Getting started up again.Had a quiz at the beginning. Nothing I hadn’t seen in the Cy-Fair class.
Cost accounting is important in the real world. Knowing your product costs for products you produce is not always straightforward.
Costs can be divided up in any number of ways. In manufacturing companies, costs are commonly divided into manufacturing costs and nonmanufacturing costs. Manufacturing costs are also called product costs. Nonmanufacturing costs are also called period costs.
Manufacturing Costs consist of Direct Materials, Direct Labor, and Manufacturing Overhead. The combination of direct material and direct labor costs is called the Prime Cost. The combination of direct labor and manufacturing overhead costs is also called Conversion Cost.
Nonmanufacturing Costs include Marketing and Selling Costs and Administrative Costs.
Accounting transactions try to follow physical materials as closely as possible.
When materials arrive, they go to Raw Material Inventory, and Raw Material Inventory account is debited. When materials are being worked on, they are moved from the raw materials inventory to the work area, and the value of those materials is credited from the Raw Materials Inventory account to the Work In Process Inventory account. The relevent Direct Labor and Manufacturing Overhead is also debited to the WIP account and credited from their respective payable or expense accounts. After processing on an amount of product is completed, the value of those finished goods is credited from the WIP account and debited to the Finished Goods account. There may, at end of period, be partially finished goods in the WIP account at the end of a period. When goods are sold, the value of those finished goods is credited from the finished goods account, and debited to the Cost Of Goods Sold Expense account.
Process Costing and Job Order Costing
Process costing is used in situations where the company produces many units of a homogeneous cost for long periods.
Job Order Costing is used when many different products are produced each period. If multiple products with heterogeneous costs are produced, accurate costs need to be tracked for each product. Most products will not have costs which are exactly proportional to their fraction of total products. Job order costing is heavily used in service industries.
In Job Order Costing, products are divided into specific jobs. A job consists of everything involved in meeting one customer order. Direct materials and direct labor are tracked for each individual job. Manufacturing overhead is charged to each job at some predetermined ratio to a more easily tracked factor.
The predetermined overhead rate is typically calculated at the beginning of the year, by dividing the expected overhead cost by the expected units of the scaling factor.