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Product and Service Costing: Overhead Application and Job-Order System

Product and Service Costing: Overhead Application and Job-Order System. Prepared by Douglas Cloud Pepperdine University. Objectives. 1. Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products.

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Product and Service Costing: Overhead Application and Job-Order System

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  1. Product and Service Costing: Overhead Application and Job-Order System Prepared by Douglas Cloud Pepperdine University

  2. Objectives 1. Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products. 2. Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment. 3. Compute a predetermined overhead rate, and use the rate to assign overhead to production. After studying this chapter, you should be able to:

  3. Objectives 4. Explain the difference between job-order and process costing, and identify the source documents used in job-order costing. 5. Describe the cost flows associated with job-order costing, and prepare the journal entries. 6. Explain why multiple overhead rates may be preferred to a single, plantwide rate.

  4. Continuum of Services and Manufactured Products Pure Service Manufactured Product Bungee jumping Beauty Salon Restaurant Automobiles Software Cereals

  5. Intangibility Services cannot be stored. There are no inventory accounts. Services cannot be protected through patents. Services cannot readily be displayed or communicated. Prices are difficult to set. There is a strong ethical code. Costs must be related to entire organization. Features of Service Firms and Their Interface with the Cost Management System Impact on Cost Management System Feature Relationship to Business

  6. Inseparability Consumer is involved in production. Cost are accounted for by customer type. Centralized mass production of services is difficult Systems must be generated to encourage consistent quality. Features of Service Firms and Their Interface with the Cost Management System Impact on Cost Management System Feature Relationship to Business Other customers are involved in production.

  7. Heterogeneity Standardization and quality control are difficult. A strong systems approach is needed. Features of Service Firms and Their Interface with the Cost Management System Impact on Cost Management System Feature Relationship to Business Productivity measurement is ongoing. TQM is critical.

  8. Perishability Service benefit expire quickly. Service may be repeated often for one customer. There are no inventories. There needs to be a standardized system to handle repeat customers. Features of Service Firms and Their Interface with the Cost Management System Impact on Cost Management System Feature Relationship to Business

  9. Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment Direct Materials Product 1 Purchase materials Assemblers’ payroll Finishers’ payroll Direct Labor Supervisors’ Payroll Depreciation Utilities Property taxes Landscaping Product 2 Overhead Cost Measurement Cost Assignment Cost Accumulation Record Costs: Classify Costs: Assign to Cost Objects:

  10. Cost Accumulation Cost accumulationrefers to the recognition and recording of costs. The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a transaction. Data from these source documents can then be recorded in a database. Well-designed source documents can supply information in a flexible way.

  11. Cost Measurement Cost measurement refers to classifying the cost. There are two commonly used ways to measure the costs associated with production: actual costing and normal costing. An actual cost system uses actual costs for direct materials, direct labor, and overhead to determine unit cost. Normal costing systemsmeasure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor.

  12. $0.30 x 2 = $0.60 $8.00 x .10 = 0.80 $1.40 Example: Prime Costs Rubber stops are made for cellos. The cost of rubber is $0.30 per ounce and two ounces are required per stop. The price of labor is $8 per hour and it takes .10 hour to make a stop. Thus, one stop should cost $1.40 calculated as follows:

  13. Example: Using Actual Overhead April June August Actual overhead $20,000 $40,000 $40,000 Actual units produced 40,000 40,000 160,000 Per-unit overhead $0.50 $1.00 $0.25 Actual overhead/ Actual production

  14. Budgeted annual overhead Budgeted annual activity level Overhead rate = $90,000 225,000 Overhead rate = Overhead Application A Normal Costing View A predetermined overhead rate is calculated using the following formula: Continuing with the celloexample: = $0.40

  15. Overhead Application 1. Units produced 2. Direct labor hours 3. Direct labor dollars 4. Machine hours 5. Direct materials Estimated Overhead Activity Driver

  16. Data on Engine Housing Cost of operating lathe $80,000 Total units produced 20,000 Total machine hours used 12,500 Simple Complicated Number of housings 10,000 10,000 Time on lathe 0.25 MHr 1 MHr Operating cost assigned using unit produced $4.00 $4.00 Operating cost assigned using machine hours $1.60 $6.40

  17. Choosing the Activity Level Expected activity levelis simply the production level the firm expects to attain for the coming year. Normal activity level is the average activity usage that a firm experiences in the long term (normal volume is computed over more than one year). Theoretical activity level is the absolute maximum production activity of a manufacturing firm. Practical activity level is the maximum output that can be realized if everything operates efficiently.

  18. Basic Concept of Overhead Application In attempting to understand the concept of applied overhead, there are two points that should be emphasized. 1. Applied overhead is the basis for computing per-unit overhead cost. 2. Applied overhead is rarely equal to a period’s actual overhead. Applied overhead = Overhead rate x Applied production activity

  19. Expected Normal Basic Concept of Overhead Application Measures of Activity Level Number of Units Consumer Demand-Oriented Measures of Activity Level Time

  20. Theoretical Normal Basic Concept of Overhead Application Measures of Activity Level Number of Units Time Productive Capability Measures of Activity Level

  21. Suncalc, Inc. Example Suncalc, Inc. produces two unique, solar-powered products: a pocket calculator and a currency translator. The following estimated and actual data for 2004: Budgeted overhead $360,000 Normal activity (DLH) 120,000 Activity (DLH) 100,000 Actual overhead $320,000

  22. Budgeted overhead Normal activity Predetermined overhead rate = $360,000 120,000 DLH = $3 per DLH = Suncalc, Inc. Example The firm bases it predetermined overhead rate on normal activity measured in direct labor hours:

  23. Suncalc, Inc. Example Using the overhead rate, applied overhead for 2004 is: Applied overhead = Overhead rate x Actual activity usage = $3 per DLH x 100,000 DLH = $300,000

  24. Pocket Calculators Currency Translator Units produced 80,000 90,000 Direct labor hours 40,000 60,000 Overhead applied to production ($3 x DLH) $120,000 $180,000 Overhead per unit $1.50 $2.00 Suncalc, Inc. Example Forty percent of the actual direct labor hours worked were used to produce 80,000 units of the pocket calculator and the remaining 60 percent was used to produced 90,000 units of the currency translator.

  25. Underapplied and Overapplied Overhead The difference between actual overhead and applied overhead is called overhead variance. If actual overhead is greater than applied overhead, then the variance is called underapplied overhead. If applied overhead is greater than actual overhead, the the variance is called overapplied overhead.

  26. Disposition of Overhead Variances The overhead variance is disposed of in one of two ways. 1.All overhead variance is allocated to cost of goods sold. 2.The overhead variance is allocated among work in process, finished goods, and cost of goods sold.

  27. Disposition of Overhead Variances Suncalc’s accounts had the following applied overhead balances for the end of 2004: Work-in-Process Inventory, $60,000; Finished Goods Inventory, $90,000; Cost of Goods Sold, $150,000. Suncale had $20,000 of underapplied overhead. The amount is allocated as follows: Work-in-Process Inventory: $60,000/$300,000 x $20,000 = $4,000 Finished Goods Inventory: $90,000/$300,000 x $20,000 = $6,000 Cost of Goods Sold: $150,000/$300,000 x $20,000 = $10,000

  28. A Job-Order Cost Sheet Job Number 16 Date Ordered April 2, 2004 Date Completed April 24, 2004 Date Shipped April 25, 2004 For Benson Company Item Description Valves Quantity Completed 100 Direct Materials Direct Labor Overhead Ticket Number Requisition Number Amount Hours Rate Amount Hours Rate Amount 12 $300 68 8 $6 $ 48 8 $10 $ 80 18 450 72 10 7 70 10 10 100 $750 $118 $180 Direct materials $750 Direct labor 118 Overhead 180 Total cost $1,048 Unit cost $10.48

  29. Material Requisition Form Date Department Job Number Material Requisition Number 678 April 8, 2004 Grinding 62 Description Quantity Cost/Unit Total Cost Casing 100 $3 $300 Jim Lawson Authorized Signature

  30. Job Time Ticket 45 Ann Wilson April 12, 2004 Employee Number Name Date Job Time Ticket Number 68 Start Time Stop Time Total Time Hourly Rate Amount Job Number 8:00 10:00 2 $6 $12 16 10:00 11:00 1 6 6 17 11:00 12:00 1 6 6 16 1:00 6:00 5 6 30 16 Jim Lawson Authorized Signature Department Supervisor

  31. Estimated Overhead Overhead rate = Estimated Direct Labor Hours Accounting for Overhead Actual overhead costs are never assigned directly to jobs. Overhead is applied using a predetermined overhead rate. $900,000 90,000 DLH = $10 per direct labor hour

  32. 2 500 00 Accounts Payable All Signs Company 1 Materials Inventory 2 500 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 1. Direct materials costing $2,500 were purchased on account.

  33. 1 500 00 Materials Inventory All Signs Company 2 Work in Process 1 500 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 2. Direct materials costing $1,500 were requisitioned for use in production.

  34. All Signs Company Job 101 Materials Job 102 Materials Req. No. Amount Req. No. Amount • 1 $ 300 • 2 200 • 3 500 • $1,000 • 4 $250 • 5 250 • 3 • $500

  35. 850 00 Wages Payable All Signs Company 3 Work-in-Process Inventory 850 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 3. Direct labor costing $850 was recognized.

  36. Job 101 Materials Job 102 Materials Ticket Hours Rate Amount • 1 15 $10 $150 • 2 20 10 200 • 3 25 10 250 • 60 $600 Ticket Hours Rate Amount • 4 15 $10 $150 • 5 10 10 100 • 25 $250 All Signs Company

  37. 340 00 Overhead Control All Signs Company 4 Work-in-Process Inventory 340 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 4. Overhead was applied to production at the rate of $4 per direct labor hour. A total of 85 direct labor hours were worked.

  38. All Signs Company 5 Overhead Control 415 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Lease Payable 200 00 Utilities Payable 50 00 Accumulated Depr.--Equipment 100 00 Wages Payable 65 00 5. Actual overhead costs of $415 were incurred: lease, $200; utilities, $50; depreciation, $100; accrued wages, $65.

  39. 1 840 00 Work-in-Process Inventory All Signs Company 6 Finished Goods Inventory 1 840 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 6. Job 101, with a total cost of $1,840, are completed and transferred to finished goods.

  40. Job Number 101 Date Ordered Jan. 1, 2004 Date Completed Jan. 2, 2004 Date Shipped Jan. 15, 2004 All Signs Company For Housing Development Item Description Street Signs Quantity Completed 20 Materials Direct Labor Overhead Ticket Number Requisition Number Amount Hours Rate Amount Hours Rate Amount 1 $300 1 15 $10 $150 15 $4 $ 60 2 200 2 20 10 200 20 4 80 3 500 3 25 10 250 25 4 100 $1,000 $600 $240 Direct materials $1,000 Direct labor $600 Overhead $240 Total cost $1,840 Unit cost $92

  41. 1 840 00 2 760 00 Finished Goods Inventory Sales Revenue All Signs Company a. Cost of Goods Sold 1 840 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. b. Accounts Receivable 2 760 00 7. Sold Job 101 for $2,760.

  42. 75 00 Overhead Control All Signs Company 8 Cost of Goods Sold 75 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 8. Underapplied overhead was closed to cost of goods sold.

  43. All Signs Company Schedule of Cost of Goods Manufactured For the Month Ended January 31, 2004 Direct materials: Beginning direct materials inventory $ 0 Purchases of direct materials 2,500 Total direct materials available for use $2,500 Ending direct materials 1,000 Total direct materials used $1,500 Direct labor 850 Manufacturing Overhead: Lease $ 200 Utilities 50 Depreciation 100 Indirect labor 65 $ 415 Continued

  44. $ 415 Less: Underapplied overhead 75 Overhead applied 340 Current manufacturing costs $2,690 Add: Beginning work in process 0 Total manufacturing cost $2,690 Less: Ending work in process -1,050 Cost of goods manufactured $1,840

  45. All Signs Company Statement of Cost of Goods Sold For the Month Ended January 31, 2004 Beginning finished goods inventory $ 0 Cost of goods manufactured 1,840 Cost of goods available for sale $1,840 Less: Ending finished goods inventory 0 Normal cost of goods sold $1,840 Add: Underapplied overhead 75 Adjusted cost of goods sold $1,915

  46. All Signs Company Income Statement For the Month Ended January 31, 2004 Sales $2,760 Less: Cost of goods sold 1,915 Gross margin $ 845 Less selling and administrative expenses: Selling expenses $200 Administrative expenses 550 750 Operating income $ 95

  47. SINGLE VERSUS MULTIPLE OVERHEAD RATES Department A Department B Total Overhead costs $60,000 $180,000 $240,000 Direct labor hours 15,000 5,000 20,000 Machine hours 5,000 15,00 20,000 Department A is labor-intensive and Department B is machine-intensive.

  48. Job 23 Job 24 Department A Department B Total Department A Department B Total Prime costs $5,000 $0 $5,000 Direct labor hours 500 0 500 Machine hour 1 0 1 Units produced 1,000 0 1,000 Prime costs $0 $5,000 $5,000 Direct labor hours 0 1 1 Machine hours 0 500 500 Units produced 0 1,000 1,000 SINGLE VERSUS MULTIPLE OVERHEAD RATES

  49. SINGLE VERSUS MULTIPLE OVERHEAD RATES Department A Department B Overhead cost $60,000 $180,000 Cost driver 15,000 DLH 15,000 MHr Department overhead rate $4/DLH $12/MHr Overhead applied to Job #23 $2,000 --- Overhead applied to Job #24 --- $6,000

  50. End of Chapter

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