Hi Tony, Thank you so much for this, I have been really enjoying following your course, thanks to your expertise in the subject, the great way you have laid out your course, and the clarity of your instruction. After following through this exercise, there is a something that I am unable to figure out. If we do the T-accounts for WIP and Finished Goods, we remain with a debit of 20k and 25k, respectively, totaling 45k of work done. When looking at the Selling & Admin expenses in the Income Statement of part d, these expenses did not only contribute to producing the items sold, they also contributed to the work done on the 45k still in the inventories. If my previous statement is correct, then: 1) How accurate are we representing the S&A expenses responsible to produce the 800k worth of goods sold, and 2) how would we account the portion of the S&A expenses responsible for producing the 45k worth of work once it gets sold. Am I missing something? I would appreciate your feedback. Thanks.
Thanks so much for your comment - I think there's a detail you are confusing: The selling and admin costs are not related to the WIP costs. Selling and admin costs help us to make the goods of course (we need presidents, and office admin to make decisions about what to make and how much stuff to make etc, and we need salespeople to sell the stuff), but these are not "Product Costs", so they don't go into WIP. The stuff in WIP are only three things Material, Labour and Overhead (and overhead is FACTORY costs), so these are treated differently from Office or Selling costs. Let's look at Apple. Let's say it costs $400 in material, labour and overhead to make an iPhone. When they spend $1,000,000 on a Super Bowl Advertisement, they don't apply any of that cost to the iPhone ($0), and they don't attempt to consider it as part of their Cost of Goods sold - it's a totally separate expense and needs to be treated separately. Have a look at "Product vs Period Costs" in a text or online search - I think this is where you're getting confused.
Thank you for your response. I will review "Product Vs Period Costs" as you recommended. Regarding the Apple example above, how do they recover the $1M cost of advertising, don't they also account for Sales & Admin costs in a similar way they treat MOH? As in calculating their yearly operating budget and dividing by the driver; like the total yearly man-hours for the whole team, then apply to the job cost on every project?@@Tony-Bell
@@WalidSulayman I don't think Apple would think of it in that way - they'd look at their revenue from selling a phone (Say $1,000) and their Product costs, DM+DL+MOH, (Say $400) and say to themselves, "Ok, we make $600 on every phone we sell and if we sold 1,000,000 phones, so we'd generate $600,000,000 to use fund operations, buying buildings, advertising etc". But they wouldn't apply advertising costs on the basis of work-hours or something like that to determine how many advertising dollars went into a phone. (At least I don't think so - I wouldn't approach it that way!)
You make perfect sense when it comes to a model like Apple. However, in a custom manufacturing small business where Admin costs are significant in proportion to direct manufacturing cost and MOH, if job costing is based simply on DL+DM+MOH, then how can one recover G&A expenses? If not factored somehow into the job cost, they might eat up profit otherwise. @@Tony-Bell
@@WalidSulayman I think it's just a different framework for thinking about it. Of course they would think about recovering G&A expenses, but they wouldn't factor it into how they think about their product costs - simply because the two aren't tied to each other. My CEO sees the company is struggling and cuts management salaries by 25% - the company's cost per unit to produce the product hasn't changed. If the CEO finds a cheaper plastic to use in the product, the cost per unit changes. Of course one needs to think of G&A expenses when making plans, but I'd consider them separately from product costs.
If this was over allocated instead of under, would we still add the 2 COGS together for the COGS on the income statement? Or would we subtract? Thank you!
Hi Tony, love your lecture :) One question though. Where did the $5,000 (b. glue and cleaning supplies) go? Just wondering if it should've been included in the operating expense?
We requisitioned 4500 of supplies for use in making the products (part c.) - they are indirect materials and have been included in MOH. The 500 we didn't use is still in supplies (an asset) at the end of the year. If we used them in our office, or sales department, they would be expenses, but the question doesn't mention this...
@@Tony-Bell Thought what sticks with the product (Glue and ... included) is DM what is used in the process and stays at the factory is MOH (Light, ...)
@@ShoaibHaidari-yo4nx So if it's easy to track how much glue went in, then it's DM - but if it's not easy to track (ie different every time) then it's MOH. Really depends on the situation.
generally speaking, why interest isn't included? Second, does these types of expenses have a cash basis and non cash basis format? (regarding D&A expense and other non cash exp)
No interest was just a choice when I wrote the question - had I included interest, it would make the question more complicated. But interest on a mortgage on the factory would be overhead, and interest on the office building would be a period cost that would go as an expense on the income statement. As for cash vs accrual - everything I do is accrual bases (not cash) to match with GAAP.
OMG - I have a memory like a sieve! Tony, I don't know how you keep all this stuff lined up and at your finger tips! You rock, man!
😅- I am known for a TERRIBLE memory for most things! I guess the accounting stuff sticks with me 😁
You have a gift of god, thank you
This sample question is really practical!!🎉🎉🎉
Thanks TonY for Making it Fun While its NOT !!
He is a hero, he is a lifesaver
Hi Tony, Thank you so much for this, I have been really enjoying following your course, thanks to your expertise in the subject, the great way you have laid out your course, and the clarity of your instruction. After following through this exercise, there is a something that I am unable to figure out. If we do the T-accounts for WIP and Finished Goods, we remain with a debit of 20k and 25k, respectively, totaling 45k of work done. When looking at the Selling & Admin expenses in the Income Statement of part d, these expenses did not only contribute to producing the items sold, they also contributed to the work done on the 45k still in the inventories. If my previous statement is correct, then: 1) How accurate are we representing the S&A expenses responsible to produce the 800k worth of goods sold, and 2) how would we account the portion of the S&A expenses responsible for producing the 45k worth of work once it gets sold. Am I missing something? I would appreciate your feedback. Thanks.
Thanks so much for your comment - I think there's a detail you are confusing: The selling and admin costs are not related to the WIP costs. Selling and admin costs help us to make the goods of course (we need presidents, and office admin to make decisions about what to make and how much stuff to make etc, and we need salespeople to sell the stuff), but these are not "Product Costs", so they don't go into WIP. The stuff in WIP are only three things Material, Labour and Overhead (and overhead is FACTORY costs), so these are treated differently from Office or Selling costs.
Let's look at Apple. Let's say it costs $400 in material, labour and overhead to make an iPhone. When they spend $1,000,000 on a Super Bowl Advertisement, they don't apply any of that cost to the iPhone ($0), and they don't attempt to consider it as part of their Cost of Goods sold - it's a totally separate expense and needs to be treated separately.
Have a look at "Product vs Period Costs" in a text or online search - I think this is where you're getting confused.
Thank you for your response. I will review "Product Vs Period Costs" as you recommended.
Regarding the Apple example above, how do they recover the $1M cost of advertising, don't they also account for Sales & Admin costs in a similar way they treat MOH? As in calculating their yearly operating budget and dividing by the driver; like the total yearly man-hours for the whole team, then apply to the job cost on every project?@@Tony-Bell
@@WalidSulayman I don't think Apple would think of it in that way - they'd look at their revenue from selling a phone (Say $1,000) and their Product costs, DM+DL+MOH, (Say $400) and say to themselves, "Ok, we make $600 on every phone we sell and if we sold 1,000,000 phones, so we'd generate $600,000,000 to use fund operations, buying buildings, advertising etc". But they wouldn't apply advertising costs on the basis of work-hours or something like that to determine how many advertising dollars went into a phone. (At least I don't think so - I wouldn't approach it that way!)
You make perfect sense when it comes to a model like Apple. However, in a custom manufacturing small business where Admin costs are significant in proportion to direct manufacturing cost and MOH, if job costing is based simply on DL+DM+MOH, then how can one recover G&A expenses? If not factored somehow into the job cost, they might eat up profit otherwise. @@Tony-Bell
@@WalidSulayman I think it's just a different framework for thinking about it. Of course they would think about recovering G&A expenses, but they wouldn't factor it into how they think about their product costs - simply because the two aren't tied to each other. My CEO sees the company is struggling and cuts management salaries by 25% - the company's cost per unit to produce the product hasn't changed. If the CEO finds a cheaper plastic to use in the product, the cost per unit changes. Of course one needs to think of G&A expenses when making plans, but I'd consider them separately from product costs.
God bless you, Thank you🥰
you are the best 🥰
thank you so much!!
If this was over allocated instead of under, would we still add the 2 COGS together for the COGS on the income statement? Or would we subtract? Thank you!
Subtract!
Hi Tony, love your lecture :) One question though. Where did the $5,000 (b. glue and cleaning supplies) go? Just wondering if it should've been included in the operating expense?
We requisitioned 4500 of supplies for use in making the products (part c.) - they are indirect materials and have been included in MOH. The 500 we didn't use is still in supplies (an asset) at the end of the year. If we used them in our office, or sales department, they would be expenses, but the question doesn't mention this...
@@Tony-Bell Thought what sticks with the product (Glue and ... included) is DM what is used in the process and stays at the factory is MOH (Light, ...)
@@ShoaibHaidari-yo4nx So if it's easy to track how much glue went in, then it's DM - but if it's not easy to track (ie different every time) then it's MOH. Really depends on the situation.
generally speaking, why interest isn't included?
Second, does these types of expenses have a cash basis and non cash basis format? (regarding D&A expense and other non cash exp)
No interest was just a choice when I wrote the question - had I included interest, it would make the question more complicated. But interest on a mortgage on the factory would be overhead, and interest on the office building would be a period cost that would go as an expense on the income statement. As for cash vs accrual - everything I do is accrual bases (not cash) to match with GAAP.
What will be the journal entry if it was overapplied, sir?
Exact opposite - DR MOH, CR COGS
@@Tony-Bell Thanks very much!