n System Design Job Order Costing n What is Product Costing n Types of Product Costing n When and how to use Job-Order Costing McGraw-Hill /Irwin

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1 2-1 Today s Lecture Management Accounting Lecture 7 (Chapter 2) Systems Design: n System Design Job Order Costing n What is Product Costing n Types of Product Costing n When and how to use n Journal entries and income statement Application of Application of The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. POHR = Ideally, the allocation base is a cost driver that causes overhead. Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner. $ Actual overhead for the period is not known until sometime after the period has ended. Actual overhead costs can fluctuate seasonally, thus misleading decision makers. It simplifies record keeping. Application of Application of Based on estimates, and determined before the period begins. applied = POHR Actual activity Actual amount of the allocation based upon the actual level of activity (this is called a normal costing system). POHR = POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = $4.00 per DLH $640, ,000 direct labor hours (DLH) For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.

2 2-2 Application of Completing the Job Cost Sheet PearCo Job Cost Sheet Job Number A-143 Initiated March 4 Completed Department B3 Units Completed Item 2 Wooden cargo crates For Stock Direct Direct Req. No. Amount Ticket Hours Amount Hours Rate Amount X $ $ 88 8 $ 4 $ 32 PearCo Job Cost Sheet Job Number A-143 Initiated March 4 Completed Department B3 Units Completed Item 2 Wooden cargo crates For Stock Direct Direct Req. No. Amount Ticket Hours Amount Hours Rate Amount X $ $ 88 8 $ 4 $ 32 Cost Summary Units Shipped Direct Number Balance Direct Total Cost Unit Product Cost Cost Summary Units Shipped Direct $ 116 Number Balance Direct $ 88 $ 32 Total Cost $ 236 Unit Product Cost $ 118 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 were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118. Let s summarize the document flow in a job-order costing system. A sales order is the basis of issuing a production order. A production order initiates work on a job. used may be either direct or indirect. Requisition Direct materials Job Cost Sheets materials Account

3 2-3 An employee s time may be either direct or indirect. Direct Job Cost Sheets Employee Time Ticket Employee Time Ticket Other Actual OH Charges Account Job Cost Sheets Account Requisition Material The Flow of Costs Summary of Cost Flows Let s examine the transactions in T- account and journal entry forms in a joborder costing system. Raw l Material Purchases Mfg. Actual Journal Entry Material Purchases Journal Entry Material Usage Raw material purchases are recorded in an inventory account. Raw Accounts Payable Direct materials issued to a job increase Work in Process and decrease Raw. materials used are charged to and decrease Raw. Raw

4 2-4 Summary of Cost Flows Journal Entry Costs Salaries and Wages Payable Mfg. Actual The cost of direct labor incurred increases and the cost of indirect labor increases. Salaries and Wages Payable Summary of Cost Flows Journal Entry Actual Mfg. Actual l Other In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are debited to the account. In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the account as they are incurred. Accounts Payable Property Taxes Payable Prepaid Insurance Accumulated Depreciation Summary of Cost Flows Journal Entry Mfg. Actual l Other l to Work in Process l If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. is increased when is applied to jobs.

5 2-5 Accounting for Nonmanufacturing Costs Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Income Statement Expense nonmanufacturing costs as incurred. Journal Entry Accounting for Nonmanufacturing Costs Nonmanufacturing Cost Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. Salaries Expense Salaries Payable Advertising Expense Accounts Payable Summary of Manufactured Cost Flows Journal Entry Cost of Manufactured l Finished As jobs are completed, the Cost of Manufactured is transferred to Finished from. Finished Summary of Job-Order System Cost Flows l Cost of Sold Sold Finished Sold Journal Entry Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished. Accounts Receivable Sales Cost of Sold Finished

6 2-6 Defining Under- and Overapplied Application Example The difference between the overhead cost applied to and the actual overhead costs of a period is termed 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 amount of overhead actually incurred during the period. PearCo s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo s jobs during the year? Use PearCo s predetermined overhead rate of $4.00 per direct labor hour. During the Period = POHR Actual Direct Hours = $4.00 per DLH 170,000 DLH = $680,000 Application Example Disposition of Under- or Overapplied PearCo s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo How has much overapplied total overhead was applied to overhead PearCo s for the jobs year during the year? Use by $30,000. PearCo s What predetermined will overhead rate of PearCo $4.00 do? per direct labor hour. During the Period = POHR Actual Direct Hours = $4.00 per DLH 170,000 DLH = $680,000 PearCo s Mfg. Actual overhead costs $650,000 $30,000 applied to jobs $680,000 $30,000 overapplied PearCo s Cost of Sold Unadjusted Balance Adjusted Balance $30,000 Multiple Predetermined Rates To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. in Service Companies Job-order costing is used in many difference types of service companies. Large companies often use multiple predetermined overhead rates. May be more complex but... May be more accurate because it reflects differences across departments.

7 2-7 Tutorial n Review of today s lecture n Complete Review Problems n 2-13 n 2-15

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