Chapter 9 Recording and Evaluating Conversion Process Activities

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Chapter 9 Recording and Evaluating Conversion Process Activities Mc. Graw-Hill/Irwin Copyright © 2009 by

Chapter 9 Recording and Evaluating Conversion Process Activities Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

What are the Primary Activities in the Conversion Process? • Schedule production • Obtain

What are the Primary Activities in the Conversion Process? • Schedule production • Obtain raw materials (internal transfer) • Use labor and manufacturing resources to convert raw materials into finished goods • Store finished goods until sold (internal transfer) 9 -2

Which of the Conversion Process Activities are Accounting Events? • Obtain raw materials §

Which of the Conversion Process Activities are Accounting Events? • Obtain raw materials § Increase work-in-process inventory § Decrease direct materials inventory • Use labor and overhead § Increase work-in-process inventory • Store finished goods § Increase finished goods inventory § Decrease work-in-process inventory 9 -3

What is the Basic Flow of Information in the Conversion Process? • Customer places

What is the Basic Flow of Information in the Conversion Process? • Customer places an order and production is scheduled • Raw materials are requisitioned and recorded • Labor is used and recorded • Cost record prepared and goods are manufactured • Goods are finished and recorded 9 -4

What are the Manufacturing Inventory Accounts? • Direct materials inventory § Current asset (similar

What are the Manufacturing Inventory Accounts? • Direct materials inventory § Current asset (similar to Merchandise Inventory for a merchandising company): Cost of direct materials on hand § Increases when purchases of direct materials are made (Chapter 8) § Decreases when direct materials are requisitioned into production 9 -5

Inventories Continued • Work-in-process inventory § Current asset: Cost of products that have been

Inventories Continued • Work-in-process inventory § Current asset: Cost of products that have been started but not completed § Increases when direct materials are requisitioned into production § Increases when direct labor is used in production § Increases when manufacturing overhead is applied to production § Decreases when products are finished 9 -6

Inventories Continued • Finished goods inventory § Current asset: Cost of products that have

Inventories Continued • Finished goods inventory § Current asset: Cost of products that have been finished but not sold § Increases when products are finished § Decreases when products are sold (Chapter 10) 9 -7

How do Costs Flow through the Inventory Accounts? Beginning direct materials inventory + Purchases

How do Costs Flow through the Inventory Accounts? Beginning direct materials inventory + Purchases of direct materials = Cost of direct materials available for use - Direct materials issued into production = Ending direct materials inventory 9 -8

Cost Flows Continued Beginning work-in-process inventory + Direct materials issued into production + Direct

Cost Flows Continued Beginning work-in-process inventory + Direct materials issued into production + Direct labor used in production + Applied manufacturing overhead = Cost of goods in process - Cost of goods manufactured = Ending work-in-process inventory 9 -9

Cost Flows Continued Beginning finished goods inventory + Cost of goods manufactured = Cost

Cost Flows Continued Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Cost of goods sold = Ending finished goods inventory 9 -10

How does the Manufacturing Overhead Application Process Work? • Beginning of period § Estimate

How does the Manufacturing Overhead Application Process Work? • Beginning of period § Estimate overhead for each cost pool • • Unit-related Batch-related Product-sustaining Facility-sustaining § Estimate cost drivers for each cost pool § Divide estimated overhead by estimated cost driver = predetermined overhead rate 9 -11

Overhead Application Continued • During period § Apply overhead to production as the cost

Overhead Application Continued • During period § Apply overhead to production as the cost driver is used § Record actual overhead as incurred • End of period § Compare total applied overhead to total actual overhead § Close the overhead account to Cost of Goods Sold (difference between applied and actual) 9 -12