Week 3 – Chapter 2 COST FLOWS

FNSACC507A Provide Management Accounting Information

By the end of this lesson, you need to know how to…

1. PREPARE SOME JOURNAL ENTRIES Prepare all the journal entries for a period (including any journals for over- and under- applied overhead costs) that will summarise factory operations relating to:  The acquisition of resources (materials, labour and factory overhead)  The utilisation of these resources in production  The output and sale of the finished product 2. RECONSTRUCT SOME GENERAL LEDGER ACCOUNTS Prepare all relevant general ledger “T” accounts as at the end of the period.

Overview 1.  Cost flow DIAGRAM (based on the

manufacturing process) 2.  Job Order production VS Process production 3.  Inventory management 4.  Methods of accounting for inventories –

Perpetual vs Periodic 5.  The ledger system 6.  Cost flows using a single ledger system –

Worked Example (Cosmix Manufacturing Co.)

The Manufacturing Process

Is about converting raw materials into finished goods with the use of

direct labour and factory overhead.

The Manufacturing Process

WORK IN PROGRESS

MATERIALS

LABOUR

OVERHEADS

FINISHED GOODS

NOTE TO STUDENTS: Before moving on to the next slide, please open the

following document now:

WEEK 3_FNSACC507A_Management Accounting_Cost Flow Diagram

This diagram explains how production costs are incurred and

passed on in the manufacturing process. Please keep this diagram handy for when we do our journal entries later on in the

lesson.

Cost Flow Diagram

2. Job Order production VERSUS Process production

JOB ORDER production PROCESS production

Each item or batch produced is UNIQUE and manufactured according to the customer’s specific instructions.

Mass production of SIMILAR units.

e.g. Home Construction (building industry)

e.g. Building Materials

3. Inventory Management 3.1 Types of inventory

(covered in WEEK 9) 3.2 Effectively managing each type

of inventory

Types of inventories  Materials includes stocks of raw material and

factory supplies e.g. lubricating oils for machinery; cleaning cloths etc.

 Work-in-progress are partially completed goods that will be completed in the future e.g. cardboard pieces cut out and ready to be glued.

 Finished goods are fully completed products ready for sale e.g. boxes.

Effective inventory management

RAW MATERIALS

Keep enough raw materials on hand to satisfy production orders.

WORK-IN-PROGRESS (WIP)

Maintain a steady rate of production to ensure labour and production facilities are effectively utilised.

FINISHED GOODS

Maintain adequate levels of finished goods to satisfy immediate customer demand.

4. Accounting for inventories There are two (2) methods used to account for inventories:

PERPETUAL PERIODIC Movements in inventory are continuously tracked.

Movements in inventory are NOT continuously tracked. They are only determined at the end of the accounting period.

The updated balance of each type of inventory is always available (RM-WIP-FG).

COGS is determined by conducting a physical stocktake at the end of the accounting period to determine ending inventories. Ending inventories are then deducted from the beginning inventory balance, purchases and other direct material costs.

Each type of inventory has a CONTROL ACCOUNT and is supported by a SUBSIDIARY LEDGER SYSTEM.

Op. inventory (stocktake) + Purchases + Freight on purchases, customs duty, other purchasing costs etc. - Cl. Inventory (stocktake) = COGS

5. The ledger system  Mirrors the physical flow of production.

 Attempts to measure the costs associated with

converting raw materials into finished goods.

5. The ledger system For all cost / asset accounts:

DEBIT (DR) CREDIT (CR) When costs are incurred. When costs are distributed or

passed on in the production process.

Worked Example

COSMIX Manufacturing Company

This example will take you through all the journal entries that will summarise factory operations relating to:   The acquisition of resources (materials, labour and factory

overhead)   The utilisation of these resources in production   The output and sale of the finished product

Worked Example

COSMIX Manufacturing Company

NOTE TO STUDENTS: Before moving on to the next slide, please open and work through the following document now:

WEEK 3_FNSACC507A_Management Accounting_WORKED EXAMPLES 1

Worked Example

Manufacturing Company

This example will take you through the process of reconstructing selected general ledger accounts based on the journal entries prepared which summarise factory operations relating to:   The acquisition of resources (materials, labour and factory

overhead)   The utilisation of these resources in production   The output and sale of the finished product

Worked Example

Manufacturing Company

NOTE TO STUDENTS: Before moving on to the next slide, please open and work through the following document now:

WEEK 3_FNSACC507A_Management Accounting_WORKED EXAMPLES 2

This week’s homework  Read chapter 3 à Cost Flows  Complete homework questions (chapter 3)

(ref. STUDENT ONLINE STUDY GUIDE)

You are now ready to start the next lesson on:

CHAPTER 4

Materials Costing