PA2-5 Recording Manufacturing Costs and Analyzing Manufacturing Overhead | Complete Solution

PA2-5 Recording Manufacturing Costs and Analyzing

Manufacturing Overhead | Complete Solution

cost accounting - -involves measuring, recording, and reporting product costs. • Accounts are fully integrated into the general ledger• Perpetual inventory system provides immediate, up-to -date information on cost of a product

•  Two basic types: (1) a process order cost system and(2) a job order cost system

Process Cost System - • Used when a large volume of similar products are manufactured - (cereal, refining of petroleum, production of ice cream)

•  Costs are accumulated for a time period - (week or month)

•Costs are assigned to departments or processes for a specified period of time

job order cost system - A cost accounting system in which costs are assigned to each job or batch.

•  Important feature: Each job or batch has its own distinguishing characteristics

•  Objective is to compute cost per job

•  Measures costs for each job completed - not for set time periods.

Job order cost flow - Basic overview of flow of costs in a manufacturing setting for production of a fire truck.

Accumulating Manufacturing Costs Raw Material Costs - Illustration: Wallace Company purchases 2,000 lithium batteries at $5 per unit ($10,000) and 800 electronic modules at $40 per unit ($32,000) for a total cost of$42,000 ($10,000 + $32,000). The entry to record this purchase on January 4 is:

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Jan. 4 Raw Materials Inventory 42,000(debit)

Accounts Payable 42,000(credit)

Factory Labor Costs(consists 3 costs) - Consists of three costs:

1.  Gross earnings of factory workers

2.  Employer payroll taxes on these earnings

3.  Fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer.

Illustration of Factory Labor Costs - Illustration: Wallace incurs $32,000 of factory labor costs. Of that amount, $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in February. The entry to record factory labor for the month is:

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Jan. 31 Factory Labor 32,000

Factory Wages Payable 27,000

Employer Payroll Taxes Payable 5,000

Accumulating Manufacturing Costs: Manufacturing Overhead Costs - Many types of overhead costs

o Property taxes, depreciation, insurance, and repairs related to the manufacturing process

•  Costs unrelated to manufacturing are expensed

•  Costs related to manufacturing process are accumulated in Manufacturing Overhead account

o Manufacturing overhead subsequently assigned to work in process

Accumulating Manufacturing Costs Illustration of Manufacturing Overhead Costs - Illustration: Using assumed data, the summary entry for manufacturing overhead in Wallace Manufacturing is:

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Jan. 31 Manufacturing Overhead 13,800

Utilities Payable 4,800

Prepaid Insurance 2,000

Accounts Payable (for repairs) 2,600

Accumulated Depreciation 3,000

Property Taxes Payable 1,400

Use a job cost sheet to assign costs to work in process. - Assigning manufacturing costs to