Summary

These notes cover topics in finance, cost accounting, and management advisory services. The document details various aspects of these subjects including career opportunities and managerial financial processes.

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FinMan Finance -​ Science and art of managing money -​ Personal Context ​ Concerned with individuals’ decisions about how much of their earnings they spend, how much they save, and how they invest their savings -​ Business Context ​ Involves the same types of...

FinMan Finance -​ Science and art of managing money -​ Personal Context ​ Concerned with individuals’ decisions about how much of their earnings they spend, how much they save, and how they invest their savings -​ Business Context ​ Involves the same types of decisions: -​ How firms raise money from investors -​ How firms invest money in an attempt to earn a profit -​ How firms decide whether to reinvest profits in the business or distribute them back to investors Career opportunities in Finance 1.​ Financial Services -​ concerned with the design and delivery of advice and financial products to individuals, businesses, and governments -​ involves a variety of interesting career opportunities within the areas of banking, personal financial planning, investments, real estate, and insurance. 2.​ Managerial Financial -​ concerned with the duties of the financial manager working in a business ​ Financial managers -​ administer the financial affairs of all types of businesses—private and public, large and small, profit seeking and not for profit. They perform such varied tasks as developing a financial plan or budget, extending credit to customers, evaluating proposed large expenditures, and raising money to fund the firm’s operations Cost Accounting MAS -​ Management advisory services refer to the function of providing professional advisory (consulting) services, the primary purpose of which is to improve the client’s use of its capabilities and resources to achieve the objectives of the organization. ​ Professional - entities, individuals with the proper educational background and experience. ​ Resources - 4m’s = machineries, man power, methods, materials ​ Objectives - maximize profit and shareholders’ wealth (Market Value) ​ Organization - Operations, servicing, merchandising,manufacturing ​ Ownership - sole proprietorship, partnership, corporation Characteristics of management advisory services 1.​Service is for management (Management Functions = Planning, Leading, Organizing, Controlling, Directing and Motivating function + Decision Making) 2.​Related to the future (decision making for future events) 3.​Problem solving 4.​Non-recurring (engagement in problem solving) 5.​Broad in scope 6.​Varied assignments 7.​Greater job specifications 8.​Require good human relations Managerial Accounting vs Financial Accounting Bases of Comparison Managerial Financial a.​Users​ ​ Internal (Owners) External (BIR, SEC) b.​Nature of Special General reports c.​Time frame Future Historical d.​Reporting Flexible GAAP standards e.​Analysis of Subjective & Objective data Objective Work of Management and the Planning and Control Cycle 1.​Planning 2.​Directing and motivating 3.​Control 4.​Decision-making Need for Information Information Data Relevant for Decision-Making Group of records. Once the data is process, it will be now an information Characteristics of managerial accounting report 1.​Relevance 2.​Timeliness 3.​Accuracy 4.​Clarity 5.​Conciseness Areas of MAS 1.​The management functions of analysis, planning, organizing and controlling. 2.​The introduction of new ideas, concepts, and methods to management. 3.​The improvement of policies, procedures, systems, methods and organization relationships. 4.​The application and use of managerial accounting, control systems, data processing and mathematical techniques, and methods. 5.​The conduct of special studies, development of plans and programs, preparation of recommendations and provision of advice and technical assistance in their implementation. Organizational Structure ​ Organizational structure refers to the way in which responsibilities and authority are distributed within an organization. -​ Centralization vs Decentralization -​ Organization charts -​ Line and staff relationships -​ The Chief Financial Officer The Chief Financial Officer -​ The controller is the manager in charge of the accounting department and he/she reports to the Chief Financial Officer. This CFO is usually a member of the top-management team and should be an active participant in the planning, control, and decision-making processes at the very highest levels in the organization. Treasurership vs Controllership functions Treasurership Controllership Functions 1.​Provision of Capital 1.​Planning and control 2.​Investor relation 2. Reporting and interpreting 3.​Short-term financing 3. Evaluating and consulting 4.​Banking and custody 4. Tax administration 5.​Credits and collection 5. Government reporting 6.​investments 6. Protection of assets 7.​insurance 7. Economic appraisal Cost Accounting Cost – Anything that is sacrificed to obtain a benefit. It could be monetary or non monetary. In cost accounting, we only focus on monetary cost. Though some non monetary cost may be relevant in decision making, we can only account for monetary cost because of its measurability. Cost accounting is a branch in accounting focused on the identification, measurement, analysis, accumulation,preparation, interpretation, and communication of costs resulting from operation. Its main objective is to provide consistent cost information for financial reporting and decision making According to the Chartered Institute of Management Accountants, London, cost accounting is the process of accounting for costs from the point at which its expenditure is incurred or committed to the establishment of the ultimate relationship with cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of the activities carried out or planned. Classifications of Cost Things to remember: -Costs can be classified in a number of ways --depending on the purpose of the classification.( external Vs internal) --classifications of costs are not mutually exclusive. GAAP Costs are costs used for financial reporting, they are normally recorded in the books and are found in our financial statements. These are your manufacturing and non manufacturing costs (functional costs such as rent, salaries,operating expenses, etc). GAAP COSTS 1.​ Manufacturing Cost – production cost, incurred in the production area or factory a.​Direct materials -​ traceable cost of raw materials that become an integral part of a finished product. (Lumber in a wooden furniture) -​ Direct Material is used raw material -​ Integral part - Product cannot exist without raw material -​ Traced - Estimate or compute -​ Direct cost b.​Direct Labor -​ labor cost that can be easily traced to a product. Also known as "touch labor" -​ Direct cost din kasi easily traced c.​Manufacturing Overhead -​ ANY manufacturing cost that cannot be classified as Direct materials or direct labor belongs to this category. ( salary of the supervisor, hardware nails, paint, depreciation on factory equipment, government contributions) -​ Allocated cost -​ Indirect labor - helper, supervisors -​ Indirect material - paint, nails d.​Prime versus Conversion Costs -​ Prime costs consist of direct materials and direct labor, the absence of one will not allow production. -​ Conversion costs consist of direct labor and manufacturing overhead, used to convert the raw materials to salable goods 2.​ Non-manufacturing costs. If it's not a manufacturing cost, then it falls in this category. Typically classified as selling (marketing) costs and administrative costs. -​ Marketing or Selling Cost - Costs necessary to get the order and deliver the product. -​ Administrative Cost - All executive, organizational and clerical costs. As to Accounting Periods 1.​ Capital Expenditure – outlays classified as an asset (benefit more than one year) 2.​ Revenue Expenditures – outlays classified as an expense(benefit less than a year) 3.​ Product Costs (Manufacturing Cost) - also known as inventoriable costs. Initially treated as asset cost (part of inventory), then EXPENSED when the inventories are sold. It also includes direct materials, direct labor, and manufacturing overhead. 4.​ Period Costs - charged against the period when incurred. Includes all marketing or selling costs and administrative costs. Assets = Expense Non GAAP Cost - Any cost classification that cannot be classified as GAAP Costs are Non GAAP cost ( Variable cost, opportunity cost, etc) NON-GAAP COSTS As to behavior 1.​ Variable Cost – dependent on the level of activity, varies in total but fixed on a per unit basis. 2.​ Fixed Cost – constant in total within the relevant range 3.​ Semi-variable/semi fixed Cost (Mixed Cost or total) – has both fixed and variable components 4.​ Step-fixed Cost (Semi-Fixed Cost) – Fixed in nature but only up to a certain range. 5.​ Non linear Cost – (YOU GOT THIS) it may increase at a decreasing/increasing rate As to activity 1.​ Direct Costs – specifically identified with a particular cost object (product, segment, activity, etc) normally traceable. 2.​ Indirect Costs – non directly attributed with a particular cost object. Usually allocated. 3.​ Common Costs – costs to benefit more than one activity or department. cannot be eliminated or reduced by removing one department. 4.​ Joint Costs – incurred when multiple outputs are derived from one source As to Managerial Influence 1.​ Controllable Cost – cost that is subject to influence by a particular manager 2.​ Non-controllable cost – just the opposite, obviously. Cost Classification according to a time frame perspective 1.​ Committed cost – cannot be easily changed or avoided by a management decision. It is a consequence of a previous commitment or decision. (ex: depreciation) 2.​ Programmed or Discretionary or Managed Costs – Can be easily avoided or reduced by coming up with a decision. Cost for Planning and Control 1.​Budgeted Costs - future costs usually expressed in totals 2.​Historical Costs - past costs 3.​Standard Cost – costs pegged at a predetermined rate usually expressed on a per unit basis Cost for Analytical Process 1.​ Relevant Costs – future differential costs. Are those costs which change by managerial decision. 2.​ Irrelevant costs – costs that will not affect decision making. Are those costs which do not get affected by the decision. 3.​ Differential costs – difference in cost between two alternatives. Are the differences in total cost between two alternatives? 4.​ Incremental Costs – decision results in an increased cost 5.​ Decremental Costs – decision results in a decreased cost 6.​ Marginal Cost – additional costs on a per unit basis. 7.​ Avoidable Cost – Avoidable costs are those which will be eliminated if a segment of a business (e.g., a product or department) with which they are directly related is discontinued. Costs that can be eliminated by virtue of an alternative 8.​ Unavoidable Cost – costs that remain regardless of the decision. Are those which will not be eliminated with the segment. Such costs are merely reallocated if the segment is discontinued. For example, in case a product is discontinued, the salary of a factory manager or factory rent cannot be eliminated. It will simply mean that certain other products will have to absorb a large amount of such overheads. 9.​ Out of Pocket Cost – costs that require current or future cash outlay. It means that the present or future cash expenditure regarding a certain decision will vary depending upon the nature of the decision made. 10.​Imputed Cost – These are the costs which do not involve cash outlay. They are not included in cost accounts but are important for taking into consideration while making management decisions. For example, interest on capital is ignored in cost accounts though it is considered in financial accounts. In case two projects require unequal outlays of cash, the management should take into consideration the capital to judge the relative profitability of the projects. 11.​Opportunity Cost – cost of benefits foregone as the result of the acceptance of an alternative. It is measured as the benefits that would result from the next best alternative use of the same resources that were rejected in favor of the one accepted. It refers to an advantage in measurable terms that have foregone on account of not using the facilities in the manner originally planned. 12.​Sunk Cost – cost which are already incurred and therefore irrelevant in decision making process QUALITY COSTS - These are costs incurred to maintain the quality of the company's outputs. there are four categories: Prevention Costs - These are incurred to prevent possible events or factors in affective the quality of the product. Appraisal Costs - Incurred to check and maintain the quality during the process Internal Failure Costs - result of producing a defective product and the product is not yet delivered External Failure Costs - incurred when defective products were already delivered Methods of Costing These are the different ways on how you can accumulate and present costs 1.​ Job Costing - You use this if your products are heterogeneous (customized boots). Different processes for different products. ( different strokes for different folks!) 2.​Contract Costing - Similar to job order costing but the outputs are on a larger scale (perhaps a subdivision) 3.​Cost Plus Costing (i just saw this somewhere but hey... it's more of a pricing method. We will get back to this...) 4.​Batch Costing - still another form of job order costing but cost accumulation is done in batches. 5.​Process Costing/Operation costing - When products are homogeneous. Think of conveyor belts and repetitive processes...you get the same results! (When a company produces one kind of product...say, WD40, or Nintendo Switch) Introduction to Cost flow Systems (The Non-Cost System) Non-Cost System -​ Normally, when the management of a manufacturing firm wants to simplify the preparation of the year end financial statements, they may only be interested in the total production cost, the total cost of goods manufactured and the total cost of goods sold. At these times, the management may want to adopt the non-cost system. -​ Under this system, the flow of costs are not accounted for in detail and paperwork is minimal. The periodic inventory system is used to arrive at the ending balances of the inventories (Raw materials, work in process, finished goods) so that the cost of goods manufactured and sold can be computed. Unit costs are usually computed by dividing the total cost of goods manufactured by the number of units produced. -​ In this system, there is poor control over costs and inventories. Pilferage and wastage may go undetected and will be absorbed by the cost of goods sold. Before we begin, you should know the following: 1.​Types of inventories: Raw materials, Work in process, Finished goods 2.​Manufacturing costs: Direct materials, Direct labor, Factory overhead 3.​Items affecting raw materials inventory: Purchases, Freight-in, Purchase returns, allowances, and discounts, materials used/issued (direct materials) 4.​Items affecting work in process inventory: Direct materials, Direct labor, Factory overhead, cost of goods manufactured. 5.​Items in our finished goods: Cost of goods manufactured, cost of goods sold. 6.​What are net purchases, total materials available for use, total cost placed in process, total goods available for sale, prime cost, conversion cost, total manufacturing cost. 7.​Addendum: producing department, servicing department, payroll account, Factory overhead control account IT STARTS IN THE STORE ROOM OF RAW MATERIALS Normally, our operations would start from the purchase of raw materials which will go to our store room. The value of such will be increased by the amount of freight incurred and will be reduced by our purchase returns, allowances, and discounts. The net purchase will be computed as follows: Purchases​​ ​ ​ ​ ​ ​ ​ P xxx Add: Freight-in​ ​ ​ ​ ​ ​ Xxx Gross Purchase​​ ​ ​ ​ ​ ​ P xxx Less: Purchase returns​ ​ P xxx Purchase allowances​ Xxx Purchase discounts​​ Xxx​ ​ Xxx Net Purchases​ ​ ​ ​ ​ ​ ​ P xxx The net purchase is the net increase in our inventory for the period. Under the periodic inventory system, you can get the value of the beginning raw materials inventory in the ledger (or last year’s trial balance/Balance sheet) and the ending raw materials inventory during our inventory count. Now you can compute your direct materials (Raw Materials Used) as follows: Net Purchases ( from above)​ ​ ​ ​ P xxx Add: Beginning Raw Materials Inventory​ ​ Xxx Total Materials available for use​ ​ ​ P xxx Less: Ending Raw Materials Inventory​ ​ xxx Direct materials (Raw materials used)​ ​ P xxx The Direct Material is the value of materials used in production. This amount represents how much materials were transferred from the storeroom going to our factory or production facility. (Others would prefer to use Direct Materials Used, but that would be redundant,would be redundant and redundant. FROM STOREROOM TO FACTORY To be transformed to its saleable state, the direct materials should be converted in the factory. In the process, we will be incurring Conversion cost (Direct labor and Factory Overhead). These costs when incurred and put together will give us the total manufacturing cost for the current period. Direct Materials​ ​ ​ P xxx Direct Labor​ ​ ​ ​ Xxx Factory Overhead​ ​ ​ Xxx Total Manufacturing cost​ P xxx Now add this to your work in process beginning inventory ( that’s the amount of inventories you did not finish last period) and you will get the Total Cost Placed In Process. This is how much you can finish for the current period. From that amount, if you deduct your work in process ending inventory (from your inventory count though most of the time it's just estimated, we'll get back on that soon), you will arrive at the Cost of Goods Manufactured. This is the value of your completed goods for the current period, and now ready for sale. Total Manufacturing cost​​ ​ P xxx Add: Beginning WIP Inventory​ ​ Xxx Total cost placed in process​ ​ P Xxx Less: Ending WIP Inventory​ ​ Xxx Cost of Goods Manufactured​ P xxx FROM FACTORY TO SALES ROOM Once these goods are completed, they are now transferred to the saleroom or to another room where finished goods are stored. In the same manner, they have to be reclassified from work in process to finished goods inventory. These inventories will be expensed at the time they are sold accounted under the Cost of Goods Sold, computed as follows: Cost of Goods Manufactured ​ ​ P xxx Add: Beginning FG Inventory​ ​ Xxx Total Goods Available for Sale​ P Xxx Less: Ending FG Inventory​ ​ Xxx Cost of Goods Sold​ ​ ​ ​ P xxx Tadaaa! Congratulations! You’ve just finished the basic cost flow of manufacturing cost… But wait, there’s more! If that’s too long for you, I will provide below not 1, not 2…but 3 T-accounts which may serve as your cheat sheet… The Costing Systems Cost Accounting is an area in accounting concerned in cost determination, analysis, and control for the purpose of financial reporting and decision making. This area of accounting supplements financial accounting by providing details of cost figures found in generic financial statements (statements that are prepared by using general standards, i.e. GAAP). It also enables management accounting is processing (cost) data which will be used in analysis and decision making. In short, we need cost accounting for financial reporting and decision making. Cost system - also known as the perpetual approach, accounts for the flow of costs in detail with the intention of providing unit costs and inventory cost for periodic reporting. Costs are accumulated by products and batches, or by processes and departments. (Review periodic vs perpetual) Know the following: (these are easy checklists of topics for you to read. It would improve your understanding in the succeeding topics if you have an idea beforehand. I would create a different entry for these but in the meantime, please read them on your own. 1.​Chart of accounts used by manufacturing firms 2.​Controlling accounts vs subsidiary accounts 3.​Stores accounts and store ledger cards 4.​Work in process account and the job cost sheet (for job order costing) and cost of production report (for process costing) 5.​Finished goods and the finished goods ledger card 6.​Other controlling accounts such as Factory overhead control, Selling Expense control, General and Administrative expense control, etc.. ( these are supported by subsidiary ledgers and may be used for both periodic and perpetual inventory systems because they do not affect value of your inventories. 7.​How (actual/applied) factory overhead is charged to production. 8.​How to dispose over/underapplied factory overhead 9.​The factory ledger and the general ledger ( main office/ factory reciprocal accounts.) 10.​ Transfer voucher (inter-office dr/cr memo) 11.​ Review your cheat sheets from the Non-cost System Job Order Costing and Process Costing Cost accumulation and reporting may be done by products or batches ( using the job order costing), or by departments (using the process costing system). Let’s have a quick comparison of these two costing system. Job Order costing Process costing As to the nature of Products or batches Products or batches products can be easily are not identified and distinguishable from differentiated from each other. each other (homogeneous) (heterogeneous). Products go through Each product has its the same continuous own unique features process resulting to due to different similar processes involved. characteristics. Examples: Customized shoes, Beverages, cosmetic made to order boats, products, canned houses, fabricated goods, refined factory machines, sweeteners. Cost accumulation By Job orders By departments or and reporting processes When is unit cost Upon completion At the end of the computed accounting/cost period (usually at the end of the month) Computation of unit Production cost per Departmental cost cost job Equivalent units of Number of units production Subsidiary record Job order cost sheet Cost of production for work in process report PRIMARY OBJECTIVE? Compute the cost per Compute the costs job charged to each production process Below is a summary of the Job order cost flow, please take note of the key entries. Understanding the cost flows together with these primary entries would facilitate future discussion. Study them, memorize them, visualize them, put them in your index cards, have them tattooed at the back of your hands, put them at the cover of your economics and psychology notebooks… I know you get the point. And below is the Process costing cost flow In addition, below is an example of a job order cost sheet… this will be used in job order costing. And below is just a sample portion of Cost of Production Report, feel free to google a better example and insert it here… coz right now I am fighting the urge to insert a picture of my cat playing with my kids toys… (I will update this post as soon as I can) Job Order Costing Accurate costing is critical to a company’s success. For example, in order to set a selling price for a new job and to know whether it profited from past jobs, the company needs a good costing system. This article will discuss how (manufacturing) costs are assigned to specific jobs. BUT FIRST, Let's have a quick review of the following concepts: 1.​Cost accounting involves the measuring, recording, and reporting of product costs. The cost data accumulated by companies determine both the total cost and the unit cost of each product. This cost information produced by the cost accounting system will be used by the company for cost management (planning and control) and financial reporting 2.​A cost accounting system consists of manufacturing cost accounts that are fully integrated into the books (general ledger) of a company. It uses the perpetual inventory system. Such a system provides immediate, up-to-date information on the cost of a product. There are two basic types of cost accounting systems: (1) a job order cost system and (2) a process cost system. 3.​A job order cost system, assigns costs to each job or to each batch of goods. The flow of manufacturing costs in a job order cost system matches the physical flow of the materials as they are converted into finished goods. As the materials are issued and transferred to the factory, manufacturing costs are assigned to the Work in Process Inventory account. When a job is completed, the company transfers the cost of the job to Finished Goods Inventory. Later when the goods are sold, the company transfers their cost to Cost of Goods Sold. There are two major steps in the flow of costs: (1)​ accumulating the manufacturing costs incurred, (debits to Raw Materials, Factory Labor, Manufacturing overhead,) ; as of this point costs are not yet associated to specific jobs. (2)​ assigning the accumulated costs to the work done (entries for materials, labor, and overhead used in production. As well as cost of completed goods and sold goods) Accumulating Manufacturing Costs To illustrate a job order cost system, we will use the January transactions of KAIA-MOTO Manufacturing Company, which makes gardening tools. RAW MATERIALS COSTS When KAIA-MOTO receives the raw materials it has purchased, it debits the costs of the materials to Raw Materials Inventory. The company would debit this account for the invoice cost of the raw materials and freight costs chargeable to the purchaser. It would credit the account for purchase discounts taken and purchase returns and allowances. KAIA-MOTO makes no effort at this point to associate the cost of materials with specific jobs or orders. For example, assume that KAIA-MOTO Manufacturing purchases on account 2,000 handles (Stock No.RM0011) at Php5 per unit (Php10,000) and 800 modules (Stock No.RM0012) at Php40 per unit (Php32,000) for a total cost of Php42,000 (Php10,000 plus Php32,000). The entry to record this purchase on January 4 is: 1/4 Raw Materials Inventory 42,000 Accounts Payable 42,000 Later in this article, the company will then assign raw materials inventory to work in process and manufacturing overhead. FACTORY LABOR COSTS Basically ,the cost of factory labor consists of three costs: (1)​ gross earnings of factory workers, (2)​ employer payroll taxes on these earnings, and (3)​ fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer. Companies debit labor costs to Factory Labor as they incur those costs. Assuming that KAIA-MOTO Manufacturing incurs Php32,000 of factory labor costs. Of that amount, Php27,000 relates to wages payable and Php5,000 relates to payroll taxes payable in January. The entry to record factory labor cost for the month is: 1/31 Factory Labor 32,000 Factory Wages Payable 27,000 Employer Payroll 5,000 Taxes Payable The company would subsequently assign factory labor to work in process and manufacturing overhead. MANUFACTURING OVERHEAD COSTS There are many types of overhead costs. An entity may recognize these costs daily, as in the case of factory equipment repairs and the use of factory supplies and indirect labor. Or, it may record overhead costs periodically through adjusting entries (as in the case of property taxes, depreciation, and insurance) This is done using a summary entry, which summarizes the totals from multiple transactions. An example for this would be the following entry (using assumed amounts): 1/31 Manufacturing Overhead 13,800 Utilities Payable 4,800 Prepaid Insurance 2,000 Accounts Payable 2,600 Accumulated 3,000 Depreciation Property Taxes 1,400 Payable The company would then assign manufacturing overhead to work in process. Assigning Manufacturing Costs to Work in Process Assigning manufacturing costs to work in process results in the following entries: (Refer to previous cheat sheet) 1.​Debits made to Work in Process Inventory. 2.​Credits made to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. An essential accounting record in assigning costs to jobs is a job cost sheet, A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Companies keep a separate job cost sheet for each job. The job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account. A subsidiary ledger consists of individual records for each individual item—in this case, each job. The Work in Process account is referred to as a control account because it summarizes the detailed data regarding specific jobs contained in the job cost sheets. Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets. RAW MATERIALS COSTS Companies assign raw materials costs when their materials storeroom issues the materials. Requests for issuing raw materials are made on a prenumbered materials requisition slip. The materials issued may be used directly on a job, or they may be considered indirect materials. The requisition should indicate the quantity and type of materials withdrawn and the account to be charged. The company will charge direct materials to Work in Process Inventory ,and indirect materials to Manufacturing Overhead. The company may use any of the inventory costing methods (FIFO, LIFO,or average-cost) in costing the requisitions to the individual job cost sheets. Periodically, the company journalizes the requisitions. For example, if KAIA-MOTO Manufacturing uses Php24,000 of direct materials and Php6,000 of indirect materials in January,the entry is: 1/31 Work in Process Inventory 24,000 Manufacturing Overhead 6,000 Raw Materials 30,000 Inventory The requisition slips show total direct materials costs of Php12,000 for Job No. 101, Php7,000 for Job No.102,and Php5,000 for Job No.103.The posting of requisition slip R247 and other assumed postings to the job cost sheets for materials are shown below. After the company has completed all postings,the sum of the direct materials columns of the job cost sheets (the subsidiary accounts) should equal the direct materials debited to Work in Process Inventory (the control account). (Companies post to control accounts monthly and post to job cost sheets daily.) FACTORY LABOR COSTS Companies assign factory labor costs to jobs on the basis of time tickets prepared when the work is performed. The time ticket indicates the employee, the hours worked, the account and job to be charged, and the total labor cost. Many companies accumulate these data through the use of bar coding and scanning devices. When they start and end work, employees scan bar codes on their identification badges and bar codes associated with each job they work on. When direct labor is involved, the time ticket must indicate the job number, as shown in Illustration 20-8. The employee’s supervisor should approve all time tickets. The time tickets are later sent to the payroll department,which applies the employee’s hourly wage rate and computes the total labor cost. Finally, the company journalizes the time tickets.It debits the account Work in Process Inventory for direct labor, and debits Manufacturing Overhead for indirect labor. For example, if the Php32,000 total factory labor cost consists of Php28,000 of direct labor and Php4,000 of indirect labor,the entry is: 1/31 Work in Process Inventory 28,000 Manufacturing Overhead 4,000 Factory Labor 32,000 As a result of this entry, Factory Labor has a zero balance, and gross earnings are assigned to the appropriate manufacturing accounts. Let’s assume that the labor costs chargeable to KAIA-MOTO’s three jobs are Php15,000, Php9,000, and Php4,000. The illustration below shows the Work in Process Inventory and job cost sheets after posting. As in the case of direct materials, the postings to the direct labor columns of the job cost sheets should equal the posting of direct labor to Work in Process Inventory. MANUFACTURING OVERHEAD COSTS Companies charge the actual costs of direct materials and direct labor to specific jobs. In contrast, manufacturing overhead relates to production operations as a whole. As a result, overhead costs cannot be assigned to specific jobs on the basis of actual costs incurred. Instead, companies assign manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base. The company may state the activity in terms of direct labor costs,direct labor hours,machine hours,or any other measure that will provide an equitable basis for applying overhead costs to jobs. Companies establish the predetermined overhead rate at the beginning of the year. Small companies often use a single, company-wide predetermined overhead rate. Large companies often use rates that vary from department to department. The formula for a predetermined overhead rate is as follows. Overhead relates to production operations as a whole. To know what “the whole” is, the logical thing is to wait until the end of the year’s operations.At that time the company knows all of its costs for the period. As a practical matter, though, managers cannot wait until the end of the year. To price products accurately,they need information about product costs of specific jobs completed during the year.Using a predetermined overhead rate enables a cost to be determined for the job immediately. KAIA-MOTO Manufacturing uses direct labor cost as the activity base. Assuming that the company expects annual overhead costs to be Php280,000 and direct labor costs for the year to be Php350,000,the overhead rate is 80%,computed as follows: Php280,000 / Php350,000= 80% This means that for every peso of direct labor,KAIA-MOTO will assign 80 cents of manufacturing overhead to a job.The use of a predetermined overhead rate enables the company to determine the approximate total cost of each job when it completes the job. Historically, companies used direct labor costs or direct labor hours as the activity base.The reason was the relatively high correlation between direct labor and manufacturing overhead. Today more companies are using machine hours as the activity base,due to increased reliance on automation in manufacturing operations. Many companies now use activity-based costing in an attempt to more accurately allocate overhead costs based on the activities that give rise to the costs. A company may use more than one activity base. For example,if a job is manufactured in more than one factory department, each department may have its own overhead rate. For KAIA-MOTO Manufacturing, overhead applied for January is Php22,400 (direct labor cost of Php28,000 80%). The following entry records this application. 1/3 Work in Process Inventory 22,400 1 Manufacturing Overhead 22,400 The overhead that KAIA-MOTO applies to each job will be 80% of the direct labor cost of the job for the month. And to summarize the WIP ObliCon Science Econ Math

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