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