Design: Systems Job-Order Costing
Chapter 3
2010 The McGraw-Hill Com
panies, Inc.
Learning Objective 1
Distinguish between
Distinguish
process costing and jobprocess
order costing and identify
order
companies that would use
each costing method.
each
McGraw-Hill/Irwin
Slide2
Types of Product Costing Systems
Process
Costing
Job-order
Costing
A company produces many units of a single
A company produces many units of a single
product.
product.
One unit of product is indistinguishable from
One unit of product is indistinguishable from
other units of product.
other units of product.
other
other
The identical nature of each unit of product enables
The identical nature of each unit of product enables
assigning the same average cost per unit.
assigning the same average cost per unit.
assigning
assigning
McGraw-Hill/Irwin
Slide3
Types of Product Costing Systems
Process
Costing
Job-order
Costing
A company produces many units of a single
A company produces many units of a single
product.
product.
Example companies:
Example companies:
1.OWeyerhaeuser (paperindistinguishable from
Weyerhaeuser (paper manufacturing)
1.One unit of product is indistinguishable from
ne unit of product is manufacturing)
other2. Reynolds Aluminum (refining aluminum ingots)
other units of product.
2.
other units of product.
other Reynolds Aluminum (refining aluminum ingots)
3.TCoca-Cola (mixing and bottling beverages)enables
he identical nature and bottling beverages)
3.TCoca-Cola (mixing of each unit of product enables
he identical nature of each unit of product
assigning the same average cost per unit.
assigning the same average cost per unit.
assigning
assigning
McGraw-Hill/Irwin
Slide4
Types of Product Costing Systems
Process
Costing
Job-order
Costing
Many different products are produced each period.
Many different products are produced each period.
Products are manufactured to order.
Products are manufactured to order.
Products
Products
The unique nature of each order requires tracing or
The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
allocating costs to each job, and maintaining cost
records for each job.
records for each job.
records
records
McGraw-Hill/Irwin
Slide5
Types of Product Costing Systems
Process
Costing
Job-order
Costing
Many different products are produced each period.
Many different products are produced each period.
Example companies:
Example companies:
PBoeing (aircraft manufacturing)
Products are manufactured to order.
roducts
1.Products(aircraft manufacturing)
Boeing
1.Products are manufactured to order.
he unique nature of (large scale construction)
2.TBechtel Internationaleach order requires tracing or
he unique nature of (large scale construction)
2.TBechtel Internationaleach order requires tracing or
llocating costs to each job, production)
3.aWalt Disney Studios (movieand maintaining cost
3.allocating costs to each job, and maintaining cost
Walt Disney Studios (movie production)
records for each job.
records for each job.
records
records
McGraw-Hill/Irwin
Slide6
Comparing Process and Job-Order Costing
Job-Order
Number of jobs worked
Cost accumulated by
Average cost computed by
McGraw-Hill/Irwin
Process
Many
Individual
Job
Single Product
Job
Department
Department
Slide7
Quick Check
Which of the following companies would be
Which of the following companies would be
llikely to use job-order costing rather than
ikely to use job-order costing rather than
process costing?
process costing?
a. Scott Paper Company for Kleenex.
a. Scott Paper Company for Kleenex.
b. Architects.
b. Architects.
c. Heinz for ketchup.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
e. Builder of commercial fishing vessels.
McGraw-Hill/Irwin
Slide8
Quick Check
Which of the following companies would be
Which of the following companies would be
llikely to use job-order costing rather than
ikely to use job-order costing rather than
process costing?
process costing?
a. Scott Paper Company for Kleenex.
a. Scott Paper Company for Kleenex.
b. Architects.
b. Architects.
c. Heinz for ketchup.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
e. Builder of commercial fishing vessels.
McGraw-Hill/Irwin
Slide9
Learning Objective 2
Identify the documents
Identify
used in a job-order costing
system.
system.
McGraw-Hill/Irwin
Slide10
Job-Order Costing An Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
McGraw-Hill/Irwin
Job No. 2
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
Slide11
Indirect Manufacturing Costs
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
McGraw-Hill/Irwin
Job No. 2
Job No. 3
Manufacturing
Manufacturing
Overhead,
Overhead,
iincluding
ncluding
iindirect
ndirect
materials and
materials and
indirect labor,,
indirect labor
are allocated
are allocated
tto all jobs
o all jobs
rather than
rather than
directly traced
directly traced
to each job.
to each job.
Slide12
The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGraw-Hill/Irwin
Date Initiated 3-4-09
Date Completed
Units Completed
Units Shipped
Date Number Balance
Slide13
Measuring Direct Materials Cost
PearCo Materials Requisition Form
Requisition No. X7 - 6890
Job No. A - 143
Department B3
Description
2 x 4, 12 feet
1 x 6, 12 feet
Quantity
12
20
Authorized
Signature
McGraw-Hill/Irwin
Date 3-4-09
$
Unit Cost
Total Cost
3.00 $
36.00
4.00
80.00
$
116.00
WillE.Delite
Slide14
Measuring Direct Materials Cost
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-09
Date Completed
Units Completed
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGraw-Hill/Irwin
$
116
Units Shipped
Date Number Balance
Slide15
Measuring Direct Labor Costs
PearCo Employee Time Ticket
Time Ticket No.
36
Date
Station
Employee I. M. Skilled
Starting
Time
0800
Ending
Time
1600
3/5/2009
42
Hours
Hourly
Completed
Rate
Amount
8.00
$
11.00 $
88.00
Totals
8.00
$
11.00 $
88.00
Job No.
A-143
A-143
Supervisor C . M. Wor kman
McGraw-Hill/Irwin
Slide16
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-09
Date Completed
Units Completed
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGraw-Hill/Irwin
$
$
116
88
Units Shipped
Date Number Balance
Slide17
Learning Objective 3
Compute predetermined
Compute
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.
the
McGraw-Hill/Irwin
Slide18
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are
Manufacturing
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.
individual
We use an allocation base because:
1.It is impossible or difficult to trace overhead costs to particular jobs.
2.Manufacturing overhead consists of many different items ranging
from the grease used in machines to production managers salary.
3.Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
McGraw-Hill/Irwin
Slide19
Manufacturing Overhead Application
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins.
McGraw-Hill/Irwin
Slide20
The Need for a POHR
Using a predetermined rate makes it
possible to estimate total job costs sooner.
Actual overhead for the period is not
known until the end of the period.
McGraw-Hill/Irwin
Slide21
Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated
using a three-step process.
Estimate the level of
Estimate the level of
production for the
production for the
period.
period.
Estimate total amount
Estimate total amount
off the allocation base
o the allocation base
ffor the period.
or the period.
Estimate total
Estimate total
manufacturing
manufacturing
overhead costs.
overhead costs.
POHR =
McGraw-Hill/Irwin
Slide22
Application of Manufacturing Overhead
Based on estimates,, and
Based on estimates and
determined before the
determined before the
period begins.
period begins.
Overhead applied = POHR Actual activity
Actual amount of allocation is
Actual amount of allocation is
based upon the actual level of
based upon the actual level of
activity (normal costing system).
activity (normal costing system).
McGraw-Hill/Irwin
Slide23
Overhead Application Rate
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
$640,000
POHR =
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For each direct labor hour worked on a particular job,
$4.00 of factory overhead will be applied to that job.
McGraw-Hill/Irwin
Slide24
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-09
Date Completed 3-5-09
Units Completed
2
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
8
$
4$
32
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGraw-Hill/Irwin
$
$
$
116
88
32
Units Shipped
Date Number Balance
Slide25
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-09
Date Completed 3-5-09
Units Completed
2
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
8
$
4$
32
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGraw-Hill/Irwin
$
$
$
$
$
116
88
32
236
118
Units Shipped
Date Number Balance
Slide26
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 was produced.
Fixed overhead would not change if another unit
was produced, so the incremental cost of
another unit is something less than $118.
McGraw-Hill/Irwin
Slide27
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.
McGraw-Hill/Irwin
Slide28
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.
McGraw-Hill/Irwin
Slide29
Learning Objective 4
Understand the flow of costs
Understand
in a job-order costing system
and prepare appropriate
journal entries to record
costs.
costs.
McGraw-Hill/Irwin
Slide30
Job-Order Costing
Document Flow Summary
A sales order is the
A sales order is the
sales
basis of issuing a
basis of issuing a
production order.
production order.
McGraw-Hill/Irwin
A production
A production
production
order initiates
order initiates
work on a job.
work on a job.
work
work
Slide31
Job-Order Costing
Document Flow Summary
Materials
Materials
used may be
used may be
either direct or
either direct or
indirect.
indirect.
Direct
materials
Job Cost
Sheets
Materials
Requisition
Indirect
materials
McGraw-Hill/Irwin
Manufacturing
Overhead
Account
Slide32
Job-Order Costing
Document Flow Summary
An
employees
time may be either
direct or
indirect.
Direct
Labor
Job Cost
Sheets
Employee Time
Ticket
Indirect
Labor
McGraw-Hill/Irwin
Manufacturing
Overhead
Account
Slide33
Job-Order Costing
Document Flow Summary
Materials
Requisition
Other
Actual OH
Charges
Employee
Time Ticket
McGraw-Hill/Irwin
Indirect
Material
POHR
rate used
to apply
Manufacturing
overhead
Overhead
Account
Job Cost
Sheets
Indirect
Labor
Slide34
Learning Objectives 4 and 7
Understand the flow of costs in a joborder costing system and prepare
order
appropriate journal entries to record
costs.
Use T-accounts to show the flow of
costs in a job-order costing system.
costs
McGraw-Hill/Irwin
Slide35
Job-Order Costing: The Flow of Costs
The transactions (in Taccount and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated on
the following slides.
McGraw-Hill/Irwin
Slide36
The Purchase and Issue of Raw Materials
Raw Materials
Material Direct
Purchases Materials
Indirect
Materials
Work in Process
(Job Cost Sheet)
Direct
Materials
Mfg. Overhead
Actual Applied
Indirect
Materials
McGraw-Hill/Irwin
Slide37
Cost Flows Material Purchases
Raw material purchases are recorded in an
inventory account.
GENERAL JOURNAL
Date
Description
Raw Materials
Accounts Payable
McGraw-Hill/Irwin
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
Slide38
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.
GENERAL JOURNAL
Date
Description
Work in Process
Manufacturing Overhead
Raw Materials
McGraw-Hill/Irwin
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
XXXXX
Slide39
The Recording of Labor Costs
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Mfg. Overhead
Actual
Indirect
Materials
Indirect
Labor
McGraw-Hill/Irwin
Applied
Slide40
The Recording of Labor Costs
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.
GENERAL JOURNAL
Date
Description
Work in Process
Manufacturing Overhead
Salaries and Wages Payable
McGraw-Hill/Irwin
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
XXXXX
Slide41
Recording Actual Manufacturing Overhead
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Mfg. Overhead
Actual
Indirect
Materials
Indirect
Labor
Other
Overhead
McGraw-Hill/Irwin
Applied
Slide42
Recording Actual Manufacturing 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
Date
Description
Manufacturing Overhead
Accounts Payable
Property Taxes Payable
Prepaid Insurance
Accumulated Depreciation
McGraw-Hill/Irwin
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Slide43
Learning Objective 5
Apply overhead cost to
Apply
Work in Process using a
predetermined overhead
rate.
rate.
McGraw-Hill/Irwin
Slide44
Applying Manufacturing Overhead
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor
Mfg. Overhead
Actual Applied
Indirect
Materials Overhead
Indirect
Applied to
Labor
Work in
Other
Process
Overhead
McGraw-Hill/Irwin
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied
If actual and applied
manufacturing overhead
are not equal, a year-end
year-end
adjustment is required.
Slide45
Applying Manufacturing Overhead
Work in Process is increased when Manufacturing
Overhead is applied to jobs.
GENERAL JOURNAL
Date
Description
Work in Process
M anufacturing Overhead
McGraw-Hill/Irwin
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
Slide46
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to
individual jobs, rather they are expensed in the
period incurred.
Examples:
Examples:
1.
Salary expense of employees
1.
Salary expense of employees
who work in a marketing, selling,
who work in a marketing, selling,
or administrative capacity.
or administrative capacity.
2.
Advertising expenses are expensed
2.
Advertising expenses are expensed
in the period incurred.
in the period incurred.
McGraw-Hill/Irwin
Slide47
Accounting for Nonmanufacturing costs Cost
Nonmanufacturing (period expenses) are
charged to expense as they are incurred.
GENERAL JOURNAL
Date
Description
Post.
Ref.
Debit
Salaries Expense
Salaries Payable
McGraw-Hill/Irwin
XXXXX
Advertising Expense
Accounts Payable
Credit
XXXXX
XXXXX
XXXXX
Slide48
Learning Objective 6
Prepare schedules of cost
Prepare
of goods manufactured
and cost of goods sold.
and
McGraw-Hill/Irwin
Slide49
Transferring Completed Units
Work in Process
(Job Cost Sheet )
Direct
Materials
Direct
Labor
Overhead
Applied
McGraw-Hill/Irwin
Finished Goods
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Slide50
Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods from
Work in Process.
GENERAL JOURNAL
Date
Description
Finished Goods
Work in Process
McGraw-Hill/Irwin
Post.
Ref.
Debit
Credit
XXXXX
XXXXX
Slide51
Transferring Units Sold
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied
Finished Goods
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Cost of
Goods
Sold
Cost of Goods Sold
Cost of
Goods
Sold
McGraw-Hill/Irwin
Slide52
Transferring Units Sold
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record
the Cost of Goods Sold.
GENERAL JOURNAL
Date
Description
Post.
Ref.
Debit
Accounts Receivable
Sales
McGraw-Hill/Irwin
XXXXX
Cost of Goods Sold
Finished Goods
Credit
XXXXX
XXXXX
XXXXX
Slide53
Learning Objective 8
Compute underapplied or
Compute
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.
appropriate
McGraw-Hill/Irwin
Slide54
Problems of Overhead Application
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as 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.
McGraw-Hill/Irwin
Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
greater
amount of overhead actually
incurred during the period.
incurred
Slide55
Overhead Application Example
PearCos actual overhead for the year was $650,000
actual
$650,000
with a total of 170,000 direct labor hours worked on
170,000
jobs.
jobs.
How much total overhead was applied to PearCos jobs
How
during the year? Use PearCos predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Applied During the Period
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
McGraw-Hill/Irwin
Slide56
Overhead Application Example
PearCos actual overhead for the year was $650,000
actual
$650,000
with a total of 170,000 direct labor hours worked on
170,000
jobs.
jobs.
How much total overhead was applied to PearCos jobs
How
during the year? Use PearCos predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Applied During the Period
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
McGraw-Hill/Irwin
Slide57
Quick Check
Tiger, Inc. had actual manufacturing overhead
Tiger, Inc. had actual manufacturing overhead
costs of $1,210,000 and a predetermined overhead
costs of $1,210,000 and a predetermined overhead
rrate of $4.00 per machine hour. Tiger, Inc. worked
ate of $4.00 per machine hour. Tiger, Inc. worked
290,000 machine hours during the period. Tigers
290,000 machine hours during the period. Tigers
manufacturing overhead is
manufacturing overhead is
a.
a.
b.
b.
$50,000 overapplied.
$50,000 overapplied.
$50,000 underapplied.
$50,000 underapplied.
c.
c.
d.
d.
$60,000 overapplied.
$60,000 overapplied.
$60,000 underapplied.
$60,000 underapplied.
McGraw-Hill/Irwin
Slide58
Quick Check
Tiger, Inc. had actual manufacturing overhead
Tiger, Inc. had actual manufacturing overhead
costs of $1,210,000 and a predetermined overhead
costs of $1,210,000 and a predetermined overhead
Overhead Applied
Overhead Applied
rrate of $4.00 per machine$hour. Tiger, 290,000 hours
ate of $4.00 per machine 4.00 per hour 290,000 hours
$4.00 per Tiger, Inc. worked
hour. hour Inc. worked
= $1,160,000
= $1,160,000
290,000 machine hours during the period. Tigers
290,000 machine hours during the period. Tigers
manufacturing overhead is
Underapplied Overhead
Underapplied Overhead
manufacturing overhead is
$1,210,000 - $1,160,000
$1,210,000 - $1,160,000
= $50,000
= $50,000
a.
a.
b.
b.
$50,000 overapplied.
$50,000 overapplied.
$50,000 underapplied.
$50,000 underapplied.
c.
c.
d.
d.
$60,000 overapplied.
$60,000 overapplied.
$60,000 underapplied.
$60,000 underapplied.
McGraw-Hill/Irwin
Slide59
Disposition of Under- or Overapplied
Overhead
PearCos Method
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Finished
Goods
Cost of
Cost
Goods Sold
McGraw-Hill/Irwin
Cost of
Goods Sold
Slide60
Disposition of
Under- or Overapplied Overhead
PearCos Cost
of Goods Sold
Actual Overhead
overhead applied
costs
to jobs
Unadjusted
Balance
$30,000
Adjusted
Balance
McGraw-Hill/Irwin
PearCos
Mfg. Overhead
$650,000
$30,000
$680,000
$30,000
overapplied
Slide61
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:
Work in process
Finished Goods
Cost of Goods Sold
Total
McGraw-Hill/Irwin
Amount
$
68,000
204,000
408,000
$ 680,000
Percent of
Total
10%
30%
60%
100%
Allocation
of $30,000
$
3,000
9,000
18,000
$
30,000
Slide62
Allocating Under- or Overapplied
Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:
Work in process
Finished Goods
Cost of Goods Sold
Total
Amount
$
68,000
204,000
408,000
$ 680,000
Percent of
Total
10%
30%
60%
100%
Allocation
of $30,000
$
3,000
9,000
18,000
$
30,000
10%
10%
$30,000
$30,000
McGraw-Hill/Irwin
Slide63
Allocating Under- or Overapplied
Overhead Between Accounts
Work in process
Finished Goods
Cost of Goods Sold
Total
Amount
$
68,000
204,000
408,000
$
680,000
Percent of
Total
10%
30%
60%
100%
Allocation of
$30,000
$
3,000
9,000
18,000
$
30,000
GENERAL JOURNAL
Date
Description
Manufacturing Overhead
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Post.
Ref.
Debit
Credit
30,000
3,000
9,000
18,000
Slide64
Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCos
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
Allocation
More accurate but more complex to compute.
More accurate but more complex to compute.
McGraw-Hill/Irwin
Slide65
Quick Check
What effect will the overapplied overhead have
What effect will the overapplied overhead have
on PearCos net operating income?
on PearCos net operating income?
a. Net operating income will increase.
a. Net operating income will increase.
b. Net operating income will be unaffected.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
c. Net operating income will decrease.
McGraw-Hill/Irwin
Slide66
Quick Check
What effect will the overapplied overhead have
What effect will the overapplied overhead have
on PearCos net operating income?
on PearCos net operating income?
a. Net operating income will increase.
a. Net operating income will increase.
b. Net operating income will be unaffected.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
c. Net operating income will decrease.
McGraw-Hill/Irwin
Slide67
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single
To
predetermined overhead rate called a plantwide
overhead rate.
overhead
Large companies
Large
often use multiple
predetermined
overhead rates.
overhead
May be more complex
May
but . . .
but
May be more accurate because
May
it reflects differences across
departments.
departments.
McGraw-Hill/Irwin
Slide68
Job-Order Costing in Service Companies
Job-order costing is used in many different
Job-order
types of service companies.
types
McGraw-Hill/Irwin
Slide69
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.
McGraw-Hill/Irwin
Slide70
The Predetermined Overhead Rate
and Capacity
Appendix 3A
2010 The McGraw-Hill Com
panies, Inc.
Learning Objective 9
(Appendix 3A)
Understand the implications of
Understand
basing the predetermined
overhead rate on activity at
capacity rather than on
estimated activity for the period.
estimated
McGraw-Hill/Irwin
Slide72
Predetermined Overhead Rate and Capacity
Calculating predetermined overhead rates using an
estimated, or budgeted amount of the allocation base
has been criticized because:
1.Basing the predetermined overhead rate upon
budgeted activity results in product costs that fluctuate
depending upon the activity level.
2.Calculating predetermined rates based upon
budgeted activity charges products for costs that they
do not use.
McGraw-Hill/Irwin
Slide73
Capacity-Based Overhead Rates
Criticisms can be overcome by using
Criticisms can be overcome by using
estimated total units in the allocation base
estimated total units in the allocation base
att capacity in the denominator of the
a capacity in the denominator of the
predetermined overhead rate calculation.
predetermined overhead rate calculation.
Lets look at the difference!
McGraw-Hill/Irwin
Slide74
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?
McGraw-Hill/Irwin
Slide75
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.
Traditional
=
Method
= $2.50 per unit
Capacity
Method
McGraw-Hill/Irwin
$100,000
40,000
$100,000
50,000
= $2.00 per unit
=
Slide76
Quick Check
Crest Winery in Woodinville leases an automatic
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. At full
corking machine for $100,000 per year. At full
capacity, it can cork 50,000 cases of wine per
capacity, it can cork 50,000 cases of wine per
year. The company estimates 40,000 cases of
year. The company estimates 40,000 cases of
wine will be produced and sold next year. What
wine will be produced and sold next year. What
iis the predetermined overhead rate based on the
s the predetermined overhead rate based on the
estimated number of cases of wine?
estimated number of cases of wine?
a. $2.00 per case.
a. $2.00 per case.
b. $2.50 per case.
b. $2.50 per case.
c. $4.00 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
Slide77
Quick Check
Crest Winery in Woodinville leases an automatic
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. At full
corking machine for $100,000 per year. At full
capacity, it can cork 50,000 cases of wine per
capacity, it can cork 50,000 cases of wine per
year. The company estimates 40,000 cases of
year. The company estimates 40,000 cases of
wine will be produced and sold next year. What
wine will be produced and sold next year. What
iis the predetermined overhead rate based on the
s the predetermined overhead rate based on the
estimated number of cases of wine?
estimated number of cases of wine?
a. $2.00 per case.
a. $2.00 per case.
b. $2.50 per case.
b. $2.50 per case.
c. $4.00 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
Slide78
Quick Check
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. 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?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
Slide79
Quick Check
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. 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?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
Slide80
Quick Check
When capacity iis used in the denominator of the
When capacity s used in the denominator of the
predetermined rate, what happens to the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
predetermined overhead rate as estimated activity
decreases?
decreases?
a. The predetermined overhead rate goes up when activity
a. The predetermined overhead rate goes up when activity
goes down.
goes down.
b. The predetermined overhead rate stays the same because
b. The predetermined overhead rate stays the same because
iitis not affected by changes in activity.
t is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity
c. The predetermined overhead rate goes down when activity
goes down.
goes down.
McGraw-Hill/Irwin
Slide81
Quick Check
When capacity iis used in the denominator of the
When capacity s used in the denominator of the
predetermined rate, what happens to the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
predetermined overhead rate as estimated activity
decreases?
decreases?
a. The predetermined overhead rate goes up when activity
a. The predetermined overhead rate goes up when activity
goes down.
goes down.
b. The predetermined overhead rate stays the same because
b. The predetermined overhead rate stays the same because
iitis not affected by changes in activity.
t is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity
c. The predetermined overhead rate goes down when activity
goes down.
goes down.
McGraw-Hill/Irwin
Slide82
Quick Check
When estimated activity is used in the
denominator of 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
because it is not affected by changes in activity.
c. The predetermined overhead rate goes down when
activity goes down.
McGraw-Hill/Irwin
Slide83
Quick Check
When estimated activity is used in the
denominator of 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
because it is not affected by changes in activity.
c. The predetermined overhead rate goes down when
activity goes down.
McGraw-Hill/Irwin
Slide84
Income Statement Preparation Capacity
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
McGraw-Hill/Irwin
40,000
$40.00
$24.00
$100,000
50,000
$2.00
$500,000
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,040,000
560,000
20,000
500,000
$
40,000
Slide85
Income Statement Preparation Traditional
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
McGraw-Hill/Irwin
40,000
$40.00
$24.00
$100,000
40,000
$2.50
$500,000
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,060,000
540,000
500,000
$
40,000
Slide86
End of Chapter 3
McGraw-Hill/Irwin
Slide87