job-order costing - · pdf filecost are accounted for by ... sequence of events in a...

Job-Order Costing

M. En C. Eduardo Bustos Farías

Features of Service Firms and Their Features of Service Firms and Their Interface with the Cost Management SystemInterface with the Cost Management System

PELICULA

Continuum of Services and Manufactured Products

Continuum of Services and Continuum of Services and Manufactured ProductsManufactured Products

PureService

Manufactured Product

Bungee jumping Beauty Salon Restaurant AutomobilesSoftware Cereals

Features of Service Firms and Their Interface with the Cost Management System

Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System

FeatureImpact on Cost

Management SystemRelationship to Business

Intangibility Services cannot be stored. There are no inventory accounts.

Services cannot be protected through patents.

There is a strong ethical code.

Services cannot readily be displayed or communicated.

Prices are difficult to set. Costs must be related to entire organization.

Management SystemRelationship to Business

Inseparability Consumer is involved in production.

Cost are accounted for by customer type.

Other customers are involved in production.

Centralized mass production of services is difficult

Systems must be generated to encourage consistent quality.

fomentar

Management System

Heterogeneity Standardization and quality control are difficult.

A strong systems approach is needed.

Productivity measurement is ongoing.

TQM is critical.

Relationship to Business

continuado

Management System

Perishability Service benefit expire quickly.

There are no inventories.

Service may be repeated often for one customer.

There needs to be a standardized system to handle repeat customers.

Relationship to Business

perecedero

ocuparse

Describe the building-blockconcepts of costing systems.

Building-Block Conceptsof Costing Systems

Cost object

Direct costsof a cost object

Indirect costsof a cost object

Cost Assignment

DirectCosts

IndirectCosts

Cost Tracing

Cost Allocation

CostObject

Cost poolcomunes

Cost allocation base

Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment

CostMeasurement

CostAssignment

CostAccumulationRecord Costs: Classify Costs: Assign to Cost Objects:

Product 2Product 2

Product 1Product 1Purchase materials Direct MaterialsDirect MaterialsAssemblers’ payrollFinishers’ payroll Direct LaborDirect Labor

OverheadOverhead

Supervisors’ PayrollDepreciationUtilitiesProperty taxesLandscaping

Otros gastos

Cost AccumulationCost Accumulation

Cost accumulation refers 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.

Conserven la cuenta

Cost MeasurementCost MeasurementCost 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 systems measure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor.

Types of Costing Systems Used to Determine Product Costs

Job-Costing andProcess-Costing Systems

Job-costingsystem

Process-costingsystem

Distinct unitsof a productor service

Masses of identicalor similar units of

a product or service

ProcessCosting

Job-orderCosting

Many different products are produced each period. Products are manufactured to order.Cost are traced or allocated to jobs.Cost records must be maintained for each distinctproduct or job.

Class 7Class 7

ProcessCosting

Job-orderCosting

Typical job order cost applications:Special-order printingBuilding construction

Also used in the service industryHospitalsLaw firms

Typical job order cost applications:Special-order printingBuilding construction

Also used in the service industryHospitalsLaw firms

Quick Check

Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for kleenex (Kimberly Clark in Mexico).

b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.

Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for kleenex (Kimberly Clark in Mexico).

b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.

Job-Order Cost Accounting

PELICULA

Job-Order Costing

DirectmaterialDirect

material

Direct labor

Manufacturingoverhead (OH)Applied to each

job using apredetermined

Manufacturingoverhead (OH)Applied to each

job using apredetermined

Traced directlyto each job

Traced directly

to each job

The JobThe Job

obtenidos

Sequence of Events in a Job-Order Costing System

Receive orders from customers

Schedulejobs

Begin production

Ordermaterials

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.

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead

Manufacturing Overhead

Apply overhead to

each job using a

predeter-mined rate.

Apply overhead to

each job using a

predeter-mined rate.

The primary document for

tracking the costs associated with a given job is the job cost sheet.

Rastrear

Let’s investigate

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-01Date 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 Product Cost

Cajas de madera para empaque

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 Product Cost

Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.

Materials Requisition Form

PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01Job No. A - 143Department B3

Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00

116.00$

Authorized Signature Will E. Delite

Materials Requisition Form

PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01Job No. A - 143Department B3

Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00

116.00$

Authorized Signature Will E. Delite

Type, quantity, and total cost of material charged to job A-143.

Cost of material is charged to job A-143.Cost of material is

charged to job A-143.

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 Product Cost

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 Product Cost

Workers use time tickets to record the time spent on each

Let’s see one

Employee Time Ticket

PearCo Employee Time Ticket

Time Ticket No. 36 Date 05/03/2001Employee I. M. Skilled Station 42

Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143

Totals 8.00 11.00$ 88.00$ A-143

Supervisor C. M. Workman

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 Product Cost

Job Number A - 143 Date Initiated 3-4-01Date Completed 3-5-01

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

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 apredetermined overhead rate of $4 per direct

labor hour (DLH).Let’s do it

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 Product Cost 118$

*$236/2 units = $ 118 per unit

PELICULA

Application of Manufacturing Overhead

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

before the period begins.

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

Actual amount of the allocation base such as units produced, direct labor hours, or machine

hours incurred during the period.

Actual amount of the allocation base such as units produced, direct labor hours, or machine

hours incurred during the period.

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.

Overhead applied = POHR × Actual activity

Recall the wooden crate example where:

Overhead applied = $4 per DLH × 8 DLH = $32

Overhead applied = POHR × Actual activity

recordemos

The Need for a Predetermined Manufacturing Overhead Rate

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.

Overhead Application Example

PearCo applies overhead based on direct labor hours. Total estimated overhead for the year

is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are

160,000.

What is PearCo’s predetermined overhead rate per hour?

Overhead Application ExampleEstimated total manufacturing

overhead cost for the coming periodEstimated total units in the

allocation base for the coming period

POHR =

$640,000160,000 direct labor hours (DLH)

POHR =

POHR = $4.00 per DLH

For each direct labor hour worked on a job, $4.00 of factory overhead will be

applied to the job.

For each direct labor hour worked on a job, $4.00 of factory overhead will be

applied to the job.

Job Number X - 32 Date Initiated 3-9-01Date Completed 3-11-01

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-7456 240$ 23 26 286$

Cost Summary Units ShippedDirect Materials 240$ Date Number BalanceDirect Labor 286$ Manufacturing OverheadTotal CostUnit Product Cost

What amount of overhead willPearCo apply to Job X-32?

Cost Summary Units ShippedDirect Materials 240$ Date Number BalanceDirect Labor 286$ Manufacturing Overhead 104$ Total CostUnit Product Cost

Cost Summary Units ShippedDirect Materials 240$ Date Number BalanceDirect Labor 286$ Manufacturing Overhead 104$ Total Cost 630$ Unit Product Cost 105$

Quick Check If the number of wooden crates in the order on the previous example is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?a. Total spending would probably change

by less than $105.b. Total spending would probably change

by about $105.c. Total spending would probably change

by more than $105.

If the number of wooden crates in the order on the previous example is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?a. Total spending would probably change

by less than $105.b. Total spending would probably change

by about $105.c. Total spending would probably change

by more than $105.

Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.

Outline a seven-stepapproach to job costing.

resumen

aproximarse

Seven-Step Approachto Job Costing

Step 1:Identify the chosen cost object.

Step 2:Identify the direct costs of the job.

Step 3:Select the cost-allocation bases.

Step 4:Identify the indirect costs.

Seven-Step Approachto Job Costing

Step 5:Compute the rate per unit.

Step 6:Compute the indirect costs.

Step 7:Compute the total cost of the job.

General Approach to Job Costing

A manufacturing company is planning to sella batch of 25 special machines (Job 650) to a

retailer for $114,800.Step 1:

The cost object is Job 650.Step 2:

Direct costs are: Direct materials = $50,000Direct manufacturing labor = $19,000

minorista

Step 3:The cost allocation base is machine-hours.

Job 650 used 500 machine-hours.2,480 machine-hours were used by all jobs.

Step 4:Manufacturing overhead costs were $65,100.

Step 5:Actual indirect cost rate is

$65,100 ÷ 2,480 = $26.25 per machine-hour.Step 6:

$26.25 per machine-hour × 500 hours = $13,125

Step 7:Direct materials $50,000Direct labor 19,000Factory overhead 13,125Total $82,125

What is the gross margin of this job?Revenues $114,800Cost of goods sold 82,125Gross margin $ 32,675What is the gross margin percentage?

$32,675 ÷ $114,800 = 28.5%

Quick Check 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?a. $200.b. $350.c. $380.d. $730.

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?a. $200.b. $350.c. $380.d. $730.

Pred. ovhd. rate $760,000/20,000hours $38

Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380Total cost $730

Quick Check 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 19,000. What would be recorded as the cost of job WR53?a. $200. b. $350.c. $750.d. $730.

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 19,000. What would be recorded as the cost of job WR53?a. $200. b. $350.c. $750.d. $730.

Quick Check If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?a. The predetermined overhead rate will

likely increase.b. The predetermined overhead rate would

be unaffected.c. The predetermined overhead rate will

likely decrease.

If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?a. The predetermined overhead rate will

likely increase.b. The predetermined overhead rate would

be unaffected.c. The predetermined overhead rate will

likely decrease.

Quick Check

If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected?a. Product costs will likely increase.b. Product costs would be unaffected.c. Product costs will likely decrease.

Quick Check

If selling prices increase, what will happen to unit sales volume?a. Unit sales volume will likely increase.b. Unit sales volume would be unaffected.c. Unit sales volume will likely decrease.

Job-Order CostingDocument Flow Summary

Let’s summarize the document flow

in a job-order costing system.

Source Documents

Job cost record

Materials requisition record

Labor time record

A Job-Order Cost SheetA JobA Job--Order Cost SheetOrder Cost SheetJob Number 16Date Ordered April 2, 2004Date Completed April 24, 2004Date Shipped April 25, 2004

For Benson CompanyItem Description ValvesQuantity Completed 100

Direct Materials Direct Labor Overhead

Requisition Number Amount

Ticket Number Hours Rate Amount Hours Rate Amount

12 $300 68 8 $6 $ 48 8 $10 $ 8018 450 72 10 7 70 10 10 100

$750 $118 $180

Direct materials $750Direct labor 118Overhead 180

Total cost $1,048

Unit cost $10.48

Material Requisition FormMaterial Requisition FormMaterial Requisition Form

DateDepartmentJob Number

Authorized Signature

Description Quantity Cost/Unit Total Cost

Jim Lawson

Casing 100 $3 $300

Material Requisition Number 678April 8, 2004

62Grinding molienda

envoltura

Job Time TicketJob Time TicketJob Time Ticket

Authorized Signature

Start Time Stop Time Total Time Hourly Rate Amount Job Number

Jim Lawson

Job Time TicketNumber 68

Employee NumberNameDate

8:00 10:00 2 $6 $12 1610:00 11:00 1 6 6 1711:00 12:00 1 6 6 161:00 6:00 5 6 30 16

45Ann WilsonApril 12, 2004

Department Supervisor

Job Cost Sheets

MaterialsRequisitionMaterials

Requisition

Direct materials

Indirect materials

Materials usedmay be either

direct orindirect.

Materials usedmay be either

direct orindirect.

Manufacturing Overhead Account

Job Cost Sheets

Employee Time Ticket

An employee’stime may be eitherdirect or indirect.

Direct Labor

Indirect Labor

OtherActual OHCharges

Job Cost Sheets

AppliedOverhead

MaterialsRequisitionMaterials

Requisition

EmployeeTime TicketEmployee

Time Ticket

IndirectMaterial

IndirectLabor

Distinguish actual costingfrom normal costing.

Costing Systems

Actual costing is a system that uses actualcosts to determine the cost of individual jobs.It allocates indirect costs based on the actualindirect-cost rate(s) times the actual quantity

of the cost-allocation base(s).

Costing Systems

Normal costing is a method that allocatesindirect costs based on the budgetedindirect-cost rate(s) times the actual

quantity of the cost allocation base(s).

Normal Costing

Assume that the manufacturing company budgets$60,000 for total manufacturing overhead costs

and 2,400 machine-hours.What is the budgeted indirect-cost rate?

$60,000 ÷ 2,400 = $25 per hourHow much indirect cost was allocated to Job 650?

500 machine-hours × $25 = $12,500

Normal Costing

What is the cost of Job 650 under normal costing?Direct materials $50,000Direct labor 19,000Factory overhead 12,500Total $81,500

Job-Order System Cost Flows

Let’s examine the cost flows in a

job-order costing system..

Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)Direct

Materials DirectMaterials

IndirectMaterials

Actual Applied

Next let’s addlabor costs and

applied manufacturing

overhead.

Mfg. Overhead

Salaries and Wages Payable

Materials

OverheadApplied

OverheadApplied to

Work inProcess

DirectLabor

IndirectLabor

IndirectMaterials

Actual AppliedIf actual and applied

manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Now let’s complete the

goods and sell them. Still with

Finished Goods

Cost ofGoodsMfd.

Cost of Goods Sold

MaterialsDirectLabor

OverheadApplied

Cost ofGoodsSold

Transactions

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

Transactions

$80,000 worth of materials (direct andindirect) were purchased on credit.

1. 80,000

Accounts PayableControl

MaterialsControl Cuentas

Por pagar

1. 80,000

Transactions

Materials costing $75,000 were sent to themanufacturing plant floor.

$50,000 were issued to Job No. 650 and$10,000 to Job 651.

entregado

$15,000 of indirect materials were issued.What is the journal entry?

diaria

Transactions

Work in Process Control:Job No. 650 50,000Job No. 651 10,000Factory Overhead Control 15,000

Materials Control 75,000

Transactions

MaterialsControl

1. 80,000 2. 75,000

Work in ProcessControl

2. 60,000

ManufacturingOverheadControl

2. 15,000Job 650

2. 50,000

Transactions

Total manufacturing payroll forthe period was $27,000.

Job No. 650 incurred direct labor costsof $19,000 and Job No. 651 incurred

direct labor costs of $3,000.$5,000 of indirect labor was also incurred.

What is the journal entry?

Transactions

Work in Process Control:Job No. 650 19,000Job No. 651 3,000Manufacturing Overhead Control 5,000

Wages Payable 27,000

Transactions

Wages PayableControl

3. 27,000

2. 60,0003. 22,000

ManufacturingOverheadControl

2. 15,0003. 5,000

Job 6502. 50,0003. 19,000

Transactions

Wages payable were paid.Wages Payable Control 27,000

Cash Control 27,000

Wages PayableControl

4. 27,000

CashControl

4. 27,0003. 27,000

Transactions

Assume that depreciation for theperiod is $26,000.

Other manufacturing overheadincurred amounted to $19,100.

What is the journal entry?

Transactions

Manufacturing Overhead Control 45,100Accumulated DepreciationControl 26,000Various Accounts 19,100

What is the balance of the ManufacturingOverhead Control account?

Transactions

$62,000 of overhead was allocated to thevarious jobs of which $12,500 went to Job 650.

Work in Process Control 62,000Manufacturing Overhead Control 62,000

What are the balances of the control accounts?

Transactions

Manufacturing OverheadControl

2. 60,0003. 22,0006. 62,000Bal. 144,000

2. 15,0003. 5,0005. 45,100Bal. 3,100

6. 62,000

Transactions

The cost of Job 650 is:

Job 6502. 50,0003. 19,0006. 12,500Bal. 81,500

Transactions

Jobs costing $104,000 were completed andtransferred to finished goods, including Job 650.

What effect does this have on the control accounts?

Transactions

Finished GoodsControl

2. 60,0003. 22,0006. 62,000Bal. 40,000

7. 104,0007. 104,000

Transactions

Job 650 was sold for $114,800.What is the journal entry?

Accounts Receivable Control 114,800Revenues 114,800

Cost of Goods Sold 81,500Finished Goods Control 81,500

Transactions

What is the balance in the Finished GoodsControl account?

$104,000 – $81,500 = $22,500Assume that marketing and administrative

salaries were $9,000 and $10,000.What is the journal entry?

Transactions

Marketing and Administrative Costs 19,000Salaries Payable Control 19,000

Transactions

Direct Materials Used $60,000

+ Direct Labor and Overhead $84,000

– Cost of Goods Manufactured $104,000

= Ending WIP Inventory $40,000Wip=Work in process

Transactions

Cost of Goods Manufactured $104,000

– Ending Finished Goods Inventory $22,500

= Cost of Goods Sold $81,500

Overapplied and UnderappliedManufacturing Overhead

Let’s return to PearCoand see what we will

do if actual and applied overhead are

not equal.

Overhead ApplicationExample

PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor

hours.How much total overhead was applied to PearCo’s

jobs during the year? Use PearCo’spredetermined overhead rate of $4.00 per direct

labor hour.

PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor

hours.How much total overhead was applied to PearCo’s

jobs during the year? Use PearCo’spredetermined overhead rate of $4.00 per direct

labor hour.

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

Work inProcess

FinishedGoods

Cost of Goods Sold

$30,000may be allocated

to these accounts.

Overapplied and Underapplied Manufacturing Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

PearCo’s Method

Overapplied and Underapplied Manufacturing Overhead

PearCo’sMfg. OverheadActual

overheadcosts

$650,000$30,000

overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000

Quick Check

What effect will the overapplied overhead have on PearCo’s cost of goods sold?a. Cost of goods sold will increase.b. Cost of goods sold will be unaffected.c. Cost of goods sold will decrease.

Quick Check

What effect will the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.

Overapplied and Underapplied Manufacturing Overhead - Summary

Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process

(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process

(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

PearCo’sMethod

Quick Check

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

a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.

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

a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.

Overhead Applied$4.00 per hour × 290,000 hours= $1,160,000

Underapplied Overhead$1,210,000 - $1,160,000= $50,000

Overhead Applied$4.00 per hour × 290,000 hours= $1,160,000

Underapplied Overhead$1,210,000 - $1,160,000= $50,000

Job-Order Costing – Typical Accounting Entries

Let’s look atsummary journal entries for a job-

order costing system.

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.

GENERAL JOURNAL Page 3

Date DescriptionPost. Ref. Debit Credit

Raw Materials XXXXX Accounts Payable XXXXX

Cost Flows – Material Usage

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.

Work in Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX

Cost Flows – Labor

The cost of direct labor incurred increases Work in Process and the cost of indirect labor

increases Manufacturing Overhead.

Work in Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX

Cost Flows – Actual Overhead

In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they

are incurred. GENERAL JOURNAL Page 3

Manufacturing Overhead XXXXX Accounts Payable XXXXX Property Taxes Payable XXXXX Prepaid Insurance XXXXX Accumulated Depreciation XXXXX

Cost Flows – Overhead Applied

Work in Process is increased when Manufacturing Overhead is applied to jobs.

Work in Process XXXXX Manufacturing Overhead XXXXX

Cost Flows – Period Expenses

Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

Salaries Expense XXXXX Salaries and Wages Payable XXXXX

Advertising Expense XXXXX Accounts Payable XXXXX

Cost Flows – Cost of Goods Manufactured

As jobs are completed, the Cost of Goods Manufactured is transferred to Finished

Goods from Work in Process.

Finished Goods XXXXX Work in Process XXXXX

Cost Flows – Sales

When finished goods are sold, two entries are required: (1) to record the sale; & (2) to record COGS and reduce Finished Goods.

Accounts Receivable XXXXX Sales XXXXX

Cost of Goods Sold XXXXX Finished Goods XXXXX

Cogs=cost of goods sold

Account for end-of-period underallocated or overallocated

indirect costs using alternative methods.

End-Of-Period Adjustments

ManufacturingOverhead Applied

Bal. 62,000

ManufacturingOverhead Control Bal. 65,100

Underallocated indirect costsOverallocated indirect costs

How was the allocated overhead determined?2,480 machine-hours × $25 budgeted rate = $62,000

$65,100 – $62,000 = $3,100 (underallocated)

Actual manufacturing overhead costs of $65,100are more than the budgeted amount of $60,000.Actual machine-hours of 2,480 are more than

the budgeted amount of 2,400 hours.

Approaches to disposing underallocatedor overallocated overhead:

1. Adjusted allocation rate approach2. Proration approaches3. Immediate write-off to Cost of Goods

Sold approach

Adjusted AllocationRate Approach

Actual manufacturing overhead ($65,100)exceeds manufacturing overhead allocated

($62,000) by 5%.3,100 ÷ 62,000 = 5%

Actual manufacturing overhead rate is $26.25per machine-hour ($65,100 ÷ 2,480) rather

than the budgeted $25.00.

Adjusted AllocationRate Approach

The manufacturing company could increasethe manufacturing overhead allocated to

each job by 5%.Manufacturing overhead allocated to Job 650

under normal costing is $12,500.$12,500 × 5% = $625

$12,500 + $625 = $13,125, which equalsactual manufacturing overhead.

Proration Approach

Basis to prorate under- or overallocated overhead:– total amount of manufacturing overhead

allocated (before proration)– ending balances of Work in Process, Finished

Goods, and Cost of Goods Sold

Proration Approach “A”

Assume the following manufacturingoverhead component of year-end

balances (before proration):Work in Process $23,500 38%Finished Goods 26,000 42%Cost of Goods Sold 12,500 20%Total $62,000 100%

Proration Approach “A”

Manufacturing Overhead Finished Goods65,100 62,000 22,500

3,100 1,302 0 23,802

Cost of Goods Sold Work in Process81,500 40,000

620 1,178 82,120 41,178

Proration Approach “B”

Ending balances of Work in Process,Finished Goods, and Cost of Goods Sold

Work in Process $ 40,000 28%Finished Goods 22,500 16%Cost of Goods Sold 81,500 56%Total $144,000 100%

Proration Approach “B”

Manufacturing Overhead Finished Goods65,100 62,000 22,500

3,100 496 0 22,996

Cost of Goods Sold Work in Process81,500 40,000 1,736 868

83,236 40,868

Immediate Write-off to Cost ofGoods Sold Approach

Manufacturing Overhead 65,100 62,000

3,100 0

Cost of Goods Sold 81,500 3,100

84,600

Apply variations fromnormal costing.

Variations of Normal Costing

Home Health budget includes the following:Total direct labor costs: $400,000

Total indirect costs: $96,000 Total direct (professional) labor-hours: 16,000

What is the budgeted direct labor cost rate?$400,000 ÷ 16,000 = $25

What is the budgeted indirect cost rate?$96,000 ÷ 16,000 = $6

Suppose a patient uses 25 direct labor-hours.Assuming no other direct costs, what is the

cost to Home Health?Direct labor: 25 hours × $25 = $625Indirect costs: 25 hours × $6 = 150Total $775

The Predetermined Overhead Rate & Capacity

Accounting for OverheadActual overhead costs are never

assigned directly to jobs. Overhead is applied using a

predetermined overhead rate.

Actual overhead costs are never assigned directly to jobs.

Overhead is applied using a predetermined overhead rate.

Estimated OverheadOverhead rate = Estimated Direct Labor Hours

$900,000

90,000 DLH= $10 per direct labor hour

All Signs CompanyAll Signs CompanyAll Signs Company

The receiving report and the invoice are used to record the receipt of the

merchandise and to control the payment.

1 Materials Inventory 2 500 00Accounts Payable 2 500 00

1. Direct materials costing $2,500 were purchased on account.

2 Work in Process 1 500 00Materials Inventory 1 500 00

2. Direct materials costing $1,500 were requisitioned for use in production.

Job 101Materials

Req. No. Amount

1 $ 3002 2003 500

$1,000

Job 102Materials

Req. No. Amount

4 $2505 2503

3 Work-in-Process Inventory 850 00Wages Payable 850 00

3. Direct labor costing $850 was recognized.

Job 101Materials

Ticket Hours Rate Amount

1 15 $10 $1502 20 10 2003 25 10 250

60 $600

Job 102Materials

Ticket Hours Rate Amount

4 15 $10 $1505 10 10 100

25 $250

4 Work-in-Process Inventory 340 00Overhead Control 340 00

4. Overhead was applied to production at the rate of $4 per direct labor hour. A total of 85 direct labor hours were worked.

5. Actual overhead costs of $415 were incurred: lease, $200; utilities, $50; depreciation, $100; accrued wages, $65.

5 Overhead Control 415 00

Lease Payable 200 00

Utilities Payable 50 00

Accumulated Depr.--Equipment 100 00

Wages Payable 65 00

6 Finished Goods Inventory 1 840 00Work-in-Process Inventory 1 840 00

6. Job 101, with a total cost of $1,840, are completed and transferred to finished goods.

Job Number 101Date Ordered Jan. 1, 2004Date Completed Jan. 2, 2004Date Shipped Jan. 15, 2004

For Housing DevelopmentItem Description Street SignsQuantity Completed 20

Materials Direct Labor Overhead

Requisition Number Amount

Ticket Number Hours Rate Amount Hours Rate Amount

1 $300 1 15 $10 $150 15 $4 $ 602 200 2 20 10 200 20 4 803 500 3 25 10 250 25 4 100

$1,000 $600 $240

Direct materials $1,000Direct labor $600Overhead $240

Total cost $1,840

Unit cost $92

a. Cost of Goods Sold 1 840 00

b. Accounts Receivable 2 760 00

Finished Goods Inventory 1 840 00

Sales Revenue 2 760 00

7. Sold Job 101 for $2,760.

8 Cost of Goods Sold 75 00

Overhead Control 75 00

8. Underapplied overhead was closed to cost of goods sold.

All Signs CompanyAll Signs CompanySchedule of Cost of Goods ManufacturedSchedule of Cost of Goods ManufacturedFor the Month Ended January 31, 2004For the Month Ended January 31, 2004

Direct materials:Beginning direct materials inventory $ 0Purchases of direct materials 2,500Total direct materials available for use $2,500Ending direct materials 1,000Total direct materials used $1,500

Direct labor 850Manufacturing Overhead:

Lease $ 200Utilities 50Depreciation 100Indirect labor 65

$ 415ContinuedContinuedContinued

$ 415Less: Underapplied overhead 75Overhead applied 340

Current manufacturing costs $2,690Add: Beginning work in process 0Total manufacturing cost $2,690Less: Ending work in process -1,050Cost of goods manufactured $1,840

Beginning finished goods inventory $ 0Cost of goods manufactured 1,840Cost of goods available for sale $1,840Less: Ending finished goods inventory 0Normal cost of goods sold $1,840Add: Underapplied overhead 75Adjusted cost of goods sold $1,915

All Signs CompanyAll Signs CompanyStatement of Cost of Goods SoldStatement of Cost of Goods Sold

For the Month Ended January 31, 2004For the Month Ended January 31, 2004

All Signs CompanyAll Signs CompanyIncome StatementIncome Statement

For the Month Ended January 31, 2004For the Month Ended January 31, 2004Sales $2,760Less: Cost of goods sold 1,915Gross margin $ 845Less selling and administrative expenses:

Selling expenses $200Administrative expenses 550 750

Operating income $ 95

Quick Check

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 has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.

encorchadora

Quick Check

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 has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.

Quick Check

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 has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.

Quick Check

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 has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.

Quick Check

When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when

activity goes down.b. The predetermined overhead rate stays the

same; it is not affected by changes in activity.c. The predetermined overhead rate goes down

when activity goes down.

When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when

activity goes down.b. The predetermined overhead rate stays the

same; it is not affected by changes in activity.c. The predetermined overhead rate goes down

Quick Check

When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a.The predetermined overhead rate goes up when

activity goes down.b.The predetermined overhead rate stays the same;

it is not affected by changes in activity.c.The predetermined overhead rate goes down

When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a.The predetermined overhead rate goes up when

activity goes down.b.The predetermined overhead rate stays the same;

it is not affected by changes in activity.c.The predetermined overhead rate goes down

Basing the rate on capacity

Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 50,000 casesPredetermined overhead rate $2.00 per caseFixed selling and admin. expense $500,000 per year

Revenue 1,600,000$ Cost of goods sold 1,040,000 Gross margin 560,000 Cost of idle capacity 20,000 Selling and admin. expense 500,000 Net operating income 40,000$

Basing the rate on expected volume

Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearExpected volume 40,000 casesPredetermined overhead rate $2.50 per caseFixed selling and admin. expense $500,000 per year

Revenue 1,600,000$ Cost of goods sold 1,060,000 Gross margin 540,000 Cost of idle capacity - Selling and admin. expense 500,000 Net operating income 40,000$

Review problem

References

1. Garrison, Ray H. & Noreen, Eric W. “ManagerialAccounting”. 10th ed. USA, Mc Graw Hill/Irwin, 2003. 838 pp.

2. Hansen & Mowen. “Cost Management. Accounting and Control”. Fourth Edition. USA, Thomson.

3. Hilton, Ronald W. “Managerial Accounting: CreatingValue in a Dynamic Business Environment ”. 5th. Ed. USA, Mc Graw Hill/Irwin, 2002. 858 pp.

4. Horngren /Datar /Foster. “Cost Accounting” 11th. ed. USA, Prentice Hall Business Publishing, 2003.

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