COST
ACCOUNTING
COST ACCOUNTING
INTRODUCTION TO MANUFACTURING OPERATIONS
In manufacturing, raw material is transformed with the help of labor and
machinery. In a merchandising firm, only one type of inventory is maintained,
and only few costs are added to the purchase price of goods to arrive at cost
of goods sold. In a manufacturing firm, many and different types of costs are
incurred:
1- direct material,
2- direct labor, and
3- factory or manufacturing overhead.
These costs are accumulated in three inventories:
1- materials,
2- work in process, and
3- finished goods.
INVENTORY ACCOUNTS The three inventory accounts used in manufacturing
operations are
1- materials inventory: these are raw materials which have not yet
entered the processing phase;
2- work in process: this accounts for all goods in the process of
manufacturing;
3- finished goods: these are completed goods ready to be sold. Combined,
they represent the inventory in the balance sheet.
TYPES OF COSTS
To control costs, the different types of costs are identified: 1- direct
materials: these make up the major component of and are easily traceable to a
given finished product;
2- direct labor: that portion of labor which is assignable to a specific
product;
3- factory overhead: all costs other than direct materials and direct
labor; this includes fixed costs such as rent and depreciation, but also
indirect materials and indirect labor.
Direct materials and direct labor are the prime costs. Direct labor and
factory overhead are conversion costs. All the above costs are product costs,
as opposed to period cost which are not part of the cost of products and are
classified as expenses.
COST OF GOODS MANUFACTURED
The cost of goods manufactured statement combines all the direct
materials, direct labor and factory with beginning work in process inventory,
minus the ending work in process inventory, to report the total cost of the
goods which have been manufactured during the period. In order to prepare the
statement, a manufacturing summary is debited for all the costs during the
year, and credited for the cost of goods manufactured and ending inventories.
The cost of goods manufactured is added to finished goods inventory to sum to
the goods available for sale, which gives the cost of goods sold when ending
finished inventory is deducted.
COST ACCOUNTING SYSTEM
The cost accounting system provides a much more effective means of
controlling costs than a general accounting system, and offers information on
unit costs useful for product pricing and promotion. The cost accounting system
uses perpetual inventories. There are two types of cost accounting systems:
1- job order cost systems used when one-of-a-kind products or batches of
products are manufactured,
2- process cost systems applicable when uniform and identical products
are manufactured on a continuous basis.
JOB ORDER DIRECT MATERIALS COST
A purchase requisition triggers a purchase order to a supplier from the
purchasing department, and when the goods are delivered, a receiving report
showing the quantity and condition of the goods. After verification, the
material inventory account is debited. A materials requisition causes goods to
be transferred from the storeroom or warehouse to the manufacturing department,
and thereupon the materials inventory account is credited. A separate account
is often maintained for each type of material.
JOB ORDER DIRECT LABOR COST
Time tickets are used to record the labor cost for each individual job.
Hours worked are verified by comparing time tickets and clock cards. Labor
costs are recorded by debiting work in process and/or factory overhead
(depending on whether it is direct or indirect labor), and crediting wages
payable.
JOB ORDER FACTORY OVERHEAD COST
Factory overhead consists of all manufacturing costs other than direct
materials and direct labor. Factory overhead costs are both fixed and variable.
The factory overhead controlling account is debited when costs are incurred and
credited when factory overhead is "applied" (i.e. allocated) to
various job orders. The overhead application rate can be based on either direct
labor hours, direct labor cost or machine hours. Total credits rarely equal
debits. A remaining credit indicates the overhead was underapplied (or
underabsorbed), a debit indicates the overhead was overapplied. If this
difference is small, it is closed to cost of goods sold. If it is large, it is
allocated to the various inventory accounts.
JOB ORDER WORK IN PROCESS
The work in process account receives debits for direct materials, direct
labor and factory overhead costs. The work in process account is a controlling
account. Cost ledgers maintain details on the costs of each individual job. A
individual cost ledger account is called a job cost sheet. It provides
extensive information on each job direct materials, direct labor, and factory
overhead costs. When a job is completed, total costs are added up and divided
by the number of units finished to determine cost per unit.
FINISHED GOODS
The finished goods account is a controlling account, with a subsidiary
ledger called the stock ledger or the finished goods ledger. The finished goods
ledger provides detailed information on goods manufactured and shipped on
quantity, price, date, and unit cost. When finished goods are sold, the cost of
goods sold is debited and finished goods credited. In the event goods are
returned by buyers, the finished goods account is debited and the cost of goods
sold credited.
REVIEW OF JOB ORDER COST SYSTEMS
Three inventory accounts are used by manufacturing enterprises: 1) materials,
2) work in process, and 3) finished goods. These inventory accounts record the
costs of manufacturing goods. The materials account records the costs of
materials purchased for production purposes. When materials are used in
production, the work in process account is debited. The work in process
inventory records materials, labor, and factory overhead costs. When goods are
completed the finished goods account is debited. When goods are sold the cost
of goods sold accounts is debited. Each of these accounts are controlling
accounts, and the detailed information is present is subsidiary ledgers.