JOB ORDER COST 10 SYSTEMS AND OVERHEAD ALLOCATIONS

10-1 10-2 Chapter JOB ORDER COST 10 SYSTEMS AND OVERHEAD ALLOCATIONS To explain the purposes of cost accounting systems. LO1 10-3 10-4 Cost Accounting Systems Cost Accounting Systems Determining unit manufacturing costs Planning and control functions Evaluate and reward employee performance Disclose inventories and cost of goods sold Cost accounting systems provide information supporting decisions making the business successful Cost accounting systems are the procedures and techniques used by management Assessing the efficiency and effectiveness of operations Providing products or services to customers Manage activities that consume resources Track resources consumed by products and services

To identify the processes for creating goods and services that are suited to job order costing. LO2 10-5 Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job. Typical job order cost applications: Special-order printing Building construction Also used in service industry Hospitals Law firms 10-6 10-7 10-8 overhead (OH) Receive orders from customers Begin production materials Applied to each job using a predetermined rate (POHR) Schedule e jobs Order Ode materials labor THE JOB

10-9 10-10 s Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. s Job No. 1 Job No. 2 Job No. 3 Apply overhead to each job using a predeter- mined rate. 10-11 10-12 Application Rates To explain the purpose and computation of overhead application rates for job order costing. 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 gperiod Estimated total units in the activity base for the coming period LO3 Ideally, the activity base is a cost driver that causes overhead.

10-13 10-14 Application Rates Application Rates Using a predetermined rate makes it possible to estimate total job costs sooner. $ Based on estimates, and determined before the period begins. applied = POHR Actual activity Actual overhead for the period is not known until the end of the period. Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the period. 10-15 10-16 Application Rates Compuline, Inc., applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor hours are 30,000. What is Compuline s predetermined overhead rate per hour? Application Rates Estimated total manufacturing overhead cost for the coming period POHR = Estimated total units in the allocation base for the coming period $360,000000 POHR = 30,000 direct labor hours (DLH) POHR = $12.00 per DLH For each direct labor hour worked on a job, $12.00 of manufacturing overhead will be applied to the job.

10-17 10-18 To describe the purpose and the content of a job cost sheet. The primary document for tracking the costs associated with a given job is the job cost sheet. LO4 Let s investigate 10-19 10-20 The Job Cost Sheet The Job Cost Sheet Oak and Glass Furniture Co. Job Cost Sheet 831 Oak and Glass Furniture Co. Job Cost Sheet 831 Product: French Court Dining Tables Date started 1/03/07 Number of units: 100 Date Completed 1/21/07 Department s Hours Cost Rate Cost Applied Milling $ 10,000 70 $ 14,000 150% $ 21,000 Finishing 15,000 300 6,000 150% 9,000 Cost Summary Total Cost Unit Cost materials used $ 25,000 $ 250 20,000 200 overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) $ 75,000 $ 750 Product: French Court Dining Tables Date started 1/03/07 A materials requisition form is used to Number of units: 100 Date Completed 1/21/07 Department s Hours Cost Rate Cost Applied Milling $ 10,000 70 $ 14,000 authorize 150% the use $ 21,000 of Finishing 15,000 300 6,000 150% 9,000 materials on a job. Cost Summary Total Cost Unit Cost materials used $ 25,000 $ 250 20,000 200 overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) $ 75,000 $ 750

10-21 10-22 The Job Cost Sheet The Job Cost Sheet Oak and Glass Furniture Co. Job Cost Sheet Product: French Court Dining Tables Date started 1/03/07 831 Accumulate direct labor costs by means of a work Cost Applied record, $ such as a time ticket, for each employee. Number of units: 100 Date Completed 1/21/07 Department s Hours Cost Rate Milling $ 10,000 70 $ 14,000 150% 21,000 Finishing 15,000 300 6,000 150% 9,000 Cost Summary Total Cost Unit Cost materials used $ 25,000 $ 250 20,000 200 overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) $ 75,000 $ 750 Oak and Glass Furniture Co. Job Cost Sheet Apply manufacturing overhead to jobs using 831a predetermined overhead rate (POHR) based on direct labor cost. Product: French Court Dining Tables Date started 1/03/07 Number of units: 100 Date Completed 1/21/07 Department s Hours Cost Rate Cost Applied Milling $ 10,000 70 $ 14,000 150% $ 21,000 Finishing 15,000 300 6,000 150% 9,000 Cost Summary Total Cost Unit Cost materials used $ 25,000 $ 250 20,000 200 overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) $ 75,000 $ 750 Document Flow Summary 10-23 Document Flow Summary 10-24 The materials requisition indicates the cost of direct Employee material Employee Employee to charge to Employee jobs and the cost of indirect material Indirect to charge to overhead. Job Cost Job Job Cost Sheets Cost Job Sheets Cost Sheets Sheets Account Employee time tickets indicate the cost of direct labor Employee Employee to charge to Employee Employee jobs and the cost of indirect labor to charge to Indirect overhead. Job Cost Job Job Cost Sheets Cost Job Sheets Cost Sheets Sheets Account

Document Flow Summary 10-25 10-26 Employee Other Actual OH Charges Indirect Account Applied with POHR Job Cost Sheets To account for the flow of costs when using job order costing. s Requisition Indirect LO5 10-27 10-28 Let s examine the cost flows in a job order costing system. We will use T-accounts and start with materials. Work in Process s Inventory (Job Cost Sheet) Purchases Indirect Mfg. Indirect

10-29 10-30 Next let s add labor costs and applied manufacturing overhead to the job order cost flows. Are you with me? Indirect Mfg. Indirect Applied to Indirect Work in Process Work in Process (Job Cost Sheet) Applied When Actual Applied factory =/ factory overhead overhead the difference is closed to cost of goods sold. 10-31 10-32 Over- or Underapplied If is... Effect of Closing to Cost of Goods Sold UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) INCREASE Cost of Goods Sold DECREASE Cost of Goods Sold Now let s complete the goods and sell them. Still with me?

10-33 10-34 Work in Process (Job Cost Sheet) Finished Goods Cost of Cost of Cost of Goods Goods Goods Mfd. Mfd. Sold Applied Cost of Goods Sold To define overhead-related related activity cost pools and provide several examples. Cost of Goods Sold LO6 10-35 10-36 Activity-Based Costing (ABC) Activity-Based Costing (ABC) One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job. Assigning overhead is difficult. I agree! Plantwide Rate Departmental Rates Activity-Based Costing Allocation

10-37 10-38 Activity-Based Costing (ABC) Activity-Based Costing (ABC) AAAA In the ABC method, we recognize that many activities within a department drive overhead costs. Identify activity cost pools and assign indirect costs to those pools. Central idea... Products require activities. Activities consume resources. AAAA B B C B B C 10-39 10-40 The Benefits of ABC Identifying Cost Drivers More detailed measures of costs. Better understanding of activities. More accurate product costs for... Pricing decisions. Product elimination decisions. Managing activities that cause costs. Benefits should always be compared to costs of implementation. Most cost drivers are related to either volume or complexity of production. Examples: machine time, machine setups, purchase orders, production orders. Three factors are considered in choosing a cost driver: Causal relationship. Benefits received. Reasonableness.

Costs and Cost Drivers in Activity-Based Costing 10-41 End of Chapter 10 10-42 Cost s purchasing s handling Personnel processing Equipment depreciation Quality inspection Indirect labor for equipment setups Engineering costs for product modifications Cost Driver Number of purchase orders Number of materials requisitions Number of employees hired or laid off Number of products produced or hours of use Number of units inspected Number of setups required Number of modifications