Managerial Accounting by G. Norren Chap003

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  • There are several methods that can be used to accumulate manufacturing costs and determine unit product cost. One of these methods is known as a job-order cost system.
  • A process cost system is best used by companies that produce many units of a single product and when one unit of output is indistinguishable from any other unit of output. Because the units of output are identical, the company will probably use an average cost system to determine product cost.
  • An example of a company that may consider a process cost system is Weyerhaeuser, a manufacturer of paper products. When we think of paper manufacturing, we generally think about continuous production of a single roll of paper that may eventually be cut into sizes needed by customers. Other companies that would benefit from process costing are Reynolds Aluminum and Coca-Cola. Certainly the desire of all three of these companies is to make each unit of output consistent with the quality standards established. Coca-Cola bottled in California should taste identical to the same product bottled in New York City.
  • A company would use a job order costing system when many different products are produced each period. The products are usually manufactured to customers’ specifications and are unique in nature.
  • Companies that may benefit from using job order cost systems include Boeing, Bechtel International, and Walt Disney Studios. Bechtel is perhaps the largest international construction company. The company works on huge projects that are unique to customer needs.
  • This table presents an overview of the differences between a job-order and process costing system. Notice that costs are accumulated by the job in a job-order system and by department in the process system. If you think of building a house, you can see how easy it is to accumulate costs for a particular house even though you may be building more than one house at a time. If you think of mixing Coca-Cola, costs would naturally be accumulated by the department working on the current batch.
  • See if you can identify those types of companies that would benefit from the use of a job-order cost system. There may be more than one company in the list.
  • How did you do? The paper and ketchup manufacturers would probably use a process costing system rather than a job-order system.
  • In a job-order costing system, direct materials and direct labor are both assigned to individual jobs on which the materials were used and the labor incurred.
  • Manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs like the power used to run the machinery in the factory. Manufacturing overhead cannot be traced directly to specific jobs. Rather, it is allocated to jobs on the basis of a predetermined rate.
  • The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a give job. We will look at a job cost sheet used by a hypothetical company called PearCo. PearCo has a job that calls for the construction of wooden cargo crates. You can see the separate sections for direct materials, direct labor, and manufacturing overhead. In addition, we have a section to summarize total costs of the job. A job number uniquely identifies each job. Direct material, direct labor and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account.
  • Here is the materials requisition form completed for job A dash 143. The requisition is number X7 dash 6890. The worker has requested twelve two by fours, twelve feet long, and twenty one by sixes, twelve feet long. The unit cost of the lumber is shown in the unit cost column. The quantity requested is multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the store room will issue the lumber once the materials requisition form has been properly authorized.
  • Once the materials have been issued by the store room, they are charged to the job cost sheet for job number A dash 143. We have a proper reference for the requisition number and the total amount. If we need to look at the details of the one hundred sixteen dollar cost, we can ask to see materials requisition form X7-6890. The direct materials were posted to the summary section of the job cost sheet.
  • Here is the time ticket for an employee who worked eight hours on job A dash 143. The employee’s hourly pay rate is eleven dollars, so the total labor cost charged to the job will be eighty-eight dollars. The time ticket, number thirty six, serves as the major source document for labor costs charged to this job. Let’s look at the labor posting to the job cost sheet.
  • On the job cost sheet we can see that time ticket number thirty-six posted eight hours to job A dash 143. The total amount of direct labor cost is eighty-eight dollars. This amount is also posted to the summary section of the job cost sheet.
  • Part I Manufacturing overhead is applied to all jobs that are in process. We apply overhead using a base we believe causes overhead costs to be incurred. Some companies allocate manufacturing overhead using direct labor hours or machine hours. Part II We must allocate overhead costs to jobs for a variety of reasons. First, it is difficult, if not impossible, to actually trace overhead costs to a particular job. The cost of grease for machinery to manufacture our product is part of our manufacturing costs. It would be impossible to accurately trace the amount of grease consumed to manufacture one unit of output. Manufacturing overhead also includes a number of different costs and it would be very difficult to gather all of them together in time to charge them to a particular job. A job may be complete and sold before we can determine the actual overhead costs incurred. Finally, many types of overhead are fixed in nature even though output fluctuates during the period.
  • To facilitate the allocation of manufacturing overhead to each job, we calculate a predetermined overhead rate before the period begins. The rate is calculated by dividing the total estimated manufacturing overhead for the coming period by the estimated total units of the allocation base. If our allocation base is machine hours, we would estimate the total number of machine hours used in production in the coming period. Ideally, the allocation base should be a cost driver , that is, it causes overhead to be incurred.
  • Predetermined overhead rates that rely upon estimated data are often used because (1) actual overhead costs for the period are not known until the end of the period, thus inhibiting the ability to estimate job costs during the period; (2) Actual overhead costs can fluctuate seasonally, thus misleading decision makers; (3) it simplifies record keeping.
  • We calculate the predetermined overhead rate before the period begins. As we work on a particular job, we apply overhead by multiplying the predetermined rate times the actual level of activity. If overhead is applied on the basis of machine hours, we would apply overhead by multiplying the predetermined rate times the actual number of machine hours used on a particular job.
  • Part I Here is our equation for calculating the predetermined manufacturing overhead rate. Part II PearCo’s predetermined overhead rate is four dollars per direct labor hour. Part III So, at PearCo each job will be charged four dollars of overhead for each one hour of direct labor worked. Let’s see how this works.
  • Our predetermined overhead rate is four dollars per direct labor hour, so we will apply thirty-two dollars of overhead to job number A dash 143. The computation is shown in the manufacturing overhead section of the job cost sheet and in the summary section. On job A dash 143 we completed two wooden cargo crates at a total cost of two hundred thirty-six dollars. The total cost includes direct materials, direct labor, and manufacturing overhead. For this particular job the average cost of each crate is one hundred eighteen dollars. We calculated the average by dividing the total cost of two hundred thirty six dollars by the two crates produced.
  • The total direct material, direct labor, and manufacturing overhead costs assigned to Job A-143 is two hundred thirty six dollars. Since this particular job included two units of production, the average cost per unit is one hundred eighteen dollars.
  • We cannot say that the average cost per crate in the future will be one hundred and eighteen dollars. If a third crate were to be produced, we would not add any additional fixed overhead cost, so the incremental cost of an additional unit may be somewhat less than one hundred eighteen dollars.
  • This problem may take a while to solve, but it will be well worth your time to work it carefully.
  • This problem may take a while to solve, but it will be well worth your time to work it carefully.
  • Now let’s look at the document flow in a job-order cost system.
  • The entire accounting process begins when a sales order is received from a customer. Once the sales order is received, a production order is drafted to initiate work on a job.
  • From the production order, we are able to determine the direct and indirect materials we will need to requisition from the store room. We now know that the materials requisition form is a critical source document in the preparation of the job cost sheet. Direct material costs are charged to specific jobs. Indirect material costs are included in manufacturing overhead.
  • As employees work on the job covered by the production order, time tickets are prepared for recording both direct and indirect labor costs. Direct labor costs are charged to specific jobs. Indirect labor costs are included in manufacturing overhead.
  • Indirect materials and indirect labor are parts of manufacturing overhead. Other overhead costs are charged to the manufacturing overhead account as incurred. As we have seen, overhead is applied to the job cost sheet.
  • Now, let’s see how these amounts flow through the tee accounts of a company.
  • Part I When raw materials are purchased they are debited to the raw materials inventory account and credited to accounts payable. Part II The cost of direct material requisitions is debited to Work in Process and added to the job cost sheet which serve as a subsidiary ledger. Part III Indirect materials are removed from raw materials inventory with a credit and debited to the manufacturing overhead account.
  • Here is an example of the general journal entry to record the purchase of raw materials on account. We debit raw materials and credit accounts payable.
  • When materials are requisitioned from raw materials inventory, we debit work in process (job cost sheet) for direct materials, and debit manufacturing overhead for indirect materials.
  • Part I Direct labor is debited to Work in Process and added to the job cost sheet which serves as a subsidiary ledger and credited to salaries and wages payable. Part II Indirect labor is debited to Manufacturing Overhead and credited to salaries and wages payable.
  • Here is an example of the entry to charge direct and indirect labor from the salaries and wages payable account and place the amount in work in process inventory. The credit side of the entry is the various liability accounts, for example, Accounts Payable, Property Taxes Payable and other accounts.
  • Additional manufacturing overhead amounts are debited to the manufacturing overhead account. The debit side of the manufacturing overhead account represents actual overhead incurred during the period.
  • This journal entry represents the accumulation of other actual overhead amounts like property taxes on the manufacturing plant, insurance on the plant structure and depreciation of manufacturing assets.
  • When we apply overhead to a particular job, we debit work in process inventory (through the job cost sheet) and credit the manufacturing overhead account. Amounts on the credit side of the manufacturing overhead account represent overhead applied . It is not likely that actual and applied overhead will be equal during a period. We normally make an adjusting entry at the end of the period to equalize actual and applied overhead.
  • This journal entry shows the application of overhead to work in process inventory.
  • We previously discussed the treatment of selling, general, and administrative salaries expense during the period. Other nonmanufacturing costs are charged as expense in the period incurred.
  • This journal entry illustrates the expensing of nonmanufacturing costs in the current period.
  • The sum of all amounts transferred from work in process to finished goods represents the cost of goods manufactured for the period. As a job is completed, its costs are transferred from the work in process inventory to finished goods inventory.
  • The transfer is accomplished with a debit to finished goods inventory and a credit to work in process inventory.
  • When a finished job is sold to the customer, the cost of that job is transferred from finished goods inventory to cost of good sold. Recall that cost of goods sold is an income statement account. If only a portion of the units associated with a particular job are shipped, then the unit cost figure from the job cost sheet is used to determine the amount of the journal entry.
  • Assuming the company uses a perpetual inventory system, two journal entries are required to record the sale. The first entry is to debit either accounts receivable or cash and credit sales for the selling price of the job completed. The second entry is to debit cost of goods sold and credit finished goods inventory for the cost incurred to complete the job. The difference between the selling price and cost is the company’s gross margin on the job.
  • When we apply overhead on the basis of a predetermined overhead rate, there is always the chance that the amount of overhead applied will be different from the amount of overhead actually incurred during the period. When there is a difference we refer to the amount as either underapplied overhead or overapplied overhead.
  • Part I Let’s assume that PearCo incurred actual overhead of six hundred fifty thousand dollars during the period and worked a total of one hundred seventy thousand direct labor hours. PearCo applies overhead at the rate of four dollars per direct labor hour worked. How much overhead did PearCo apply to jobs during the period? Part II PearCo would have applied six hundred eighty thousand dollars of overhead during the period. That is four dollars per direct labor hour times the one hundred seventy thousand direct labor hours actually worked. Can you see our problem?
  • The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. PearCo incurred actual overhead of six hundred fifty thousand dollars and applied six hundred and eighty thousand dollars, so the company overapplied thirty thousand dollars of overhead for the year. How do we dispose of this overapplied overhead?
  • In this question we ask you to calculate the overapplied or underapplied overhead. Be careful with your intermediate computations.
  • In this question we ask you to calculate the overapplied or underapplied overhead. Be careful with your intermediate computations.
  • There are two way to dispose of over- or underapplied overhead. The more complex approach is to allocate a portion of the over- or underapplied overhead to work in process inventory, finished goods inventory, and cost of goods sold. The allocation would be based on the relative dollar value in each of the three accounts involved. An easier way to deal with the problem, and the way PearCo uses, is to adjust cost of goods sold for the entire amount of the over- or underapplied overhead.
  • Part I We know that PearCo applied six hundred eighty thousand dollars of overhead but incurred only six hundred fifty thousand dollars of actual overhead. The manufacturing overhead account has a thirty thousand dollar credit balance, representing the overapplied overhead during the year. PearCo chooses to adjust cost of goods sold for the entire amount. Part II The adjustment necessary at the end of the year is to debit the manufacturing overhead account for thirty thousand dollars and credit, or reduce, cost of goods sold by the same amount.
  • We may elect to allocate the over- or underapplied overhead to ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold. Let’s assume that at the end of the period PearCo had the following overhead costs in each of the accounts shown.
  • We will complete the following allocation of the thirty thousand dollars of overapplied overhead. We will reduce ending Work in Process Inventory by three thousand dollars, and the other accounts by the amounts shown.
  • The journal entry to record the allocation is to debit Manufacturing Overhead for thirty thousand dollars, credit Work in Process Inventory for three thousand dollars, credit Finished Goods Inventory for nine thousand dollars, and credit Cost of Goods Sold for eighteen thousand dollars.
  • We have provided a good study aid for dealing with overapplied or underapplied overhead. We have shown the impact of both the allocation approach to the solution to the problem and the direct adjustment to cost of goods sold approach. It is a good idea to review this chart before your next exam.
  • Give this question some thought before deciding on your answer.
  • How did you do?
  • Part I We have assumed that the company has used one single predetermined overhead rate for the entire factory. Part II Many large companies use multiple predetermined overhead rates. Part III Using multiple overhead rates can cause more complexity. Part IV But when a company uses multiple rates it promotes accuracy in the allocation process because it gives formal recognition to differences across departments in how overhead costs are incurred.
  • In a law firm, each client represents a job . Legal forms and similar inputs represent direct materials. The time expended by attorneys represents direct labor. The costs of secretaries, clerks, rent, depreciation, and so forth, represent the overhead.
  • As in any area of business, technology may play an important role in the accounting process. New, easier to use, programming languages and the mastery of microcomputers help spread technology throughout the organization.
  • 3- In this appendix we will look at the relationship between the predetermined overhead rate and capacity utilization.
  • There are two major criticisms of calculating the predetermined overhead rate based on estimated amounts. The first is that the predetermined rate creates problems when actual levels of activity are different from estimated, or budgeted, amounts. The second is that in some cases basing the predetermined overhead rate on estimated amounts charges products for costs that they do not use.
  • We can minimize the criticisms by basing estimated total units in the allocation base at capacity levels of activity.
  • Here is a rather simple example where a company leases a piece of equipment for one hundred thousand dollars per year. Full capacity at the company is fifty thousand units of output. Management estimates that forty thousand units will be produced and sold in the coming year. Let’s calculate the predetermined overhead rate.
  • Part I Under the traditional method we have used in this chapter the predetermined overhead rate will be two dollars and fifty cents. We divide the total cost of one hundred thousand dollars by the estimated level of activity, forty thousand units. Part II Under the capacity approach, the predetermined overhead rate is two dollars per unit. We divide the total cost of one hundred thousand dollars by production at capacity, fifty thousand units.
  • 3- Based on the information given, what is the predetermined overhead rate using the traditional method?
  • 3- The correct answer is four dollars per case. How did you do?
  • 3- Now calculate the predetermined overhead rate using the capacity approach.
  • 3- Did you get the correct answer of two dollars and fifty cents per case?
  • 3- Recall your answers to the previous questions and answer this question about changes in the predetermined overhead rate.
  • 3- The predetermined overhead rate stays the same and is not affected by changes in the level of activity.
  • 3- Now take that same information and answer this questions assuming the traditional approach is used by the company.
  • 3- Now we know that the predetermined overhead rate goes up when activity goes down.
  • 3- Look carefully at the income statement prepared using the capacity approach to calculate the predetermined overhead rate. Notice the twenty thousand dollars cost of idle capacity. This cost is incurred because we were not able to fully utilize our capacity.
  • 3- Here is the income statement using the traditional approach. Notice that cost of goods sold is charged with the cost of idle capacity.
  • We have certainly covered a great deal of ground in this chapter. Job order costing is used by many companies and it is important for you, as a potential manager, to understand how the system works.
  • Managerial Accounting by G. Norren Chap003

    1. 1. 11 th Edition Chapter 3
    2. 2. Chapter Three Systems Design: Job-Order Costing
    3. 3. Types of Product Costing Systems Process Costing Job-order Costing <ul><li>A company produces many units of a single product. </li></ul><ul><li>One unit of product is indistinguishable from other units of product. </li></ul><ul><li>The identical nature of each unit of product enables assigning the same average cost per unit. </li></ul>
    4. 4. Types of Product Costing Systems Process Costing Job-order Costing Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages) <ul><li>A company produces many units of a single product. </li></ul><ul><li>One unit of product is indistinguishable from other units of product. </li></ul><ul><li>The identical nature of each unit of product enables assigning the same average cost per unit. </li></ul>
    5. 5. Types of Product Costing Systems Process Costing Job-order Costing <ul><li>Many different products are produced each period. </li></ul><ul><li>Products are manufactured to order. </li></ul><ul><li>The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. </li></ul>
    6. 6. Types of Product Costing Systems Process Costing Job-order Costing Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production) <ul><li>Many different products are produced each period. </li></ul><ul><li>Products are manufactured to order. </li></ul><ul><li>The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. </li></ul>
    7. 7. Comparing Process and Job-Order Costing
    8. 8. Quick Check  <ul><li>Which of the following companies would be likely to use job-order costing rather than process costing? </li></ul><ul><ul><li>a. Scott Paper Company for Kleenex. </li></ul></ul><ul><ul><li>b. Architects. </li></ul></ul><ul><ul><li>c. Heinz for ketchup. </li></ul></ul><ul><ul><li>d. Caterer for a wedding reception. </li></ul></ul><ul><ul><li>e. Builder of commercial fishing vessels. </li></ul></ul>
    9. 9. Quick Check  <ul><li>Which of the following companies would be likely to use job-order costing rather than process costing? </li></ul><ul><ul><li>a. Scott Paper Company for Kleenex. </li></ul></ul><ul><ul><li>b. Architects. </li></ul></ul><ul><ul><li>c. Heinz for ketchup. </li></ul></ul><ul><ul><li>d. Caterer for a wedding reception. </li></ul></ul><ul><ul><li>e. Builder of commercial fishing vessels. </li></ul></ul>
    10. 10. Direct Manufacturing Costs Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Direct Materials Direct Labor
    11. 11. Direct Manufacturing Costs Manufacturing Overhead, including indirect materials and indirect labor , are allocated to jobs rather than directly traced to each job. Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead
    12. 12. Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-05 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units Shipped Direct Materials Date Number Balance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
    13. 13. Materials Requisition Form Will E. Delite
    14. 14. Job-Order Cost Accounting
    15. 15. Employee Time Ticket
    16. 16. Job-Order Cost Accounting
    17. 17. 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. <ul><li>We use an allocation base because: </li></ul><ul><li>It is impossible or difficult to trace overhead costs to particular jobs. </li></ul><ul><li>Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. </li></ul><ul><li>Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. </li></ul>
    18. 18. <ul><li>The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. </li></ul>Manufacturing Overhead Application Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Ideally, the allocation base is a cost driver that causes overhead.
    19. 19. <ul><li>Using a predetermined rate makes it possible to estimate total job costs sooner. </li></ul><ul><li>Actual overhead for the period is not known until the end of the period. </li></ul>The Need for a POHR $
    20. 20. Application of Manufacturing Overhead Actual amount of the allocation based upon the actual level of activity. Based on estimates , and determined before the period begins. Overhead applied = POHR × Actual activity
    21. 21. Overhead Application Rate For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job. POHR = $4.00 per DLH $640,000 160,000 direct labor hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =
    22. 22. Job-Order Cost Accounting
    23. 23. Job-Order Cost Accounting
    24. 24. Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.
    25. 25. Quick Check  <ul><li>Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? </li></ul><ul><ul><li>a. $200. </li></ul></ul><ul><ul><li>b. $350. </li></ul></ul><ul><ul><li>c. $380. </li></ul></ul><ul><ul><li>d. $730. </li></ul></ul>
    26. 26. Quick Check  <ul><li>Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? </li></ul><ul><ul><li>a. $200. </li></ul></ul><ul><ul><li>b. $350. </li></ul></ul><ul><ul><li>c. $380. </li></ul></ul><ul><ul><li>d. $730. </li></ul></ul>
    27. 27. Job-Order Costing Document Flow Summary Let’s summarize the document flow in a job-order costing system.
    28. 28. Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.
    29. 29. Job-Order Costing Document Flow Summary Job Cost Sheets Materials Requisition Manufacturing Overhead Account Materials used may be either direct or indirect. Direct materials Indirect materials
    30. 30. Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account An employee’s time may be either direct or indirect. Direct Labor Indirect Labor
    31. 31. Job-Order Costing Document Flow Summary Manufacturing Overhead Account Other Actual OH Charges Job Cost Sheets Materials Requisition Employee Time Ticket Applied Overhead Indirect Material Indirect Labor
    32. 32. Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system.
    33. 33. Job-Order System Cost Flows Raw Materials <ul><li>Material </li></ul><ul><li>Purchases </li></ul>Mfg. Overhead Work in Process (Job Cost Sheet) Actual Applied <ul><li>Direct Materials </li></ul><ul><li>Direct Materials </li></ul><ul><li>Indirect Materials </li></ul><ul><li>Indirect Materials </li></ul>
    34. 34. Cost Flows – Material Purchases <ul><li>Raw material purchases are recorded in an inventory account. </li></ul>
    35. 35. Cost Flows – Material Usage <ul><li>Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials. </li></ul>
    36. 36. Job-Order System Cost Flows Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) <ul><li>Direct Materials </li></ul><ul><li>Indirect Materials </li></ul>Actual Applied <ul><li>Direct Labor </li></ul><ul><li>Direct Labor </li></ul><ul><li>Indirect Labor </li></ul><ul><li>Indirect Labor </li></ul>
    37. 37. Cost Flows – Labor <ul><li>The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead. </li></ul>
    38. 38. Job-Order System Cost Flows Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) <ul><li>Direct Materials </li></ul><ul><li>Direct Labor </li></ul><ul><li>Direct Labor </li></ul><ul><li>Indirect Materials </li></ul>Actual Applied <ul><li>Indirect Labor </li></ul><ul><li>Indirect Labor </li></ul><ul><li>Other Overhead </li></ul>
    39. 39. Cost Flows – Actual Overhead <ul><li>In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. </li></ul>
    40. 40. Job-Order System Cost Flows Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) <ul><li>Direct Materials </li></ul><ul><li>Direct Labor </li></ul><ul><li>Direct Labor </li></ul><ul><li>Indirect Materials </li></ul>Actual Applied <ul><li>Indirect Labor </li></ul><ul><li>Indirect Labor </li></ul><ul><li>Other Overhead </li></ul>If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. <ul><li>Overhead Applied </li></ul><ul><li>Overhead Applied to Work in Process </li></ul>
    41. 41. Cost Flows – Overhead Applied <ul><li>Work in Process is increased when Manufacturing Overhead is applied to jobs. </li></ul>
    42. 42. Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.
    43. 43. Nonmanufacturing Cost Flows <ul><li>Nonmanufacturing costs (period expenses) are charged to expense as they are incurred. </li></ul>
    44. 44. Job-Order System Cost Flows Finished Goods Work in Process (Job Cost Sheet) <ul><li>Direct Materials </li></ul><ul><li>Direct Labor </li></ul><ul><li>Overhead Applied </li></ul><ul><li>Cost of Goods Mfd. </li></ul><ul><li>Cost of Goods Mfd. </li></ul>
    45. 45. Cost Flows – Cost of Goods Manufactured <ul><li>As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process. </li></ul>
    46. 46. Job-Order System Cost Flows Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) <ul><li>Direct Materials </li></ul><ul><li>Direct Labor </li></ul><ul><li>Overhead Applied </li></ul><ul><li>Cost of Goods Mfd. </li></ul><ul><li>Cost of Goods Mfd. </li></ul><ul><li>Cost of Goods Sold </li></ul><ul><li>Cost of Goods Sold </li></ul>
    47. 47. Cost Flows – Sales <ul><li>When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods. </li></ul>
    48. 48. Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed 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.
    49. 49. <ul><li>PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. </li></ul><ul><li>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. </li></ul>Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
    50. 50. <ul><li>PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. </li></ul><ul><li>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. </li></ul>Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo has overapplied overhead for the year by $30,000. What will PearCo do?
    51. 51. <ul><li>Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is </li></ul><ul><li>a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. </li></ul>Quick Check 
    52. 52. <ul><li>Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is </li></ul><ul><li>a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. </li></ul>Quick Check  Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
    53. 53. Disposition of Under- or Overapplied Overhead OR $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold PearCo’s Method Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts.
    54. 54. Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance Overhead applied to jobs $680,000 $30,000 $30,000
    55. 55. Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:
    56. 56. Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead:
    57. 57. Allocating Under- or Overapplied Overhead Between Accounts
    58. 58. Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method
    59. 59. Quick Check  <ul><li>What effect will the overapplied overhead have on PearCo’s net operating income? </li></ul><ul><ul><li>a. Net operating income will increase. </li></ul></ul><ul><ul><li>b. Net operating income will be unaffected. </li></ul></ul><ul><ul><li>c. Net operating income will decrease. </li></ul></ul>
    60. 60. Quick Check  <ul><li>What effect will the overapplied overhead have on PearCo’s net operating income? </li></ul><ul><ul><li>a. Net operating income will increase. </li></ul></ul><ul><ul><li>b. Net operating income will be unaffected. </li></ul></ul><ul><ul><li>c. Net operating income will decrease. </li></ul></ul>
    61. 61. 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. May be more complex but . . . May be more accurate because it reflects differences across departments.
    62. 62. Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies.
    63. 63. 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.
    64. 64. Appendix 3a The Predetermined Overhead Rate & Capacity
    65. 65. Predetermined Overhead Rate and Capacity <ul><li>Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: </li></ul><ul><li>Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. </li></ul><ul><li>Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use. </li></ul>
    66. 66. Capacity-Based Overhead Rates Criticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation. Let’s look at the difference!
    67. 67. 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?
    68. 68. 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? Traditional Method = $2.50 per unit $100,000 40,000 = Capacity Method = $2.00 per unit $100,000 50,000 =
    69. 69. Quick Check  <ul><li>Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? </li></ul><ul><ul><li>a. $2.00 per case. </li></ul></ul><ul><ul><li>b. $2.50 per case. </li></ul></ul><ul><ul><li>c. $4.00 per case. </li></ul></ul>
    70. 70. Quick Check  <ul><li>Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? </li></ul><ul><ul><li>a. $2.00 per case. </li></ul></ul><ul><ul><li>b. $2.50 per case. </li></ul></ul><ul><ul><li>c. $4.00 per case. </li></ul></ul>
    71. 71. Quick Check  <ul><li>Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity ? </li></ul><ul><ul><li>a. $2.00 per case. </li></ul></ul><ul><ul><li>b. $2.50 per case. </li></ul></ul><ul><ul><li>c. $4.00 per case. </li></ul></ul>
    72. 72. Quick Check  <ul><li>Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity ? </li></ul><ul><ul><li>a. $2.00 per case. </li></ul></ul><ul><ul><li>b. $2.50 per case. </li></ul></ul><ul><ul><li>c. $4.00 per case. </li></ul></ul>
    73. 73. Quick Check  <ul><li>When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? </li></ul><ul><ul><li>a. The predetermined overhead rate goes up when activity goes down. </li></ul></ul><ul><ul><li>b. The predetermined overhead rate stays the same; it is not affected by changes in activity. </li></ul></ul><ul><ul><li>c. The predetermined overhead rate goes down when activity goes down. </li></ul></ul>
    74. 74. Quick Check  <ul><li>When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? </li></ul><ul><ul><li>a. The predetermined overhead rate goes up when activity goes down. </li></ul></ul><ul><ul><li>b. The predetermined overhead rate stays the same; it is not affected by changes in activity. </li></ul></ul><ul><ul><li>c. The predetermined overhead rate goes down when activity goes down. </li></ul></ul>
    75. 75. Quick Check  <ul><li>When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? </li></ul><ul><ul><li>a.The predetermined overhead rate goes up when activity goes down. </li></ul></ul><ul><ul><li>b.The predetermined overhead rate stays the same; it is not affected by changes in activity. </li></ul></ul><ul><ul><li>c.The predetermined overhead rate goes down when activity goes down. </li></ul></ul>
    76. 76. Quick Check  <ul><li>When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? </li></ul><ul><ul><li>a.The predetermined overhead rate goes up when activity goes down. </li></ul></ul><ul><ul><li>b.The predetermined overhead rate stays the same; it is not affected by changes in activity. </li></ul></ul><ul><ul><li>c.The predetermined overhead rate goes down when activity goes down. </li></ul></ul>
    77. 77. Basing the rate on capacity
    78. 78. Basing the rate on expected volume
    79. 79. End of Chapter 3

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