Chapter 3 - Full Student Version

Chapter 3 - Full Student Version - 3-1 MANAGERIAL...

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Unformatted text preview: 3-1 MANAGERIAL ACCOUNTING RSM222 Systems Design: Job-Order Costing Chapter 3 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. 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 Example companies: records for each job. records for each job. recordsBombardier (aircraft manufacturing) records 1. 1. Bombardier (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Hallmark (greeting card design and printing) LO 1 3-3 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 LO 1 3-4 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 LO 1 3-5 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: 1.One Mary’s product is indistinguishable from St. unit of product is indistinguishable from One unit of Cement (cement mixing) other units of product.(refining oil) other units of product. other Petro-Canada other 2. 3.TCoca-Cola (mixing and bottling beverages)enables The identical nature 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 LO 1 Product Costing Systems: Job Costing vs. Product Process Costing Process Job costing Job costing A product costing system that accumulates A product costing system that accumulates and assigns costs to a specific job. and assigns costs to a specific job. Process costing Process costing A product costing system that accumulates A product costing system that accumulates costs by process or department and tthen costs by process or department and hen assigns them to a large number of identical assigns them to a large number of identical products. products. 3-6 3-7 Comparing Process and Job-Order Costing Job-Order Number of jobs worked Cost accumulated by Average cost computed by Process Many Individual Job Single Product Job Department Department LO 1 3-8 Job-Order Costing – An Overview Direct Materials Job No. 1 Direct Labour Job No. 2 Job No. 3 Charge direct material and direct labour costs to each job as work is performed. LO 2 3-9 Job-Order Costing – An Overview Direct Materials Job No. 1 Direct Labour Manufacturing Overhead Job No. 2 Job No. 3 Manufacturing Overhead, including indirect materials and indirect labour, are allocated to all jobs rather than directly traced to each job. LO 2 3-10 The Job Cost Sheet PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount Date Initiated 3-4-11 Date Completed Units Completed Direct Labour Manufacturing Overhead Ticket Hours Amount Hours Rate Amount Cost Summary Direct Materials Direct Labour Manufacturing Overhead Total Cost Unit Product Cost Units Shipped Date Number Balance LO 2 3-11 Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Date Initiated 3-4-11 Date Completed 3-5-11 Units Completed 2 Direct Materials Direct Labour 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 Labour Manufacturing Overhead Total Cost Unit Product Cost $ $ $ $ $ 116 88 32 236 118 Units Shipped Date Number Balance LO 3 3-12 Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Date Initiated 3-4-11 Date Completed 3-5-11 Units Completed 2 Direct Materials Direct Labour 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 Labour Manufacturing Overhead Total Cost Unit Product Cost $ $ $ 116 88 32 Units Shipped Date Number Balance LO 3 3-13 Why Use an Allocation Base? An allocation base, such as direct labour hours, An allocation base, such as direct labour hours, direct labour dollars, or machine hours, is used to direct labour dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. assign manufacturing overhead to individual jobs. 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 the production manager’s salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. LO 3 3-14 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. LO 3 3-15 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. LO 3 3-16 The Purchase and Issue of Raw Materials Raw Materials Inventory Material Direct Purchases Materials Indirect Materials Work in Process Inventory (Job Cost Sheet) Direct Materials Mfg. Overhead Actual Applied Indirect Materials LO 4 3-17 The Recording of Labour Costs Salaries and Wages Payable Direct Labour Indirect Labour Work in Process Inventory (Job Cost Sheet) Direct Materials Direct Labour Mfg. Overhead Actual Indirect Materials Indirect Labour Applied LO 4 3-18 Recording Actual Manufacturing Overhead Salaries and Wages Payable Direct Labour Indirect Labour Work in Process Inventory (Job Cost Sheet) Direct Materials Direct Labour Mfg. Overhead Actual Indirect Materials Indirect Labour Other Overhead Applied LO 4 3-19 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 Inventory (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 adjustment is required. adjustment is required. LO 5 3-20 Transferring Completed Units Work in Process Inventory (Job Cost Sheet) Direct Materials Direct Labour Overhead Applied Finished Goods Inventory Cost of Goods Mfd. Cost of Goods Mfd. LO 6 3-21 Transferring Units Sold Work in Process Inventory (Job Cost Sheet) Direct Materials Direct Labour Overhead Applied Finished Goods Inventory Cost of Goods Mfd. Cost of Goods Mfd. Cost of Goods Sold Cost of Goods Sold Cost of Goods Sold LO 6 3-22 Accounting for Non-Manufacturing Cost Non-manufacturing costs are not assigned to individual jobs; rather they are expensed in the period incurred. Examples: Examples: 1.. Salary expense of employees 1. 1 Salary 1. Salary expense of employees Salary who work in a marketing, selling, who work in a marketing, selling, or administrative capacity. or administrative capacity. 2.. Advertising expenses are expensed 2. 2 Advertising 2. Advertising expenses are expensed Advertising in the period incurred. in the period incurred. LO 5 3-23 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. incurred LO 7 3-24 Overhead Application Example PearCo’s actual overhead ffor the year was PearCo’s actual overhead or the year was actual actual $650,000 with a total of 170,000 direct labour $650,000 with a total of 170,000 direct labour $650,000 170,000 $650,000 170,000 hours worked on jobs. hours worked on jobs. hours hours How much total overhead was applied to How much total overhead was applied to How How PearCo’s jobs during the year? Use PearCo’s PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per predetermined overhead rate of $4.00 per direct labour hour. direct labour hour. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 LO 7 3-25 Overhead Application Example PearCo’s actual overhead ffor the year was PearCo’s actual overhead or the year was actual actual $650,000 with a total of 170,000 direct labour $650,000 with a total of 170,000 direct labour $650,000 170,000 $650,000 170,000 hours worked on jobs. hours worked on jobs. hours hours How much total overhead was applied to How much total overhead was applied to PearCo has overapplied How How PearCo’s jobs during the year? Use PearCo’s overhead for theduring the year? Use PearCo’s PearCo’s jobs year predetermined will by $30,000. What overhead rate of $4.00 per predetermined overhead rate of $4.00 per direct labour hour. PearCo do?irect labour hour. d Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 LO 7 Disposition of Under- or Overapplied Overhead 3-26 PearCo’s Method PearCo’s Method $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 LO 7 3-27 Disposition of Under- or Overapplied Overhead PearCo’s Cost of Goods Sold Actual Overhead overhead applied costs to jobs Unadjusted Balance $30,000 Adjusted Balance PearCo’s Mfg. Overhead $650,000 $30,000 $680,000 $30,000 overapplied $0 LO 7 Allocating Under- or Overapplied Overhead Between Accounts 3-28 Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below: LO 7 3-29 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 Post. Ref. Debit Credit 30,000 3,000 9,000 18,000 LO 7 Overapplied and Underapplied Manufacturing Overhead - Summary 3-30 PearCo’s 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 LO 7 3-31 Multiple Predetermined Overhead Rates To this point, we have assumed that there is a To single predetermined overhead rate called a plantwide overhead rate. plantwide Large companies Large often use multiple predetermined overhead rates. overhead May be more May complex but . . . complex May be more accurate May because it reflects differences across departments. departments LO 7 3-32 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 webbased programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes. LO 7 3-33 SOLAR TECHNOLOGY, INC. Schedule of Cost of Goods Manufactured For the Quarter Ended March 31 Direct materials: Raw materials inventory, beginning $ –0– Add: Purchases of raw materials 360,000 Raw materials available for use 360,000 Deduct: Raw materials inventory, ending 10,000 Raw materials used in production $350,000 Direct labour Manufacturing overhead: Maintenance, production Indirect labour Cleaning supplies, production Rental cost, facilities (80% × $75,000) Insurance, production 70,000 43,000 120,000 7,000 60,000 8,000 3-34 Cost of goods manufactured $780,000 = = $19.50 per unit Batteries produced during the quarter 40, 000 units Since 8,000 batteries (40,000 – 32,000 = 8,000) were in the finished goods inventory at the end of the quarter, the total cost of this inventory would be: 8,000 batteries × $19.50 per battery = $156,000. 3-35 SOLAR TECHNOLOGY, INC. Income Statement For the Quarter Ended March 31 Sales (32,000 batteries) $960,000 Less cost of goods sold: Finished goods inventory, beginning $ –0– Add: Cost of goods manufactured 780,000 Goods available for sale 780,000 Deduct: Finished goods inventory, ending 156,000 624,000 Gross margin 336,000 Less operating expenses: Selling and administrative salaries 110,000 Advertising 90,000 Rental cost, facilities (20% × $75,000) 15,000 Amortization, office equipment 27,000 Utilities (10% × $80,000) 8,000 Travel, salespersons 40,000 290,000 Net income $ 46,000 3-36 Example Gamma Company 3-37 Gamma Company: Accounting Entries a) Raw materials acquired from suppliers on account, $400,000 J ournal entries in '000 Date Description Raw Materials Accounts Payable Post. Ref. Debit Credit 400 400 3-38 Gamma Company: Accounting Entries b) Raw materials requisitioned for use in production, $360,000 ($200,000 for Job A, $100,000 for Job B and $60,000 indirect). Date Description Work In Process Inventory Factory Overhead Raw Materials Post. Ref. Debit Credit 300 60 360 3-39 Gamma Company: Accounting Entries c) Costs for employee services were incurred as follows: Direct labor costs $90,000 ($50,000 for Job A; $40,000 Job B) Indirect labor costs $85,000 Date Description Work In Process Inventory Factory Overhead Salaries Payable Post. Ref. Debit Credit 90 85 175 3-40 Gamma Company: Accounting Entries d) Depreciation was recorded on equipment, of which $40,000 related to equipment used in the factory and $30,000 related to equipment used in selling and administrative activities. Date Description Factory Overhead Depreciation Expense Accumulated Depreciation Post. Ref. Debit Credit 40 30 70 3-41 Gamma Company: Accounting Entries e) Advertising expense accrued, $220,000. Date Description Advertising Expense Accounts Payable Post. Ref. Debit Credit 220 220 3-42 Gamma Company: Accounting Entries f) Utility costs accrued, $20,000 (80 percent related to factory operations, and the remainder related to selling and administrative expenses). Date Description Factory Overhead Utility Expense Accounts Payable Post. Ref. Debit Credit 16 4 20 3-43 Gamma Company: Accounting Entries g) Rent accrued on facilities, $120,000 (90 percent related to factory operations, and the remainder related to selling and administrative activities). Date Description Factory Overhead Rent Expense Accounts Payable Post. Ref. Debit Credit 108 12 120 3-44 Gamma Company: Accounting Entries h) Administrative salaries incurred, $180,000. Date Description Salary Expense Salaries Payable Post. Ref. Debit Credit 180 180 3-45 Gamma Company: Accounting Entries i) Overhead was applied to jobs on the basis of direct labor costs. Overhead allocation rate = $891,000/$270,000 = $3.3/DL$ Gamma incurred DL cost of 90,000 = (50,000+40,000) (part c) Post. $90,000 * 3.3= 297,000 Date Description Work In Process Factory Overhead Ref. Debit Credit 297 297 3-46 Gamma Company: Accounting Entries j) Job A is the only job completed in 2013. Job Card: Job A Beg. WIP Direct Labour Direct Materials Mfg overhead: $165,000) Total Job Cost: Date $60,000 (from intro) $50,000 (c) $200,000 (b) $165,000 (i) ($50,000 * 3.3= $475,000 Description Finished Goods Work In Process Post. Ref. Debit Credit 475 475 3-47 Gamma Company: Accounting Entries k) Sales for the year (on account) were $1,000,000 (Job A). GENERAL JOURNAL Date Description Accounts Receivable Sales Revenue Cost of Goods Sold Finished Goods Inventory Post. Ref. Debit Credit 1,000 1,000 475 475 3-48 Gamma Company: Accounting Entries 4) Prepare a journal entry to dispose of the under or over applied manufacturing overhead. Actual Mfg. OH: Indirect Materials $60,000 (b) Indirect Labour $85,000 (c) Depr. on factory equip. $40,000 (d) Utility cost on factory $16,000 (f) Rent on factory $108,000 (g) Total overhead incurred: $309,000 Total overhead applied: (Debit side of T account) $297,000 (i) (Credit side of T account) Underapplied overhead Date Description Cost of Goods Sold Factory Overhead Post. Ref. Debit Credit 12 12 3-49 Case Analysis Framework 3-50 Case Analysis Framework What is a case? A case describes a real business scenario or a situation that closely resembles real life. Often there is a significant amount of information that you do not need. Sifting through this information is required. There are usually multiple issues in the case, which are not necessarily apparent. You must figure out what is important. 3-51 Case Analysis Framework Sometimes there is only one ‘right’ answer to an issue. Often an issue has a range of ‘right’ answers, which are reasonable given the assumptions and arguments that you make. Depending on what information is included in the case and the instructions, some parts of the framework may not be applicable. 3-52 Case Analysis Framework Context Briefly describe the situation Company/industry background (if applicable) Issue(s) identification (required) Issue analysis with reference to the case facts (required) Alternative solution analysis for each issue Critical success factors (if applicable) Strategy identification (if applicable) Conclusion and/or recommendation (required) Implementation plan (if applicable) LO 7 3-53 Case Analysis Framework Writing component will be discussed in the writing tutorial It is important to pay attention to grammar, spelling, proper use of appendices, tables and charts (links), structure and use of headings, proper citations. Appendices/exhibits should have appropriate titles There should be references to appendices/exhibits in the body of the report Professionalism and integration with other courses. LO 7 ...
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