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Systems Design: Job-Order Costing. Chapter Three. Learning Objective 1. Distinguish between process costing and job-order costing and identify companies that would use each costing method. A company produces many units of a single product.
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Systems Design: Job-Order Costing Chapter Three
Learning Objective 1 Distinguish between process costing and job-order costing and identify companies that would use each costing method.
A company produces many units of a single product. • One unit of product is indistinguishable from other units of product. • The identical nature of each unit of product enables assigning the same average cost per unit. Types of Product Costing Systems ProcessCosting Job-orderCosting
Many different products are produced each period. • Products are manufactured to order. • The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Types of Product Costing Systems ProcessCosting Job-orderCosting
Learning Objective 2 Identify the documents used in a job-order costing system.
Will E. Delite Measuring Direct Materials Cost
Learning Objective 3 Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. • We use an allocation base because: • It is impossible or difficult to trace overhead costs to particular jobs. • Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period Ideally, the allocation base is a cost driver that causes overhead. Manufacturing Overhead Application The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
The Need for a POHR Using a predetermined rate makes itpossible to estimate total job costs sooner. Actual overhead for the period is notknown until the end of the period. $
Overhead applied = POHR × Actual activity Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Actual amount of the allocation based upon the actual level of activity.
Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period $640,000 POHR = 160,000 direct labor hours (DLH) Overhead Application Rate POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.
Learning Objective 4 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs.
Job-Order CostingDocument Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.
Direct materials Indirect materials Job-Order CostingDocument Flow Summary Materials usedmay be eitherdirect orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account
Direct Labor Indirect Labor Job-Order CostingDocument Flow Summary An employee’stime may be eitherdirect or indirect. Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account
IndirectLabor AppliedOverhead IndirectMaterial Job-Order CostingDocument Flow Summary EmployeeTime Ticket OtherActual OHCharges Manufacturing Overhead Account Job Cost Sheets MaterialsRequisition
Learning Objectives 4 & 7 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs. Use T-accounts to show the flow of costs in a job-order costing system.
Direct Materials • Direct Materials • Indirect Materials • Indirect Materials The Purchase and Issue of Raw Materials Raw Materials Work in Process(Job Cost Sheet) • Material Purchases Mfg. Overhead Actual Applied
Direct Labor • IndirectLabor • Direct Labor • IndirectLabor The Recording of Labor Costs Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Materials Mfg. Overhead Actual Applied • Indirect Materials
Recording Actual Manufacturing Overhead Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor Mfg. Overhead Actual Applied • Indirect Materials • IndirectLabor • OtherOverhead
Learning Objective 5 Apply overhead cost to Work in Process using a predetermined overhead rate.
Overhead Applied • OverheadApplied to Work inProcess Applying Manufacturing Overhead Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor Mfg. Overhead Actual Applied • Indirect Materials If actual and applied manufacturing overheadare not equal, a year-end adjustment is required. • IndirectLabor • OtherOverhead
Accounting for Nonmanufacturing Cost Nonmanufacturing costs are not assigned to individual jobs; rather they are expensed in the period incurred. Examples:1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.
Learning Objective 6 Prepare schedules of cost of goods manufactured and cost of goods sold.
Cost ofGoodsMfd. • Cost ofGoodsMfd. Transferring Completed Units Work in Process(Job Cost Sheet) Finished Goods • Direct Materials • Direct Labor • Overhead Applied
Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.
Learning Objective 8 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.
Problems of Overhead Application The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead. Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.
Overhead Application Example PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s Method $30,000may be allocatedto these accounts. $30,000 may beclosed directly to cost of goods sold. Work inProcess FinishedGoods Cost of Goods Sold Cost of Goods Sold Disposition of Under- or Overapplied Overhead OR
$30,000 $30,000 Disposition of Under- or Overapplied Overhead PearCo’sMfg. Overhead PearCo’s Costof Goods Sold Unadjusted Balance Actualoverhead costs $650,000 Overhead appliedto jobs $680,000 AdjustedBalance $30,000 overapplied
Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method
May be more complex but . . . May be more accurate because it reflects differences across departments. Multiple Predetermined Overhead Rates To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates.
Job-Order Costing in Service Companies Job-order costing is used in many different types of service companies.
The Use of Information Technology Technology plays an important part in many job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.
The Predetermined Overhead Rate & Capacity Appendix 3A
Learning Objective 9 (Appendix 3A) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.
Predetermined Overhead Rate and Capacity • Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: • Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. • Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.
An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?
TraditionalMethod $100,000 40,000 = = $2.50 per unit Capacity Method $100,000 50,000 = = $2.00 per unit An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?
Quick Check When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.
