When a table is sold, the average price of the table is transferred from the inventory account to the goods sold (expense) account. It is first included as part of the inventory and finally as part of the expense, the cost of goods.
Indirect labor such as the cost of salaries paid to production supervisors, inspectors, and mainte- nance personnel
If the amount of a material in a product is known, it can usually be classified as a direct material. Like direct materials, labor costs must be easily traced to a specific product in order to be classified as direct costs.
Rental cost for manufacturing facilities and equipment
If the amount of time employees worked on a product can be determined, these costs can usually be classified as direct labor. Indirect labor such as the cost of salaries paid to production supervisors, inspectors and maintenance personnel.
Utility costs
In addition to basic resources such as wood or metals, it can include crafted parts. Please note that indirect materials used in the manufacturing process may not appear in the final product.
Depreciation
An example is a chemical solvent, the production process may not appear in the final product. An example is a chemical solvent used to clean products during the production process, but not a component material found in the final product.
Security
For example, engines, glass and car tires can be regarded as raw materials for a car manufacturer. The labor costs paid to factory workers who are involved in physical contact with the products being manufactured.
The cost of preparing equipment for the manufacturing process (i.e., setup costs)
Maintenance cost for the manufacturing facility and equipment
CHECK YOURSELF 10.2
Manufacturing Product Cost Summary
SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
The 2013 ending balances for the inventory accounts were as follows: Raw Materials Inventory, $950; Work in Process Inventory,.
UPSTREAM AND DOWNSTREAM COSTS
PRODUCT COSTING IN SERVICE AND MERCHANDISING COMPANIES
PATILLO MANUFACTURING COMPANY
Home Depot, Inc., Costco Wholesale Corporation, and Best Buy Co., Inc., are trading companies. In contrast, products produced by manufacturing companies may be held in the form of inventory until they are sold to consumers. Similarly, most of the labor and overhead costs incurred by trading companies result from providing assistance to customers.
Indeed, trading companies are often viewed as service companies rather than considered a distinct business category. Like managers of manufacturing companies, managers of service and trading businesses can benefit from cost analysis to satisfy their customers. For example, Wendy's, a service company, can benefit from knowing how much a hamburger costs in the same way that Bayer Corporation, a manufacturing company, benefits from knowing the cost of a bottle of aspirin.
CHECK YOURSELF 10.3
For example, Ernst & Young, a large accounting firm, has to pay employees (labor costs), use office supplies (material costs), and pay utilities, depreciation, etc. in the process of performing audits. (overheads). The main difference between manufacturing entities and service companies is that the products provided by service companies are consumed immediately. These costs are typically treated as general, selling, and administrative expenses, rather than accumulated in inventory accounts.
The important point to remember is that all business managers are expected to control costs, improve quality and increase productivity.
JUST-IN-TIME INVENTORY
Just-in-Time Illustration
By guaranteeing that she would buy at least 30 roses per week, she was able to convince the local florist to match her current cost of $2.00 per rose. The JIT system also enabled Paula to eliminate the cost of the non-value-added activity of driving at her former florist. Customer satisfaction actually improved because no one was turned away due to lack of inventory.
In June, Paula was able to buy and sell 310 roses with no waste or driving costs. May's sales suffered from the lost opportunity to earn a gross margin of $1 per flower on 30 roses, an opportunity cost of $30. The topic of opportunity cost has wide application and is discussed in more detail in subsequent chapters of the text.
CHECK YOURSELF 10.4
After studying just-in-time inventory systems in her managerial accounting class, Paula decided to apply the concepts to her small business. She had previously considered buying from this florist, but had rejected the idea because the florist's regular selling price of $2.25 per flower. rose was too high. The local florist agreed that she could make purchases in lots of any size as long as the total amounted to at least 30 per week.
Recall that under the previous inventory system, Paula had to turn away some potential customers because she sold out of the flowers before all the customers were served. A likely explanation for the 30-unit difference is that customers who would have purchased flowers in May were unable to do so due to lack of availability. This opportunity cost is the missing link in explaining the difference in returns between May and June.
STATEMENT OF ETHICAL PROFESSIONAL PRACTICE
In its 2007 National Survey of Government Ethics, the Ethics Resource Center reported its findings on the occurrence and reporting of unethical behavior in local, state, and federal governments. Fifty-seven percent of respondents reported observing unethical behavior during the past year. More serious offences, such as discrimination or taking bribes, were reported much less often than activities such as lying to customers, vendors or the public.
For example, only 25 percent of observed incidents of altering financial records were reported to regulators or whistleblower hotlines, and only 54 percent of observed bribes were reported. The survey also found that only 18 percent of public entities have ethics and compliance programs in place that could be considered well-implemented. In these units, only 36 percent of respondents said they had observed misconduct (compared to 57 percent overall), and when they did observe misconduct, 75 percent said they reported it.
REALITY BYTES
Unethical behavior was reported most often by people in local governments (63%) and least often at the federal level (52%). The definition of ethical misconduct used in the study was quite broad, ranging from behavior where an individual puts his or her personal interests above the interests of the organization, to sexual harassment and taking bribes. However, when well-implemented programs are in place, perceived unethical misconduct is less likely to occur and more likely to be reported.
A Look Back <<
There is a need for an ethical code of conduct in the accounting industry because accountants hold positions of trust and face conflicts of interest. Recognizing the temptations faced by accountants, the IMA has issued a Statement of Ethical Professional Practice, which provides guidance to accountants in resisting temptation and in making difficult decisions. New trends such as just-in-time inventory and activity-based management are methods that many companies have used to restructure their production and delivery systems to eliminate waste, reduce errors and minimize costs.
Activity-based management seeks to eliminate or reduce non-value-added activities and create new value-added activities. Just-in-time inventory aims to reduce inventory costs and lower prices for customers by making inventory available just in time for customer consumption. In the next chapter, costs are classified according to the behavior they exhibit when the number of product units increases or decreases (the volume of activity changes).
APPENDIX A
In addition to distinguishing costs per product versus G, S, and A classifications, other classifications can be used to aid management decision making. You will learn to distinguish between costs that vary with changes in activity volume and costs that remain fixed with changes in activity volume.
Emerging Trends in Managerial Accounting
- Paid $136,000 for rent and utility costs on the manufacturing facility
- Paid $41,000 for inventory holding expenses for completed headsets (rental of warehouse space, salaries of warehouse personnel, and other general storage costs.)
- Completed and transferred headsets that had a total cost of $520,000 from work in process inventory to fi nished goods
- Sold headsets for $738,200
- It cost Tuscan $517,400 to make the headsets sold in Event 13
Activity-based management assesses the value chain to create new or refine existing value-added activities and to eliminate or reduce non-value-added activities. Non-value-added activities are tasks performed that do not contribute to a product's ability to satisfy customer needs. Firms can also gain competitive advantage by identifying and eliminating non-value-added activities and providing products of comparable quality at lower costs than competitors.
A comprehensive analysis of the value chain extends from the acquisition of raw materials to the final disposition of finished products. Paid $41,000 for inventory costs for finished headsets (warehouse space rental, warehouse staff salaries and other general warehousing costs.), space, warehouse staff salaries and other general warehousing costs.). For example, can manufacturers could be encouraged to build production facilities near Pepsi bottling plants, thereby eliminating the non-value-added activity of transporting empty cans from the manufacturer to the bottling plant.
TUSCAN MANUFACTURING COMPANY
- What is cost allocation? Give an example of a cost that needs to be allocated
- What are some of the common ethical confl icts that accountants encounter?
- What costs should be considered in deter- mining the sales price of a product?
- What is a just-in-time (JIT) inventory system? Name some inventory costs that
- What are the two dimensions of a total quality management (TQM) program?
- What does the term reengineering mean?
- How has the Institute of Management Accountants res ponded to the need for
- What does the term activity-based manage- ment mean? (Appendix)
- What is a value chain? (Appendix)
- What do the terms value-added activity and nonvalue-added activity mean? Provide an
- Identifying effect of product versus general, selling, and administrative costs on financial statements
- Identify effect of product versus general, selling, and administrative costs on financial statements
- Identifying product costs in a manufacturing company
- Identifying product versus general, selling, and administrative costs A review of the accounting records of Rayford Manufacturing indicated that the company
- Recording product versus general, selling, and administrative costs in a financial statements model
- Recognized depreciation on offi ce furniture
- Recognized revenue from cash sale of products
- Recognized cost of goods sold from sale referenced in Event 3
- Acquired cash by issuing common stock
- Paid cash to purchase raw materials that were used to make products
- Paid wages to production workers
- Paid salaries to administrative staff
- Allocating product costs between ending inventory and cost of goods sold
- Financial statement effects for manufacturing versus service organizations
- Identifying the effect of product versus general, selling, and administrative cost on the income statement and statement of
- Paid $12,000 cash in advance on May 1 for a one-year rental contract on administrative offi ces
- Paid $12,000 cash in advance on May 1 for a one-year rental contract on manufacturing facilities
Indicate whether each of the following costs should be classified as product costs or as general, selling, and administrative costs. Use the following format to classify each cost as either a product cost or a general, selling, and administrative expense (G, S, and A). Indicate whether the event increases (I), decreases (D), or has no effect (NA) on each element of the financial statements.
Also indicate in the Cash Flow column whether the cash flow is intended for operating activities (OA), investing activities (IA) or financing activities (FA). Note: Show the accumulated depreciation as a decrease in the carrying amount of the relevant asset account.). Indicate for each part of the financial statements whether the event increases (I), decreases (D) or has no effect (NA). Each of the following events describes the acquisition of an asset that requires a year-end adjustment.
DEWBERRY CORPORATION
- Upstream and downstream costs
- Statement of Ethical Professional Practice
- Using JIT to minimize waste and lost opportunity
- Using JIT to minimize holding costs
- Value chain analysis (Appendix)
- Product versus general, selling, and administrative costs
- Effect of product versus period costs on financial statements
- Paid $8,000 for the materials used to make products, all of which were started and com- pleted during the year
- CHECK FIGURES
- Paid salaries of $4,400 to selling and administrative employees
- Paid wages of $7,000 to production workers
- Sold inventory to customers for $25,000 that had cost $14,000 to make
- Product versus general, selling, and administrative costs
- Paid $720 for materials used to produce inventory
- Paid $1,800 to production workers
- Paid $540 rental fee for production equipment
- Paid $180 to administrative employees
- Paid $144 rental fee for administrative offi ce equipment
- Produced 300 units of inventory of which 200 units were sold at a price of $12 each
- Schedule of cost of goods manufactured and sold
- CHECK FIGURES
- Paid $45,000 for rent and utility costs on the manufacturing facility
- Paid $70,000 for inventory holding expenses for completed eBook readers (rental of ware- house space, salaries of warehouse personnel, and other general storage cost)
- Completed and transferred eBook readers that had total cost of $240,000 from work in pro- cess inventory to fi nished goods
- Sold 1,000 eBook readers for $420,000
- It cost Kirsoff $220,000 to make the eBook readers sold in Event 13
- Service versus manufacturing companies
- Importance of cost classification and ethics
- Using JIT to reduce inventory holding costs
- Using JIT to minimize waste and lost opportunity
- CHECK FIGURE
- Value chain analysis (Appendix)
- CHECK FIGURES
- Business Applications Case Financial versus managerial accounting The following information was taken from the 2008 and 2009 Form 10-Ks for Dell, Inc
- Group Assignment Product versus upstream and downstream costs Victor Holt, the accounting manager of Sexton Inc., gathered the following information for
- Paid a $258,000 cash dividend to owners
- Paid $80,000 to set up manufacturing equipment for production
- Paid a one-time $186,000 restructuring cost to redesign the production process to implement a just-in-time inventory system
- Made 69,400 units of product and sold 60,000 units at a price of $70 each
- Research Assignment Identifying product costs at Snap-on, Inc
- Writing Assignment Emerging practices in managerial accounting An annual report of the Maytag Corporation contained the following excerpt
- Ethical Dilemma Product cost versus selling and administrative expense Emma Emerson is a proud woman with a problem. Her daughter has been accepted into a pres-
Determine the total product cost and the average price per unit. unit of inventory produced in 2011. Determine the amount of cost of goods sold that will appear on the 2011 income statement. Determine the amount of the ending inventory balance that would appear on the December 31, 2011, balance sheet.
Prepare an income statement, balance sheet, and cash flow statement for Goree Company for 2011 under each of the following independent scenarios. Prepare an income statement, balance sheet, and cash flow statement for each of the two options. Based on the information provided, determine the annual holding costs of the raw material inventory.
Paid engineers in the product design department $10,000 for wages that accrued at the end of last year. After the cost of goods sold amount is determined, the student on board constructs the portion of the income statement that shows the gross margin determination.
