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  • What we're going to do today is talk about a whole bunch a different areas that we need

  • to understand because it will lead us into other areas where we talk about something

  • called variance analysis, so it's going to be important to understand it for that. What

  • is our goal here? Our goal, our objective is to accumulate the cost. That way we can

  • value inventory and costs of goods sold. So, for example, you've got beginning, plus purchase

  • is available, minus ending, is costs of goods sold, so our goal is going to be to come up

  • with our ending inventory so we can back into things like costs of goods sold. And we will

  • use this again and again, in job order costing, process costing, different manufacturing operations

  • and so on, but that's what we're really looking at. Now, when we talk about cost accounting,

  • we're looking at not just one type of inventory, but three. In financial accounting, were

  • mainly looking at purchases, like you have one type of item...I'm buying a calculator,

  • I sell the calculator. What is costs of goods sold? Whatever it cost me...FIFO, LIFO, oh

  • yeah, I remember that stuff. So it cost me 3 dollars, and then cost in, cost out. Here,

  • were manufacturing the calculator. So what do I have to manufacture it? I have some raw

  • materials. I have some work in process. I have some finished goods inventory, raw materials

  • inventory, work in process inventory, finished goods inventory and then finally costs of

  • goods sold. So, you can see here that we have a manufacturing process, so we're going to

  • have to look more at the actual cost as we produce the goods. It says here, the primary

  • purpose of cost measurement is to allocate the cost of production, direct materials,

  • direct labor, overhead to the units produced. It also provides important information for

  • management decisions, such as product pricing decisions, so we can kind of figure out how

  • much we should charge you for this product. Now, a formula that’s going to be very important

  • who will come back to haunt us again and again and again and again is y=a + bx. Now, what

  • does that mean? y=a + bx or total cost equals fixed plus variable times x. Now, what does

  • this mean? It means fixed cost. Now what are fixed costs? Fixed cost...we've talked about

  • those in the past. Those are costs that are fixed in total but variable per unit. So let's

  • say, for example, we're all hungry, we haven't had lunch or dinner yet, so I buy 1 pizza.

  • Mmm hmm. How much is that? Fixed price, 10 bucks. Little pepperoni, little sausage, little

  • vegetables, yum, yum, yum. Ten bucks. So how much is it a person? One person, 10 dollars.

  • Hey, it still cost us 10 dollars, but now there’s 2 people. Fixed cost 10 bucks, now

  • it’s 5 dollars apiece. Oh, there’s 4 people. Now it’s 2.50 apiece. So, notice that it's

  • fixed in total 10 bucks, but it’s variable per unit depending on how many people need

  • to eat. We have variable costs. What are variable cost? Variable costs are fixed per unit but

  • variable in total. For example, my electricity, it cost me what? It cost me a dollar an hour.

  • Now, depending on how many hours I use this office, it's one hour's a dollar, 2 dollars,

  • 2 hours is two dollars, 10 hours is 10 dollars...so notice it fixed per unit, but varies in total.

  • Now, that's fixed, that’s variable. Why do we care? Because when I say y=a + bx, that’s

  • total cost equals fixed plus variable times x. Remember in economics...wasn’t that ago,

  • BEC 1. We had something like this. That was x and that was y. So if you look at this formula...Can

  • you see all that? Mmm hmm...here, y=a + bx. a is fixed, b is variable times x. What is

  • x? x is some activity level. Now, remember we talked about quantity and price, so for

  • example, if it is a fixed cost, means it’s the same amount, then if you go across, boom,

  • that would be a fixed cost because no matter what the quantity is, the price is the same.

  • It cost me how much, for example, is my rent? 10,000 dollars, 100,000 for the year, whatever,

  • so 100,000 for the year. It's fixed. No matter how my production is, it's fixed in total,

  • but as I have more production, the variable cost per unit drops. Remember we talked about

  • average variable cost and so on. What about variable cost? Let's look at it this way...boom.

  • Here is your x, here’s your y. What's it say? It says that it’s 0 production, 0 cost.

  • At this production, this cost. At this production, this cost, and so on. So that would be x and

  • y. Notice here, again, x is your cost driver. What is a cost driver? It drives the cost.

  • It could be direct labor dollars, direct labor hours, machine hours, some kind of quantity.

  • That is called the cost driver. What cost driver basis will we use? Whatever base is

  • best for your industry. So, it just depends on what you're doing, which youre manufacturing

  • and so forth. What is y? y would be, in this case, my total costs. So as we look at this,

  • that's called variable. So this one’s fixed, this one's variable. What would total cost

  • look like? Let’s put them together...boom, boom...here's x, here's y. Here would be my

  • fixed costs, and this angle would be my variable costs. That’s total cost. What’s total

  • cost? It says that at this level of activity, boom, boom is total cost. At this level of

  • activity, boom, boom, that's total cost. So, notice that’s your total cost, that’s

  • your y, x and y. So when we come back over to this formula, total cost equals fixed plus

  • variable times x. x is called your cost driver. x is your independent variable. Why? Because

  • your y is total cost. That’s dependent. What is that dependent upon? The x. So ifyou

  • come back over here, independent, dependent. Why? Because total cost is dependent upon

  • the x, so this is called the independent variable, this is called the dependent variable. What

  • are we looking at? The cost driver. So let's look at the terms on page 1. It says y=a +

  • bx, total cost equals fixed plus variable times x. The y is equal to total cost and

  • is referred to as the what? Dependent variable since it’s amount is dependent upon other

  • factors. The x is equal to volume, which is referred to as independent variable, since

  • it can be increased or decreased at the company’s discretion. It's also called the what? Cost

  • driver. a is called the fixed cost, b our variable cost. Note: these cost assumptions

  • only remain valid between the...within the what? Relevant range. Now, what is the relevant

  • range? That is defined as the range in which your cost assumptions remain valid. For example,

  • fixed are fixed in total but variable per unit. Variable are fixed per unit but vary

  • in total. So, for example, fixed costs are fixed in total. So the relevant range means

  • that I assume if my factory rent’s 100,000 dollars, fixed is a 100,000. What if, in my

  • capacity, I can only manufacture 100,000 units, but I want to manufacture 105,000? Then what's

  • going to happen to total costs? They have to go up, because now, instead of manufacturing

  • 100,000, I want to manufacture 105, I need a new factory. So we're assuming that your

  • costs are within the relevant range, where fixed are fixed in total, variable are also

  • fixed per unit. So what's electricity? A dollar an hour. That is the assumption within the

  • relevant range. Now the next thing down the page is called a mixed cost or semi-variable

  • cost. Now, with a mixed cost, that's a cost that is both fixed and variable components,

  • fixed and variable components. Now, when we talk about a mixed cost, basically this would

  • be like, let's say your phone bill. Ok? In the olden days, when you had a phone and you

  • had to pay a monthly fee. So, you pay 20 dollars a month. That's my fixed, and every minute

  • on the phone, you're paying an extra dollar, let's say. So, that's when I pick up the phone,

  • and I would call my girlfriend because you can't see her because you're studying, “Hi

  • Pookie!” “No, youre Pookie.” “I love you [kissing sounds].” “I love you,

  • too [kissing sounds.]” So what happens? Youve got a fixed and a variable component.

  • So what we're trying to do is, we use this thing called the high-low method in order

  • to break out the fixed and variable components. Because when you think about your phone bill,

  • youve got a fixed portion and a variable portion. What is consistent between the low

  • and the high activity? What costs are fixed? The fixed costs. So if we, for example, let's

  • look at this graph. We're going to look at our high level of activity. We're going to

  • look at our low level activity. Now, within both of these, what costs are the same? This

  • fixed cost is the same. So what we do is, we're going to take the high from the low.

  • When you take the high from the low, your fixed costs disappear. You're just left with

  • the variable costs. Then what we're going to do is were going to try to force the

  • slope of the angle because the slope of the angle are what? Your variable costs. Because

  • this is fixed, that angle is variable. This is total because it starts with the fixed

  • and the variable. So notice that we're going to try to force the slope of the line. That'll

  • give us an estimate of what our variable costs are. This method is called the high hyphen

  • low, high hyphen low method. Now, in the high hyphen low...What is a hyphen in mathematics?

  • It’s a minus. Very good. So, it's a high minus low. Hmmm....that sounds interesting.

  • Let's look at it. It says high-low method, total cost and total hours. Here's our total

  • cost. Here's our hours. What it says is, at the high 110 and 30,000 hours. At the low...what

  • is it? 80,000 total cost and 20,000 hours. So if you take the high hyphen low, then that

  • gives us 30,000 dollars and 10,000 hours. Now, if you divide the high and the low, that

  • gives us 3 dollars per base. What's our base? Hour. 3 dollars an hour. That is an estimate

  • of your variable costs because what happens is, back on this picture, at the high minus

  • low, you...your fixed costs disappear, you're left with variable costs. Now, incidentally,

  • mark this in your notes, what is this point right here called? The intercept, because

  • that is where it crosses the y-axis. That is called the intercept. Important to understand

  • that. So, if I wanted to then take this and set up a formula, my formula could be...oh,

  • right here. What is it? You would say total cost, 110, equals my fixed plus variable,

  • which we just figured as 3, times activity level is either one of these. Well, at 110,

  • it must be 30. So, 30 times 3 is 90, 110, this must be 20. Let's try it again. Let's

  • see if it works. Let's try the other one. 80 equals fixed plus 3 times x. What's x?

  • 20 times 3 is 60 plus 20 is, so it works. So if I want to set up a formula, what is

  • the formula I'm going to use? Youre going to say, total cost equals fixed, 20, plus

  • 3 times x. Now, what does x represent? Any activity level. What will this formula give

  • me? It'll give me anything on this line. Mmmmm....so, if I were to pick a point here, go up, boom,

  • that's going to give me total cost. What's the formula? Total cost equals 20 plus variable

  • times x...well not variable, times 3 times x. So, whatever this is, you plug it in here.

  • That'll tell you what this total cost should be. Remember, this is called the what? Dependent.

  • What is this? Independent. This is independent. This is dependent upon this. Now that's an

  • important concept. Why? Because later on, this becomes something called our flexible

  • budget equation. It’s flexible. Wooo! What does that mean? It tells you what total cost

  • will be at different levels of activity based on your cost driver, so that is called your

  • flexible budget equation. So, as we go through this later on, we're going to be doing something

  • called variance analysis and all of your overhead variances are done using the flexible budget

  • equation. So you're going to see, as we go through time, that this formula will be used

  • again and again and again and again and again and again. Woo! Woo! Alrighty, let's turn

  • to the next page. Cost classifications. Now, with our cost classifications, we are looking

  • at different types of costs and we have here what we call manufacturing costs, and those

  • are going to be called our manufacturing or our product costs. We also have what we call

  • non-manufacturing costs. Those are called our period costs. So what I want to compare

  • are the manufacturing costs, also called a product cost, versus our non-manufacturing

  • costs, also called a period cost. So, we're going to look at what are the differences.

  • Well, what is a non-manufacturing cost? A non-manufacturing cost is considered a period

  • cost. It is considered an expense in the period whether you sell them or not. What’s an

  • example? SG & A. What is SG & A? Selling general administrative expenses. Those are considered

  • an expense in the period. It says theyre marketing costs, freight out, re-handling.

  • Also, very important, abnormal spoilage, and I’m going to talk about that throughout

  • the course, but abnormal versus normal spoilage. Those are all non-manufacturing. Those are

  • all period costs and expense in the period whether you sell it or not. SG & A, selling

  • general administrative marketing cost and abnormal spoilage versus, the other cost is

  • called a product cost. Those are manufacturing costs. They become part of the cost of the

  • product. The product that you are manufacturing. Now, as far as manufacturing costs, they include

  • 3 basic elements...direct materials, direct labor, and manufacturing or factory overhead.

  • So, I’m going to call that direct materials, DM, direct labor and factory overhead. Those

  • are the 3 different types of manufacturing costs. For example, I'm going to build this

  • wooden lectern I have right here. Now, if I want a build that podium or that lectern,

  • what do I need? I need 1, 2, 3, 4, 5, 6 pieces of fake wood, alright? That’s 6 pieces.

  • That is called my direct material. What is direct materials? Those are the materials

  • that become an integral part of the product. Those are called my direct materials. So,

  • they become an integral part of the product. The direct labor is, my friend Jesse here

  • is going to hammer, glue and screw it together, and I go, “Hey, how long is it going to

  • take you?” He goes, “Dos horas, Señor amigo. Two hours!” I go, “Hey, muchas

  • gracias. Si por supuesto.” I say, “Cuanto t...” No, I’ll say it in German. “Jawohl.

  • Wieviel teich brauchen Sie.” And he says, “Ich will zwei stunden brauchen auch ja

  • ehrlich das vouche du ergen.” Whatever. So, what is he saying? “It’s going to

  • take me two hours.” I go, “Okay. I pay you 15 bucks an hour for 2 hours, that’s

  • 30 bucks. So that’s direct materials, direct labor. What about factory overhead? What is

  • that? That all the other time in the factory except which two? Direct materials, direct

  • labor. So, I go, “Oh, okay.” That's indirect materials, indirect labor, all of those are

  • the costs in the factory. What else? Insurance, rent, depreciation, heat, electricity, right?

  • All of those costs also indirect labor, such as what? He works right on the product. That's

  • direct. But what about the factory foreman? He doesn't work on the product directly. What

  • about the timekeeper? He doesn't work...so all of those are people in the factory, but

  • not working directly. So when we talk about manufacturing costs, it says product cost,

  • direct materials, direct labor, manufacturer overhead, all costs in the factory except

  • which two? Direct materials, direct labor. So it includes indirect materials, indirect

  • labor, things like that. Now, there's another term you need to know. These two together

  • are called the prime costs of the product. Because what is the main cost of the product?

  • The materials and labor. The overheads and all the others are not, but the materials

  • and labor. What about these two together? These are called conversion costs. Those are

  • the costs of converting a raw material to a finished good. What does it take, to take

  • this wood and make it a podium? Labor and overhead. So we're going to talk about materials,

  • labor, overhead. Remember the words prime cost, conversion cost, prime direct materials,

  • direct labor, conversion, labor overhead. Question on the exam a long time ago: which

  • cost is included in both prime and conversion? Direct labor. Hmm...ok. So, notice indirect

  • materials is a what? It is a factory overhead. It is a conversion cost. It is a manufacturing

  • cost. It is a product cost. Those are all correct answers. One more time...indirect

  • labor is an overhead, conversion, manufacturing, product. Now, what does it mean to be a product

  • cost? What it means is, you don't expense it till it's sold. Cost of goods sold. So,

  • as I spend the money, I don't debit expense, credit asset, I debit asset...I’m sorry...I

  • don’t...I don’t debit expense, credit asset like cash. I don't debit expense credit

  • cash. I debit asset inventory, work in process inventory, finished goods inventory, work

  • in process inventory. Then, when I sell it, boom, now it becomes costs of goods sold,

  • and get rid of the inventory, because now were selling it. So notice, you capitalize

  • it, it becomes a product cost versus a period cost. Now another expense in there are called

  • your spoilage. Now, what is spoilage? Let's say, for example, I'm going to manufacture

  • this beautiful Roger CPA Review shirt that I'm wearing, gorgeous shirt, gorgeous shirt.

  • Now, how do you manufacture a shirt? You take a piece a material, like this, and you have

  • to cut it out, and you can see I'm not an artist, okay, it's a little irregular. I’ll

  • sell it to Marshall’s. Okay, so here's my shirt, let’s get rid of the head. Here's

  • my shirt, so I cut around here, and all of this material around here is called normal

  • spoilage. Why? Because that’s a normal part of the production process. Now, what do you

  • do with normal spoilage? Normal spoilage is over here. Normal spoilage. Because normal

  • spoilage should be part of the cost of the good units you produce. Why? Because that’s

  • part of the...if this whole piece of material cost me a dollar, even though I'm cutting

  • around it, that should still be part of the cost of the dollar of creating the shirt.

  • Now, obviously a nice shirt, it’s only one piece I’ll have to tie a string around it

  • to wear it. It’s a backless shirt. So that’s that. Now, that is called the product cost.

  • What if the shirts are done and theyre on the loading dock and the truck is coming

  • back to pick them up? Beep, beep. C’mon. Beep, beep. C’mon. Beep, beep..whoops. They

  • run over them, oil, grease all over. We have to throw them way. That's called abnormal

  • spoilage. That's an expense. So, abnormal is an expense in the period, normal usually

  • becomes part of the good units produced. So that's what we mean by normal versus abnormal

  • as far as the spoilage. Now, when we get down the road, we're going to talk about another

  • fun and exciting area called what? Variance analysis. What is that? Variance, well variance

  • analysis says what could go wrong with these costs. Direct materials, direct labor, overhead.

  • First of all, with materials, what could go wrong? You could pay too much per pound or

  • you could use too many pounds. So we're going to learn about direct material price variance,

  • direct materials usage variance. Labor...what can go wrong? You either pay too much direct

  • labor rate variance, or you use too many hours because people wasted time, they were less

  • efficient, causing direct labor efficiency variance. Then youve got overhead. Now

  • these are the hard ones. These are the ones from school that most of you hated, never

  • understood. But what could go wrong in this huge, big factory? What could go wrong is

  • we either spend too much on fixed or variable, fixed rent, variable electricity, or we are

  • less efficient with our electricity or our production volume, our production capacity

  • is down...In other words, this factory, I could have produced 100,000 podiums, but we

  • only produce 90,000. What does that mean? That we were underutilized. Our production

  • volume was down, so that's what we mean by spending efficiency volume. That’s called

  • overhead variances, well do in another section, but again, just some of the excitement

  • that's coming our way. Now, as far as cost of systems, it says their actual cost system

  • standard cost system, normal cost system. What's the difference? In an actual cost system,

  • that's where we're going to go through and use direct materials, direct labor and factory

  • overhead based on what? Actual. We have a standard cost system. That's where we're going

  • to use materials labor and overhead based on what? Standards. And then we have a normal

  • cost system, that’s what were going to be using. What does a normal cost system say?

  • It says, if he's going to build this podium or lectern, isn’t it pretty easy to keep

  • track as I hand him a piece of wood, of how much that wood cost me? Mmm hmm. And, every

  • day he works, he goes, “How much did you work?” “I worked 8 hours today.” 8 hours

  • at 15 bucks, 80, answer 120 bucks. Let’s keep track of that. What about, okay, I just

  • worked today. How much should I add for electricity, insurance, rent, depreciation? I don't know,

  • so what I’ll do is that’s where I’ll say, “You know what? Let's come up with

  • what we call a pre-determined overhead rate. It'll be an application rate. It's going to

  • be based on estimates at the beginning of the month, beginning of the year, and I will

  • apply that into production as he works on this podium.” So, that way, every hour he

  • works, I’ll add some money for electricity rent, insurance, depreciation, glue, screws,

  • the factory foreman salary, the timekeeper salary, the guy who cleans and sweeps the

  • floor...all these factory costs that are not direct material, direct labor. Because I don't

  • know till the end of the month. At the end of the month, I get a bill, and I go, “Oh,

  • that's how much it really was.” Then I can compare it to what I...what we call applied

  • in to work in process. So, under a normal cost system, I’m going use materials and

  • labor based on actual because I can figure those out pretty easily, but the overhead

  • is the one that I'm going to use what we call a pre-determined overhead application rate.

  • That is going to be overhead based on what? On a standard called a pre-determined overhead

  • rate. That's what we're going be doing in most of this section, which is dealing with

  • normal costing. So, normal costing says what? Direct materials, actual. Direct labor, actual.

  • Overhead based on a pre-determined overhead rate. Alrighty, youll see here in the notes

  • it says pre-determined overhead rate. So, let's talk about that pre-determined overhead

  • rate, and the pre-determined overhead rate just basically says, how am I going to go

  • about applying my overhead into production. So what we're really looking at here is, how

  • should I apply my overhead into production? Alright, now with a pre-determined overhead

  • rate, what we're going to do at the beginning of the month is figure out what my costs are

  • expected to be. Estimated cost for...over some estimated base. Then I'm going to come

  • up with a basic overhead rate, so this is my pre-determined overhead rate. I will then

  • multiply that times actual production, actual units, actual hours, actual pounds, actual

  • dollars. If I’m using direct labor, dollars is a base. That'll give me how much overhead

  • I need to apply. Where? Into WIP. What’s WIP? Work in process. So, what I'm trying

  • to figure out is, how much to apply into my work in process. So the way this works is,

  • let's look at a couple of journal entries, and let's take a mental picture of all this.

  • Alright, that’s your lens, very good. Well recreate it later when we do some problems

  • on this because were going to do some problems. We're going to have some fun. Woo. Were

  • going to do some problems. We're going to have some fun with everyone. Alright, how

  • yadoin’? Good? Let's have a little bit more Fresca...oh no, Mountain Dew. Do the

  • Dew. Mmmm. Alright. Now, with our pre-determined overhead rate, what we're going to do is,

  • were going to come up with a basic rate, and we're doing this at the beginning of the

  • month, beginning of the year. We're going to have our estimated, and this is going to

  • be estimated overhead costs divided by our estimated base, and the base could be direct

  • labor dollars, direct labor hours, that equals our pre-determined overhead rate. We will

  • multiply that times our actual production. That equals our applied overhead. One more

  • time. We take estimated...overestimated...why? Because it’s the beginning of the month.

  • You take your estimated overhead costs. Let's say, for example, I think I'm going to spend

  • 100,000 dollars in overhead. What is overhead? Indirect materials, indirect labor, and so

  • on, divided by an estimated base. Now, your base could be whatever. Now, in the exam,

  • it’s usually either direct labor dollars, direct labor hours, machine hours, could be,

  • you know, materials, could be size meters, inches, yards, whatever. Usually, it’s direct

  • labor dollars, direct labor hours. So, let's say for example, it’s direct labor hours,

  • and I figure we're going to work 20 hours, 20,000 hours. So, I think we're going to spend

  • 100,000 dollars on overhead and we're going to spend 20,000 hours. That gives me about

  • 5 dollars per direct labor hour. So, that means my pre-determined rate is 5 dollars

  • per what? Per hour. So, I'm going to multiply that times actual hours. That means for every

  • hour that Jesse works on this lectern, this podium, I'm going to add materials, what I

  • actually put in, labor 15 bucks an hour times the number of hours and overhead would be

  • 5 dollars per hour. So, for every hour he works, I’m going to add 5 dollars for overhead.

  • Hmmm...okay. And that's going to give me what I apply. Now, where do you apply this? To

  • work in process, to WIP. Whip it! Whip it good, right? Who sings doo doo doo doo doo

  • doo doo? Woo! Whip it! Devo. ‘80s. Look it up on YouTube. Alright, you should know

  • that by now. So, that’s what’s going on. Hey, what's another base we could use? We

  • can use direct labor dollars. So let's say direct labor dollars was our base. We'd say

  • 100,000 dollars over, let's say 50 direct labor dollars, 50,000 direct labor dollars.

  • What does that mean? It means we think overhead is going to be 100,000 dollars. We expect

  • to have 50,000 dollars in direct labor. That's how much our cost is going to be. Notice,

  • that equals, in this case, 2. What is 2? 200%. Now, what is 200% mean? It means it’s 200%

  • of the base, 200% of direct labor dollars. What does that mean? It means for every hour

  • he works, I'm going to add double. So, whatever his dollars are...if I pay him 15 dollars,

  • I’m going to add 30 dollars for overhead, and that’s 200%. Now, a lot of times it

  • might be 200%, it might be 80%, 60%. What does that mean? For every hour, I'm going

  • to add 80% or 60%. So if I’m paying 10 dollars in labor, I’ll add 8 dollars or 6 dollars.

  • So, notice, it could be your base, could be direct labor hours, direct labor dollars.

  • If its direct labor hours...and what does that mean? It means that per hour. If it’s

  • direct labor dollars, it's that per dollar. So, notice, here's something I want to teach

  • you now because I’m going to teach you break even analysis. I want you to remember this.

  • Dollars over hours equals dollars per hour. So, dollars over non-dollars is dollars. Dollars

  • over dollars is non-dollars. One more time, dollars over non-dollars is dollars. Dollars

  • over dollars is non-dollars. What is the non-dollars? A percent. Hmmm...okay. So, that's good to

  • know. So, that’s our pre-determined overhead rate. Now this is how you apply it. Where

  • you apply it into? Work in process, WIP. So, let's look at our journal entry in our notes,

  • and I'll put it up here. I've got applied act...applied overhead. As you apply overhead

  • into production, what’s your journal entry going to be? You're going to debit work in

  • process control, credit factory overhead applied. That’s for your applied overhead. Then,

  • at the end of the month, you get your bill for your actual overhead. What is your journal

  • entry? Debit factory overhead control for what it really cost you, credit whatever...cash,

  • payables and so on. Now, what is this all mean? Here's what it means. Apply it. How

  • am I applying it? Let's look back over here. I’m setting up some pre-determined overhead

  • rate, times actual production is what gets applied into WIP. So, in this example I came

  • up with some base times the production equals what gets applied into WIP. This is only for

  • overhead, not for materials and labor, just for overhead. So, you have WIP, credit factor...What

  • is WIP? I’ll show you in a minute...work in process. It’s an inventory account. What

  • is this? It is a temporary holding account, like purchases. Then when I actually spend

  • money, debit factory overhead control, credit cash, balance sheet. What is this? This is

  • a temporary account. At the end of the month, end of the year, let's flip these out. What

  • do I do? This is to close it out. I debit factory overhead applied for 300, credit factory

  • overhead control for 500. The difference is 200 dollars. What does it mean? I only applied

  • 300 dollars for electricity, rent and insurance, but it really cost me 5, so we're going to

  • call that over- or underapplied...in this case I applied 3, but it really cost 5, I'm

  • underapplied. By what? By 200 bucks...mmm...so what does that mean? My costs really are higher,

  • so therefore costs of goods sold is generally increased for the extra 200 bucks because

  • I didn't apply what was called underapplied robe reply. Now, this is going to be important

  • when I teach you variances because what we're going to do in variances, is were going

  • to figure out what happened here. Why did I apply 3 but really spent 5? What was the

  • problem? That's where we're going to have those 3 different variances, and if you look

  • down this way, you'll see here materials, labor, oh, here, overhead. What are the 3

  • variances? Spending, efficiency, volume. I'm off by 200 bucks. Why? Because I spent too

  • much on fixed or variable or I was less efficient so I wasted electricity or my production volume

  • capacity was down. So, those are going to be my spending efficiency volume variances.

  • So, when I come back to looking at overhead and saying, why am I underapplied, this difference

  • could be spending efficiency or volume because spending could be fixed or variable, efficiency,

  • you're going to learn, is all variable, volume, youll learn, is all fixed. So, these are

  • the problems. This is why I am underapplied or overapplied, so that’s how I'm getting

  • it. Now, what I want us to see is the flow of the cost system. What does that mean? It

  • means, how do I get the money into work in process? How do I do that? So let's come on

  • down this way, before I erase all this, let's take a little mental picture of this again.

  • Ready? [clicking sound] Again, what we're looking at is materials, labor and overhead.

  • We're talking about how do I get these into work in process materials, actual labor, actual

  • overhead, applied...Applied what? [whistling] Based on a pre-determined overhead rate, estimated

  • cost, estimated base, comes up with a pre-determined rate times actual gives you applied. Where

  • does it go? Into WIP. How do I get it into WIP? That’s what we're going to do now.

  • Look at the journal entries in your notes where it says the flow of a cost system. So

  • let's set this up and see how the cost system will actually flow. Now, as far as the flow

  • of a cost system, we're going to have what we call raw materials inventory, work in process

  • inventory, finished goods inventory and then costs of goods sold. I was just thinking,

  • we haven’t had an earthquake in a little while. I think were due. Hmmm? Uh-oh, here

  • we go. I’m just kidding. Yeah, the things start shaking. Alright, flow of a cost system.

  • We've got raw materials, work in process, finished goods and then, finally, costs of

  • goods sold. Are we good? Okay, so well skip that for now. Let’s come back over

  • here. So, raw materials. What is that? We have some beginning raw materials plus purchases

  • equals raw materials available for sale minus ending raw materials equals raw materials

  • either used or requisitioned into production. Okay? So, that's called requisition. Now,

  • where does it go? Raw materials goes where? It goes into WIP. WIP. Whip it good. Alright,

  • so, work in process. I've got some beginning work in process, plus normally this raw materials,

  • that becomes your DM, direct materials. Then I'm going to add to that direct labor. Now

  • remember, if I'm using what we call a normal cost system, as Jesse works on this podium

  • or lectern, what am I saying? I'm saying, “Hey, here’s some materials, direct materials.

  • Okay we'll add the cost to that. Here’s some direct labor. Ok, well add the cost

  • to that.” And then what about all the overhead? What kind of overhead am I going to add in

  • here? It's called applied overhead. Notice, it's not actual, it’s applied. How did I

  • figure out this amount? Because I said estimated dollars, over estimated base, equals some

  • rate times actual something equals applied. How did I do that? I debited WIP control,

  • that’s that, work in process, factory overhead applied. That's for this amount. Later I'm

  • going to find out that it really cost me 500, but right now, we just did this. We debited

  • WIP. What is WIP? Work in process. What is work in process? It is called an inventory

  • account. That gives me my WIP available minus ending WIP, work in process, equals costs

  • of goods, careful, not costs of goods sold, called cost of goods completed or manufactured.

  • Now, cost of goods completed or manufactured. Where do those go? Those go into finished

  • goods. So, I have some beginning finished goods plus, woooop, cost of goods manufactured

  • or completed equals finished goods available minus ending finished good equals costs of

  • goods sold. Now, I’ll bring that over here to cost of goods sold, plus, this is where

  • I'm going to adjust over/under applied. So now what's happening? Now, I've got my costs

  • of goods sold number, but now what we're going to say is, if I didn't apply enough, then

  • my expense is too low, plus underapplied or minus overapplied equals your real costs of

  • goods sold. So, in this case, I was underapplied by 200 bucks. That's why I'm adding it here

  • in costs of goods sold. So, let's look back here. Youre going to hear that beep beep

  • beep beep. That’s me backing up. Because I’ve got a big booty. Big booty backing

  • up. Beeeeep beep. Watch out! Here we go. Remember here? Debit WIP credit factory overhead applied.

  • Then factory over...cash. What happened? We were underapplied by 200, boom. Hit it for

  • what? Throw it into costs of goods sold. Ohhh...the lights are going on. So what do we do? We

  • just throw it into costs of goods sold, unless it’s material. If it’s material, you could

  • throw it into wherever there is ending inventory and there's overhead in it. Does raw materials

  • have overhead? No. Work in process? Yes. Finished goods? Yes. Cost of goods sold? Yeah. The

  • stuff you sold has electricity in it. Yes. So, you could allocate it either all to costs

  • of goods sold, which is what’s usually tested, or you could put it into WIP, finished goods

  • and costs of goods sold. So, like, they'll say, base it on ending. So what is ending?

  • Ending, ending, ending. Add them up. Divide them. 1/3rd, 2/3rds, you know, whatever it

  • is. So you just do a proportionate share. Usually it’s just immaterial, throw it out

  • to costs of goods sold. So, again, why did we increase costs of goods sold? Because we

  • were underapplied. In other words, we were underapplied by 200. This amount here...we

  • only applied 300, it should have been 500, but we didn't know till the end of the month,

  • so we added the 200 in here. Mmm kay, that makes sense. Now, what does this mean? Raw

  • materials, boom, this is what we use, becomes direct materials, WIP, direct materials, direct

  • labor, overhead, boom, that’s the cost of goods completed, transferred, beginning costs

  • of goods completed, finished goods available minus ending, costs of goods sold, then, boom,

  • I adjust over/under here. Notice, when I say different types of ending inventory on your

  • balance sheet, if I am buying calculators, that’s my calculator now, If I buy this

  • calculator, what is it? Just the cost. FIFO. First in, first out, you know. That’s how

  • I figure it out. FIFO LIFO weighted average, moving average, dollar value, blah blah blah.

  • Here, I’m manufacturing it, so what kind of inventory? Raw materials inventory, work

  • in process inventory, finished goods inventory, those are all the types of inventory I could

  • have on my balance sheet. So, on your balance sheet under inventory, you're not going to

  • just have purchases, but you can have all these different types. You look in your notes,

  • you'll see the flow of the cost system, and, again, it's important to understand the flow

  • and how it goes. Now, you'll see here in your notes, it says to determine direct materials

  • used the calculation is, beginning plus purchases minus ending is direct materials used. What

  • is that? That's over here as just this. Raw materials used, direct materials used, cost

  • of goods manufactured...this. Finished goods, this. So, I kind of give it to you in a formula

  • format, but it's really just my T account that we're using again and again and again.

  • Alright, if you look on the next page, it says in boldface, direct labor hours, direct

  • labor dollars, machine hours...the paragraph that says the most common base. What is the

  • most common base up here for figuring this out? As I said, it could be direct labor hours,

  • could be direct labor dollars, could be machine hours...it’s whatever works best for your

  • industry. So, that's what we have to look at as far as the different types that we're

  • going to do. Ok? Alright. Very good. Let's turn to the back, and in a minute, let's do

  • a couple questions on all this fun stuff.

What we're going to do today is talk about a whole bunch a different areas that we need

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BEC試験原価計算|ロジャーCPAレビュー (BEC Exam Cost Accounting | Roger CPA Review)

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    Jinyong Zheng に公開 2021 年 01 月 14 日
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