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Job Costing and Overhead Rates: Levi Strauss Factory Example

Learn about job costing and overhead rates using the Levi Strauss factory as an example. Discover how to calculate overhead allocation rates based on budgeted and actual overhead costs and production.

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Job Costing and Overhead Rates: Levi Strauss Factory Example

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  1. November 16, Part 4 • The Value Chain • Job Costing and Overhead Rates • Actual versus Budgeted Amounts • Levi Strauss Factory Example • Absorption Costing and Variable Costing • The Eskimo Pie Company

  2. November 16, Part 4 • The Value Chain • Job Costing and Overhead Rates • Actual versus Budgeted Amounts • Levi Strauss Factory Example • Absorption Costing and Variable Costing • The Eskimo Pie Company

  3. Costs by Business Functiona.k.a. the value chain R & D Manufacturing Marketing, Distribution, Sales

  4. Costs Classified By Business Function ______ R & D PRODUCT MFG. GAAP PLANNING Marketing, & Distribution, Sales PRICING

  5. November 16, Part 4 • The Value Chain • Job Costing and Overhead Rates • Actual versus Budgeted Amounts • Levi Strauss Factory Example • Absorption Costing and Variable Costing • The Eskimo Pie Company

  6. Cost Flows for a Manufacturing Firm Raw Mat.s Direct Labor W.I.P. F/G Inv. COGS Mfg O/H = Income Statement Account = Balance Sheet account = expense account

  7. Overview of Job Costing for Manufacturing Companies Indirect Cost Pool Cost Allocation Base the “Job” Direct Costs Manufacturing Overhead Machine Hours Indirect Costs Direct Costs Direct Materials Direct Labor

  8. Five Step Approach To Job Costing • Identify the cost object. • Identify the direct costcategories for the job. • Identify the indirect cost poolsassociated with the job. • Select the cost allocation basefor each indirect cost pool. • Calculate the rate per unitof the allocation base to allocate indirect costs.

  9. Calculation Of Overhead Rates Over- = total costs in the cost pool head total quantity of the cost Rate allocation base

  10. Calculation Of Overhead Rates Over- = total costs in the cost pool head total quantity of the cost Rate allocation base When indirect costs are allocated using budgeted rates, step 5 involves the following: 5a For the budget period, prepare estimates of the total quantity of the cost allocation base to be incurred (or available). 5b For the budget period, estimate total indirect costs (overhead $$$). 5c budgeted indirect cost rate = 5b / 5a

  11. November 16, Part 4 • The Value Chain • Job Costing and Overhead Rates • Actual versus Budgeted Amounts • Levi Strauss Factory Example • Absorption Costing and Variable Costing • The Eskimo Pie Company

  12. Actual versus Budgeted Amounts • Actual or budgeted rates for overhead. • Actual or budgeted prices/rates of direct inputs. • Actual quantities of direct inputs, or standard quantities based on actual production. • Actual quantity of overhead, or standard quantity based on actual production.

  13. Why Use Budgeted Amounts? • Actual costs may not be known on a timely basis. • Actual costs may be subject to short-run fluctuations. • When actual O/H rates are used, production volume for one product affects the reported costs of other products. • A system using budgeted numbers may be more economical.

  14. November 16, Part 4 • The Value Chain • Job Costing and Overhead Rates • Actual versus Budgeted Amounts • Levi Strauss Factory Example • Absorption Costing and Variable Costing • The Eskimo Pie Company

  15. The Levi Strauss factory in Albuquerque makes jeans and Dockers. Each product line has its own production line on the factory floor. Budgeted and actual overhead costs for the entire factory for 1997 were $1,200,000 and $1,100,000, respectively. Budgeted production for each product line was 500,000 units for the year (one million units for the factory in total). Actual production of jeans was equal to budget. However, actual production of Dockers was curtailed to 400,000 units, due to increased competition in the casual slacks market.

  16. Budgeted Overhead: $1.2 million Actual Overhead: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production.

  17. Budgeted Overhead: $1.2 million Actual Overhead: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. $1,200,000  (500,000 + 500,000) = $1.20 per unit Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production. $1,100,000  (500,000 + 400,000) = $1.22 per unit

  18. Budgeted Overhead: $1.2 million Actual Overhead: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. $1,200,000  (500,000 + 500,000) = $1.20 per unit Calculate the misapplied overhead:

  19. Budgeted Overhead: $1.2 million Actual Overhead: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. $1,200,000  (500,000 + 500,000) = $1.20 per unit Calculate the misapplied overhead: $1.20 per unit x 900,000 units = $1,080,000 applied $1,080,000 applied - $1,100,000 actual = $20,000 underapplied.

  20. Misapplied Overhead • The use of budgeted overhead rates usually results in underallocated or overallocated overhead. • Possible disposition of these variances include: 1) Restate to actual cost 2) Write off to COGS 3) Prorate between COGS & inventory 4) Treat as a period cost

  21. Budgeted Overhead: $1.2 million Actual Overhead: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production. $1,100,000  (500,000 + 400,000) = $1.22 per unit Calculate the misapplied overhead:

  22. Budgeted Overhead: $1.2 million Actual Overhead: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production. $1,100,000  (500,000 + 400,000) = $1.22 per unit Calculate the misapplied overhead: $1.22 per unit x 900,000 units = $1,100,000 applied $1,100,000 applied - $1,100,000 actual = $0 misapplied.

  23. Misapplied Overhead • Restatement using actual overhead rates is preferred conceptually, but is not necessarily the most conservative. • Restatement can result in higher net income and ending inventory than write-off to COGS when variances are unfavorable. • Is there justification for treating unfavorable variances as a period cost?

  24. Budgeted O/H: $1.2 million Actual O/H: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that the budgeted overhead of $1,200,000 consisted of $800,000 budgeted for variable overhead and $400,000 for fixed overhead. Also assume that the factory has the capacity to produce 1.5 million pairs of pants, and that the fixed overhead rate is calculated using capacity in the denominator. Calculate the budgeted overhead rates for fixed overhead and for variable overhead.

  25. Budgeted O/H: $1.2 million Actual O/H: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that the budgeted overhead of $1,200,000 consisted of $800,000 budgeted for variable overhead and $400,000 for fixed overhead. Also assume that the factory has the capacity to produce 1.5 million pairs of pants, and that the fixed overhead rate is calculated using capacity in the denominator. Calculate the budgeted overhead rates for fixed overhead and for variable overhead. Variable O/H rate: $800K  1,000,000 = $.80 per unit Fixed O/H rate: $400,000  1,500,000 = $.27 per unit Total: $1.07 per unit

  26. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 1997, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate (one rate for both fixed and variable overhead) using direct labor hours as the allocation base, and using actual costs and actual labor hours. Using the allocation rate above, how much overhead would be allocated to jeans in 1997?

  27. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 1997, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate (one rate for both fixed and variable overhead) using direct labor hours as the allocation base, and using actual costs and actual labor hours. $1,100,000  500,000 = $2.20 per direct labor hour Using the allocation rate above, how much overhead would be allocated to jeans in 1997?

  28. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 1997, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate (one rate for both fixed and variable overhead) using direct labor hours as the allocation base, and using actual costs and actual labor hours. $1,100,000  500,000 = $2.20 per direct labor hour Using the allocation rate above, how much overhead would be allocated to jeans in 1997? $2.20 per direct labor hour x 200,000 direct labor hours = $440,000; which is $0.88 per pair of jeans.

  29. November 16, Part 4 • The Value Chain • Job Costing and Overhead Rates • Actual versus Budgeted Amounts • Levi Strauss Factory Example • Absorption Costing and Variable Costing • The Eskimo Pie Company

  30. Variable Costing Also called Direct Costing Fixed Mfg O/H is a Period Cost Focus is on Contri-bution Margin This isn’t G.A.A.P. Absorption Costing Also called Full Costing Fixed Mfg O/H is an Inventoriable Cost Focus is on Gross Margin This is G.A.A.P. Two Ways To Treat Fixed Manufacturing Overhead

  31. What Costs Are Included In Inventory? Non-manufacturing costs (e.g. selling, general & admin.) Variable manufac- turing costs (& any direct, fixed costs) Variable Costing Absorption Costing Fixed Manufacturing Overhead

  32. Example comparing absorption costing and variable costing 10,000 units are made and sold. Each unit sells for $350. Variable mfg costs are $150 per unit. Fixed mfg costs are $700,000. Variable non-mfg costs are $50 per unit. Fixed non-mfg costs are $400,000.

  33. Gross MarginIncome Statement Sales $3,500,000 Cost of Goods Sold 2,200,000 Gross Margin 1,300,000 Non-manufacturing costs 900,000 Income $ 400,000 COGS: $700K FMOH ÷ 10K units = $70 per unit $150 variable mfg + $70 FMOH = $220 per unit.

  34. Contribution MarginIncome Statement Sales $3,500,000 Variable Costs Manufacturing costs 1,500,000 Non-manufacturing costs 500,000 Contribution Margin $1,500,000 Fixed Costs Manufacturing costs 700,000 Non-manufacturing costs 400,000 Income $ 400,000

  35. November 16, Part 4 • The Value Chain • Job Costing and Overhead Rates • Actual versus Budgeted Amounts • Levi Strauss Factory Example • Absorption Costing and Variable Costing • The Eskimo Pie Company

  36. The Eskimo Pie Company

  37. The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non-manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non-manufacturing costs are $0.10 for each Eskimo Pie sold.

  38. The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non-manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non-manufacturing costs are $.10 for each Eskimo Pie sold. Required: 1. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Absorption (i.e., Full) Costing?

  39. The Eskimo Pie Company • The company’s cost structure is as follows: fixed mfg O/H costs per month are $50,000. Variable mfg costs are $1.40 for each delicious Eskimo Pie. Fixed non-mfg costs (selling, general and administrative costs) are $27,000 per month. Variable non-mfg costs are $.10 for each Eskimo Piesold. • If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Absorption (i.e., Full) Costing? • F.M.O.H. rate = $50,000 ÷ 20,000 pies = $2.50 per pie. • $2.50 fixed mfg + $1.40 variable mfg = $3.90 per pie • $3.90 per pie x 1 pie = $3.90

  40. The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non-manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non-manufacturing costs are $0.10 for each Eskimo Pie sold. Required: 2. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Variable Costing?

  41. The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non-manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non-manufacturing costs are $0.10 for each Eskimo Pie sold. 2. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Variable Costing? $1.40 per pie x 1 pie = $1.40

  42. The Eskimo Pie Company The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non-manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non-manufacturing costs are $0.10 for each Eskimo Pie sold. Required: 3. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Absorption (i.e., Full) Costing?

  43. The Eskimo Pie Company The company’s cost structure is as follows: fixed mfg overhead costs per month are $50,000. Variable mfg costs are $1.40 for each delicious Eskimo Pie. Fixed non-mfg costs (selling, general and administrative costs) are $27,000 per month. Variable non-mfg costs are $0.10 for each Eskimo Pie sold. 3. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Absorption (i.e., Full) Costing? $27,000 loss (fixed non-mfg costs). (All mfg costs are capitalized in ending inventory, and no variable non-mfg costs have been incurred.

  44. The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non-manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non-manufacturing costs are $0.10 for each Eskimo Pie sold. Required: 4. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Variable Costing?

  45. The Eskimo Pie Company The company’s cost structure is as follows: fixed mfg overhead costs per month are $50,000. Variable mfg costs are $1.40 for each delicious Eskimo Pie. Fixed non-mfg costs (selling, general and administrative costs) are $27,000 per month. Variable non-mfg costs are $0.10 for each Eskimo Pie sold. 4. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Variable Costing? $27,000 + $50,000 = $77,000 loss. (The variable mfg costs are capitalized in ending inventory, and no variable non-mfg costs have been incurred.)

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