© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin 17-1 job order cost systems and overhead...

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

17-1

JOB ORDER COST SYSTEMS AND OVERHEAD ALLOCATIONS

Chapter

17


17-2

Planning andcontrol

functions.

Providingproducts or services tocustomers.

Assessing theefficiency andeffectivenessof operations.

Determining unitmanufacturing

costs.

Cost accounting systems provide information supporting decisions making the business successful.

Cost Accounting SystemsCost Accounting Systems


17-3

Discloseinventoriesand cost ofgoods sold.

Track resourcesconsumed byproducts and

services.

Manage activitiesthat consume

resources.

Evaluate andreward

employeeperformance.

Cost accounting systems are the proceduresand techniques used by management.

Cost Accounting SystemsCost Accounting Systems


17-4

Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.

Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.

Job Order CostingJob Order Costing

Typical job order cost applications: Special-order printing Building construction

Also used in service industry Hospitals Law firms

Typical job order cost applications: Special-order printing Building construction

Also used in service industry Hospitals Law firms


17-5

Receive orders from customers

Begin production

Ordermaterials

Schedulejobs



17-6

THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate (POHR)



17-7

Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Charge direct

material and direct labor

costs to each job as

work is performed.

Direct MaterialsDirect Materials

Direct LaborDirect Labor



17-8

Apply overhead to

each job using a

predeter-mined rate.

Apply overhead to

each job using a

predeter-mined rate.

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead




17-9

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theactivity base for the coming period

POHR =

The predetermined overhead rate (POHR) used to apply overhead to jobs is

determined before the period begins.

Ideally, the activity base is a cost driver that causes overhead.

Overhead Application RatesOverhead Application Rates


17-10

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.

$$



17-11

Overhead applied = POHR × Actual activity

Actual amount of the cost driver such as units produced, direct labor hours, or machine hours

incurred during the period.

Based on estimates, and determined before the

period begins.



17-12

Compuline, Inc., applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor

hours are 30,000.

What is Compuline’s predetermined overhead rate per hour?

Compuline, Inc., applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor

hours are 30,000.

What is Compuline’s predetermined overhead rate per hour?



17-13

For each direct labor hour worked on a job, $12.00 of manufacturing overhead

will be applied to the job.

POHR = $12.00 per DLH

$360,000

30,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =



17-14

The primary document for tracking the costs

associated with a given job is the job

cost sheet.

Let’s investigate



17-15

The Job Cost SheetThe Job Cost Sheet

RoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost


17-16





Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost

A materials requisition form is used to

authorize the use of materials on a job.


17-17





Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Cost

Accumulate direct labor

costs by means of a

work record, such as a time ticket, for each

employee.


17-18



Job Number A - 143 Date Initiated 3-4-X9Date Completed 3-5-X9

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$

Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on

direct labor hours (DLH).


17-19

Let’s summarize the document flow we have

been discussing in a job order

costing system.

Job Order CostingDocument Flow Summary



17-20

Materials Ledger CardsMaterials

Ledger CardsMaterials Ledger CardsMaterialsRequisition

Direct materials

The materials requisition

indicates the cost of direct

materialto charge to

jobsand the cost of

indirect material to charge to overhead.

Indirect materials

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Manufacturing Overhead Account




17-21

Employee time tickets indicate

the cost of direct labor

to charge tojobs

and the cost of indirect labor

to charge to overhead.

Job Cost Sheets


Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Direct Labor

Indirect Labor

Employee Time TicketEmployee Time

TicketEmployee Time TicketEmployee Time

Ticket




17-22

EmployeeTime Ticket

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

OverheadApplied

withPOHR


Job Cost Sheets




17-23

Let’s examine the cost flows in a

job order costing system. We will use T-accounts and start with

materials.

Flow of Costs in Job CostingFlow of Costs in Job Costing


17-24

•MaterialPurchases

•Direct Material

•Direct Material

Mfg. Overhead•Indirect Material

Work in Process(Job Cost Sheet)

•Indirect Material

Materials Inventory



17-25

Next let’s add labor costs and

applied manufacturing overhead to the job order cost flows. Are you

with me?



17-26

•Direct Labor

Mfg. Overhead

Work in Process(Job Cost Sheet)

•Indirect Material

•Direct Material

•OverheadApplied to

Work inProcess

•IndirectLabor

•Direct Labor

•Overhead Applied

•IndirectLabor

the difference is closed to cost of goods sold.

When Actual Applied factory factoryoverhead overhead

=/

Labor



17-27

If Manufacturing Effect of Closing toOverhead is . . . Cost of Goods Sold

UNDERAPPLIED INCREASE(Applied OH is less Cost of Goods Sold

than actual OH)

OVERAPPLIED DECREASE(Applied OH is greater Cost of Goods Sold

than actual OH)

Closing Under- or OverappliedManufacturing Overhead

Closing Under- or OverappliedManufacturing Overhead


17-28

Now let’s complete the

goods and sell them. Still with

me?



17-29

•Cost ofGoodsMfd.

Finished Goods

•Cost ofGoodsSold

•Cost ofGoodsMfd.

Cost of Goods Sold

•Cost ofGoodsSold

Work in Process(Job Cost Sheet)•Direct

Material•Direct Labor

•Overhead Applied



17-30

A

B CA

CB

Activity-Based Costing (ABC)Activity-Based Costing (ABC)


17-31

One of the most difficult tasks in

computing accurate unit costs lies in determining the

proper amount of overhead cost to

assign to each job.

One of the most difficult tasks in

computing accurate unit costs lies in determining the

proper amount of overhead cost to

assign to each job.

Assigningoverhead is

difficult. I agree!



17-32

Level of C

omplexity

Overhead Allocation

Plantwide Overhead

Rate

DepartmentalOverhead

Rates

Activity-BasedCosting



17-33

In the ABC method, we recognize that many

activities within a department drive overhead costs.

In the ABC method, we recognize that many

activities within a department drive overhead costs.A

B CA

CB



17-34

Identify activities and assign indirect costs to those activities.

Central idea . . .Products require activities.Activities consume resources. A

B CA

CB



17-35

More detailed measures of costs.Better understanding of activities.More accurate product costs for . . .

Pricing decisions.Product elimination decisions.Managing activities that cause costs.

Benefits should always be compared tocosts of implementation.

More detailed measures of costs.Better understanding of activities.More accurate product costs for . . .

Pricing decisions.Product elimination decisions.Managing activities that cause costs.

Benefits should always be compared tocosts of implementation.

The Benefits of ABCThe Benefits of ABC


17-36

Most cost drivers are related to either volume or complexity of production. Examples: machine time, machine setups, purchase

orders, production orders.

Three factors are considered in choosing a cost driver: Causal relationship. Benefits received. Reasonableness.

Most cost drivers are related to either volume or complexity of production. Examples: machine time, machine setups, purchase

orders, production orders.

Three factors are considered in choosing a cost driver: Causal relationship. Benefits received. Reasonableness.

Identifying Cost Drivers Identifying Cost Drivers


17-37

Overhead Actual Rate Activity

×

Rate = Estimated overhead costs in activity cost pool

Estimated number of activity units

Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each

activity. Compute overhead rate for each cost pool:

Assign costs to products:

Activity-Based CostingProcedures

Activity-Based CostingProcedures


17-38

Let’s look at anexample comparingtraditional costing

with ABC. We will start with

traditional costing.

Activity-Based CostingActivity-Based Costing


17-39

Pear Company manufactures a product in regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Budgeted overhead for the current year is $2,000,000. Other information:

Deluxe RegularModel Model

Direct Material 150$ 112$ Direct Labor Cost 16 8 Direct Labor Time 1.6 hours 0.8 hoursExpected Volume (units) 5,000 40,000

First, determine the unit cost of each model using traditional costing methods.

Traditional Costing vs. ABCExample

Traditional Costing vs. ABCExample


17-40

DirectLabor Hours

Deluxe Model 5,000 units @ 1.6 hours 8,000 Regular Model 40,000 units @ 0.8 hours 32,000

Total Direct Labor Hours (DLH) 40,000

Overhead Estimated overhead costs Rate Estimated activity

=

Overhead $2,000,000 Rate 40,000 DLH

= = $50 per DLH

Traditional CostingTraditional Costing


17-41


Direct Material 150$ 112$ Direct Labor 16 8 Manufacturing Overhead$50 per hour × 1.6 hours 80 $50 per hour × 0.8 hours 40 Total Unit Cost 246$ 160$

ABC will have differentoverhead per unit.

Traditional CostingTraditional Costing


17-42

Pear Company plans to adopt activity-based costing. Using the following activity center

data, determine the unit cost of the two products using activity-based costing.

OverheadActivity Cost Cost for Units of ActivityCenter Driver Activity Deluxe Regular

Purchasing Orders 84,000$ 400 800 Scrap Rework Orders 216,000 300 600 Testing Tests 450,000 4,000 11,000 Machine Related Hours 1,250,000 20,000 30,000 Total Overhead 2,000,000$



17-43

Overhead UnitsActivity Cost Cost for ofCenter Driver Activity Activity Rate

Purchasing Orders 84,000$ 1,200 Scrap Rework Orders 216,000 900 Testing Tests 450,000 15,000 Machine Related Hours 1,250,000 50,000 Total Overhead 2,000,000$

400 deluxe + 800 regular = 1,200 total



17-44

Overhead UnitsActivity Cost Cost for ofCenter Driver Activity Activity Rate

Purchasing Orders 84,000$ 1,200 $ 70 per orderScrap Rework Orders 216,000 900 $240 per orderTesting Tests 450,000 15,000 $ 30 per testMachine Related Hours 1,250,000 50,000 $ 25 per hourTotal Overhead 2,000,000$

Rate = Overhead Cost for Activity ÷ Units of Activity



17-45

Deluxe Model Regular ModelActual Cost Actual Cost

Units of Allocated Units of AllocatedActivity Rate Activity to Product Activity to Product

Purchasing $ 70/order 400 ? 800 ?Scrap Rework $240/order 300 ? 600 ?Testing $ 30/test 4,000 ? 11,000 ?Machine Related $ 25/hour 20,000 ? 30,000 ?Total Overhead ? ?



17-46



Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 ? 600 ? Testing $ 30/test 4,000 ? 11,000 ? Machine Related $ 25/hour 20,000 ? 30,000 ? Total Overhead ? ?

Cost Allocated to Product = Actual Units of Activity × Rate

Let’s completethe table.



17-47



Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$




17-48



Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$


Total overhead = $720,000 + $1,280,000 = $2,000,000Recall that $2,000,000 was the original amount of

overhead assigned to the products using traditional overhead costing.



17-49

Overhead Costs Assigned to Products: Deluxe Model $720,000 ÷ 5,000 units = $144 per unit Regular Model $1,280,000 ÷ 40,000 units = $32 per unit


Direct Materials 150$ 112$ Direct Labor 16 8 Manufacturing Overhead 144 32 Total Unit Cost 310$ 152$



17-50

This result is not uncommon when activity-based costing is used. Many companies have found that low-

volume, specialized products have greater overhead costs than previously realized.

Traditional Costing ABCDeluxe Regular Deluxe RegularModel Model Model Model

Direct materials 150$ 112$ 150$ 112$ Direct labor 16 8 16 8 Overhead 80 40 144 32 Total cost 246$ 160$ 310$ 152$



17-51

Cost Cost DriverMaterials purchasing Number of purchase ordersMaterials handling Number of materials

requisitionsPersonnel processing Number of employees hired

or laid offEquipment depreciation Number of products

produced or hours of useQuality inspection Number of units inspectedIndirect labor for Number of setups required equipment setupsEngineering costs for Number of modifications product modifications

Costs and Cost Drivers inActivity-Based Costing

Costs and Cost Drivers inActivity-Based Costing


17-52

End of Chapter 17End of Chapter 17

© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin 17-1 job order cost systems and overhead...

Documents