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Manufacturing Cost Accounting

Enterprise Excellence Series

2009 Factory Strategies Group LLC. All rights reserved.

Outline
Cost Terms, Concepts, and Classifications Job Order Costing Cost Behavior Cost Volume Profit Activity Based Costing Profit Planning Standard Costs Flexible Budgets and Overhead Analysis Relevant Costs for Decision-Making

2009 Factory Strategies Group LLC. All rights reserved.

Product Costs - A Closer Look


Raw Materials
Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process
Beginning work in process inventory + Total manufacturing costs = Total work in process for the period Ending work in process inventory = Cost of goods manufactured.
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Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
2009 Factory Strategies Group LLC. All rights reserved.

The Contribution Format


Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20

The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.
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Calculating Breakeven in Units


Here is the information from Wind Bicycle Co.:
Total $250,000 150,000 $100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40%

Sales (500 bikes) Less: variable expenses Contribution margin Less: fixed expenses Net income

2009 Factory Strategies Group LLC. All rights reserved.

The Master Budget


Sales Budget

Ending Inventory Budget Direct Materials Budget

Production Budget Direct Labor Budget

Selling and Administrative Budget Manufacturing Overhead Budget

Cash Budget

Budgeted Financial Statements


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The Direct Materials Budget


Production Materials per unit Production needs Add desired ending inventory 23,000 14,500 July Total needed Production and Inventory 153,000 244,500 Sales in units 25,000 Less beginning Add desired ending inventory 3,000 inventory 13,000 23,000 Total units needed 28,000 Materials to be Less beginning inventory 5,000 purchased 140,000 221,500 Production in units 23,000 Pounds per unit 5 Total pounds 115,000 Desired percent 10% Desired ending inventory 11,500 April 26,000 5 130,000 May 46,000 5 230,000 June 29,000 5 145,000 11,500 156,500 14,500 142,000 Quarter 101,000 5 505,000 11,500 516,500 13,000 503,500

2009 Factory Strategies Group LLC. All rights reserved.

Labor Variances Summary


Actual Hours Actual Rate
1,550 hours $6.20 per hour = $9,610

Actual Hours Standard Rate


1,550 hours $6.00 per hour = $9,300

Standard Hours Standard Rate


1,500 hours $6.00 per hour = $9,000

Rate variance $310 unfavorable


2009 Factory Strategies Group LLC. All rights reserved.

Efficiency variance $300 unfavorable


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Flexible Budget Performance Report CheeseCo


Cost Formula Per Hour
Machine hours Variable costs Indirect labor Indirect material Power Total variable costs Fixed Expenses Depreciation Insurance Total fixed costs Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000

Total Fixed Costs

Flexible Budget 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000

Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350

Variances 0 $ 2,000 U 1,500 U 200 F $ 3,300 U 0 50 U 50 U $ 3,350 U


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2009 Factory Strategies Group LLC. All rights reserved.

Utilization of a Constrained Resource


Lets calculate the contribution margin per unit of the scarce resource, machine A1.
Product 1 Contribution margin per unit Time required to produce one unit Contribution margin per minute $ 2 24 $ 15 1.00 min. 0.50 min. $ 24 min. $ 30 min.

If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then use remaining capacity to make Product 1.
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