Work order costing system
INTRODUCTION
Cost accounting is a general accounting specialty that records, summarizes, analyzes, and interprets the details of the costs of materials, labor, and manufacturing overhead incurred to produce an item or service for a business in order to be able to measure, control and analyze the results of the production process through obtaining unit and total costs.
Cost accounting also measures performance, product quality, and productivity; includes the analysis and synthesis of the total cost of production, based on the costs of work orders, the compilation of production costs provides a basis for determining the cost of goods to be sold in the future.
The word cost is usually preceded by other words that help to understand the real meaning that is intended to give said term. The expressions: material costs, labor costs, conversion costs, cost accounting, cost systems, cost department, etc. are some examples of the way in which this word is commonly used.
The cost can be said to refer to expenditures or disbursements made to acquire goods or services, these disbursements are grouped or classified so that they can adequately serve the needs of those who intend to use or analyze them.
A prerequisite and fundamental in a work order costing system is the possibility of being able to segregate or quantitatively identify the product under preparation in the factory or workshop, at any given time. This system allows to collect separately each of the cost elements (direct materials, direct labor and indirect manufacturing costs), for each job or work order in process.
The work order costing system is most appropriate when manufactured products differ in terms of customer requirements or specifications, and the quoted price is closely associated with the estimated cost. The cost incurred in preparing a specific work order must be allocated to the items produced.
In a work order costing system the three basic elements of cost (MD, MOD, CIF) are accumulated according to the numbers assigned to the work orders.
JUSTIFICATION
Our main motivation for the development of this topic is to know the bases to control and record production costs effectively in a work order costing system.
Aware of the utility that cost accounting provides, we have directed this work to the development of innovative techniques applied to production, basically generated in companies in the manufacturing sector and that base the development of their social purpose not only on mass production of articles, but also in its orderly and systematic process.
The use of a work order costing system in companies that manufacture their products according to customer specifications allows management to control and evaluate the use of their resources in production.
The present work aims to introduce the reader to the cost accounting cycle in the production process through a work order costing system, adequate control of materials, labor and indirect manufacturing costs.
GENERAL OBJECTIVES
Define the importance of the work order costing system for decision making in the manufacturing industry.
Explain the process of the work order costing system in manufacturing companies.
SPECIFIC
Analyze the cost elements in a work order costing system (Direct Materials, Direct Labor, Indirect Manufacturing Costs) to determine unit costs.
Describe the main bases used for the determination of Budgeted Indirect Manufacturing Costs (applied) in the work order costing system.
Explain the treatment of damaged, defective units, scrap material, and scrap material in the job order costing system.
Know the characteristics, advantages and disadvantages of the work order costing system.
DEVELOPMENT OF THE TOPIC
CHAPTER I COSTS BY WORK ORDERS
The cost of producing a good or service can be defined as the value of the set of goods (direct and indirect material) and efforts (direct and indirect labor) that have been or will be incurred in the production department for obtain as a result a good or finished product with good conditions to be acquired by the commercial sector.
The cost of the product to be manufactured must be similar or lower, but of good quality to that of the competitor's product, from the accounting point of view, cost is the sum of values, quantifiable in money, that represent the consumption of the factors of production (MD, MOD, CIF) disbursed to achieve the objective of obtaining a finished product. The main objective of cost accounting is to contribute to the control of operations, communicate financial information and exercise administrative control that serves as a planning, control and decision-making tool.
The primary purpose of a cost accounting system is to gather data related to the cost of producing each manufacturing unit. By obtaining this data, management and support staff distribute the company's resources to meet organizational goals, since resources are limited, they must be based on cost data when deciding the actions that would provide optimal returns for the company.
The control of production costs allows management to obtain necessary information and take actions in order to reduce costs, for example: using substitute material, proposing a new product design without reducing quality, but if the amount of material used, modifying wage systems to reduce idle labor and its costs, installing machinery to increase production or replacing obsolete machinery, adequately controlling purchases and outputs of materials and supplies to reduce waste.
The work order costing system is applicable to those manufacturing companies that produce according to customer specifications. The companies that normally use the work order costing system are: construction companies, advertising video producers, furniture stores, printers, cardboard, plastics, assembly plants, shoe stores, among others. In this system it is important to keep a strict control of the orders that are submitted to the process through the numbering assigned to each one of them and to control the prime cost (MD and MOD) by means of referrals from the warehouse to the production department and invoice of work for each production order.
COST ELEMENTS (MD, MOD, CIF)
Manufacturing a good or service involves the use of materials, labor, and manufacturing overhead.
MATERIALS:
They represent the main cost element in the elaboration of a product, these are subjected to a process and become finished products with the addition of labor and indirect manufacturing costs.
DIRECT MATERIALS are all those that can be easily identified in the finished product and represent the main cost in the production of the product. An example of direct material is the fabric, thread, buttons that are used in the manufacture of shirts.
INDIRECT MATERIALS are those used in the elaboration of a product, but they are not easily identifiable and are included as part of the indirect manufacturing costs. An example of indirect materials are labels, oils for machines, cardboard boxes for packaging that are used in the textile industry.
PURCHASE OF MATERIALS
Manufacturing companies generally have a purchasing department whose function is to order raw materials and supplies necessary for production. The purchasing department manager is in charge of ensuring that the items ordered meet the specifications and quality requirements established by the Company, that they are purchased at the lowest price and dispatched on time. These materials are stored in the materials and supplies warehouse, under the control of the warehouse manager who will only deliver materials or supplies by request and authorization of the plant or production manager.
PURCHASE REQUISITION
A purchase requisition is a written form that is generally sent by the purchasing department and arises from the need for materials or supplies. Purchase requisitions are generally printed and prenumbered with Company specifications.
Purchase requisition format
PURCHASE ORDER
A purchase order is a written request sent to a supplier, originated by a requisition or need for materials and supplies. The purchase order is sent when a price has been agreed, specifications of the terms of payments and delivery; the purchase order authorizes the supplier to deliver the materials or supplies and to issue the invoice.
All materials or supplies purchased must be supported with purchase orders duly prenumbered in order to guarantee control over their use.
Purchase order format
The original purchase order is sent to the supplier, a copy is delivered to the accounting department for proper registration and another copy to the purchase department to follow up on the order.
INPUT OF MATERIALS AND SUPPLIES
It is used by the warehouse manager, when he receives the requested materials and supplies, he unpacks and counts them, checks the materials to make sure they are not damaged and comply with the specifications and requirements given in the purchase order and requested quantity. the original is handled in accounting and the copy is filed by the warehouse manager, who must issue an entry report either weekly, biweekly or monthly.
Materials and supplies entry format
Journal entry for material purchase record
Inventory of materials and supplies C $ 85,740
Tax paid in advance VAT 12,861
Accounts payable C $ 98,601
Equal amounts C $ 98,601 C $ 98,601
For the recording of materials and supplies in the journal entry, a debit must be made to the inventory account of materials and supplies, which is where the purchases of raw materials are controlled and the obligation is created with the supplier in case of credit or the allocation to cash in cash and banks if it is cash.
USE OF MATERIALS
MATERIALS AND SUPPLIES REQUIREMENT
The output of materials and supplies starts the production process, it consists of making use of the raw material from the materials and supplies warehouse. The warehouse manager must guarantee adequate storage, protection and release of all materials under his control. The output of materials is through the requisition of materials, prepared by the production staff and authorized by the production manager or by the department supervisor. The requisition must specify the order number in which the material will be used and thus control the material cost of the work order.
Material output format
The calculation of the total cost of the materials delivered is obtained by multiplying the unit cost of the material by the quantity requested. The quantity is easily determined from the materials requisition form. When direct materials are sent to production, a journal entry must be recorded uploading the work-in-process inventory or the specific work order in which the material will be used against the materials and supplies inventory account.
Material issues are assigned to each order and you must make a journal entry for the total delivered during the day, or a summary entry at the end of each month.
Journal entry for recording material consumption
Production in process inventory - Materials C $ 83,340
Order # 0201 C $ 69,450
Order # 0202 13,890
Control CIF 2,400
Order # 0201 C $ 2,000
Order # 0202 400
Inventory of materials and supplies C $ 85,740
Equal amounts C $ 85,740 C $ 85,740
To record the consumption of materials and supplies, a journal entry must be made debiting the production in process or the orders in process for the direct material used, the indirect material is part of the CIF and a credit the inventory account of materials and supplies.
WORKFORCE:
It represents the work used by the people who contribute directly or indirectly to the transformation of the raw material, it is the physical or mental contribution to the elaboration of a good or product. The cost of labor represents the amount or price paid for employing human resources. It is the compensation or remuneration to the personnel who work in a certain order of production.
DIRECT LABOR is the one that is used directly in the transformation of the raw material into a good or finished product, it is characterized because it can easily be associated with the product and represents a significant cost in the production of said article. Direct labor is considered a prime cost as well as a conversion cost.
INDIRECT LABOR is the work employed by production personnel who are not directly involved in the transformation of raw material, such as the production manager, supervisor, superintendent, etc. This is considered as part of the indirect manufacturing costs.
The main cost of labor is the wages paid to production workers. Wages are paid based on hours, days, or orders worked. Fixed payments made regularly for production office or managerial services are considered a secondary cost and are part of manufacturing overhead.
LABOR RECORD
Registering labor generally involves three steps: time control, payroll preparation, and payroll registration.
TIME CONTROL is through a time card or clock and work slip. The time card or clock is used several times a day by the employee: upon arrival, when going out for lunch, when taking a break and when he finishes working in order to control the number of hours in a certain order. The card displays a brief description of the work performed and the employee's wage rate, it provides a reliable source for recording the cost of payroll.
Time or clock control card format
This is a time card of a sewing machine operator who is regarded as a direct employee in production.
Job tickets are prepared daily by employees who are working in a certain order, indicating the number of hours worked, a brief description of the job and the employee's salary rate to be sent to the payroll department.
Job ticket format
THE PREPARATION OF THE PAYROLL is in charge of the payroll department based on time control and work tickets, the payroll must include the gross amount and the net amount to be paid to the employees after the corresponding deductions such as INSS, IR and others. This department distributes the payroll and keeps track of the employees' income, wage rate and job classification.
Once the payroll has been prepared and reviewed by the production manager, it is sent to the cost accounting department who assigns the payroll costs to the work orders in process.
THE PAYROLL RECORD is generally prepared weekly, biweekly, or monthly. The gross pay for an employee is determined by multiplying the hours indicated on the time cards or work slip by the hourly rate, plus any bonuses or overtime.
Journal entry for payroll registration
Production in process inventory - Labor C $ 14,800
Order # 0201 C $ 12,333.33
Order # 0202 2,467.67
Payroll payable C $ 14,800
Equal amounts C $ 14,800 C $ 14,800
This is the journal entry to record the payroll and the corresponding liability, it is prepared in each payroll period. Usually the employer's payroll costs and their distribution are recorded at the end of the month. The journal entry for the payroll record is as follows:
Payroll payable C $ 14,800
Cash in cash and banks C $ 14,800
Equal amounts C $ 14,800 C $ 14,800
When the payroll is canceled, a debit must be made to the provision account against a credit to the cash and bank account.
SPECIAL LABOR SITUATIONS
Accounting for labor includes special situations that do not appear in the materials record, such as employee withholdings (IR, INSS), social benefits (vacations, thirteenth month and severance pay), holidays worked, hours extras, idle time, guaranteed minimum wage, incentive plans and employer contribution from INSS and Inatec.
SOCIAL BENEFITS
The employer has the duty to pay its employees the social benefits contemplated in the Labor Code of the Republic of Nicaragua as established in its articles:
Art. 45. When the employer terminates the employment contract for an undetermined time and without just cause, it will pay the worker compensation equivalent to: one month's salary for each of the first three years of work; twenty days of salary for each year of work from the fourth year. In no case will the compensation be less than one month or more than five months. The fractions between the years worked will be settled proportionally.
Art. 76. Every worker has the right to enjoy fifteen days of continuous and paid rest as vacation, for every six months of uninterrupted work in the service of the same employer. two
Art. 77. When the employment contract or employment relationship is terminated, the worker will have the right to be paid wages and the proportional part of his legal benefits accumulated during the time worked.2
Art. 93. Every worker has the right to have his employer pay him an additional month's salary after a year of continuous work, or the proportional part that corresponds to the period of time worked, greater than one month and less than one year.2
The social benefits journal entry is illustrated later in the recording of manufacturing overhead.
The vacation value should not be charged to the production in process when the employee takes it rested, it should be assigned to the cost only for the period worked.
HOLIDAYS WORKED
In the case of working holidays, the payment depends on what is established in the clauses of the contract or the general policies for personnel, the Labor Code of the Republic of Nicaragua establishes in this regard:
Art. 66. The following are mandatory national holidays with the right to rest and salary: January 1st, Holy Thursday and Friday, May 1st, July 19, September 14th and 15th, December 8th and 25th.
Journal entry for the record
CIF control xxxx.xx
Holidays worked
Order # 001 xxx.xx
Order # 002 xxx.xx
Payroll xxxx.xx
To record the holidays worked, a debit must be made to the CIF control account, since it is considered an indirect cost in the manufacture of the product and creates the provision of the liability for wages. For the purposes of our practical case, they are not taken into account because such an eventuality did not happen.
EXTRA HOURS
The cost of overtime is the product of the overtime worked, it must be settled as follows:
Art. 62. Overtime hours and those worked by the worker on his rest or compensatory day for any reason, will be paid one hundred percent more than that stipulated for the respective normal working day.
In other words, the worker will earn a remuneration equivalent to one normal hour worked plus one hundred percent per overtime.
Journal entry for recording overtime
Production in Process Inventory - Workforce xxxx.xx
Order # 001 xxx.xx
Order # 002 xxx.xx
Payroll xxxx.xx
For the registration of overtime, the journal entry is similar to direct labor for workers' salaries, direct labor is charged to the production in process because this time is used directly in the manufacture of the order In the case of blue-collar workers, the overtime of the production office staff is recorded as part of the manufacturing overhead. For the purposes of our case, no overtime was worked.
LEISURE TIME
Idle time is generated when employees have no work to do, but are paid for their time. For example, when a new job is established in production, some workers may temporarily have nothing to do. If your leisure is normal to the production process and cannot be avoided, the cost of the idle time could be charged to production and become part of the manufacturing overhead. If the idle time was due to negligence or inefficiency, it could be recorded as other expenses within the results of operations.
GUARANTEED MINIMUM SALARY
When an employee's salary is based on the number of units produced, he is said to be paid at a piecework rate. Many companies pay a minimum wage, the income of the employees can increase when they produce more, the record of the guaranteed minimum wage is exact to that of direct labor since it is considered as a fixed cost per labor.
INCENTIVE PLANS
Incentive plans vary in form and application. Two commonly used plans are the Gnatt Plan, with a bonus rate that is applied to the total quantity produced in excess of the standard number of units and the Taylor System, a bonus rate that is applied to the total quantity of parts produced as the standard is soon reached. There are other worker incentive plans such as: salary or food bonus for meeting goals and work efficiency, specialization in a certain area for better service to the company, among others.
Before adopting an incentive plan, management should examine the possible negative and positive effects. Incentive plans require additional record keeping, leading to increased manufacturing overhead. For incentive plans to be considered successful, increases in total payroll costs must be offset by increases in production and sales.
INSS AND INATEC EMPLOYER CONTRIBUTION
The company as such is obliged to pay the INSS employer contribution, which will be calculated using the table issued by the Inss and is a benefit that protects the employee in case of occupational diseases or risks, the Inatec is the contribution of 2% on the gross amount of the payroll which is used for the training of workers or office employees; will be part of the manufacturing overhead.
INDIRECT MANUFACTURING COSTS
Indirect manufacturing costs as its name indicates are all those costs that are not directly related to manufacturing, but contribute to and are part of the production costs: indirect labor and indirect materials, heating, light and energy for the factory, factory building leasing, factory building and equipment depreciation, factory building and equipment maintenance, insurance, inatec, welfare benefits, incentives, downtime are examples of manufacturing overhead.
Daily entry for recording manufacturing overhead
CIF Control C $ 23,889
Order # 0201 C $ 19,907.5
Order # 0202 3,981.5
Payroll payable C $ 9,000
Other accounts payable 3,090
Accrued expenses payable 10,716
Accumulated Depreciation 1,083
Equal amounts C $ 23,889 C $ 23,889
Indirect manufacturing costs based on their behavior with respect to production can be: variable, fixed or mixed.
INDIRECT VARIABLE MANUFACTURING COSTS change in direct proportion to the level of production, the higher the total number of units produced, the higher the total indirect variable manufacturing costs. Indirect labor, indirect materials, and accelerated depreciation are examples of variable costs.
FIXED INDIRECT MANUFACTURING COSTS remain constant over a relevant period, regardless of changes in production levels within that period. Linear depreciation and factory building lease are examples of fixed manufacturing overhead.
INDIRECT MIXED MANUFACTURING COSTS are not totally fixed or totally variable in nature. These should be separated from fixed and variable components for planning and control purposes. Truck leases for factory and factory telephone service and salaries for factory supervisors and inspectors are examples of mixed manufacturing overhead.
REAL COST VERSUS NORMAL COST OF INDIRECT MANUFACTURING COSTS
In the actual cost system, product costs are only recorded when they are incurred. This technique is generally accepted for direct material and direct labor registration because they can be easily associated with work orders. Indirect manufacturing costs, due to their nature in the cost of the product, cannot be easily or conveniently associated with a measure that they are incurred with one exception: indirect manufacturing costs are applied to production based on actual inputs multiplied by a predetermined rate of application of manufacturing overhead, this procedure is required because manufacturing overhead is not incurred uniformly over a period,requiring estimates and a rate to apply to orders as units are produced.
The two key factors in determining the rate of application of manufacturing overhead for a period are: estimated level of production and estimated manufacturing overhead.
The estimated level of production for the calculation of the rate of application of indirect manufacturing costs for a period is divided by the denominator of the predetermined rate corresponding to the total indirect manufacturing costs.
The estimated level of production cannot exceed in the short term the production capacity of the Company, the productive capacity of the Company depends on many factors such as the physical size and conditions of the building or factory equipment, availability of resources such as trained workforce and diversity of raw material, etc. Generally, management sets production capacity based on projected market demand for the product. Engineers are assigned the task of product design and production specifications, however, one of the biggest problems is that the projected demand for the product in some cases is unknown or varies annually. To assist management in making decisions related to optimal plant capacity,Many innovative techniques have been developed that make use of sophisticated tools. For our purposes we assume that adequate production facilities are available in the appropriate location.
The problem is to estimate the number of units that will be produced in the period, subject to the constraints of the existing productive resources during the next period. To project the level of production corresponding to future periods, use of production capacity levels can be used.
THEORETICAL OR IDEAL PRODUCTIVE CAPACITY, is the maximum performance that a department or factory is capable of producing, without considering shortages of sales orders or interruptions in production due to work stoppages, idle time in machines for repairs or maintenance, days holidays, etc. At this level of capacity, it is assumed that the plant operates 24 hours a day, 7 days a week and 52 weeks a year, without taking into account interruptions that prevent reaching the highest possible physical production, that is, 100% of the plant capacity.
PRACTICAL OR REALISTIC PRODUCTIVE CAPACITY, is the maximum achievable production, considering foreseeable or unavoidable interruptions in production without taking into account lack of sales orders, practical capacity is the maximum capacity expected when the plant operates at a planned level of efficiency.
NORMAL OR LONG-TERM CAPACITY, is the capacity that is based on the practical productive capacity and that consults the customer's demand for the product in the long term, the normal capacity must be equal to or less than the practical productive capacity.
EXPECTED OR SHORT-TERM PRODUCTIVE CAPACITY, is the capacity that is based on the estimated production of the following period, the expected productive capacity may be greater, equal to or less than the normal productive capacity. In the long term, the total expected productive capacity must be equal to the normal productive capacity.
The first two levels of production capacity only take into account the physical capacity of the factory. Thus, if a company could sell everything it produces, these capacity levels could be used to calculate the rate of application of manufacturing overhead costs, however, this rarely happens because most companies produce only what they expect to sell, for Consequently, sales projections are a vital factor in the planning process and must be taken into account when estimating production levels. Normal production capacity or expected production capacity is used to calculate indirect manufacturing costs because these bases include projected customer demand in their estimates.The expected productive capacity should only be used in theory when it is difficult to estimate normal productive activity. The normal productive capacity is used by companies that consider that the cost of the product should be based on an average cost that takes into account the interruptions related to production and fluctuations in demand, assuming that all other factors remain constant, the capacity Normal production results in uniform product costs per unit over different time periods.Assuming all other factors remain constant, normal productive capacity results in uniform product costs per unit over different time periods.Assuming all other factors remain constant, normal productive capacity results in uniform product costs per unit over different time periods.
The use of the expected productive capacity as a base provides a close approximation of the activity of the following period, since the expected productive capacity is based on a projection of the production of that period, the amount of the fixed CIF not absorbed by the production they should be kept to a minimum. The main drawback in using expected productive capacity is that it results in a variable unit cost over different time periods if production varies considerably.
ESTIMATED INDIRECT MANUFACTURING COSTS
When determining the estimated production level, some procedures must be developed to obtain a satisfactory estimate of manufacturing overhead. Generally, a budget is prepared for the estimated manufacturing overhead for the following period.
Indirect manufacturing cost application rates are set in córdobas per unit of activity estimated on some basis. There are no absolute bases to determine which base to use as the activity of the denominator. However, there must be a direct relationship between the base and manufacturing overhead. The method used to set the application rate for manufacturing overhead should be straightforward and easy to calculate and apply. Once the basis for estimating total manufacturing overhead has been chosen, the normal capacity level must be estimated in order to calculate the rate of application of manufacturing overhead, whose formula is the same regardless of the chosen basis.
The base is expressed in córdobas, the rate is a percentage and must be multiplied by 100.
The most common bases for the application of CIF are:
Production units
% of direct materials cost
% of direct labor cost
Direct labor hours
Machine hours
For the application of the predetermined rate of the CIF we illustrate the following budget:
CONFECCIONES TELY, SA
PRODUCTION BUDGET
January 2004
EXPRESSED IN CÓRDOBAS (C $)
Budgeted CIF:
Fixed C $ 10,600
Variables 15,800 C $ 26,400
Estimated Units
to be produced during the month 1,300
Estimated Direct Materials Cost 84,000
Estimated cost of direct labor 15,000
Hours of direct labor estimated 150 Hours
Estimated machine hours 150 Hours / Máq.
The data of this budget will be taken up in the methods of application of the CIF described below.
PRODUCTION UNIT BASE
The estimated CIFs are taken among the estimated production units, this method is convenient if only one product is being manufactured, otherwise it is impossible to apply it, it is one of the simplest methods to distribute the manufacturing load. This can be a pound, a foot, a machine, a hundred pieces, etc. The formula for determining this rate is:
If we receive an order from the Immaculate College on January 5, 2004 to produce 1000 shirts, we will apply C $ 20.31 of CIF for each shirt, that is, C $ 20,310 is what we will record in the CIF production in process account for that order.
BASE OF THE COSTS OF DIRECT MATERIALS
Some companies consider a percentage of the cost of direct materials used in production, it is a satisfactory method to determine the amount to add to the cost of direct materials and direct labor when computing the cost of manufacture. The formula for determining the rate is:
CONFECCIONES TELY, SA uses this method to determine its estimated indirect manufacturing costs and that on January 05, 2004 it receives orders 0201 and 0202 to produce 1,000 and 200 shirts respectively and the real limit of direct materials taken to the process is C $ 69,450 and C $ 13,890, we will assign the following as CIF to each order:
Order 0201 C $ 69,450 x 31.43% = C $ 21,814.14
Order 0202 C $ 13,890 x 31.43% = C $ 4,365.63
Journal entry for the registration of the CIF applied
Prod. Proc. - CIF C $ 26,193.77
Order # 0201 C $ 21,828.14
Order # 0202 4,365.63
CIF Applied C $ 26,193.77
Equal amounts C $ 26,193.77 C $ 26,193.77
DIRECT LABOR COST BASE
This method closely follows the cost of materials method. Companies that have the same hourly wage rate for all direct workers may better use this method.
In the event that you use this method to determine the CIF and the actual direct labor is C $ 14,800, we will assign 176% of the estimated CIF, that is, C $ 26,048, which is prorated to each of the orders.
BASE OF DIRECT LABOR HOURS
This method considers the time factor as the basis for applying the factory load. It is known as the man-hour rate and can be used in cases where the work is manual in nature.
With this method, real man-hours were 143, we will assign C $ 176 for each man-hour, that is, C $ 25,168 is what we would charge to production orders by CIF.
BASE OF HOURS-MACHINES
This method is analogous to the direct labor hours method and is used when the work is performed primarily by machine. In many companies, a large production of the factory load is made up of depreciation of the machines, maintenance and repairs of the machines, thus being able to use this method to calculate the factory load.
If for the same orders to produce 1000 and 200 shirts the machine hours are 143, we will assign C $ 176 for each hour, that is, C $ 25,168 that will be charged to the orders as CIF, prorated between the orders.
After determining the rate of application of manufacturing overhead, the estimated manufacturing overhead costs are typically applied to production on a progressive basis as the items are manufactured on the basis used.
Generally, actual manufacturing overhead costs are incurred daily and are periodically recorded in general ledgers, and subsidiary ledgers. Using subledgers allows a greater degree of control over manufacturing overhead costs as related accounts can be grouped.
Indirect manufacturing costs come from sources such as:
Invoices: Accounts received from service providers and organizations.
Vouchers: Paid bills.
Accumulations: Adjustments for accounts such as accumulated services payable, social benefits.
Adjustment entries at the end of the year: Account adjustments such as depreciation and amortization expenses.
RECORDING OF INDIRECT MANUFACTURING COSTS IN THE DAILY BOOK
The journal entries for recording manufacturing overhead costs using a work order costing system or using a process costing system are basically the same. The main difference is that in a work order costing system, the applied manufacturing overhead costs are accumulated by work orders, and with the other system these are accumulated by department.
The actual manufacturing overhead costs are debited to the CIF Control account are applied as production progresses, the estimated manufacturing overhead costs are debited to the CIF account of the orders in process against the applied CIF account, the purpose of using two separate accounts of indirect manufacturing costs is that the debits in the CIF Control account represent the total indirect costs incurred in production, while the balance of the CIF account applied represents the total indirect costs applied or estimated to the order, at the end of the period, the applied CIF account balance is closed against the CIF Control account balance, the difference in them represents an over - application (credit balance) or under - application (debit balance) of CIF.
The over or under - application of the CIF is due in part to the following: variation in the price of indirect materials that would increase the variable CIF or change in the depreciation method that increases the fixed CIF or increase in the hours used by the Indirect personnel in production, or significant variation in production volume according to budget.
In the costing system for work orders, the CIF over or under - applied must be adjusted, either to the cost of sales when the production has been delivered, inventory of finished products if it is in the possession of the Company in storage or to the production in the case of those orders in process, everything will depend on the state in which the products are.
WORK ORDER
The document used in a Company that uses the work order costing system is called a work or production order, it contains the accumulation of each of the cost elements (MD, MOD, CIF).
This document is designed to manage information required by management and therefore varies according to the demands or needs of management, for example some formats include sales and administrative expenses and sales price so that the profit can be easily estimated in the order, usually the format includes the basic production data.
The work order is used when the customer makes the request for products and remains active throughout the production process until the finished products are completed and transferred to the warehouse (The production order is illustrated in Annex 4
Total indirect manufacturing costs C $ 23,889
Indirect manufacturing costs incurred are prorated to orders based on the number of shirts to be produced.
For the calculation of the indirect manufacturing costs applied to the orders, 31.43% of the direct materials to be used is taken as the basis for the predetermined rate.
Selling and administrative expenses amounted to C $ 15,500 and C $ 10,400 corresponds to salaries of general management, financial and sales paid in cash.
The waste produced in the manufacture of the shirts is used to fill artisan products (cushions, pillows, etc.) and was sold at a minimum sale price of C $ 200.
50% is paid to the balance of suppliers.
Customers pay 70% of the balance.
The over or under - application of manufacturing overhead is determined.
On January 26, 2004, the orders submitted to the process were successfully completed and transferred to the finished products warehouse.
On January 28, 2004, the finished products are delivered to our customers.
CONCLUSIONS
- The development of this work allowed us to demonstrate the entire production process, quantify costs, expenses and sales of the products manufactured using the work order costing method, where the cost elements are accumulated by orders. We understand how the system provides quickly to management the data related to the costs of producing or selling each item, facilitating the preparation of a series of reports from which they base management decisions, since a good cost accounting system is not only limited to the accounting function, but also to keep cost control, which refers to the best way to use resources.We have been able to verify how accurate our knowledge is in terms of cost accounting,we hope with this work to show the reality of the production process of a company.We gained a better understanding about the documents used to control materials and labor, as well as the bases used to determine the indirect manufacturing costs applied, due the importance of these in determining the cost of producing the product and providing an acceptable selling price to the customer; We also learned about the characteristics, advantages and disadvantages of using the job costing system.due to the importance of these in determining the cost of producing the product and providing an acceptable sale price to the customer; We also learned about the characteristics, advantages and disadvantages of using the job costing system.due to the importance of these in determining the cost of producing the product and providing an acceptable sale price to the customer; We also learned about the characteristics, advantages and disadvantages of using the job costing system.
BIBLIOGRAPHY
- Polimeni, Fabozzy and Adelberg, Cost Accounting Third Edition. Mexico 1997. Editorial McGraw-HillTheodore Lang, Manual of the Cost Accountant, Third Edition. Managua, June 1998 Law N ° 185 Labor Code of the Republic of Nicaragua Microsoft Encarta Encyclopedia 2003 www.google.com.niwww.ciberconta.unizar.eswww.iasc.org.comwww.monografias.com
