Chapter 2 ICE 2-2

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University of Nevada, Las Vegas *

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Feb 20, 2024

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CHAPTER 2 - IN CLASS EXAMPLE 2-2 HALLOWEEN COSTUMES Party Town specializes in making high end costumes for very exclusive Halloween parties. Party Town uses job costing to account for its operations. Each costume is considered a job. Prior to May, Party Town had started the following costumes which were in work in process inventory as of May 1. Job 304 –Black Panther Costume As of may 1 Job 306 – Emoji Costume As of may 1 In May, the following costumes were started into production. Job 307 – Heineken Dog After May 1 Job 308 – UNLV Rebel Costume May 31 (end) What makes each of these costumes a job? Unique, custom, made to order To make a costume what is needed? Fabric, thread, sewing machine, pins, employees, glue Ponder Point: Visualize the process in three different areas: 1) Buy materials and materials are stored in materials store room Raw Materials Warehouse 2) Produce the costumes Factory 3) Completed costumes in a separate area ready to be sold. Finished Goods Warehouse Do each of the three areas correspond to different inventory accounts in a job order system? If so, what are they? Raw materials, Work in progress, Finished Goods (in order as above)
Job Cost Information : At the end of May, Jobs 304, 306, and 307 are completed but only Jobs 304 and 307 are delivered to customers (sold). These 3 jobs are called Cost of Goods Manufactured- the cost of completed jobs. Jobs 304 and 307 are Cost of Goods Sold. Job 308 is started but not _completed_. What type of inventory account is Job 308? WIP Job 306 is started and completed but not __sold__. What type of inventory account is Job 306? Finished Goods Jobs 304 and 307 are started, completed and ___sold____. Their cost will end up in COGS When jobs are started their costs go to _______WIP________. Into production When jobs are completed their costs go to _________FG__________ and costs come out of ______WIP_______. When job are sold their costs go to ________COGS__________ and out of _______FG__________. JOBS Where does the cost end up at the end of May? 304 COGS 306 FG COGM = cost 307 COGS jobs 304,306, 308 WIP 307. COGS = Cost of 304 and 307 FG = Cost of 306 WIP = cost of 308
Ponder Point: Think about how cost flows relate to the financial statements. Costs are accumulated in the inventory accounts. Once the inventory is sold the costs move to the income statement as cost of goods sold.
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Party Town Information for May: The following information is available as of May 1 for the work-in-process inventory account. These are the beginning balances at the beginning of May. All work done on 304 and 306 was done during or before April. In the problem below, please make sure to distinguish between the year and the month of May. Job# Direct materials Direct labor Manufacturing overhead Total costs 304 $3,000 $1,800 $2,520 $7,320 306 4,000 2,100 2,940 9,040 Total costs $7,000 $3,900 $5,460 $16,360 During May, Party Town pays an hourly rate of $15 for direct labor. The manufacturing overhead costs are applied to jobs based on the direct labor hours used and the same overhead application rate is used for all jobs. The estimated overhead for the year was $42,000 and the estimated direct labor hours for the year were 2,000. Actual overhead for the year was $45,000. During the month of May, Party Town spends $5,800 to purchase materials and $4,650 for manufacturing overhead. The operations in May are summarized below and these items are direct materials and direct labor and were traced to these jobs. Recall that overhead is never traced to jobs as it is an indirect manufacturing cost and must be allocated to the jobs based on a predetermined overhead rate. Job# Material requisition summary Time card summary (Hours) 304 $1,100 40 306 900 30 307 2,800 110 308 750 25 Total $5,550 205
Required: 1) Calculate the predetermined overhead rate used to apply overhead. Hint: You will have to compute the predetermined overhead rate based on estimated annual overhead divided by estimated annual allocation base (in this case direct labor hours). POHR = Estimated Overhead/Estimated Allocation Base $21/ DLH 2) Analyze the costs that go to each job Job 304 – (Work In Process Account or WIP) Beginning Balance, May 1 7320 Direct Materials 1100 Direct Labor 600 Overhead applied 840 Ending Balance, May 31 9860 COGS Job 306 – (Work In Process Account) Beginning Balance, May 1 9040 Direct Materials 900 Direct Labor 450
Overhead applied 630 Ending Balance, May 31 11020 FG Job 307 – (Work In Process Account) Beginning Balance, May 1 0 Direct Materials 2800 Direct Labor 1650 Overhead applied 2310 Ending Balance, May 31 6760 COGS Job 308 – (Work In Process Account) Beginning Balance, May 1 0 Direct Materials 750 Direct Labor 375 Overhead applied 525 Ending Balance, May 31 1650 WIP
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3) Summarize the following: WIP inventory at the end of May WIP would represent a job that was started into production but not completed. Which job was WIP at the end of May? Job 308 $1650 May 31 COGM for May (cost of goods manufactured or completed) COGM represents the cost of any jobs that were completed during May. When jobs are completed their costs move from _____WIP_______ to ________FG________. Which jobs were completed? 304 9860 306 11,020 307 6760 COGM 27,640
Alternative Calculation of COGM Beginning WIP (May 1) + Costs added during May: Dm DL OH applied Total cost of manufacturing - End WIP (May 31) COGM 16,360 + (5,550+3075+4305)= 29,290 – 1,650= 27,640 COGS for May (cost of goods sold) COGS represents the costs of jobs that were completed and then later sold. When jobs are sold then their costs move from ____FG__________ to ______COGS___________. Which jobs were completed and then later sold? Jobs 304 9860 307 6760 Cogs 16620 Job level
Alternative Calculation of COGS F/S level Beg FG (May 1) 0 + COGM (304,306,307) 27640 Cost of jobs available to sell 27640 - FG (May 31) (unsold but completed) 11020 COGS 4) Overhead Analysis: for the month of may Was overhead under or overapplied? (Write off any variance to cost of goods sold immediately). Hint: Compare overhead applied to all of the jobs to the actual overhead incurred. Applied overhead is based on the predetermined overhead rate and actual overhead is given. Applied OH for may 4305 Actual OH for may 4650 Difference (under applied) 345 If OH is under applied then COGS is too LOW . Therefore we must INCREASE COGS. Prelim COGS 16620 Adjustment for underappied OH +345 Final COGS 16965 If OH is overapplied then COGS is too HIGH. Therefore we must decrease COGS
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