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Presentation Transcript

Slide1: 

11th Edition Chapter 3

Chapter Three: 

Chapter Three Systems Design: Job-Order Costing

Types of Product Costing Systems: 

Types of Product Costing Systems Process Costing Job-order Costing

Types of Product Costing Systems: 

Types of Product Costing Systems Process Costing Job-order Costing

Types of Product Costing Systems: 

Types of Product Costing Systems Process Costing Job-order Costing

Types of Product Costing Systems: 

Types of Product Costing Systems Process Costing Job-order Costing

Comparing Process and Job-Order Costing: 

Comparing Process and Job-Order Costing

Quick Check : 

Quick Check  Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

Quick Check : 

Quick Check  Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

Direct Manufacturing Costs: 

Direct Manufacturing Costs

Direct Manufacturing Costs: 

Direct Manufacturing Costs

Job-Order Cost Accounting: 

Job-Order Cost Accounting

Materials Requisition Form: 

Materials Requisition Form

Job-Order Cost Accounting: 

Job-Order Cost Accounting

Employee Time Ticket: 

Employee Time Ticket

Job-Order Cost Accounting: 

Job-Order Cost Accounting

Why Use an Allocation Base?: 

Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: It is impossible or difficult to trace overhead costs to particular jobs. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Manufacturing Overhead Application: 

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Manufacturing Overhead Application

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. The Need for a POHR $

Application of Manufacturing Overhead: 

Application of Manufacturing Overhead

Overhead Application Rate: 

Overhead Application Rate POHR = $4.00 per DLH

Job-Order Cost Accounting: 

Job-Order Cost Accounting

Job-Order Cost Accounting: 

Job-Order Cost Accounting

Interpreting the Average Unit Cost: 

Interpreting the Average Unit Cost

Quick Check : 

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.

Quick Check : 

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.

Job-Order Costing Document Flow Summary: 

Job-Order Costing Document Flow Summary

Job-Order Costing Document Flow Summary: 

Job-Order Costing Document Flow Summary

Job-Order Costing Document Flow Summary: 

Job-Order Costing Document Flow Summary Materials used may be either direct or indirect.

Job-Order Costing Document Flow Summary: 

Job-Order Costing Document Flow Summary An employee’s time may be either direct or indirect.

Job-Order Costing Document Flow Summary: 

Job-Order Costing Document Flow Summary

Job-Order System Cost Flows: 

Job-Order System Cost Flows

Job-Order System Cost Flows: 

Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) Actual Applied Job-Order System Cost Flows

Cost Flows – Material Purchases : 

Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

Cost Flows – Material Usage: 

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.

Job-Order System Cost Flows: 

Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Indirect Materials Actual Applied Job-Order System Cost Flows

Cost Flows – Labor: 

Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

Job-Order System Cost Flows: 

Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Direct Labor Indirect Materials Actual Applied Indirect Labor Indirect Labor Job-Order System Cost Flows Other Overhead

Cost Flows – Actual Overhead: 

Cost Flows – Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

Job-Order System Cost Flows: 

Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Direct Labor Indirect Materials Actual Applied Indirect Labor Indirect Labor Job-Order System Cost Flows Other Overhead

Cost Flows – Overhead Applied: 

Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.

Nonmanufacturing Cost Flows: 

Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred.

Nonmanufacturing Cost Flows: 

Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

Job-Order System Cost Flows: 

Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Job-Order System Cost Flows

Cost Flows – Cost of Goods Manufactured: 

Cost Flows – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

Job-Order System Cost Flows: 

Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Mfd. Job-Order System Cost Flows

Cost Flows – Sales: 

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.

Defining Under- and Overapplied Overhead: 

Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process 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.

Overhead Application Example: 

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. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Overhead Application Example: 

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. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Quick Check : 

Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Quick Check 

Quick Check : 

Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Quick Check 

Disposition of Under- or Overapplied Overhead: 

Disposition of Under- or Overapplied Overhead

Disposition of Under- or Overapplied Overhead: 

Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance Overhead applied to jobs $680,000

Allocating Under- or Overapplied Overhead Between Accounts: 

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: 

Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead:

Allocating Under- or Overapplied Overhead Between Accounts: 

Allocating Under- or Overapplied Overhead Between Accounts

Overapplied and Underapplied Manufacturing Overhead - Summary: 

Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

Quick Check : 

Quick Check  What effect will the overapplied overhead 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.

Quick Check : 

Quick Check  What effect will the overapplied overhead 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.

Multiple Predetermined Overhead Rates: 

Multiple Predetermined Overhead Rates To this point we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates.

Job-Order Costing in Service Companies: 

Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies.

The Use of Information Technology: 

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 web-based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.

Appendix 3a: 

Appendix 3a The Predetermined Overhead Rate & Capacity

Predetermined Overhead Rate and Capacity: 

Predetermined Overhead Rate and Capacity Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.

Capacity-Based Overhead Rates: 

Capacity-Based Overhead Rates Criticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation. Let’s look at the difference!

An Example: 

An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?

An Example: 

An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?

Quick Check : 

Quick Check  Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

Quick Check : 

Quick Check  Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

Quick Check : 

Quick Check  Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

Quick Check : 

Quick Check  Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

Quick Check : 

Quick Check  When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.

Quick Check : 

Quick Check  When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.

Quick Check : 

Quick Check  When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.

Quick Check : 

Quick Check  When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.

Basing the rate on capacity: 

Basing the rate on capacity

Basing the rate on expected volume: 

Basing the rate on expected volume

End of Chapter 3: 

End of Chapter 3