Manufacturing Overhead & Cost Accounting

• Financial accounting reports financial information to external parties like stockholders, creditors, and regulators.
• It complies with rules such as GAAP/IFRS.
• Financial accounting highlights the financial consequences of past transactions
• It emphasizes precision and verifiability in reports
• Managerial accounting provides information to people within an organization, including senior, middle, and front-line employees.
• It is not mandatory and aims to create cost-beneficial reports.
• Managerial accounting does not have to comply with external rules.
• It aims to improve future performance through planning, controlling, and decision making.
• Managerial accounting emphasizes segment reports, timely/credible judgements, assumptions, and estimates.
• Planning sets goals and specifies their achievement.
• Controlling gathers feedback to ensure proper plan execution or modification due to changing circumstances.
• Decision making selects an action from competing options.

Cost Concepts

• Cost definitions vary based on accounting management needs.
• Financial accounting classifies costs to enable financial statement preparation under externally imposed rules.
• Managerial accounting classifies costs to assist in planning, controlling, and decision making within an organization.
• Managers use these costs to predict future costs, compare actual costs to budgets, assign costs to business segments, and contrast competing alternatives.

Assigning Costs to Cost Objects

• Costs are assigned for pricing, profitability studies, and controlling spending.
• A cost object is anything for which cost data is desired, such as products, customers, plants, etc.
• Costs are classified as either direct or indirect.
• Direct costs can be easily traced to a cost object.
• Indirect costs cannot be easily traced to a cost object.
• Common costs support multiple cost objects but cannot be individually traced. All common costs are indirect costs.
• A cost may be direct or indirect based on the cost object in question.

Cost Classifications for Manufacturing Companies

• Manufacturing firms categorize costs into manufacturing and nonmanufacturing costs.
• Manufacturing costs include direct materials, direct labor, and manufacturing overhead.
• Nonmanufacturing costs include selling and administrative costs.
• Raw materials are used in the final product and whose costs can be easily traced.
• Direct materials are raw materials whose costs can be easily traced to finished products
• Direct labor is labor costs easily traceable to finished products, often called "touch labor."
• Prime cost includes direct materials cost and direct labor cost.
• Manufacturing overhead includes manufacturing costs except direct materials and direct labor and costs that cannot be readily traced to specific products
• Indirect materials, such as solder and glue, are included in manufacturing overhead and are raw materials whose costs cannot be easily traced to finished products.
• Indirect labor refers to employees essential to running a manufacturing facility whose cost of compensation cannot be traced to finished products.
• Manufacturing overhead includes production costs like depreciation, utility costs, property taxes, and insurance premiums for factory operations.
• Synonyms for manufacturing overhead include indirect manufacturing cost, factory overhead, and factory burden.
• Conversion cost is the sum of direct labor and manufacturing overhead, and are incurred to convert direct materials into finished products
• Nonmanufacturing costs divide into selling and administrative costs.
• Selling costs are incurred to secure customer orders and deliver the finished product, and an example is advertising.
• Administrative costs account for general management of an organization, like executive compensation.
• Administrative costs can be direct or indirect.
• Nonmanufacturing costs are also called selling, general, and administrative (SG&A) costs.

Cost Classifications for Preparing Financial Statements

• Costs are classified as product or period costs for balance sheet and income statement preparation.
• Recognizing expenses on the income statement during the period benefits from matching principle financial accounting.
• The matching principle follows the accrual concept, where costs to generate revenue are expensed in the same period the revenue is recognized.
• Product costs are incurred in acquiring or making a product, and attach to products as purchased or made.
• Product costs remain attached while in inventory awaiting sale, and are initially assigned to inventories, so are known as inventoriable costs.
• Product costs for manufacturers include direct materials, direct labor, and manufacturing overhead.
• The cost of goods sold appears on the income statement, with product costs released from inventory as expenses.
• Product costs flow through Raw Materials, Work in Process, and Finished Goods inventory accounts on the balance sheet before being recorded in cost of goods sold on the income statement.
• Period costs include all costs that are not product costs, and selling and administrative expenses are treated as period costs.
• Period costs are expensed on the income statement and do not flow through inventory.

Cost Classifications for Predicting Cost Behavior

• Managers need to predict cost behavior for planning purposes.
• Cost behavior is how a cost reacts to changes in activity levels.
• Cost structure is the relative proportion of each cost type (variable, fixed, mixed) in an organization.
• A variable cost varies in total, in direct proportion to changes in the level of activity.
• A variable cost's activity base is a measure of what causes its incurrence, and also called cost driver.
• Common activity bases include direct labor-hours, machine-hours, units produced/sold, etc.
• A fixed cost remains constant in total, regardless fixed-costs are not affected by changes in activity.
• Manufacturing overhead usually includes various fixed costs such as depreciation, insurance, rent, property taxes, and supervisory salaries.
• nonmanufacturing Fixed include advertising, salaries, and depreciation of nonmanufacturing assets
• The average fixed cost per unit decreases as the activity level rises.
• Committed fixed costs represent organizational investments that can't be significantly reduced even for short periods, for example, investments in real estate.
• Discretionary fixed costs arise from annual management decisions to spend on certain fixed cost items, for example, advertising.
• The linearity assumption maintains that costs are strictly linear within a narrow activity band known as the relevant range.
• The relevant range is the range of activity within which cost behavior assumptions are reasonably valid.
• A mixed cost contains both variable and fixed cost elements, also known as semivariable costs.

Cost Classifications for Decision Making

• Every decision involves choosing from alternatives.
• The key to choosing among alternatives is distinguishing between relevant and irrelevant costs and benefits.
• Differential costs are relevant costs and differ between two alternatives
• Differential revenue is relevant and differs between two alternatives
• Irrelevant costs and benefits do not differ between alternatives and shoudl always be ignored
• Incremental cost is an increase in cost from one alternative to another
• Differential cost encompasses both cost increases (incremental costs) and cost decreases (decremental costs) between alternatives.
• Marginal cost and marginal revenue are terms used by economists.
• Marginal cost is the cost involved in producing one more unit and marignal revenue is the revenue obained from selling one more unit
• Opportunity cost is the potential benefit given up when one alternative is selected over another.
• Opportunity costs are not found in accounting records but are relevant.
• Sunk costs have already been incurred and cannot be changed, so they aren't relevant and should always br ignored.
• Managers may use cost classifications, like controllable or uncontrollable, for employee performance evaluation.
• A controllable cost can be influenced by the manager, whereas an uncontrollable cost cannot.
• Costs may also be classified as value-added or non-value-added, and a value-added cost increases value to the company's stakeholders.

Income Statements

• The overarching theme of different cost classifications for different purposes is highlighted by contrasting traditional and contribution format income statements.
• Traditional income statements are for external reporting and organize costs using product and period cost classifications.
• Contribution format income statements aid decision making by organizing costs using variable and fixed cost classifications.
• Traditional income statements organize costs into cost of goods sold and selling/administrative expenses.
• The equation sales - cost of goods sold = gross margin is used on traditional format income statements.
• gross margin - selling/administrative expenses = net operating income in the tradional statements
• The cost of goods sold reports product costs attached to merchandise.
• Selling and administrative expenses report all period costs expensed as incurred.
• Cost of goods sold for merchandising firms can be computed from these components: Beginning merchandise inventory + Purchases - Ending merchandise inventory
• Contribution format income statements separate costs into fixed and variable categories. Variable expeses come first, while fixed expenses are at the end of the statement
• Contribution margin is the amount remaining from sales revenues after deducting variable expenses. Variable expenses are deducted first and then fixed expenses

Chapter 2: Job-Order Costing – Calculating Unit Product Costs

• Companies assign costs to products/services for planning, control, decision making and valuing ending inventories/cost of goods sold for external reporting.
• External financial reporting requirements influence product costing methods.
• External financial reports need some form of absorption costing
• Absorption costing assigns all manufacturing costs to products.
• Nonmanufacturing costs are treated as period costs and aren't assigned to products under absorption costing
• Common types of absorption costing system is known as job-order costing.
• Job-order costing is used for planning, control, and decision making, in terms of assigning manufacturing costs to individual jobs
• How job-order costing systems used to prepare schedules of the cost of goods manufactured and the costs of goods sold

Key Points of Job-Order Costing

• Job-order costing is used by companies with many different products, each with unique features, for example, a clothing factory making many different types of jeans
• Costs are traced and allocated to jobs, and costs of the job are divided by the number of ubnits in order to arrive at an average cost per unit or unit product cost
• Job-order costing is used extensively in service industries; including hospitals, law firms, movie studios etc
• In job-order costing, manufacturing costs are classified into three broad categories: (1) direct materials, (2) direct labor, and (3) manufacturing overhead.
• Job-order costing tracks a specific job as it progresses throguh the manufacturing process
• If this were one of the company's standard products, it would have an established bill of materials, which lists the quantity of each type of direct material needed to complete a unit.
• The materials requisition form specifies the type and quantity of materials to be drawn from the storeroom and identifies the job charged for the cost of the materials.
• The form (materials requistion) is used to control the flow of materials into production and for to make journal entires in the accounting records
• A job cost sheet records the materials, labor, and manufacturing overhead costs charged to that job.
• The requistion number from the materials requisition form is shown on the job cost sheet to easier identify the source
• Direct labor costs can be directly traced to particular jobs
• Time tickets summarize the employee's activities and records how much direct labor cost to assign to each job
• Indirect labor cost related to performing maintenance does not get directly posted on a job cost sheet.

Predetermined Overhead Rates in Job-Order Costing

• Product costs include manufacturing overhead, so mnaufacturing overhead needs to be listed on the job cost sheet
• Manufacturing overhead needs to be recorded on the job cost sheet but there are a few complications to it
• Manufacturing overhead is an indirect cost, hard to trace costs back to the job
• Manufacturing overhead consists of costs from the grease used in the machines to the annual salary of the production manager
• There is a wide flucation in total manufacturing overhead costs because overhead costs are only accounted for at the end of each business period
• These circumstances, one or more allocation bases are used to assign overhead costs to products using Predetermined overhead rates
• Allocation base is a measure such as direct labor hours or machine hours that is common to all priducts can be used to assign those overhead costs to them
• Allocation bases in manufacturing are commonly direct labor-hours, directs labor cost, machine-hours, and where company only has single product, then units of product
• Manufacturing overhead is commonly allocated to products using a predetermined overhead rate, Predetermined overhead rate is computed by dividing the total estimated manufacturing overhead cost for the period by estimated total amount of the allocation bases
• That predetermined overhead rate is used to estimate the total amount of manufacturing overhead and estimate variable manufactruign overhead cost per unit of allocation base, which becomes the denominator
• After that the Estimated total amount of allocation base is used to compute the predetermined overhead rate

Manufacturing Overhead

• Once predetermined overhead rate is computed it is used to apply overhead costs to jobs at the end of each business period
• The formula for to what to apply is that predetermined overhead rate times the amount of allocation base incurred
• formula: Overhead applied to a particular job = Predetermined overhead rate x amount of the allocation base incurred
• Note the amount of overhead applied is not the accurate amount of overhead it is only a predetermined percentage
• Allocation is more known as Normal costing. Normal Costing means when normal costs have been applied by what was estimated before the year begins and then take the actual amount of what was alloted
• To illustrate teh steps involved in comuting and using all these percentages.
• A close look at all manufacturing Overhead
• A company should estimate before the period begings what labor hours would be alloted to support the planned product
• A step should be alloted every period
• One step is to analyze total manufacturing overhead costs (the numerator)
• Total: Y = a + bX, "a" being the estimated total for fixed
• Notice, estimate of the Base which has the potential to be a lot
• Then calculate predetermined overhead rate
• Y for predetermined = a / b
• Exhibit 2-4 indiciated that labor will cost 27 direct labor house, therefore a total manufacturing overhead would bbe applied

The need for rate.

• All of the following helps better determine what that predetermine rates
• Instead of relying on estimates they tempt you to suggest you make use of actual costs because you don't have to go back and re-estiamte
• However these come with seasonal flucations, which can impact the costs negatively
• Manufacturing uses a predetermined rate instead
• the cost of all the completed parts or job needs to be accurate at the end of every month or quarter and every project by accounting standards

Manufacturing OH to Unit Product costs.

• With the application of what as been done in steps on Exhibit 2-4 the sheet is complete except for 2 steps
• First is added totals for D M , D L and ManOH , Cost summary sheets and all of them are to obtained together to obtain the total cost
• This cost product unit costs are the key step and will be provided later on
• Is something that will be less than the actaul costs if Another unit were producted because costs changed

Managerial Acct In action

• How much agreement on everything could result is
• Relies heavily upon profitability report to make decision
• If any certain reports such as low volume enjineering intesneice seem highly profitable than add future add space to advertising expedintures

Data Visulazations

• Use these to produce jobs
• It is important to take notes which will make everything highly successful
• accurate in labor it is highly valuable to all
• Be on the lookup even if is correct or not is it could be over or not
• Be a hard worker so there will not have to be any corrections

Allocate base of key to accuracy

• Use and analyze if something is overcost like if your friends ate more of the Piza, then charge them more
• You would need a single pre set rate but cannot drive up cost
• Single OH cannot be a single rate, so use m ultiple rates to determine the numbers
• More then once use a method to allocate all the costs that the cost is higher then all of the other rate combined when one on the rates is higher

Numbers Predetermined rates

• To use more use multi numbers in the deparments

• To calculate use for the total formula use with formula then take more with multi to increase the results

• The second steps then the 407 step process then you all the formula to be able ot apply over then that then multply by the total then to get final number

• Its important to know why departmens for what has been derived base that either direct label or more to the chart to know the result

• There is more for one to all so that you can now what you can do

• The action is based on more for something to know how to have more people and have results

External to the business report.

• Need everything to do outside what to do for other people what needs to go outside

All jobs to be able to be recorded it

• It takes all the work put inn to show what there doone
• It take the time to see what the work what there make
• It takes all the time to better more of what happen and get all the process one so that you are correct and true to your self and the company as well it is worth

Overhead & Income

• For total OH equals the total actual cost so as to try and reapply.
• The way that they work, the way that is great is better then one to one in what one it needs
• Is is that thing that must happen
• In service many are made that work in work in services like in job in a shop or store
• More to how and you will get in virtually

There so much more things that can be in the future

• The main point is it has to be equal no matter what it is
• There all good so it is one to add that is all in process
• All that must always follow should make the work easy has has to be caused

More stuff to have more of what is needed and it will always be great.

• Work cost that must know in that has there and you you need in the company
• This will never stop in it is always right
• More often it can only be what said which then must now all good

Explore manufacturing overhead application, cost differences, and treatment of selling and administrative costs. Understand depreciation differences and the impact of over/under-applied overhead on financial statements. Learn about cost of goods sold calculations.