Systems Design: JobOrder Costing 110904

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Systems Design Job-Order Costing11/09/04
Chapter 3
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Types of Costing Systems Used to Determine
Product Costs
ProcessCosting
Job-orderCosting
Chapter 4

• Many different products are produced each
  period.
• Products are manufactured to order.
• Cost are traced or allocated to jobs.
• Cost records must be maintained for each
  distinct product or job.

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Process Cost System

• Company produces many units of a single product
  for long periods
• Examples orange juice concentrate, paper,
  mixing and bottling beverages, gasoline.
• Costs are accumulated by each department or
  operation in the process
• Total costs are divided by the number of units
  produced to get unit product cost
• Potato Chip example

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Job Order Costing System
ProcessCosting
Job-orderCosting

• Typical job order cost applications
• Special-order printing
• Building construction
• Also used in the service industry
• Hospitals
• Law firms

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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.

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Job-Order Costing
Manufacturingoverhead (OH) Applied to eachjob
using apredeterminedrate
The Job
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Sequence of Events in a Job-Order Costing System
Charge direct material and direct labor costs to
each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Sequence of Events in a Job-Order Costing System
Direct Materials
Apply overhead to each job using a predeter-mined
rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Job-Order Cost Accounting

• The primary document for tracking the costs
  associated with a given job is the job cost sheet.

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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Materials Requisition Form
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Materials Requisition Form
Cost of material is charged to job A-143.
Type, quantity, and total cost of material
charged to job A-143.
Will E. Delite
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Job-Order Cost Accounting(Phase II inventory
problem)
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Job-Order Cost Accounting
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Employee Time Ticket
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Application of Manufacturing Overhead

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

Ideally, the allocation base is a cost driver
that causes overhead.
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Application of Manufacturing Overhead
Based on estimates, and determined before the
period begins.
Actual amount of the allocation base such as
units produced, direct labor hours, or machine
hours incurred during the period.
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The Need for a Predetermined Manufacturing
Overhead Rate

• Using a predetermined rate makes itpossible to
  estimate total job costs sooner.
• Actual overhead for the period is notknown until
  the end of the period.

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Overhead Application Example

• PearCo applies overhead based on direct labor
  hours. Total estimated overhead for the year is
  640,000. Total estimated labor cost is
  1,400,000 and total estimated labor hours are
  160,000.What is Pear Co.s predetermined
  overhead rate per hour?

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Overhead Application Example
POHR 4.00 per DLH
For each direct labor hour worked on a job, 4.00
of factory overhead will be applied to the job.
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Overhead Application Example
What amount of overhead willPearCo apply to Job
X-32?
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Overhead Application Example
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Overhead Application Example
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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.

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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 19,000. What would be recorded as the cost
  of job WR53?
• a. 200.
• b. 350.
• c. 750.
• d. 730.

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Quick Check ?

• If overhead contains fixed costs, what will
  happen to the predetermined overhead rate if
  lower unit sales volume is expected?
• a. The predetermined overhead rate will likely
  increase.
• b. The predetermined overhead rate would be
  unaffected.
• c. The predetermined overhead rate will likely
  decrease.

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Underabsorbed Overhead

• If overhead is underabsorbed due to under
  utilization of plant capacity, I would record it
  as such.
• Do not allocate it to the cost of your product,
  as in the prior example.
• Otherwise you might blame lack of efficiency for
  the higher cost when the problem is really lack
  of sufficient business to fully absorb your costs
  of capacity.

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Allocation Base

• A Cost Driver is a factor that directly causes
  overhead costs to be incurred
• The Cost Driver must be common to all company
  products and services
• Cost Drivers include machine-hours, direct labor,
  computer time, direct material, etc.
• Selection of an appropriate Cost Driver is
  essential to proper overhead allocation

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Job-Order CostingDocument Flow Summary
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Job-Order CostingDocument Flow Summary
Materials usedmay be eitherdirect orindirect.
Job Cost Sheets
MaterialsRequisition
Manufacturing Overhead Account
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Job-Order CostingDocument Flow Summary
An employeestime may be eitherdirect or
indirect.
Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
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Job-Order CostingDocument Flow Summary
EmployeeTime Ticket
Manufacturing Overhead Account
OtherActual OHCharges
Job Cost Sheets
MaterialsRequisition
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Job-Order System Cost Flows
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Job-Order System Cost Flows
Raw Materials
Work in Process(Job Cost Sheet)

• Direct Materials

• Material
• Purchases

• Direct Materials

• Indirect Materials

Mfg. Overhead
Actual
Applied

• Indirect Materials

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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Salaries and Wages Payable

• Direct Labor

• Direct Materials

• IndirectLabor

• Direct Labor

• Overhead Applied

Mfg. Overhead
Actual
Applied
If actual and applied manufacturing overheadare
not equal, a year-end adjustment is required.

• OverheadApplied to Work inProcess

• Indirect Materials

• IndirectLabor

All other OH
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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Finished Goods

• Cost ofGoodsMfd.

• Cost ofGoodsSold

• Direct Materials

• Cost ofGoodsMfd.

• Direct Labor

• Overhead Applied

Cost of Goods Sold

• Cost ofGoodsSold

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Job-Order System Cost Flows
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Overhead Application Example

• PearCos actual overhead for the year was
  650,000 for a total of 170,000 direct labor
  hours.
• How much total overhead was applied to PearCos
  jobs during the year? Use PearCos predetermined
  overhead rate of 4.00 per direct labor hour.

SOLUTION Applied Overhead POHR Actual
Direct Labor Hours Applied Overhead 4.00 per
DLH 170,000 DLH 680,000
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Overapplied and Underapplied Manufacturing
Overhead
30,000may be allocatedto these accounts.
OR
Work inProcess
FinishedGoods
Cost of Goods Sold
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Overapplied and Underapplied Manufacturing
Overhead
PearCosMfg. Overhead
PearCos Costof Goods Sold
Unadjusted Balance
Actualoverheadcosts 650,000
OverheadAppliedto jobs 680,000
680,000
30,000
30,000
AdjustedBalance
30,000 overapplied
650,000
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Quick Check ?

• What effect will the adjustment of overapplied
  overhead have on PearCos cost of goods sold?
• a. Cost of goods sold will increase.
• b. Cost of goods sold will be unaffected.
• c. Cost of goods sold will decrease.

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Quick Check ?

• What effect will the overapplied overhead have
  on PearCos net operating income?
• a. Net operating income will increase.
• b. Net operating income will be unaffected.
• c. Net operating income will decrease.

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If Over/Under significant,Allocate Between
Accounts

• Determine the amount of overhead applied to WIP,
  Finished Goods and COGS
• Calculate the of total Overhead applied to each
  account
• Multiply the Over/Under amount times the s and
  allocate to each account
• See example on page 115

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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.
  Tigers manufacturing overhead is
• a. 50,000 overapplied.b. 50,000
  underapplied.c. 60,000 overapplied.d.
  60,000 underapplied.

Overhead Applied 4.00 per hour 290,000
hours 1,160,000 Underapplied Overhead
1,210,000 - 1,160,000 50,000
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End of Chapter 3