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Management Accounting
Lecture 7
(Chapter 2)
Systems Design: Job-Order Costing
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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
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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.
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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
$
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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
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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
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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
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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
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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.
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Let
’
s summarize
the document flow
in a job-order
costing system.
Job-Order Costing
Document Flow Summary
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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.
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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.
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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
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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
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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.
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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
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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.
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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
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Mfg. Overhead
Salaries and
Wages Payable
Work in Process
(Job Cost Sheet)
lDirect
Materials
lDirect
Labor
lDirect
Labor
lIndirect
Labor
lIndirect
Materials
Actual
Applied
lIndirect
Labor
Summary of Cost Flows
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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.
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Mfg. Overhead
lIndirect
Materials
Actual
Applied
lIndirect
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.
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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.
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Mfg. Overhead
Work in Process
(Job Cost Sheet)
lDirect
Materials
l OverheadApplied
l OverheadApplied to
Work in
Process
lDirect
Labor
lIndirect
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
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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.
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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.
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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.
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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
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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.
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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
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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.
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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.
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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
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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?
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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
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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.
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Job-Order Costing in Service Companies
Job-order costing is used in many
difference types of service companies.
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