202 Ch 3 S08 S

202 Ch 3 S08 S - ACC 202 Intro to Management Accounting...

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Unformatted text preview: ACC 202 Intro to Management Accounting Chapter 3: System Design: JobOrder Costing obj 1 Learning Objectives Process Costing vs. JobOrder Costing JobOrder Costing: Apply MOH using a predetermined Document Flow Journal entries overhead rate Assign over or underapplied overhead amounts Absorption Costing ALL manufacturing costs (variable and fixed) are assigned to units of product "Full cost" approach Used by a majority of companies worldwide Generally required for financial & tax reporting Types of Product Costing Systems Process Costing Job-order Costing Used when a company produces many units of a single product (mass production). Every unit of product is the same as every other unit of product ("homogeneous" products). Each unit is identical so each can be assigned the same average cost per unit. Types of Product Costing Systems Process Costing Job-order Costing A company produces many units of a single product. Examples: 1.One unit of product is indistinguishable from Weyerhaeuser (paper manufacturing) other units of product. 2. Reynolds Aluminum (refining aluminum ingots) 3.The identical nature and bottling beverages)enables Coca-Cola (mixing of each unit of product assigning the same average cost per unit. Types of Product Costing Systems Process Costing Job-order Costing Many different products are produced each period. Products are manufactured to order (custom made). The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Types of Product Costing Systems Process Costing Job-order Costing Examples: Products are manufactured to order. 1. Boeing (aircraft manufacturing) 2.The unique nature of each order requires tracing or Bechtel International (large scale construction) allocating costs to each job, and maintaining cost 3. Walt Disney Studios (movie production) records for each job. Many different products are produced each period. Comparing Process and Job-Order Costing Job-Order Number of jobs worked Cost accumulated by Average cost computed by Many Individual Job Job Process Single Product Department Department Quick Check Which of the following companies would be likely to use joborder costing rather than process costing? (may be more than one) a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels. Job-Order Costing Document Flow Sales Order Production Order Bill of Materials Time Ticket Materials Requisition Form Job Cost Sheet Job-Order Costing Document Flow Sales Order Production Order Created when a customer places an order; the basis of issuing a production order Contains specifics of the customers order including quantity & shipment date; document that initiates work on a job Created the first time a new product is manufactured Lists the type and quantity of each item needed to complete a unit of product Bill of Materials Materials Requisition Form Job-Order Costing Document Flow Time Ticket Specifies the type & quantity of materials taken from the storeroom into production Identifies the job to be charged Hour by hour summary of employee's activities Identifies the job to be charged Job Cost Sheet Prepared for each production job Records materials, labor and MOH costs charged to the job Subsidiary ledger for Work in Process account Job-Order Costing Document Flow Materials used may be either direct or indirect. Direct materials Materials Requisition Indirect materials Job Cost Sheets Manufacturing Overhead Account Job-Order Costing Document Flow An employee's time may be either direct or indirect. Direct Labor Job Cost Sheets Employee Time Ticket Indirect Labor Manufacturing Overhead Account Job-Order Costing Document Flow Employee Time Ticket Indirect Labor Other Actual OH Charges Manufacturing Applied Overhead Overhead Account Job Cost Sheets Materials Requisition Indirect Material Job-Order System Cost Flows Let's examine the cost flows in a job-order costing system. Cost Flows Material Purchases Raw material purchases are recorded in an inventory account. GENERAL JOURNAL Date Description Post. Ref. Debit Credit Raw Materials Inventory Accounts Payable XXXXX XXXXX Direct Manufacturing Costs Direct Materials Job No. 1 Direct Labor Job No. 2 Job No. 3 Manufacturing Overhead Charge direct material and direct labor costs to each job as work is performed. Indirect Manufacturing Costs Direct Materials Job No. 1 Direct Labor Job No. 2 Job No. 3 Manufacturing Overhead Manufacturing Overhead, including indirect materials and indirect labor, are allocated to jobs rather than directly traced to each job. Job-Order System Cost Flows Raw Materials Material Direct Purchases Materials Indirect Materials Work in Process (Job Cost Sheet) Direct Materials Mfg. Overhead Actual Applied Indirect Materials 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 Post. Ref. Debit Credit Work in Process Inventory Manufacturing Overhead Raw Materials Inventory XXXXX XXXXX XXXXX Job-Order System Cost Flows Salaries and Wages Payable Direct Labor Indirect Labor Work in Process (Job Cost Sheet) Direct Direct Materials Labor Mfg. Overhead Actual Applied Indirect Materials Indirect Labor Cost Flows Labor The cost of direct labor incurred increases Work in Process. The cost of indirect labor increases Manufacturing Overhead. GENERAL JOURNAL Date Description Post. Ref. Debit Credit Work in Process Inventory Manufacturing Overhead Salaries and Wages Payable XXXXX XXXXX XXXXX Job-Order System Cost Flows Salaries and Wages Payable Direct Labor Work in Process (Job Cost Sheet) Direct Indirect Labor Mfg. Overhead Actual Applied Indirect Materials Indirect Labor Other Overhead Direct Materials Labor Cost Flows Actual Overhead In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. GENERAL JOURNAL Date Description Post. Ref. Debit Credit Manufacturing Overhead Accounts Payable Property Taxes Payable Prepaid Insurance Accumulated Depreciation XXXXX XXXXX XXXXX XXXXX XXXXX Job-Order System Cost Flows Salaries and Wages Payable Direct Labor Work in Process (Job Cost Sheet) Direct Indirect Labor Mfg. Overhead Actual Applied Indirect Materials Overhead Indirect Applied to Labor Work in Other Process Overhead Direct Materials Labor Overhead Applied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Cost Flows Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs. GENERAL JOURNAL Date Description Post. Ref. Debit Credit Work in Process Inventory Manufacturing Overhead XXXXX XXXXX Job-Order System Cost Flows Work in Process (Job Cost Sheet) Finished Goods Direct Direct Materials Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Mfd. Cost Flows Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process. GENERAL JOURNAL Date Description Post. Ref. Debit Credit Finished Goods Inventory Work in Process Inventory XXXXX XXXXX Computation of Unit Costs Goods transferred to Finished Goods Inventory have per unit costs assigned to them that are calculated as follows: Cost of goods manufactured / number of units produced This unit product cost is an average cost. It should not be interpreted as the cost incurred if another unit were produced. Many MOH costs are fixed and would not change if another unit were produced. This means the incremental cost is something less than the average cost. Job-Order System Cost Flows Work in Process (Job Cost Sheet) Finished Goods Direct Direct Materials Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Mfd. Cost of Goods Sold Cost of Goods Sold Cost of Goods Sold Cost Flows Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods. GENERAL JOURNAL Date Description Post. Ref. Debit Credit Accounts Receivable Sales Revenue Cost of Goods Sold Finished Goods Inventory XXXXX XXXXX XXXXX XXXXX The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period Manufacturing Overhead Application Ideally, the allocation base is a cost driver that causes overhead. Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Overhead applied = POHR Actual activity Actual amount of the allocation based upon the actual level of cost driver activity. 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. Applying MOH - Normal Cost System Identify the main "driver" of MOH costs (cost driver) Calculate a Predetermined OH Rate Usually direct labor hours, direct labor costs, or machine hours Use this cost driver as an allocation base Estimated Total MOH Cost / Estimated Total Units of the Allocation Base Use this rate to apply overhead based on actual cost driver data Overhead Application Example A PearCo's MOH costs are primarily driven by direct labor hours. PearCo estimates total direct labor hours for the year will be 175,000, and total MOH costs will be $700,000. Calculate PearCo's predetermined MOH rate. Predetermined Overhead Rate PMOH Rate = Estimated MOH / Estimated Direct Labor Hours Overhead Application Example B PearCo's incurred 2,000 actual direct labor hours on Job #1. Calculate the amount of MOH to apply to Job #1. Overhead Application for Job #1 Applied MOH = PMOH Rate x Actual Direct Labor Hours MOH Rate Differences When the cost driver application base is hours: When the cost driver application base is The predetermined OH rate is a dollar amount dollars / hours = dollars per hour dollars: The predetermined OH rate is a percentage dollars / dollars = percentage of cost driver amount Cost driver is DM Cost MOH Rate Percentage (Pg. 112) Estimated DM cost = $80,000 Estimated MOH = $120,000 Estimated MOH / Estimated DM Cost $120,000 / $80,000 150% of DM cost MOH applied = $10K x 150% = $15K Predetermined MOH Rate Actual DM Cost for job = $10,000 Under- & Overapplied Overhead The difference between the amount of overhead cost applied to Work in Process and the actual overhead costs incurred for the period Total Actual MOH Incurred < MOH Applied > Underapplied / (Overapplied) Manufacturing Overhead At the end of the period this amount is either: 1) Closed to COGS, or 2) Allocated to WIP, Finished Goods, and COGS in proportion to amounts applied during the period Overhead Application Example C PearCo's actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much MOH was applied to PearCo's jobs during the year? Was MOH over or under applied? Under / (Over) Applied MOH During the Period Applied MOH = POHR Actual Direct Labor Hours Actual MOH - Applied MOH = Underapplied / (Overapplied) MOH Disposition of Under- or Overapplied Overhead $30,000 may be allocated to these accounts. Easy Method $30,000 may be closed directly to cost of goods sold. OR Work in Process Finished Goods Cost of Goods Sold Cost of Goods Sold Disposition of Under- or Overapplied Overhead PearCo's Cost of Goods Sold Unadjusted Balance $30,000 Adjusted Balance PearCo's Mfg. Overhead Actual overhead costs $650,000 $30,000 Overhead applied to jobs $680,000 $30,000 overapplied Quick Check What effect will closing the overapplied overhead to COGS 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. Disposition of Under- or Overapplied Overhead Better Method Easy 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 Goods Cost of Goods Sold Cost of Goods Sold 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: Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead: Percent of Total 10% 30% 60% 100% Allocation of $30,000 $ 3,000 9,000 18,000 $ 30,000 Work in process Finished Goods Cost of Goods Sold Total Amount $ 68,000 204,000 408,000 $ 680,000 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 Post. Ref. Debit Credit Manufacturing Overhead Work in Process Inventory Finished Goods Inventory Cost of Goods Sold 30,000 3,000 9,000 18,000 Overapplied and Underapplied Manufacturing Overhead - Summary Easy Method If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) Better Method Alternative 2 Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold Alternative 1 Close to Cost of Goods Sold INCREASE Cost of Goods Sold DECREASE Cost of Goods Sold Multiple Predetermined Overhead Rates We have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates. May be more complex but . . . May be more accurate because it reflects differences across departments. Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies. 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. ...
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This note was uploaded on 08/25/2008 for the course ACC 202 taught by Professor Woollen during the Spring '08 term at Hawaii.

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