BUSA 12 Fund. Of Acct.

II
Chapter 14
Debra L. Schmidt, CPA
Intro to Managerial Acct
And
Job Order Costing

Goals of Chapter 14
Understand the differences between financial

and managerial accounting

Be able to understand and classify different
types of costs
Understand the similarities and differences between

Comparison of Financial &

Managerial Accounting
Job Ord

Managerial Accounting
Designed for Internal Users those inside the
companyUses much more subjective data more
focused on the future than on the past
Prepared according to what mnmt needs
Much more flexible
Prepared as needed
er and Process Costing
Be able to track costs from start to finish in the
manufacturing process using job order costing (Taccounts and JEs)

Understand basic financial statements for a

manufacturer

Comparison of Financial &

Managerial Accounting
Financial Accounting
Designed for External Users those outside the
companyReporting of historical data those

transactions that have already happened

Objective and governed by GAAP
Very strict and rigid rules and requirements
Prepared periodically as specified

The Management Process

Managerial Accounting comes into play
throughout the Management Process
Planning
Directing
Controlling
Improving

Costs What are they

A cost is a payment of cash (or equiv.) for the purpose
of generating revenues. All expenses are costs, but
not all costs are expenses
Expense
The benefit is received immediately.
Asset
The benefit has some value in the future

Classifying Costs
Product Costs
Any cost that is involved in the manufacturing
process of the goods
Product costs flow through balance sheet accounts
until the product is sold
Period Costs
Costs not related to the manufacturing process
Selling and Admin. Expenses
No future value
An expense of the period

Manufacturing Product Costs

All Manufacturing Costs can be divided into
one of three product cost categories
Direct Materials
Direct Labor
Factory Overhead

Direct Materials
Raw materials that can be directly traced to

the products
They make up a significant portion of the cost
Costs of Materials goes into a Direct Materials
Account (debit)
DM costs go out to WIP
Indirect materials get charged to FOH

Direct Labor

DL is a product cost
Includes the wages of those touch laborers
DL costs get directly charged into WIP
Indirect Labor Labor costs involved in the

manufacturing process that are NOT directly

traced to the products
Indirect Labor charged to FOH

Factory Overhead (FOH)

FOH is a product cost
Includes all manufacturing costs except DM and DL
Sometimes called factory burden
FOH costs, by definition, are indirect costs
Accounts go into a FOH acct and then are

allocated out to WIP using a pre-determined rate, or

some other alloc. method

Cost Accounting Systems

Objectives
To accumulate product costs
To assist management in establishing product
prices
To assist in controlling operations
To assist in preparing financial statements

Two Common Cost Acct Systems

Job Order Costing
Separate record for each jobBest suited for
Custom mnfg.Costs accumulate by job

Cost Accum. Direct Materials

Flow of Costs

Process Costing
Costs accum. By department or process
Best suited for mnfg of homogenous goods
Used for continuous processing

Cost Accum. Direct Materials

Direct
Flow of
Costs Materials

as materials
Costs
out as materials
*addCosts
the T in
account
and what
happens
are purchased
are used
on each
side of it.

Flow of Costs - DL

DM go to WIP
Direct labor costs are directly charged to the
Ind Mat go to FOH
jobs through the WIP accountSource of costs
are the time cards and payroll recordsIndirect
labor costs (non touch labor product costs) go
through FOH

Factory Overhead (FOH)

Flow of Costs
*add the T account and what happens
on each side of it.

FOH Allocations
Must use a reasonable method of allocation
Easiest method: Single pre-determined FOH rate

FOH Rate = Bucks/Basis=rate per he

Charge out to jobs based on number of hours (DL or
Machine hrs) usedOther methods multiple rates

and ABC methods (another chapter)

FOH Account
The FOH account is a dummy account
Only used to temporarily hold FOH Costs
After allocations are made, the account will

have a balance
Debit balance = underapplied
Credit balance = overapplied
If immaterial, close to COGS

WIP - Work in Process Acct.

One of the largest inventory accts on books of a

manufacturer
Costs come in from 3 sources: DM, DL and FOH.
Holds the cost of the goods (or jobs) as they are
constructed
Costs get transferred to FG when the goods are
completed (Job Order when job is complete)

WIP Cost Accum.

*add the T account and what happens
on each side of it.

Finished Goods
A balance sheet account

Holds the costs of the goods from the time

they are completed until the time they are sold

Another name for stock on hand
Several types of costing methods are used to
transfer costs out: ie FIFO

Finished Goods Cost Flow

*add the T account and what happens
on each side of it.

Flow of Product Costs

DM
DL
FOH
Applied

Financial Statements
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income From Operations
Other Income/Expense
Net Income

Calculation of COGS
Beg. Fin. Goods
Add: Cost of Goods
Cost of Goods Avail

Manufactured *

Less: Ending Fin Goods

End. Fin. Goods
* See next slide

Calc of Cost of Goods Manf.

This is basically a summary of the WIP account
Beginning WIP
XXX
Add:
DM Used
XXX
DL Used
XXX
FOH Applied
XXX
Total Manufacturing Costs
XXX
Less Ending WIP
(XX)
Cost of Goods Manufactured XXX