommon Stock 5,000
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Jan. 2: Pearson purchased $1,200 of direct raw materials. The
entry is a debit to Raw Materials and a credit to Cash Cash Raw
Materials 1,200
Slide 8
Jan. 3: $900 of raw materials are put into production. The
entry is a debit to Work-in-Process and a credit to Raw Materials
Work-in-ProcessRaw Materials 900
Slide 9
Jan. 20: Paid production workers. Total hours worked were 120 @
$8 per hour. The entry is a debit to Work-in-Process and a credit
to Cash Work-in-ProcessCash 960
Slide 10
Jan. 21: Purchased $160 of production supplies. The entry is a
debit to Production Supplies and a credit to Cash Production
SuppliesCash 160
Slide 11
Manufacturing Overhead is a temporary asset account The debit
side is the increase side - its where ACTUAL overhead is recorded.
The credit side is the decrease side - its where APPLIED overhead
is recorded. Manufacturing Overhead Account
Jan. 21: Paid $1,560 for annual insurance policy on the
facility. The entry is a debit to Manufacturing Overhead and a
credit to Cash Manufacturing OverheadCash 1560
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Jan. 23: Paid $610 for rental of manufacturing facility and
equipment. The entry is a debit to Manufacturing Overhead and a
credit to Cash Manufacturing OverheadCash 610
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Total Estimated Overhead for the year Cost Driver = Allocation
Rate allocation rate predetermined overhead rate The allocation
rate is also called the predetermined overhead rate because it is
determined before actual overhead costs are known. Predetermined
Overhead Rate Calculating Predetermined Overhead Rate
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Predetermined Overhead Rate cost driver allocation rate
Predetermined Overhead Rate for Pearson: Total Overhead costs for
the year are ESTIMATED to be $12,750. Pearson uses direct labor
hours as a cost driver. Labor hours for the year are ESTIMATED to
be 1,500. So, the calculation of the allocation rate is: 12750 1500
= $8.50 per direct labor hour allocation rate cost driver To APPLY
the overhead, multiply allocation rate by cost driver. From slide
8, Pearson paid for 120 direct labor hours. The calculation is 120
x $8.50 = $1,020.
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Jan. 30: Recorded applied overhead for the month The entry is a
debit to Work-in-Process and a credit to Manufacturing Overhead
Manufacturing OverheadWork-in-Process 1,020
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Jan. 30: Completed work on 576 frames that were started this
month. (Transfer the total cost of these frames from
Work-in-Process to Finished Goods.) The entry is a debit to
Finished Goods and a credit to Work-in-Process Finished
GoodsWork-in-Process 2,880
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Calculating Product Cost PER UNIT We find total product cost by
adding the debit side of Work-in- Process. cost per unit When
products are finished, cost per unit must be calculated. The
calculation is: cost per unit Total product cost # units finished =
cost per unit Cost per unit for Pearson Total product cost $2,880 #
units 576 = $5.00 cost per unit When products are transferred or
sold, the cost of the # of total units transferred or sold must be
calculated cost per unit Multiply cost per unit by the #
transferred or sold to get the amount for the entry Pearson sold
500 frames. The calculation is: 500 x $5.00 = $2,500
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Jan. 30: Sold 500 frames @ $9.00 each 2 entries are required
for a sale transaction. Finished GoodsCost of Good Sold 2,500 The
first entry transfers the frames sold from Finished Goods to Cost
of Goods Sold. We just calculated that the cost of 500 frames is
$2,500. The entry is a debit to Cost of Goods Sold and a credit to
Finished Goods The second entry records the revenue. Calculate by
multiplying the # units sold by the unit sales price. 500 x $9.00 =
$4,500 The entry is a debit to Cash and a credit to Revenue
RevenueCash 4,500
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You have just learned how to do the entries and calculations
for a manufacturer. Now well look at some statements used by a
manufacturer. First is the Cost of Goods Manufactured and Sold. A
description of each line on the statement is in parenthesis.
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Slide 23
Now, lets look at the Variable Costing Income Statement
Variable Absorption 3 big differences between the Variable Costing
Income Statement and the standard Absorption version: Variable 1 -
the Variable version only includes Cost of Goods Sold information
for the units SOLD, not units produced. Variable Contribution
Margin 2 - the Variable version splits costs into variable and
fixed costs, and calculates a Contribution Margin. Variable 3 - The
Variable version is only used internally.
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We have learned the entries for physical events in a
manufacturing facility, but there are some internal events that
occur that also need to be recorded. On the next slides, we will
look at adjusting entries and closing entries for a manufacturer.
Adjusting entries for a manufacturer: Production Supplies
adjustment
Slide 25
Dec. 31: The Production Supplies account has a balance of $660,
but a physical count only shows $150 worth of supplies on hand. The
entry is a debit to Manufacturing Overhead and a credit to
Production Supplies Manufacturing OverheadProduction Supplies 1,560
610 8,900 510 Adjusting entries for a manufacturer: Production
Supplies adjustment 1,020 11,135 660 Adjusted Bal 150
Slide 26
Analyzing the Manufacturing Overhead account At the end of an
accounting period, the Overhead account must be analyzed to
determine if overhead was overapplied or underapplied during the
period. Since the debit side is the Actual side, if it has a debit
balance, the account is Underapplied. Since the credit side is the
Applied side, if it has a credit balance, the account is
Overapplied. An entry is made to leave the Overhead account with a
Zero balance; the other part of the entry is to Cost of Goods Sold.
Manufacturing Overhead Credit entryDebit balance Manufacturing
Overhead Debit entryCredit balance
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Dec. 31: Manufacturing Overhead account has a Credit balance of
$575, meaning it was overapplied. ANY balance is moved to COGS. The
entry is a debit to Manufacturing Overhead and a credit to Cost of
Goods Sold Cost of Goods Sold 575 Adjusting entries for a
manufacturer: Manufacturing Overhead Adjustment Manufacturing
Overhead 1,560 610 8,900 510 575 1,020 11,135 2,500 24,500 Adjusted
Bal $0
Slide 28
Closing the temporary Owners Equity accounts At the end of an
accounting period, the temporary Owners Equity accounts must be
closed. For our manufacturing examples, the temporary OE accounts
are Sales Revenue, Cost of Goods Sold, and GSA Expenses. For our
manufacturing examples, the permanent OE accounts are Common Stock
and Retained Earnings. Common Stock is reserved for recording owner
investments, so the temporary OE accounts are closed into the
Retained Earnings account. The closing entry leaves the temporary
OE accounts with Zero balances, with the balances being transferred
to Retained Earnings.
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Closing the temporary Owners Equity accounts Temporary OE
accounts with debit balances are credited for the amount of their
balances to leave them with Zero balances. Temporary OE accounts
with credit balances are debited for the amount of their balances
to leave them with Zero balances. Retained Earnings receives ONE
entry for the difference of the accounts. Debit 48,600 Sales
Revenue Bal 48,600 End Bal $0 Retained Earnings Bal 0 End Bal
$16,085 Credit 16,085 Cost of Goods Sold Bal 26,425 End Bal $0
Credit 26,425 GSA Expenses Bal 6,090 End Bal $0 Credit 6,090 Debit
48,600 Credit 26,425 Credit 6,090 Credit 16,085 to balance
entry
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Slide 31
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