midterm 2

• manufacturing costs (inputs) are broken down into 3 categories: raw materials, factory labour and manufacturing overhead
• the raw materials category consists of the cost of materials required in the manufacturing process
• the factory labour category consists of factory workers, payroll taxes (cpp, ei) and fringe benefits (ie. pension)
• the manufacturing overhead category consist of costs related to the manufacturing process:

  • indirect labour
  • indirect materials
  • utilities
  • building property taxes and insurance
  • equipment maintenance + repairs
  • building + equipment depreciation
• Marketing / Selling Costs are Costs necessary to get the order and deliver it (advertising, sales commission)
• product costs include direct materials, direct labour and manufacturing overhead
• process job costing Measures the costs of producing identical or very similar products (ie. potato chips) over a period of time (ie. week, month). Costs are assigned to departments or processes for a specific time period
• the job order cost system Measures the cost to complete each unique job or batch that has distinguishing characteristics. it Calculates cost per job and is More precise than process costing, so it's useful for projecting costs and bidding on jobs. the Downside is that it is more labor intensive
• when Direct materials are used, it's removed from the raw materials inventory account and charged to the work in process inventory account. we will Debit Work in Process and credit raw Material Inventory
• Direct labor costs are charged to Work in Process Inventory based on the worker’s tracked time multiplied by the worker’s labor rate. we debit the Work in Process inventory account and credit Salaries Payable
• Indirect labor and indirect materials are debited to Manufacturing Overhead under job costing process
• when Jobs are completed, they are transferred from the Work-In-Process account to the Finished Goods account to await sale to customer
• predetermined overhead rate = Estimated Annual Overhead Cost / Estimated Annual Activity
• Small manufacturers have a single overhead rate, while Large manufacturers have a different overhead rate for each department / activity base
• Record the predetermined overhead rate by multiplying the rate by the activity level. then debit work in progress and credit manufacturing overhead
• At month end, the balance of the Work in Process Inventory account should equal the sum of costs of all unfinished jobs
• As products are completed, they are transferred from work in process inventory to finished goods inventory. we will debit Finished Goods Inventory and credit Work in Process inventory
• flow of raw materials cost: purchases → raw material inventory → work in progress inventory → finished goods inventory → cogs
• flow of direct labour and manufcaturing overhead costs: work in progress inventory → finished goods inventory → cogs
• selling and administrative costs flow from period costs → selling and administrative expenses
• If manufacturing overhead costs are over applied, they are greater than the actual costs. the product cost will be inflated, job profits will be understated, and operating income will be understated
• If manufacturing overhead costs are underapplied, lower than actual costs the product cost will be understated, job profits will be overstated and operating income will be overstated
• the manufacturing overhead account will have a debit balance if the actual cost of indirect materials and labor was greater than the estimated overhead (under-applied). there is still cost in the account that needs to be allocated to jobs. overhead will be credited and work in progress, finished goods, and/or cogs will need to be debited
• the manufacturing overhead account will have a credit balance if the actual cost of indirect materials and labor was less than the estimated overhead (over-applied). more cost was allocated to the jobs than what was actually incurred. we debit manufacturing overhead and will have to credit, work in progress, finished goods and/or cogs
• departmental overhead rate refers to each product that passes through each department has its own rate based on its own cost driver. this only applies to manufacturing overhead so we still assume a single allocation base / predetermined overhead rate for each department.
• activity-based costing (Abc) includes all indirect costs which are organized into separate activities throughout the production process. it requires a greater cost and effort required for greater accuracy
• a cost pool is a group of individual costs so they can be allocated to cost objects through activities that can be easily measured