• What are the various documents used in the conversion cycle and what does each
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Question
• What are the various documents used in the conversion cycle and what does each one do?
• Why do companies need to calculate the costs associated with/assigned to products?
• Describe the importance/use of each of the following accounts – Manufacturing Overhead, Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory, Cost of Goods Sold. Know what type of account each one is and the events that increase and decrease the account.
• Show the journal entries used to record events in the conversion cycle.
• What is over/under applied overhead and why do we have it? What do we do with it at the end of the period?
Explanation / Answer
Answer 1:
various documents used in the conversion cycle are as under:-
sales forecast
production schedule
bill of materials,
route sheet (or master operations list)
work order
move ticket
materials requisition.
All the above documents are needed to authorise inputs and processes and movement of work through production system
Answer 2: Companies need to calculate the costs associated with/assigned to products because it is essential to calculate costs associated with each product so as to asceratin the selling price by adding a suitable profit margin or decide about product mix decisions or decisions whether to continue or stop the production of a product if it is not viable.
Answer 3:-
Manuafcturing overhead; It is used to allocate the manufacturing overheads incurred in the production processes to various products and processes.
Raw Materials Inventory:- Raw materials inventory represents the cost of all component parts that have not been used in work in process or finished production.
Work in process inventory is used to record inventory of goods which are in production stage though not fully completed
Finished Goods Inventory is the cost of goods which have been fully converted from raw materials to finished goods.
Cost of goods sold is the total cost incurred on saleable goods. Mathematically sales -cost of goods sold is equal to gross profit.
All additions/purchase to raw materials, work in process inventory and finished goods inventory increase it and issues/sales decrease them.
Answer 4: Journal entries to record events in conversion cycle:
A manufacturing co produced raw materials and adds labour and overhead. After this units are completed and company sells products. For Transfer of material, labor and overheads
Work in process----Debit
Raw Material Inventory--Credit
Direct Labor---------------Credit
Factory overhead-------Credit
For transfer of completed goods:-
Finished Goods Inventory------Debit
Work in process Inventory ------Credit
Answer 5:-
Over or under applied overhead is the debit or credit balance of manufacturing overhead account. Actual overhead costs are debited as they are incurred and applied overhead costs are credited as they are applied to work in process.
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