Managerial Accounting: Flow of costs in a Manufacturing Company, Calculating Overhead – video

Managerial Accounting: Flow of costs in a Manufacturing Company, Calculating Overhead – video


This is part five in our Management
Accountability series on manufacturing company costs. We’re going to take up
where we left off in part four with our three inventory accounts for a
manufacturing company and how the costs flow through those t accounts. So just a
quick overview remember when we used materials the direct materials went into
work in process along with direct labor and overhead those three costs made up
product costs. Once a product was completed it moved out of work in
process into finished goods as our cost of goods manufactured and it remained in
finished goods until the product was sold and we expensed it as cost of goods
sold. So just a little bit more terminology here. Your beginning
materials plus purchases is called your cost of materials available for use. Your
beginning work in process plus your product costs: materials, labor, and
overhead is called your costs to account for. Your beginning finished goods plus
your cost of goods manufactured is called your cost of goods available for
sale and again your direct materials plus your direct labor plus your
overhead make up what is called product cost. Remember you can also hear that
called inventoriable costs or manufacturing costs. Another term I’d
like for you to be familiar with is prime costs. Prime costs are made up of
your direct materials plus your direct labor. These are called prime costs
because they’re direct cost, they are directly associated with the product and
they are the prime cost of that product. Conversion costs
are your direct labor plus your overhead. They’re called conversion costs because
it takes direct labor and overhead to convert direct materials into a finished
good. Let’s look at an example here of computing materials used. So you’re a new
accounting intern at the warehouse. Your boss gives you the following information
and asks you to compute direct materials used. So we’re given purchases of direct
materials, we’re given Freight in, we’re given property taxes, ending and
beginning materials. So for me the easiest way to compute our materials used
is to draw that materials t-account. So we’ll start with the t-account and
remember this is an inventory account so it’s an asset so any beginning and
ending inventories will appear on the debit side. We’re just going to fill
in the information that we know. We know we start with beginning materials, we
know that purchases make materials go up, and we’ve also learned that Freight in
is not an expense but it’s considered part of the cost of our inventory in
this case our materials and also we have our ending materials. When materials move
out of our materials inventory account into work in process that’s called
materials used and that is what we’re looking to calculate here. So let’s just
fill in information that we know. We know beginning inventory is 4200, we know our
purchases of materials was 6700, and we know our Freight in is 100 and our
ending inventory is 1600. So if we take all of our debits add them up and then
subtract our ending, we will get materials used to be $9,400. Overhead- there are three types of costs
that are included as part of overhead: indirect materials, indirect labor, and
other overhead. So for example let’s say we’re producing wooden chairs. The wood
to produce the chair would be a major part of the cost of the product. That
would be considered a direct material. An indirect material might be glue a
little bit of glue that is used on the chair to glue things together or to make
things more stable. That would be considered an indirect material. Labor-
well the people that put the chair together actually hands on putting the
chair together would be called direct labor. An example of indirect labor may
be the custodian in the plant. The word plant is your key word there and other
overhead would be things like utilities for the plant or depreciation on plant
equipment. Let’s look at an example and we’re going to add up here our total
overhead costs from these selected accounts given. Moon Dust manufactures
sunglasses. Suppose the company’s August records include the following items.
Calculate Moon Dust’s total manufacturing overhead cost in August. So we’re looking
for overhead here. Let’s start with glue for the frames. Let’s just quickly
scan the dollar amounts of all these items here. So they’re pretty small
except for the company president’s salary and lenses. We know the company
president’s salary is not part of the product, but lenses that is actually part
of the sunglasses and look how much it is. So we can tell
by looking at the amount and thinking about lenses and knowing it’s part of
the product that that is actually a direct material. It’s a prime cost of
that product. So let’s go back to glue for the frames. Now comparing the glue
with the lenses, $400 to $48,000 we can
assume that glue is an indirect cost, an indirect material. It’s going to be part
of the product, but it’s not really cost advantageous for us to trace that cost
back to the product. So we just call it an indirect material and it’s included
as part of overhead. How about depreciation expense on company cars
used by the sales force? Well the the word sales that clues us in this is
a selling expense, so it’s not a product cost, it’s an operating cost.
How about plant depreciation expense? There’s that keyword that I told you
about “plant.” Plant depreciation- any time you see the word plant or factory or
manufacturing that’s a pretty good clue that that is going to be overhead. So in
this case plant depreciation would be that third category of overhead called
other overhead. So the keyword plant there so this is overhead. Interest
expense- interest expense is an operating expense. Actually it’s an other expense
underneath operating. So it is not my product cost. Company president’s salary-
well the company president is not working in the plant he’s working in the
administrative building. He’s an admin person, so that is an administrative
expense another operating expense. How about the plant
foreman’s salary? Again that keyword “plant.” So that is overhead.
Plant janitors’ wages- again that keyword “plant,” that is overhead. It’s indirect labor.
Oil for the manufacturing equipment- there’s the keyword “manufacturing” that
is other overhead so that is included as part of overhead and we distinguished
earlier that lenses is a direct material. It is not part of overhead. It’s a
product cost, but it’s not part of overhead. So if we add up all the ones
indicated here you will find that your overhead costs equal $11,150. you

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