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McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Management Accounting

Lecture 7

(Chapter 2)

Systems Design: Job-Order Costing

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Today’s Lecture

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

n

Journal entries and income statement

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

The predetermined overhead rate

(

POHR

) used to apply overhead to jobs

is determined before the period begins.

Application of Manufacturing Overhead

Estimated total manufacturing

overhead cost for the coming period

Estimated total units in the

allocation base for the coming period

POHR =

Ideally, the allocation base

is a cost driver that causes

overhead.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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 Manufacturing Overhead

$

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Actual amount of the allocation

based upon the actual level of

activity (this is called a normal

costing system).

Based on

estimates

, and

determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

For each direct labor hour worked on a

particular job, $4.00 of factory overhead

will be applied to that job.

Application of Manufacturing Overhead

POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)

POHR =

Estimated total manufacturing

overhead cost for the coming period

Estimated total units in the

allocation base for the coming period

(2)

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Application of Manufacturing Overhead

PearCo Job Cost Sheet

Job Number A-143

Date Initiated March 4

Date Completed

Department B3

Units Completed

Item 2 Wooden cargo crates

For Stock

Direct Materials

Direct Labor

Manufacturing Overhead

Req. No. Amount Ticket

Hours Amount Hours

Rate

Amount

X7 - 6890

$

116

36

8

$

88

8

$

4

$

32

Cost Summary

Units Shipped

Direct Materials

Date

Number Balance

Direct Labor

Manufacturing Overhead

Total Cost

Unit Product Cost

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Completing the Job Cost Sheet

PearCo Job Cost Sheet

Job Number A-143

Date Initiated March 4

Date Completed

Department B3

Units Completed

Item 2 Wooden cargo crates

For Stock

Direct Materials

Direct Labor

Manufacturing Overhead

Req. No. Amount Ticket

Hours Amount Hours

Rate

Amount

X7 - 6890

$

116

36

8

$

88

8

$

4

$

32

Cost Summary

Units Shipped

Direct Materials

$

116

Date

Number Balance

Direct Labor

$

88

Manufacturing Overhead

$

32

Total Cost

$

236

Unit Product Cost

$

118

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Let

s summarize

the document flow

in a job-order

costing system.

Job-Order Costing

Document Flow Summary

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing

Document Flow Summary

A sales order is the

basis of issuing a

production order.

A production

order initiates

work on a job.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing

Document Flow Summary

Job Cost

Sheets

Materials

Requisition

Manufacturing

Overhead

Account

Direct

materials

Indirect

materials

Materials used

may be either

direct or

indirect.

(3)

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing

Document Flow Summary

Job Cost

Sheets

Employee Time

Ticket

Manufacturing

Overhead

Account

An employee’s

time may be either

direct or indirect.

Direct

Labor

Indirect

Labor

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing

Document Flow Summary

Manufacturing

Overhead

Account

Other

Actual OH

Charges

Job Cost

Sheets

Applied

Overhead

Materials

Requisition

Employee

Time Ticket

Indirect

Material

Indirect

Labor

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing—The Flow of Costs

Let’s examine the

transactions in

T-account and journal

entry forms in a

job-order costing system.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Raw Materials

l

Material

Purchases

Mfg. Overhead

Work in Process

(Job Cost Sheet)

Actual

Applied

l 

Direct

Materials

l 

Direct

Materials

l 

Indirect

Materials

l 

Indirect

Materials

Summary of Cost Flows

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Raw Materials

XXXXX

Accounts Payable

XXXXX

Journal Entry – Material Purchases

Raw material purchases are

recorded in an inventory account.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Work in Process

XXXXX

Manufacturing Overhead

XXXXX

Raw Materials

XXXXX

Journal Entry – 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 decrease Raw

(4)

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Mfg. Overhead

Salaries and

Wages Payable

Work in Process

(Job Cost Sheet)

l 

Direct

Materials

l 

Direct

Labor

l 

Direct

Labor

l 

Indirect

Labor

l 

Indirect

Materials

Actual

Applied

l 

Indirect

Labor

Summary of Cost Flows

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Work in Process

XXXXX

Manufacturing Overhead

XXXXX

Salaries and Wages Payable

XXXXX

Journal Entry – Labor Costs

The cost of direct labor incurred

increases Work in Process and the

cost of indirect labor increases

Manufacturing Overhead.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Mfg. Overhead

l 

Indirect

Materials

Actual

Applied

l 

Indirect

Labor

Summary of Cost Flows

l 

Other

Overhead

In addition to indirect

materials and indirect

labor, other actual

manufacturing

overhead costs are

debited to the

Manufacturing

Overhead account.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Manufacturing Overhead

XXXXX

Accounts Payable

XXXXX

Property Taxes Payable

XXXXX

Prepaid Insurance

XXXXX

Accumulated Depreciation

XXXXX

Journal Entry – 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.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Mfg. Overhead

Work in Process

(Job Cost Sheet)

l 

Direct

Materials

l Overhead

Applied

l Overhead

Applied to

Work in

Process

l 

Direct

Labor

l 

Indirect

Materials

Actual

Applied

If actual and applied manufacturing overhead

are not equal, a year-end adjustment is

required.

l 

Indirect

Labor

Summary of Manufacturing Overhead

Cost Flows

l 

Other

Overhead

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Work in Process

XXXXX

Manufacturing Overhead

XXXXX

Journal Entry – Overhead Applied

Work in Process is increased

when Manufacturing Overhead

is applied to jobs.

(5)

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Salaries Expense

XXXXX

Salaries Payable

XXXXX

Advertising Expense

XXXXX

Accounts Payable

XXXXX

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.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Finished Goods

l 

Cost of

Goods

Mfd.

l 

Cost of

Goods

Mfd.

Work in Process

(Job Cost Sheet)

l 

Direct

Materials

l

Direct

Labor

l Overhead

Applied

Summary of Goods Manufactured Cost

Flows

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Finished Goods

XXXXX

Work in Process

XXXXX

Journal Entry – Cost of Goods

Manufactured

As jobs are completed, the Cost of

Goods Manufactured is transferred to

Finished Goods from Work in Process.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Finished Goods

Cost of Goods Sold

Work in Process

(Job Cost Sheet)

l 

Direct

Materials

l

Direct

Labor

l Overhead

Applied

l

Cost of

Goods

Mfd.

l

Cost of

Goods

Mfd.

l

Cost of

Goods

Sold

l

Cost of

Goods

Sold

Summary of Job-Order System Cost

Flows

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL

Date

Description

Post.

Ref.

Debit

Credit

Accounts Receivable

XXXXX

Sales

XXXXX

Cost of Goods Sold

XXXXX

Finished Goods

XXXXX

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

Goods.

(6)

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

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

PearCo has

overapplied

overhead for the year

by $30,000. What will

PearCo do?

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Disposition of Under- or Overapplied

Overhead

PearCo’s

Mfg. Overhead

Actual

overhead

costs

$650,000

$30,000

overapplied

Overhead

applied

to jobs

$680,000

PearCo’s Cost

of Goods Sold

Unadjusted

Balance

Adjusted

Balance

$30,000

$30,000

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

May be more

complex but . . .

May be more

accurate because it

reflects differences

across departments.

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Costing in Service Companies

Job-order costing is used in many

difference types of service companies.

(7)

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Tutorial

n

Review of today’s lecture

n

Complete Review Problems

n

2-13

References

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