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Solution Manual For Managerial Accounting: Creating Value in a Dynamic Business Environment, 10th Edition

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    Appendix I - The Sarbanes - Oxley Act, Internal Controls, and Management Accounting App I - 1 Solutions Manual to accompany MANAGERIAL ACCOUNTING Tenth Edition (Global Edition) Ronald W. Hilton Cornell Univer sity David E. Platt University of Texas at Austin

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 1 CHAPTER 1 THE CHANGING ROLE OF MANAGERIAL ACCOUNTING IN A DYNAMIC BUSINESS ENVIRONMENT Learning Objectives 1. Define managerial accounting and describe its role in the management process. 2. Explain four fundamental management processes that help organi za tions attain their goals. 3. List and describe five objectives of managerial accounting activity. 4. Explain the major differences between managerial and finan cial accounting. 5. Describe the accounting and finance structure in an organization. 6. Describe the roles of an organization ' s chief financial officer (CFO) or controller, trea surer, and internal auditor. 7. Understand and explain the value chain concept. 8. Explain how investments in capacity affect managerial decisions making. 9 . Discuss the professional organizations and certification s in the field of managerial accounting. 10. Describe the ethical responsibilities and ethical standards that apply to managerial accounting.

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 2 Chapter Overview I. Managing Resources, Activities, and People A. What is managerial accounting? B. Management activities 1. Decision making 2. Planning 3. Directing operational activities 4. Controlling II. How Managerial Accounting Adds Value to the Organization A. Objectives of managerial accounting activity 1. Provides information for decision making and planning 2. Assists in directing and controlling 3. Motivates managers and employees 4. Measures performance 5. Assesses an organization's competitive position B. Balanced Scorecard C. Managerial Versus Financial Accounting 1. Focus of reports 2. External vs. internal users of information 3. Degree of regulation 4. Information focus D. Managerial Accounting in Different Types of Organizations III. Where Do We Find Managerial Accountants in an Organization? A. Organization Chart 1. Line and staff positions 2. Chief financial officer (CFO) or controller 3. Treasurer 4. Internal auditor B. Cross - functional deployment C. Physical location IV. The Operational Context of Managerial Accounting A. Managerial Accounting and the Value Chain B. Capacity and Capacity Costs C. Cost management systems V . Managerial Accounting as a Career A. Professional Organiz ations B. Professional Certification VI. Managerial Accounting and the Ethical Climate of Business

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 3 Key Lecture Concepts I. Managing Resources, Activities, and People • Types of organizations include manufacturers, retailers, service providers, agribusinesses, and nonprofit firms. These organizations have goals — for example: growth, profit, quality, leadership, etc. • Organizations have information needs in the financial, production, personnel, environmental, and legal areas. Managerial accounting provides some of this information. Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization's goals. • The role of managerial accountants has expanded in recent years. Managerial accountants are specialists in using the tools of managerial accounting to help the organization and its managers run the operation smoothly. Formerly in staff positions, managerial accountants now serve as internal business consultants, trusted advisors, and "business partners." • Management functions performed within an organization can often be summarized as decision making, planning, the directing of operational activities, and controlling. ➢ Decision making — the process of choosing among available alternatives ➢ Planning — developing a detailed financial and operational description of anticipated operations ➢ Directing operational activities — running the organization on a day - to - day basis ➢ Controlling — ensuring that the organization operates in the intended manner to achieve its goals

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 4 II. How Managerial Accounting Adds Value to the Organization • Provides managers with information (e.g., product costs, budgets, cash flows). The information includes financial and nonfinancial data to help managers with strategic planning and decision making. • Assists in directing and controlling (analyzing and comparing actual performance to budgeted plans; attention - directing to highlight successful or problem areas). • Motivates managers to achieve the organization's goals by communicating the plans, providing a measurement of how well the plan was achieved, and prompting an explanation of deviations from plans. • Measures performance not only for the entire organization, as in financial accounting, but also for many subunits (divisions, departments, managers). • Assesses the organization's competitive position in the rapidly changing business environment. Looks at how well the firm is doing internally, in the eyes of its customers, from the standpoint of innovation and continuous improvement, and financially. ➢ The preceding factors are integrated in a model of performance evaluation known as the balanced scorecard. • Managerial Versus Financial Accounting ➢ Financial accounting is intended for external users (investors, creditors, etc.); is heavily regulated by the FASB, SEC; is mandatory for publicly - traded companies; is historic in nature. ➢ Managerial accounting is intended for internal users (managers); is not heavily regulated; is not mandatory but rather is adopted based on costs/benefits; is future - oriented.

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 5 III. Where Do We Find Managerial Accountants in an Organization? • Line personnel are directly involved in carrying out the mission of the organization (e.g., assembly workers in a factory, doctors in a hospital, teachers in a school). • Staff personnel (accountants, lawyers, personnel directors, and other administrative positions) provide support for the organization's mission. ➢ An accountant in a CPA firm would be in a line position, because the organization's mission is providing accounting services. In contrast, an accountant at a university would be in a staff position. • The chief financial officer (CFO) or controller is the chief accountant responsible for the supervision of the accounting department, preparation of reports, and the interpretation of information to line managers. • The treasurer is responsible for raising capital, safeguarding assets, managing investments, insurance coverage, and the credit policy of an organization. • The internal auditor reviews accounting procedures, reports, and performance on behalf of top management. • More and more, managerial accountants work throughout an entire enterprise and are deployed in cross - functional management teams, working with top executives and personnel from a variety of functional areas (e.g., marketing, production, engineering, and operations).

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 6 IV. The Operational Context of Managerial Accounting • More attention is being paid to the value chain — the set of linked, value - creating activities, from conducting product research, to manufacturing, to providing customer service. ➢ A number of activities occur prior to the production of a good or service (i.e., upstream activities) and several occur after (so - called downstream activities). • To achieve an organization's goals, managers must understand the entire value chain as well as the related cost - causing factors (cost drivers). • Managing the cost relationships within a value chain to the firm's advantage is called strategic cost management . • A key objective of managerial accounting information is the management of an organization’s capacity and the costs of providing that capacity. Capacity is the upper limit on the amount of goods or services that an organization can produce in a specified period of time. There are various concepts of an organization’s capacity. Theoretical capacity refers to the upper limit on production of goods or services if everything works perfectly. Practical capacity allows for normal occurrences such as machine downtime and employee fatigue or illness. • The growing use of cost management systems — planning and control systems that measure the cost of resources and eliminate non - value - added costs (costs that can be eliminated with no deterioration of product quality, performance, or perceived value) . ➢ These systems also help determine the efficiency and effectiveness of the enterprise, and identify new opportunities for the organization. ➢ Activity - based costing (ABC) is a system for determining the cost of prod ucing goods or services. ➢ A ctivity - based management (ABM) is the process of using an ABC system to improve the operations of an organization. V . Managerial Accounting as a Career • The Institute of Management Accountants (IMA) administers the

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 7 Certified Management Accountant (CMA) program. Students interested in internal accounting rather than employment in a public accounting firm may wish to pursue this designation. VI. Managerial Accounting and the Ethical Climate of Business • Recent corporate scandals have involved mismanagement, alleged ethical lapses, and criminal behavior. Causes of these scandals were attributable to: ➢ Greedy corporate executives, managers who made over - reaching business deals and a lack of oversight by boards of directors and audit committees. ➢ Shoddy work by external auditors, a lack of sufficient probing by Wall Street analysts and the financial press, and overly aggressive accounting. • Various reforms have begun to surface that remedy deficiencies in corporate governance and accounting. For example, the Sarbanes - Oxley Act both: ➢ Created the Public Company Accounting Oversight Board (PCAOB) to establish auditing standards and provide for an audit quality review process, and ➢ Limits the types of non - audit work that public accounting firms can perform for their audit clients. • Professional ethics require high standards of conduct from management accountants in the areas of competence, confidentiality, integrity, and credibility. Teaching Tip: If you plan to highlight ethics throughout the course, you may want to spend extra time in class discussing the Focus on Ethics box at the end of this chapter. The box summarizes the standards of conduct just noted by the use of various detailed examples.

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 8 Teaching Overview The main objective of the first two class meeting s is to help students understand the overall context in which managerial account ing satisfies the information needs of an enterprise. I urge students to think not only about the discipline in its current form but also how it should evolve to meet the changing needs of organiza tions. Therefore, the first two class es include not only the usual discussion of the syllabus but also the role of the management accountant in an organization, the differences between finan cial accounting and managerial accounting, managerial account ing as a tool for managers, and emerging trends in the field. It is especially important to stress the cost - benefit theme, as cost - benefit analysis will surface throughout the course and text. Students have very insightful thoughts on the emerging trends in business today. Therefore, I try to generate some discus sion of their ideas early on. (I also want to communicate the need for student participation — not always an easy task if the group is large.) After some discussion, I like to conclude the second class by having the students suggest some accounting informa tion needs that they feel mana gers have in the current business environment. Their sugges tions usually include: how much does my product or service cost? How much inventory should I have on hand? At what point does my business breakeven? How do I put together a budget? How do I project cash flows? As class ends, I tell students that these are the very issues we will be working on during the semester and that one of our first tasks will be to answer the basic ques tion, " H ow can we calculate the cost to produce a product or service? " In summary, by the end of the second class, students should have a basic understand ing of managerial accounting ' s purpose and appreciat e the need to study the discipline.

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    Chapter 0 1 - The Changing Role of Managerial Accounting i n a Dynamic Business Environmen t 1 - 9 Links to the Text Homework Grid Item No. Learning Objectives Completion Time (min.) Special Features* Exercises: 1 - 25 3 , 4 25 1 - 26 2 , 3 2 0 1 - 27 1, 3, 5 30 C Problems: 1 - 28 4, 6 30 W , E 1 - 29 4, 5, 6, 8 25 G 1 - 30 6, 7, 9, 10 45 W , E 1 - 31 3, 8 25 Cases: 1 - 32 1, 3, 6, 7 , 9, 10 40 E, G 1 - 33 9, 10 40 W , E, G , C * W = written response E = Ethical issue G = Group work I = International C = Internet use

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 1 CHAPTER 2 BASIC COST MANAGEMENT CONCEPTS Learning Objectives 1. Explain what is meant by the word cost . 2. Distinguish among product costs, period costs, and expenses. 3. Describe the role of costs in published financial statements. 4. List five types of manufacturing operations and describe mass customization . 5. Give examples of three types of manufacturing costs. 6. Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and an income statement for a manufacturer. 7. Understand the importance of identifying an organization ' s cost drivers. 8. Describe the behavior of variable and fixed costs, in total and on a per - unit basis. 9. Distinguish among direct, indirect, controllable, and uncontrollable costs. 10. Define and give examples of an opportunity cost, an out - of - pocket cost, a sunk cost, a differential cost, a marginal cost, and an average cost.

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 2 Chapter Overview I. What Do We Mean by a Cost ? A. Product costs, period costs, and expenses II. Costs on Financial Statements A. Income statement 1. Selling and administrative costs 2. Costs of manufactured inventory B. Balance sheet 1. Raw - materials inventory 2. Work - in - process inventory 3. Finished - goods inventory III. Manufacturing Operations and Manufacturing Costs A. Job shop, batch, assembly line, continuous flow B. Assembly manufacturing C. Manufacturing c osts 1. Direct material 2. Direct labor 3. Manufacturing overhead 4. Indirect material 5. Indirect labor 6. Other manufacturing costs 7. Conversion cost, prime cost IV. Manufacturing Cost Flows A. Cost of goods manufactured B. Production costs in service industry firms and nonprofit organizations V. Basic Cost Management Concepts : Different Costs for Different Purposes A. The cost driver team 1. Variable and fixed costs B. The cost management and control team 1. Direct and indirect costs 2. Controllable and uncontrollable costs C. The outsourcing action team 1. Opportunity costs 2. Out - of - pocket costs 3. Sunk costs 4. Differential and incremental costs 5. Marginal and average costs D. Costs and benefits of information VI. Costs in the Service Industry A. Product and period costs

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 3 B. Variable and fixed costs C. Controllable and uncontrollable costs D. Opportunity, out - of - pocket , and sunk costs E. Differential, marginal , and average costs

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 4 Key Lecture Concepts I . What Do We Mean by a Cost? • A cost is the sacrifice made to achieve a particular purpose. • There are different costs for different purposes, with costs that are appropriate for one use being totally inappropriate for others (e.g., a cost that is used to determine inventory valuation may be irrelevant in deciding whether or not to manufacture that same product). • An expense is defined as the cost incurred when an asset is used up or sold for the purpose of generating revenue. The terms " product cost " and " period cost " are used to describe the timing with which expenses are recognized. ➢ Product costs are the costs of goods manufactured or the cost of goods purchased for resale. These costs are inventoried until the goods are sold. ➢ Period costs are all other non - product costs in an organization (e.g., selling and administrative). Such costs are not inventoried but are expensed as time passes. II . Costs on Financial Statements • Product costs are shown as cost of goods sold on the income statement when goods are sold. Income statements of service enterprises lack a cost - of - goods - sold section and instead reveal a firm ' s operating expenses. • Product costs , housed on the balance sheet until sale, are found in three inventory accounts: ➢ Raw materials — materials that await production ➢ Work in process — partially completed production ➢ Finished goods — completed production that awaits sale

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 5 III. Manufacturing Operations and Manufacturing Costs • There are various types of production processes; for example: ➢ Job shop — low production volume, little standardization; one - of - a - kind products ➢ Batch — multiple products; low volume ➢ Assembly line — a few major products; higher volume ➢ Continuous flow — high volume; highly standardized commodity products • Direct materials — materials easily traced to a finished product (e.g., the seat on a bicycle ) • Direct labor — the wages of anyone who works directly on the product (e.g., the assembly - line wages of the bicycle manufacturer) • Manufacturing overhead — all other manufacturing costs such as : ➢ I ndirect materials — materials and supplies other than those classified as direct materials , ➢ I ndirect labor — personnel who do not work directly on the product (e.g., manufacturing supervisors ), and ➢ O ther manufacturing costs not easily traceable to a finished good (insurance, property taxes, depreciation, utilities , and service/support department costs ). Overtime premiums and the cost of idle time are also accounted for as overhead. ➢ Idle time – time that is not spent productively by an employee due to such events as equipment breakdowns or new setups of production runs. • Conversion cost (the cost to convert direct materials into finished product): direct labor + manufacturing overhead • Prime cost: direct material + direct labor

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 6 IV. Manufacturing Cost Flows • Manufacturing costs (direct materials, direct labor, and manufacturing overhead) are " put in process " and attached to work - in - process inventory. The goods are completed (finished goods), and the costs are then passed along to cost of goods sold upon sale. • Cost of goods manufactured: Direct materials used + direct labor + manufacturing overhead + beginning work - in - process inventory - ending work - in - process inventory ➢ This amount is transferred from work - in - process inventory to finished - goods inventory when goods are completed. • Product costs and cost of goods sold for a manufacturer: Beginning Cost of Goods Ending Inventory, + Manufactured - Inventory, = Cost of Finished Goods to Completion Finished Goods Goods Sold S upported by A schedule of Current Income the prior year ' s production costs balance sheet statement balance sheet • Production - cost concepts are applicable to service businesses and nonprofit organizations. For example, the direct - materials concept can be applied to the food consumed in a restaurant or the jet fuel used by an airline. Similarly, direct labor would be equivalent to the cooks in a restaurant and the flight crews of an airline. Cost of Goods Sold Ending Finished Goods Cost of Goods Manu . Beginning Finished Goods

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 7 V. Basic Cost Management Concepts: Different Costs for Different Purposes • A cost driver is any event or activity that causes costs to be incurred. Cost driver examples include labor hours in manual assembly work and machine hours in automated production settings. ➢ The higher the degree of correlation between a cost - pool increase and the increase in its cost driver, the better the cost management information. • Variable and fixed costs ➢ Variable costs move in direct proportion to a change in activity. For example, in the manufac ture of bicycles, the total cost of bicycle seats goes up in proportion to the number of bicycles produced. However, the cost per unit (i.e., per seat) remains constant. ➢ Fixed costs remain constant in total as the level of activity changes. For instance, straight - line deprecia tion of a bicycle plant remains the same whether 100 bicycles or 1,000 bicycles are produced. However, the depreciation cost per unit fluctuates because this constant total is spread over a smaller or greater volume. • Direct and indirect costs ➢ An entity (e.g., a specific product, service, or department) to which a cost is assigned is commonly known as a cost object. ➢ A direct cost is one that can be easily traced to a cost object . ▪ If a college department has been defined as the cost object , p rofessors ' salaries and administrative assistants' salaries are direct costs of the department (just as assembly workers ' wages are direct costs of a manufacturing department). ➢ An indirect cost is a cost that cannot be easily traced to a cost object . ▪ For example, the costs of a university ' s controller, president, campus security, and groundskeeper cannot be directly traceable to a specific department, as these individuals service the entire university. (Similarly, a factory guard ' s salary is not traceable to only one depart - ment and is, thus, considered indirect to all departments. ) ➢ A c ost management system strive s to trace costs to the objects

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 8 that caused them so that manage rs can isolate responsibility for spending and objectively evaluate operations. Teaching Tip: When discussing indirect costs, you may want to cite a hospital ' s medical and surgical supplies as an example. Such items do not appear to be a primary target for trimming; however, these indirect costs often account for a sizable portion of a hospital ' s operating costs. Understanding indirect costs has become more valuable in a managed - care environment because it helps hospitals negotiate fixed - fee contracts. • Controllable and uncontrollable costs ➢ Controllable costs — costs over which a manager has influence (e.g., d irect material s) ➢ Uncontrollable costs — costs over which a manager has no influence (e.g., t he salary of a firm ' s CEO from the production manager ' s viewpoint ) • O pportunity cost — the benefit forgone by choosing an alternative course of action (e.g., the wages forgone when a student decides to attend college full - time rather than be employed) • Out - of - pocket cost — a cost that requires a cash outlay • Sunk cost — a cost incurred in the past that cannot be changed by future action (e.g., the cost of existing inventory or equipment) ➢ Such costs are not relevant for decision making. • Differential cost — the net difference in cost between two alternative courses of action ➢ Incremental cost — the increase in cost from one alternative to another • Marginal cost — the extra cost incurred when one addi tional unit is produced • Average cost per unit — total cost divided by the units of activity • Accountants must weigh the benefits of providing information against the costs of generating, communicating, and using that information. The goal is to use information effectively and avoid information overload.

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 9 VI. Costs in the Service Industry • The preceding costs are relevant in service providers as well as for manufacturing entities.

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 10 Teaching Overview The main purpose of Chapter 2 is to expand the way in which costs are defined and viewed. After completing a course in financial accounting, students are very much geared into thinking about func tional costs (depreciation, utilities , and commissions ) for an entire organization. While this is useful information to an outside creditor or investor, it is insufficient with respect to helping internal managers do their jobs effectively. Managers must also consider cost behavior, controllability, costs incurred by smaller segments, and so on. An initial reminder of these facts generally opens a discussion of addi tional ways of viewing financial information. It is worthwhile to spend a few extra minutes in the area of cost behavior since it is so fundamental to later topics. Before discussing manufacturing costs, I ask for a show of hands from students who have actually visited a manufacturing plant. The typical, small number of hands serves as a reminder that many students have little idea of what a factory " looks like " and does. Pictures and videos are helpful in providing a context for the concepts being discussed — even a field trip to a local manufacturer is a good idea. This is also an excellent time to point out that even if a student does not plan to work in production manage ment, he or she may well work in accounting, finance, or marketing for a company that makes a product. Therefore, being conversant in the language and concepts of cost accounting will be useful. Accounting techniques in manufacturing are frequently transferable to the service sector , and this fact should be emphasized in class . In summary, Chapter 2 discusses the many ways that costs can be categorized. Chapter 3 then follows with a discussion of a system to track product costs and answers the age - old question, “ H ow much does this cost? ” I recommend using Problem 2 - 50 (cost terminology and cost behavior) and Exercise 2 - 2 8 (financial schedules and statements) as lecture demonstration problems.

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 11 Links to the Text Homework Grid Item No. Learning Objectives Completion Time (min.) Special Features* Exercises: 2 - 24 2, 5, 8 2 0 2 - 25 1, 3, 6 10 2 - 26 5 10 2 - 27 5 10 2 - 28 1, 3, 6 25 2 - 29 4 30 C 2 - 30 1, 8 15 2 - 31 1, 10 5 I 2 - 32 1, 8, 10 15 2 - 33 1, 9, 10 5 2 - 34 1, 10 10 2 - 35 1, 10 10 2 - 36 1, 10 15 Problems: 2 - 37 2, 5, 10 2 5 2 - 38 1, 3, 5, 9 15 2 - 39 3, 4 2 0 C 2 - 40 1, 2, 3 10 2 - 41 1, 9 1 0 2 - 42 1, 5, 9 2 0 2 - 43 1, 3, 5, 6 35 S 2 - 44 5, 6 30 2 - 45 2, 5 40 S 2 - 46 5, 6, 8 25 2 - 47 5, 6 25 2 - 48 7, 8 25 2 - 49 7, 8 15 2 - 50 5, 8, 9 20 2 - 5 1 1, 3 40 W 2 - 52 8, 9, 10 25 2 - 53 7, 8 15 2 - 5 4 1, 3, 9, 10 20 2 - 55 7 , 10 10 2 - 56 4 , 10 25 2 - 57 8, 10 15 2 - 58 7, 8 25

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    C hapter 0 2 - Basic Cost Management Concepts 2 - 12 Cases: 2 - 59 7, 8, 10 30 W , G 2 - 60 10 50 W, E * W = W ritten response E = Ethical issue G = Group work I = International C = Internet use S = Spreadsheet

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 1 CHAPTER 3 PRODUCT COSTING AND COST ACCUMULATION IN A BATCH PRODUCTION ENVIRONMENT Learning Objectives 1. Discuss the role of product and service costing in manufactur ing and nonmanufactur ing firms. 2. Diagram and explain the flow of costs through the manufacturing accounts used in product costing. 3. Distinguish between job - order costing and process costing. 4. Compute a predetermined overhead rate, and explain its use in job - order costing for job - shop and batch - production environments. 5. Prepare journal entries to record the costs of direct material , direct labor , and manufacturing overhead in a job - order costing system. 6. Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and an income statement for a manufac turer. 7 . Describe the two - stage allocation process used to assign manufacturing overhead costs to production jobs . 8. Describe the process of project costing used in service industry firms and nonprofit organizations.

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 2 Chapter Overview I. Product and Service Costing A. Use in financial accounting B. Use in managerial accounting C. Use in cost management D. Use in reporting to interested organizations II. Flow of Costs in Manufacturing Firms A. Work - in - process inventory B. Finished - goods inventory C. Cost of goods sold III. Types of Product - Costing Systems A. Job - order costing systems B. Process - costing systems IV. Accumulating Costs in a Job - Order Costing System A. Job - cost record B. Direct materials costs C. Direct labor costs D. Manufacturing - overhead costs 1. Overhead application 2. Predetermined overhead rate 3. Applying overhead costs V. Illustration of Job - Order Costing A. Purchase of material B. Use of direct material C. Use of indirect material D. Use of direct labor E. Use of indirect labor F. Incurrence of manufacturing - overhead costs G. Application of manufacturing overhead H. Summary of overhead accounting I. Selling and administrative costs J. Completion of a production job K. Sal e of goods L. Underapplied and overapplied overhead M. Schedule of cost of goods manufactured N. Schedule of cost of goods sold O. Posting journal entries to the ledger

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 3 V I. Further Aspects of Overhead Application A. Actual and normal costing B . Choosing the cost driver for overhead application C . Departmental overhead rates VII. Two - stage cost allocation VIII . Project Costing : Job - Order Costing in Nonmanufacturing Organizations IX. Changing Technology in Manufacturing Operations A. EDI and XML B. Use of bar codes and RFID system

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 4 Key Lecture Concepts I. Product and Service Costing • A product - costing costing system accumulates the total cost of making products and facilitates the calculation of a per - unit cost. Applications exist in: ➢ Financial accounting : Valuation of ending inventory on the balance sheet and determination of cost of goods sold for the income statement ➢ Managerial accounting : Planning, cost control, and decision making ➢ Cost management : Cost control and cost reduction ➢ Reporting to interested organizations : Audience includes state regulatory agencies, insurance companies, hospitals, and the government . • Managers of nonmanufac tur ing organizations need product - cost information as well. For example, product costs are used by account - ing firms, which set a contract price for audit jobs, and by hospitals, which are reim bursed on a per - case basis under Medicare. II. Flow of Costs in Manufacturing Firms • As production takes place, manufacturing costs are tracked in the Work - in - Process Inventory account. Every product is made up of three cost components: direct materials, direct labor, and manufacturing overhead. • After products are completed, the corresponding cost leaves the Work - in - Process account and is debited to the Finished - Goods account. (A merchandising firm buys its goods already completed and directly debits the items ' cost to Merchandise Inventory.) • When units are sold, the Finished - Goods Inventory account is credited and Cost of Goods Sold is debited.

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 5 III. T ypes of Product - Costing Systems • A product - costing system must be adapted to match the environ ment in which it operates. • A job - order costing system is used in an industry where products are made individually, or in relatively small batches, and one product or batch is readily distinguishable from the other . ➢ C andidates for job - costing systems would be custom homebuilding, custom printing, custom furniture construction , legal cases, medical cases, audits, and research projects. • A process - costing system is employed in an environment at the other end of the continuum: the mass production of like units. Users might include manufacturers of chemicals, gasoline, and microchips. This topic is discussed fully in Chapter 4.

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 6 IV. Accumulating Costs in a Job - Order Costing System • A job - cost record is used to accumulate the actual direct materials, actual direct labor, and applied manufacturing overhead costs for each job. The recording of costs on this record and in the general ledger is triggered by various source docu ments. • Material requisition forms authorize the transfer of direct materials from the warehouse to production. In many firms, the requisitions are based on a bill of materials that lists all of the materials (e.g., parts) needed. • Supply chain — the flow of all goods, services, and information into and out of the organization. The supply chain often has ramifications for materials, as manufacturers work with vendors to achieve improved delivery schedules and reductions in material cost. • Time records are used to gather the amount of direct labor worked on a specific job. • Manufacturing overhead is entered on the job - cost record in the form of applied (i.e., estimated) overhead. Source documents, such as invoices for factory insurance and schedules for factory depreciation, trigger a general - ledger entry that debits the Manufacturing Overhead account. • Overhead accounting involves a number of steps. Chapter 3 focuses on the final step: the application of overhead to jobs and products. ➢ Although overhead cannot be directly traced to the product, the use of an application rate should allocate an equitable amount of cost to each job (known as overhead application) . ➢ Step 1: Set a predetermined overhead rate at the beginning of the accounting period. This is done by dividing the period ' s estimated (budgeted) overhead by the period ' s estimated number of cost - driver units. ➢ Step 2: Use the predetermined overhead rate to apply an equitable portion of overhead to each job. As the actual number of cost - driver units used on a job becomes known, it is multiplied by the predetermined overhead rate. ➢ Actual overhead costs incurred during the year are debited to the Manufacturing Overhead control account. In contrast, applied overhead is debited to Work - in - Process Inventory and

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 7 credited to Manufacturing Overhead. ➢ The year - end difference between actual and applied amounts is known as over - or underapplied overhead. This figure is adjusted in the process of closing the Manufacturing Overhead account to zero by either: ▪ Charging or crediting the amount to cost of goods sold. This approach is acceptable if the over - or underapplication is small or if most of the products made during the period have been sold. ▪ Prorating the amount among work in process, finished goods, and cost of goods sold. Teaching Tip: E mphasize that under - and overapplied overhead is the difference between actual and applied overhead, not actual and budgeted overhead. The budgeted figure is used solely in the determination of the predetermined rate.

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    Chapter 03 - Product Costing a nd Cost Accumulation i n a Batch Production Environment 3 - 8 V. Illustration of Job - Order Costing • As noted earlier, the Work - in - Process Inventory account contains charges for direct materials used, direct labor, and applied manufacturing overhead. • Period costs are expensed and not charged to Manufacturing Overhead. • A sale requires two journal entries: one to record the sales revenue and another to transfer the goods ' cost from Finished - Goods Inventory to Cost of Goods Sold. Teaching Tip: Although the text illustration appears relatively complicated, it is simply presenting the details that accompany the flow of goods (and costs) from work in process, to finished goods, to cost of goods sold. • The schedule of cost of goods manufactured details the activity in the Work - in - Process account (beginning balance, direct materials used, direct labor, applied overhead, and ending balance). • The schedule of cost of goods sold details the activity in the Finished - Goods Inventory account. It is similar to the cost - of - goods - sold schedule as shown in financial accounting courses for merchandising companies, except the " purchases " amount is replaced with cost of goods manufactured.

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