Q1.  What is the difference between the product cost and period cost? Give some examples for each type                                                                                                                                      

Q2.  What do you understand by utilization rate? Give an example                                   

Q3.   The AMS Manufacturing Company uses a job costing system with machine hours as the allocation base for overhead.  The company uses normal costing to develop the overhead allocation rate.  The following data are available for the latest accounting period:

Estimated fixed factory overhead cost                     SAR 160,000

Estimated machine-hours                                                 100,000

Actual fixed factory overhead cost incurred            SAR 170,000

Actual machine-hours used                                              110,000

Jobs worked on:

Job No. Machine Hours Used

1020                                          12,000

1030                                          18,000

1040                                          15,000

1050                                          10,000

a.   Compute the overhead allocation rate.                                                                                 

b.   Determine the overhead allocated to job 1040.                                                 

c.   Determine total over or underapplied overhead at the end of the year             

Explanation & Answer length: 2 pages


Q1. What is the difference between the product cost and period cost? Give some examples for each type Q2. What do you understand by utilization rate? Give an Q3. The AMS Manufacturing Company uses a job costing system with machine hours as the allocation base for overhead. The company uses normal costing to develop the overhead allocation rate. The following data are available for the latest accounting period: Estimated fixed factory overhead cost Estimated machine-hours SAR 160,000 100,000 Actual fixed factory overhead cost incurred Actual machine-hours used SAR 170,000 110,000 Jobs worked on: Job No. Machine Hours Used 1020 12,000 1030 18,000 1040 15,000 1050 10,000 a. Compute the overhead allocation rate. b. Determine the overhead allocated to job 1040. c. Determine total over or underapplied overhead at the end of the year Chapter 1 Introduction to Managerial Accounting Differences Between Managerial and Financial Accounting (slide 1 of 4) Types of accounting information Financial accounting Managerial accounting © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Accounting and Managerial Accounting © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 2 of 4) • Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 3 of 4) © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differences Between Managerial and Financial Accounting (slide 4 of 4) • Unlike the financial statements prepared in financial accounting, managerial accounting reports do not always have to be: 1. Prepared according to generally accepted accounting principles (GAAP). ▪ Only the company’s management uses the information. ▪ In many cases, GAAP are not relevant to the specific decisionmaking needs of management. 2. Prepared at fixed intervals (monthly, quarterly, yearly). ▪ Although some management reports are prepared at fixed intervals, most reports are prepared as management needs the information. 3. Prepared for the business as a whole. ▪ Most management reports are prepared for products, projects, sales territories, or other segments of the company. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managerial Accounting in the Organization (slide 1 of 2) • Most large companies are organized in terms of “verticals” and “horizontals.” o Verticals are sometimes referred to as business units, because they are often structured as separate businesses within the parent company. ▪ Verticals develop products that are sold directly co customers. o Horizontals are departments within the company that are not responsible for developing products. ▪ Horizontals provide services to the various verticals and other horizontals. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managerial Accounting in the Organization (slide 2 of 2) Manager of the accounting function of a vertical Controller Chief financial officer Rank within the accounting and finance function © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Process (slide 1 of 2) © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Management Process (slide 2 of 2) © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Planning • Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action. • Planning may be classified as follows: 1. Strategic planning, which is developing long-term actions to achieve the company’s objectives. ▪ These long-term courses of action are called strategies, which often involve periods of 5 to 10 years. 2. Operational planning, which develops short-term actions for managing the day-to-day operations of the company. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Directing • The process by which managers run day-to-day operations is called directing. o For example, directing is a production supervisor’s efforts to keep the production line moving without interruption (downtime). © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Controlling • Monitoring operating results and comparing actual results with the expected results is controlling. 1. • This feedback allows management to isolate areas for further investigation and possible remedial action. The philosophy of controlling by comparing actual and expected results is called management by exception. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Improving • Continuous process improvement is the philosophy of continually improving employees, business processes, and products. 1. The objective of continuous process improvement is to eliminate the source of problems in a process. ▪ In this way, the right products (or services) are delivered in the right quantities at the right time. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Decision Making • Inherent in each of the preceding management processes is decision making. 1. In managing a company, management must continually decide among alternative actions. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Uses of Managerial Accounting Information • Managerial accounting provides information and reports for managers to use in operating the business. 1. 2. 3. 4. 5. The cost of manufacturing a product could be used to determine its selling price. Comparing the costs of manufacturing products over time and can be used to monitor and control costs. Performance reports could be used to identify any large amounts of scrap or employee downtime. A report could analyze the potential efficiencies and savings of purchasing a new computerized equipment to speed up the production process. A report could analyze how many units need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Operations • The operations of a business can be classified as service, retail, or manufacturing. 1. Most of the managerial accounting concepts that apply to manufacturing businesses also apply to service and merchandising businesses. ▪ The manufacturing operations for a guitar manufacturer, Legend Guitars, is illustrated on the following slide. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct and Indirect Costs (slide 1 of 2) • A cost is a sacrifice made to obtain some benefit. 1. In managerial accounting, costs are often classified according to the decision-making needs of management. ▪ For example, costs are often classified by their relationship to a segment of operations, called a cost object. – A cost object may be a product, a sales territory, a department, or an activity, such as research and development. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct and Indirect Costs (slide 2 of 2) • Costs identified with cost objects are either direct costs or indirect costs. 1. Direct costs are identified with and can be traced to a cost object. ▪ For example, the cost of wood used to make guitars is a direct cost. 2. Indirect costs cannot be identified with or traced to a cost object. ▪ For example, the salaries of production supervisors are indirect costs of producing a guitar because their salaries cannot be identified with or traced to any individual guitar. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing Costs • The cost of a manufactured product includes the cost of materials used in making the product. • In addition, the cost of a manufactured product includes the cost of converting the materials into a finished product. • Thus, the cost of a finished product includes: 1. Direct materials cost 2. Direct labor cost 3. Factory overhead cost © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Materials Cost • Manufactured products begin with raw materials that are converted into finished products. • To be classified as a direct materials cost, the cost must be both of the following: • 1. An integral part of the finished product 2. A significant portion of the total cost of the product Examples of direct materials costs include the following: 1. The cost of the wood used in producing a guitar 2. The cost of electronic components for a television 3. Silicon wafers for microcomputer chips 4. Tires for an automobile © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Direct Labor Cost • Most manufacturing processes use employees to convert materials into finished products. • The cost of employee wages that is an integral part of the finished product is classified as direct labor cost. • A direct labor cost must meet both of the following criteria: • 1. An integral part of the finished product 2. A significant portion of the total cost of the product Examples of direct labor costs include the following: 1. 2. 3. 4. The wages of employees who cut guitars out of raw lumber and assemble them Mechanics’ wages for repairing an automobile Machine operators’ wages for manufacturing tools Assemblers’ wages for assembling a laptop computer © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead Cost (slide 1 of 2) • Costs other than direct materials cost and direct labor that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes called manufacturing overhead or factory burden). • All factory overhead costs are indirect costs of the product. • Some factory overhead costs include the following: 1. Heating and lighting the factory 2. Repairing and maintaining factory equipment 3. Property taxes on factory buildings and land 4. Insurance on factory buildings 5. Depreciation of factory plant and equipment © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prime Costs and Conversion Costs (slide 1 of 2) • Direct materials, direct labor, and factory overhead costs may be grouped together for analysis and reporting. 1. Two such common groupings are as follows: ▪ Prime costs, which consist of direct materials and direct labor costs ▪ Conversion costs, which consist of direct labor and factory overhead costs – Conversion costs are the costs of converting the materials into a finished product. • Direct labor is both a prime cost and a conversion cost. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs and Period Costs (slide 1 of 2) Direct materials Product costs Direct labor Factory overhead Costs Selling expenses Incurred while marketing and delivering the product to the customer Administrative expenses Incurred while managing the company and are not directly related to the manufacturing or selling functions Period costs © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs and Period Costs (slide 2 of 2) • As product costs are incurred, they are recorded and reported on the balance sheet as inventory. When the inventory is sold, the cost of the manufactured product sold is reported as cost of goods sold on the income statement. • Period costs are reported as expenses on the income statement in the period in which they are incurred, and, thus, they never appear on the balance sheet. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Costs, Period Costs, and the Financial Statements © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Statements for a Manufacturing Business • The statement of stockholders’ equity and statement of cash flows for a manufacturing business are similar to those for service and retail businesses. • However, the balance sheet and income statement for a manufacturing business are more complex. 1. This is because a manufacturer makes the products that it sells and, thus, must record and report product costs. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet for a Manufacturing Business • A manufacturing business reports three types of inventory on its balance sheet as follows: 1. Materials inventory (sometimes called raw materials inventory) consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process. 2. Work in process inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process). 3. Finished goods inventory consists of completed (or finished) products that have not been sold. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 1 of 4) • The income statements for retail and manufacturing businesses differ primarily in the reporting of the cost of goods (merchandise) available for sale and sold during the period. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 2 of 4) • A retail business determines its cost of good sold by first adding its net purchases for the period to its beginning inventory. o • This determines inventory available for sale during the period. The ending inventory is then subtracted to determine the cost of good sold. A manufacturing business makes the products it sells, using direct materials, direct labor, and factory overhead. o Manufacturing business must determine its cost of goods manufactured during the period. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 3 of 4) • The cost of goods manufactured is determined by preparing a statement of cost of goods manufactured. o This statement summarizes the cost of goods manufactured during the period © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement for a Manufacturing Business (slide 4 of 4) • The statement of cost of goods manufactured is prepared using three steps Determine the cost of materials used Determine the total manufacturing costs incurred Determine the cost of goods manufactured © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Flow of Manufacturing Costs © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Utilization Rates (slides 1 of 3) • A utilization rate measures the use of a fixed asset in serving customers relative to the asset’s capacity. o • A higher utilization rate is considered favorable, while a lower utilization rate is considered unfavorable. Different service industries will have different names and computations used for measuring utilization rates. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Utilization Rates (slides 2 of 3) • In the hotel industry, for example, utilization is measured by the occupancy rate, which is computed as: Occupancy rate = o Guest nights Available room nights Where, ▪ Guest nights = Number of guests × Number of nights per visit (per time period) ▪ Available room nights = Number of available rooms × Number of nights per time period o The number of guests is determined under single room occupancy, so that the number of guests is equal to the number of occupied rooms. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Utilization Rates (slides 3 of 3) • Assume EasyRest Hotel is a single hotel with 150 rooms. During the month of June, the hotel had 3,600 guests, each staying for a single night. The occupancy rate would be determined as follows: Guest nights Available room nights 3,600 guest nights = = 80% 150 rooms × 30days Occupancy rate = o The hotel was occupied to 80% of capacity, which would be considered favorable. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 2 Job Order Costing Cost Accounting Systems Overview (slide 1 of 4) Measure, record, and report product costs Cost accounting systems Job order cost systems Process cost systems © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Accounting Systems Overview (slide 2 of 4) Uses of product costs Setting product prices Controlling operations Developing financial statements © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Accounting Systems Overview (slide 3 of 4) • A job order cost system provides product costs for each quantity of product that is manufactured. o • Each quantity of product that is manufactured is called a job. Job order cost systems are often used by companies that manufacture custom products for customers or batches of similar products

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