Job-Order Costing and Accounting for Overhead

1. Job-Order Costing and Accounting for Overhead 6

2. Product Costing Job Order Allocate costs to products that are readily identifiable Common in construction, print shops, unique goods Accumulate costs for specific jobs Produce for sale Process Costing Average costs over large number of nearly identical units Common in chemical, textiles, lumber, glass, food processing Accumulate costs by departments Produce for inventory

3. Job-Order Costing Job Cost Sheet Job #963 12 units Direct materials $460.00 Direct labour 267.50 Applied factory overhead 180.00 Total cost $907.50 Unit cost ($907.50 / 12 ) $75.625 Direct Material Requisition Sheet Labour Time Ticket Overhead Application Rate

4. Job-Costing Cost Flows • Apply material, labour and overhead costs to work in process • As goods as produced costs flow to finished goods inventory • When sold, costs shift to cost of goods sold Direct Material Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Use Material Buy Material Production Sales Labour Costs Overhead Control Account Over / under applied overhead (at year end) Overhead Costs

5. Accounting for Factory Overhead Overhead Application (Overhead Absorption) • Allocation of overhead costs to products Budgeted Factory Overhead Rate • Calculated at the beginning of the year and used to apply overhead to products throughout the year Six Steps in Applying Overhead 1. Select a cost driver for overhead 2. Prepare a budget for yearly overhead costs and yearly volume of the cost driver • Calculate the budgeted factory overhead rate as Overhead rate = budgeted total overhead / budgeted cost driver 4. Obtain data on the actual cost driver 5. Apply overhead to products 6. At year end, account for difference between actual overhead costs and applied overhead costs

6. Over / Under Application of Overhead $ Actual overhead • a mixed cost function with variable and fixed costs • Y = F + VX Applied overhead • a variable cost function • Applied overhead = overhead rate x actual driver Volume $ Volume $ Applied Overhead Actual Overhead • Overapplied: Applied > Actual • Underapplied: Applied < Actual • Dispose of over/under applied • overhead at year end Volume

7. Fixed Manufacturing Overhead & Absorption Costing • Firms use a overhead rate to smooth the application of overhead to work in process and determine "full" product costs Budgeted overhead = Budgeted total factory overhead application rate Budgeted total of cost driver Actual Fixed Overhead Applied Fixed Overhead Rate x Actual Volume Budgeted Fixed Overhead Fixed Overhead Spending Variance Production-Volume Variance Over / Under Applied Overhead • difference between actual and applied fixed overhead relates to: • spending more or less than expected • producing more or less than expected

8. Budgeted and Applied Fixed Overhead $ $ Volume Volume Budgeted Fixed Overhead Applied Fixed Overhead

9. Production Volume Variance in Absorption Costing • Change in net income due to not producing the amount of output expected when we determined the P.O.R. at the beginning of the year Production = Actual - Expected x Budgeted Volume Variance volume volume overhead rate $ Applied Overhead Actual Overhead Budgeted Overhead Volume of activity

10. Dell’s Value Chain and ABC System R & D Indirect costs are allocated to product lines based on ABC cost drivers Individual Job Direct material $xxx Direct labour xxx Applied overhead xxx Total job cost xxx Markup xxx Job price $xxx Product Design Production Marketing Distribution Other indirect costs + profit Customer Service