Chapter 19 Cost Accounting for a Manufacturing Business
Direct Materials: Materials that are of significant value in the cost of and that become an identifiable part of a finished product.
Direct Labor: Salaries of factory workers who make a product.
Factory Overhead: All expenses other than direct materials and direct labor that apply to the making of products.
Indirect Materials: Materials used in the completion of a product but that are of insignificant value to justify accounting for separately.
Indirect Labor: Salaries paid to factory workers who are not actually making products.
Work In Process: Products that are being manufactured but are not yet complete.
Finished Goods: Manufactured products that are fully completed.
Materials Ledger: A ledger containing all records of materials.
Cost Ledger: A ledger containing all cost sheets for products in the process of being manufactured.
Finished Goods Ledger: A ledger containing records of all finished goods on hand.
Applied Overhead: The estimated amount of factory overhead recorded on cost sheets.
Manufacturing businesses buy raw materials, produce finished products from this and sell to merchandising businesses.
The cost of manufacturing involves three elements: direct materials, direct labor, and factory overhead.
Factory overhead consists of indirect materials and indirect labor. Indirect materials may include glue, solder, bolts, and rivets as well as cleaning supplies etc. Indirect Labor includes personnel who may supervise, clerical, maintenance. These salaries paid to people who do not produce items are indirect labor. Other costs may be depreciation, insurance, taxes, heat, light, and power. This is all factory overhead.
Manufacturing businesses have 3 inventories---Materials, Work in Process, and Finished Goods where as merchandising businesses normally only has one.
Cost records are kept for 3 reasons: To determine accurate costs for each product produced, to provide specific cost information to managers to make decisions, to provide cost summary information for journalizing.
Subsidiary Cost Ledgers:
Merchandise Inventory is kept perpetually by keeping a continuous record of increases, decreases, and balance on hand.. Cost sheets are maintained for each job worked on which includes direct materials, direct labor, and overhead. The file of all cost sheets is called a cost ledger. The finished goods ledger is made to have an inventory of all completed jobs on hand.
Manufacturing Cost Flows:
1. When both direct and indirect materials are purchased, the number and cost of each kind of material are recorded on the materials ledger cards.
2. When direct materials are issued for use in the factory, a materials requisition is prepared. The amount of direct materials issued is recorded as a reduction on the material ledger card and an increase in the Direct Materials column of the cost sheet.
3. When direct labor is used, job-time records are prepared. Time record amounts are recorded in the Direct Labor column of the cost sheet.
4. When a product is completed, the amount of factory overhead is estimate dna recorded in the Summary column of the cost sheet. Estimating factory overhead is described later in this chapter.
5. When a product is completed, amounts on the cost sheet are totaled and recorded on a finished goods ledger card.
Applied Overhead Calculations:
Generally 3 factors are considered in estimating factory overhead: Amount of factory overhead for the past several fiscal periods, Number of products the factory expects to produce in the next fiscal period, expected increase in unit costs of factory overhead items.
If you need to Calculate Direct Labor: = Estimated Units Produced multiplied by hours of labor multiplied by salary per hour.
Step 1: Estimated Factory Overhead divided by Estimated Direct Labor = Factory Overhead Applied Rate.
Step 2: Total Direct Labor Costs multiplied by Factory Overhead Applied Rate = Applied Overhead.
Joint Projects: Problems 19-1,19-2,19-3,19-4.
Individual Projects: Problems 19-M,19-C. Study Guide 19.