Chapter 3 - Job-Order Costing - 3-1 MGT 223 Systems Design:...

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Unformatted text preview: 3-1 MGT 223 Systems Design: Job-Order Costing Chapter Three Learning Objective 1 Distinguish between process costing and jobjoborder costing and identify companies that would use each costing method. Types of Product Costing Systems Process Costing Job-order Costing One unit of product is indistinguishable from One unit of product is indistinguishable from One other units of product. other units of product. The identical nature of each unit of product enables The identical nature of each unit of product enables The assigning the same average cost per unit. assigning the same average cost per unit. 3-2 Types of Product Costing Systems Process Costing Job-order Costing Many different products are produced each period. Many different products are produced each period. Many Products are manufactured to order. Products are manufactured to order. Products The unique nature of each order requires tracing or The unique nature of each order requires tracing or The allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job. records for each job. Learning Objective 2 Identify the documents used in a job-order costing jobsystem. Job-Order Costing – An Overview Direct Materials Direct Materials Direct Labour Direct Labour Manufacturing Manufacturing Overhead Overhead Job No. 1 Job No. 1 Job No. 2 Job No. 2 Job No. 3 Job No. 3 Charge Charge direct direct material and material and direct labour direct labour costs to costs to each job as each job as work is work is performed. performed. 3-3 Direct Manufacturing Costs Direct Materials Direct Materials Direct Labour Direct Labour Manufacturing Manufacturing Overhead Overhead Job No. 1 Job No. 1 Job No. 2 Job No. 2 Job No. 3 Job No. 3 Manufacturing Manufacturing Overhead, Overhead, including including indirect iindirect ndirect materials and materials and indirect labour,, iindirect labour ndirect are allocated are allocated to all jobs to all jobs rather than rather than directly traced directly traced to each job. to each job. Learning Objective 3 Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process. Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labour hours, direct labour dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: 1. ? 2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. 3-4 Manufacturing Overhead Application 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 Ideally, the allocation base Ideally, the allocation base is a that is a that causes overhead. causes overhead. The Need for a POHR Using a predetermined rate makes it possible to estimate total job costs sooner. $ 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 the allocation Actual amount of the allocation based upon the actual level of based upon the actual level of activity. activity. 3-5 Overhead Application Rate POHR = POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period $640,000 160,000 direct labour hours (DLH) POHR = $4.00 per DLH For each direct labour hour worked on a For each direct labour hour worked on a particular job, $4.00 of factory overhead particular job, $4.00 of factory overhead will be applied to that job. will be applied to that job. Learning Objective 4 Record the journal entries that reflect the flow of costs in a job-order jobcosting system. The Purchase and Issue of Raw Materials Raw Materials Material Direct Purchases Materials Indirect Materials Mfg. Overhead Indirect Materials Work in Process (Job Cost Sheet) Direct Materials 3-6 The Recording of Labour Costs Salaries and Wages Payable Direct Labour Indirect Labour Work in Process (Job Cost Sheet) Direct Materials Direct Labour Mfg. Overhead Actual Indirect Materials Indirect Labour Applied Recording Actual Manufacturing Overhead Salaries and Wages Payable Direct Labour Indirect Labour Work in Process (Job Cost Sheet) Direct Materials Direct Labour Mfg. Overhead Actual Indirect Materials Indirect Labour Other Overhead Applied Learning Objective 5 Apply overhead cost to Work in Process using a predetermined overhead rate. 3-7 Applying Manufacturing Overhead Salaries and Wages Payable Direct Labour Indirect Labour Mfg. Overhead Actual Applied Indirect Materials Overhead Indirect Applied to Labour Work in Other Process Overhead Work in Process (Job Cost Sheet) Direct Materials Direct Labour Overhead Applied If actual and applied If actual and applied manufacturing overhead manufacturing overhead are not equal, a year-end are not equal, a year-end is required. is required. Learning Objective 8 Compute under- or underoverapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts. Complications 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. 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. 3-8 Disposition of Under- or Overapplied Overhead $30,000 may be allocated to these accounts. $30,000 may be closed directly to cost of goods sold. OR Work in Work in Process Process Finished Finished Goods Goods Cost of Cost of Goods Sold Goods Sold Cost of Cost of Goods Sold Goods Sold Disposition of Under- or Overapplied Overhead Cost of Goods Sold Mfg. Overhead Actual Overhead overhead applied costs to jobs Unadjusted Balance $30,000 $650,000 $30,000 Adjusted Balance $680,000 $30,000 overapplied 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 Amount 68,000 204,000 408,000 $ 680,000 $ 3-9 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 ...
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