chapter two manufacturing costs and job-order costing systems
TRANSCRIPT
Chapter Two
Manufacturing Costs and
Job-Order Costing Systems
What Does it Cost to Make Something? In Accounting 284, all inventory was
purchased from another entity In Accounting 285, we will learn how to
cost a product that is manufactured All cost associated with the production
process are called product costs and go through inventory accounts
Product and Period Costs Product costs are
Direct material Direct labor Manufacturing
Overhead Indirect material Indirect labor Utilities Depreciation Any other
manufacturing cost
Period Costs are Selling cost Administrative cost
Product Costs and Period Costs
Product Cost
Period Cost
InventoryAccounts
Cost of Goods
Sold
SellingGeneral and
AdministrativeExpense
Income StatementBalance Sheet
Three Inventory Accounts
Material inventory includes the cost of materials purchased but not yet put into production
Work in Process (WIP) includes the cost of material, labor and manufacturing overhead of goods started but not yet completed
Finished goods included the cost of good completed but not yet sold
Cost Flows Through Inventory
Rawmaterial
Directlabor
Overhead
Workin
Process
FinishedGoods
Cost ofGoodsSold
Flow Through AccountsMaterial WIP Finished
Goods Beginning Material Beginning WIP Beginning
Finished goods + Purchases +Direct Material
used + Direct Labor + MOH
+ Cost of goods manufactured
= Material Available =Total cost to account for
=Goods available for sale
- Ending Material - Ending WIP - Ending Finished Goods
= Cost of material used
= Cost of goods manufactured
=Cost of goods sold
Job-order versus Process CostingJob-order costing keeps track of the cost of materials and labor used on each job and then applies manufacturing overhead to each job.
Process costing keeps track of total costs and divides by output for a period to get an average unit cost.
Job Order versus Process Costing
Use Job order costing for non-repetitive, high cost unique orders
Use Process costing for large numbers of homogeneous products
Which would home builder, tomato cannery, and automobile manufacturer use?
Job Order Costing
Keep payroll records according to jobs to know direct labor cost of each job
Use material requisitions for all materials to know the direct material cost for each job
Put all overhead (including indirect materials and indirect labor) into the overhead account and “apply” it to jobs
Actual versus Normal Overhead
The big problem in job order costing is relating overhead to production
To solve this, overhead is applied to production on the basis of some activity driver
Actual costing waits until the end of the period and then determines the actual overhead and the actual level of the driver.
Normal costing estimates the level of the driver and overhead in advance and then applies it throughout the period.
Problems with Actual Costing If done on shorter than an annual period
- say monthly - overhead rates can vary greatly from month to month.
If done annually, must wait until end of year to determine costs of all units during the year
No estimates are available for bidding, which is how job order costers normally obtain jobs.
Normal Costing
Use a predetermined overhead rate so that products can be costed as the period goes along, not at the end
Rate is developed by using the cost formula for overhead, estimating activity and developing a rate
This is called NORMAL COSTING
Developing Overhead Rate
1) Determine overhead application basis
2) Estimate activity level
3) Estimate overhead costs at that level
4) Divide estimated costs by activity to get rate
Rate Example
1) Activity driver is direct labor hours
2) Estimated activity level is 25,000 hours
3) Estimated costs at 25,000 hours is $250,000
4) Rate is 250,000/25,000 = $10/DLHr
Applying Overhead
1) Multiply actual activity by predetermined overhead rate - this is applied overhead
2) Compare to the actual overhead - if the applied is greater overhead is overapplied, if it is less it is under applied. Being overapplied is favorable.
3) The amount of under or overapplied overhead is assigned to cost of goods sold or prorated between inventories
Applied Overhead Example1) Assume that actual hours worked were
26,000 and actual overhead was $257,000
2) Applied overhead would be 26,000 * $10 or $260,000
3) Overhead would be overapplied by $3,000
Why might this be the case?
Causes of Under/overapplied Assume that overhead was $150,000 +
$4/direct labor hours so that at a volume of 25,000 hours overhead was estimated to be $250,000 (150,000+(4*25,0000))
The rate of $10 consists of $6 fixed and $4 variable.
When we work 26,000 hours, its like more people coming to the party in that we keep applying the overhead even though we shouldn’t still be incurring it.
More analysis Overhead was overapplied by $3,000
(Actual overhead was $257,000 and applied was $260,000)
Overhead for 26,000 hours should have been 150,000 + (4)(26,000) = 254,000
Thus we spent $3,000 more than we should have, but made up for it by working 1,000 extra hours and applying $6,000 in fixed overhead that we should not have incurred
You Try it
Driver is DL hours Overhead is expected to be
$200,000 + $6/DLHr Expected hours are 40,000 Actual hours are 42,000 Actual overhead is $455,000
What are the: the overhead application rate, the amount of under/overapplied
overhead, the amount of overhead expected for the
volume achieved, the deviation from expected overhead the impact of missing the volume
Overhead Application Rate
The rate is:
$200,000 +(6)(40,000) = $11/hour
40,000
Under/overapplied overhead
Actual hours x predetermined rate
42,000 x $11 = $462,000
Actual overhead is $455,000
Overhead is overapplied by $7,000
The amount of overhead expected for the volume achieved
The budget formula for overhead was OH = $200,000 + $6/DLHr
Actual hours were 42,000
Budget for volume achieved was200,000 + (42,000)(6) = $452,000
The deviation from expected overhead
The overhead for the actual volume that we worked was $455,000 and the budget for that volume was $452,000
Thus, we spent $3,000 more than we should have
The impact of missing the volumeThe expected volume was 40,000 and the
actual volume was 42,000 direct labor hours
The extra 2,000 hours times the $5/DLHr fixed overhead ($200,000/40,000) gives us $10,000 in extra applied overhead
The overhead was $7,000 overapplied even though we spent $3,000 more than we should have because we worked more that enough extra hours to cover it
Costing Individual Job
Assume Job ANZ used $5,000 worth of material, 150 labor hours at $15/hour; what is the cost of this job?
Direct material $5,000 Direct labor $2,250 Overhead (150*$10) $1,500 Total Cost $8,750
Just In Time Production Goal is to minimize inventories
to allow quicker response to customer needs
Requires more frequent smaller delivers tied to when the input is needed in production
Allows simpler accounting procedures as there are fewer inventories
Total Quality Management
Continuous improvement Do it right the first time Listen to the needs of customers Empowering employees to make good
products or provide good service