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Calculate Cost of Goods Sold and Ending Overhead Balance © Dale R. Geiger 20111.

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Presentation on theme: "Calculate Cost of Goods Sold and Ending Overhead Balance © Dale R. Geiger 20111."— Presentation transcript:

1 Calculate Cost of Goods Sold and Ending Overhead Balance © Dale R. Geiger 20111

2 Terminal Learning Objective Task: Calculate Cost of Goods Sold and Ending Overhead Balance Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors. Standard: With at least 80% accuracy Calculate cost of job given predetermined overhead rate Calculate predetermined overhead rate Calculate over-/ under-applied overhead Explain causes of over-/under-applied overhead Prove ending balances in inventory accounts © Dale R. Geiger 20112

3 If Unit Cost is misstated, how might that affect these decisions? Do user fees cover Unit Cost? On which products and services should we expend our limited resources? Should we increase user fees? Are we competitive in providing this service? © Dale R. Geiger 20113

4 Job Order Costing Provides a methodology for calculating the cost of a job Assumes that each job is unique and has identifiable direct costs Assumes that all jobs consume indirect resources in a similar manner © Dale R. Geiger 20114

5 Job Order Costing Records Direct Materials and Labor for each individual job Work in Process consists of all jobs still in process Cost of job = Direct Materials + Direct Labor + Applied Overhead © Dale R. Geiger 20115

6 Job Order Costing Applies Overhead on a predetermined rate Traditional labor-based OH Rate = Estimated Overhead $ / Estimated Direct Labor $ Assumes that indirect costs are closely correlated to Direct Labor OH Application = Overhead Rate * Direct Labor $ © Dale R. Geiger 20116

7 Job Order Costing Lends itself readily to service applications: Legal services Repair and maintenance services Contract services Others? © Dale R. Geiger 20117

8 Overhead The Inventory Chain © Dale R. Geiger 20118

9 Job Order Cost Flow © Dale R. Geiger 20119

10 Check on Learning What is the goal of Job Order costing? What is the equation for the cost of a job? © Dale R. Geiger

11 Job Tickets Detailed information about each job is recorded on a Job Ticket: Direct Materials Direct Labor Overhead Applied Work in Process = Total of Job Tickets for unfinished jobs Cost of Goods Manufactured = Total of Job Tickets for jobs completed during the period © Dale R. Geiger

12 Job Tickets Detailed information about each job is recorded on a Job Ticket: Direct Materials Direct Labor Overhead Applied Work in Process = Total of Job Tickets for unfinished jobs Cost of Goods Manufactured = Total of Job Tickets for jobs completed during the period © Dale R. Geiger

13 Job Tickets Detailed information about each job is recorded on a Job Ticket: Direct Materials Direct Labor Overhead Applied Work in Process = Total of Job Tickets for unfinished jobs Cost of Goods Manufactured = Total of Job Tickets for jobs completed during the period © Dale R. Geiger

14 Job Order Cost Flow Total cost of direct materials used equals cost of materials for Job A plus cost of materials for Job B © Dale R. Geiger

15 Job Order Cost Flow Total cost of Work in Process equals cost of materials, labor and overhead for Job A plus cost of materials, labor and overhead for Job B © Dale R. Geiger

16 Job Order Cost Flow If Job B is completed and transferred to Finished Goods, Cost of Goods Manufactured equals cost of Job B. Work in Process consists of Job A, which is still unfinished. © Dale R. Geiger

17 Check on Learning Work in Process inventory is equal to? Cost of Goods Manufactured is equal to? © Dale R. Geiger

18 Demonstration Problem The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Overhead is applied at 50% of Direct Labor Calculate the cost of each job AlphaBravoCharlie Parts Labor Overhead??? Total??? © Dale R. Geiger

19 Demonstration Problem The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Overhead is applied at 50% of Direct Labor Calculate the cost of each job AlphaBravoCharlie Parts Labor Overhead Total??? © Dale R. Geiger

20 Demonstration Problem The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Overhead is applied at 50% of Direct Labor Calculate the cost of each job AlphaBravoCharlie Parts Labor Overhead Total © Dale R. Geiger

21 Demonstration Problem Alpha and Bravo are completed and transferred out. Charlie remains in process Calculate Cost of Goods Manufactured and ending Work in Process inventory AlphaBravoCharlie Parts Labor Overhead Total © Dale R. Geiger

22 Check on Learning How is overhead applied to each job? What is the underlying assumption in using direct labor as a basis for overhead application? © Dale R. Geiger

23 Perpetual Overhead Application Uses a Predetermined Overhead Rate: Estimated Overhead $ Estimated Direct Labor $ Overhead is applied or added to jobs As direct labor is incurred by jobs In proportion to Direct Labor © Dale R. Geiger

24 Perpetual Overhead Example The Contract Administration Department accounts for the cost of administering contracts using a job order cost system. The Department Manager estimates that Overhead for the year will be $85,500 and Direct Labor on contracts will be $95,000. Calculate the Predetermined Overhead Rate: Estimated Overhead: $85,500= 90% Estimated Direct Labor: $95,000 © Dale R. Geiger

25 Perpetual Overhead Example The Contract Administration Department accounts for the cost of administering contracts using a job order cost system. The Department Manager estimates that Overhead for the year will be $85,500 and Direct Labor on contracts will be $95,000. Calculate the Predetermined Overhead Rate: Estimated Overhead: $85,500= 90% Estimated Direct Labor: $95,000 © Dale R. Geiger

26 Check on Learning How is the predetermined overhead rate calculated? Why is perpetual overhead application used in Job Order costing? © Dale R. Geiger

27 Perpetual Overhead Example (contd) The Training and Education contract requires $3,000 of direct Contract Administration labor. How much Overhead should be added to the cost of administering the contract? $3,000 * 90% = $2,700 Direct Contract Administration Labor incurred on all other contracts during June totaled $6,800 How much Overhead was applied to other contracts? $6,800 * 90% = $6,120 © Dale R. Geiger

28 Perpetual Overhead Example (contd) The Training and Education contract requires $3,000 of direct Contract Administration labor. How much Overhead should be added to the cost of administering the contract? $3,000 * 90% = $2,700 Direct Contract Administration Labor incurred on all other contracts during June totaled $6,800 How much Overhead was applied to other contracts? $6,800 * 90% = $6,120 © Dale R. Geiger

29 Perpetual Overhead Example (contd) The Training and Education contract requires $3,000 of direct Contract Administration labor. How much Overhead should be added to the cost of administering the contract? $3,000 * 90% = $2,700 Direct Contract Administration Labor incurred on all other contracts during June totaled $6,800 How much Overhead was applied to other contracts? $6,800 * 90% = $6,120 © Dale R. Geiger

30 Perpetual Overhead Example (contd) Contract Administration overhead incurred in June: Supplies$1,000 Supervision 6,000 Facilities 1,500 Total$8,500 Contract Administration overhead applied in June: T&E Contract:$2,700 Other contracts: 6,120 Total$8,820 Incurred OH $8,500 < Applied OH $8,200 Overhead is over-applied by $320 © Dale R. Geiger

31 Check on Learning How is actual overhead calculated? How is applied overhead calculated? © Dale R. Geiger

32 Over-applied vs. Under-applied Perpetual overhead application is a function of estimates OH rate = Estimated OH$/Estimate DL$ If our estimates are perfect, actual overhead will equal applied overhead Since perfection is rare, more likely the actual will differ from the estimate If the relationship between actual overhead and actual labor is different than estimated, overhead may be over- or under-applied © Dale R. Geiger

33 Over-applied vs. Under-applied Think of the overhead account as a bank account Actual overhead cost incurred is like a deposit Overhead applied to jobs is like a withdrawal If more overhead is applied jobs than incurred, the account is overdrawn, or over- applied OH incurred 8500 OH applied (+) (-) © Dale R. Geiger

34 Over-applied vs. Under-applied If actual overhead incurred < overhead applied, overhead is over-applied Too much overhead was applied to each contract. Reported cost of administering contracts is too high. If actual overhead incurred > overhead applied, overhead is under-applied Not enough overhead was applied to each contract. Reported cost of administering contracts is too low. © Dale R. Geiger

35 Is this a Serious Problem? If the over- or under-applied overhead amount is Material then the difference will affect decisions What constitutes a material amount? It depends. If the error is more than 5% of the total contract amount, it is probably significant Is the error due to a significant error in estimating either Labor $ or Overhead $? If so, the overhead rate should be adjusted © Dale R. Geiger

36 Under- or Over-costing How might under-costing Contract Administration affect decisions? How might over-costing Contract Administration affect decisions? © Dale R. Geiger

37 Under- or Over-costing How might under-costing Contract Administration affect decisions? If contract administration costs are significantly under-costed (think underpriced), the demand for contract administration resources will increase and they will be over-consumed. How might over-costing Contract Administration affect decisions? © Dale R. Geiger

38 Under- or Over-costing How might under-costing Contract Administration affect decisions? If contract administration costs are significantly under- costed (think underpriced), the demand for contract administration resources will increase and they will be over-consumed. How might over-costing Contract Administration affect decisions? If contract administration costs are significantly over- costed, it may make outsourcing appear attractive. © Dale R. Geiger

39 Check on Learning How can perpetual overhead application result in over- or under-applied overhead? If actual overhead is greater than applied overhead, overhead will be -applied. © Dale R. Geiger

40 Demonstration Problem – Part 2 The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Alpha and Bravo are completed and transferred out. Charlie remains in process. AlphaBravoCharlie Parts Labor Overhead Total © Dale R. Geiger

41 Demonstration Problem – Part 2 Additional Information Beginning Raw Materials (Parts)$1500 Ending Raw Materials (Parts) 2500 Overhead Costs Incurred: Shop utilities$1700 Shop supplies 3300 Indirect labor 2100 Administrative costs 2800 All jobs are sold when completed. User fees equal Cost + 10% to cover administrative costs © Dale R. Geiger

42 Demonstration Problem – Part 2 Use the inventory template to: Calculate Raw Materials Purchases Calculate Cost of Goods Sold Prove the ending balances in the inventory accounts Calculate Gross Profit and Operating Income © Dale R. Geiger

43 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases ? End DMU ? DMU DL OHDM Beg.COGM End. COGS Work in Process Bravo WIP - Summary Beg. -0- DL OHDMU End. COGM COGM © Dale R. Geiger

44 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases End DMU DL 4500 OH 2250 DM = = = =12800 Beg.COGM End. COGS Work in Process Bravo WIP - Summary Beg. -0- DL OH 7050 DMU End. COGM COGM Total of materials for the three jobs equals Direct Materials Used © Dale R. Geiger

45 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases End DMU DL 4500 OH 2250 DM = = = =12800 Beg.COGM End. COGS Work in Process Bravo WIP - Summary Beg. -0- DL OH 7050 DMU End. COGM COGM Ending is 1000 more than Beginning; Inputs must be 1000 more than Outputs © Dale R. Geiger

46 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases End DMU DL 4500 OH 2250 DM = = = =12800 Beg.COGM End. COGS Work in Process Bravo WIP - Summary Beg. -0- DL OH 7050 DMU End. COGM COGM Total of labor for the three jobs equals Direct Labor © Dale R. Geiger

47 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases End DMU DL 4500 OH 2250 DM = = = =12800 Beg.COGM End. COGS Work in Process Bravo WIP - Summary Beg. -0- DL OH 7050 DMU End. COGM COGM Total of Overhead applied to for the three jobs equals Overhead Applied © Dale R. Geiger

48 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases End DMU DL 4500 OH 2250 DM = = =12800 Beg. COGM End COGS Work in Process Bravo WIP - Summary Beg. -0- DL OH 7050 DMU End COGM Alpha and Bravo are completed. COGM equals total of Alpha and Bravo © Dale R. Geiger

49 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases End DMU DL 4500 OH 2250 DM = = =12800 Beg. -0- COGM End COGS Work in Process Bravo WIP - Summary Beg. -0- DL OH 7050 DMU End COGM All jobs are sold when completed. COGS equals total of Alpha and Bravo © Dale R. Geiger

50 Demonstration Problem – Part 2 Raw Materials Alpha Finished Goods Charlie Beg Purchases End DMU DL 4500 OH 2250 DM = = = Beg. -0- COGM End COGS Work in Process Bravo WIP - Summary Beg. -0- DL OH 7050 DMU End COGM Ending Balance in WIP is equal to the cost of Charlie © Dale R. Geiger

51 Demonstration Problem – Part 2 Is overhead over- or under-applied? Actual > Applied, so under-applied Statement of Activities Revenue: User Fees $28,105 Less: COGS25,550 Gross Profit 2,555 Less: Admin cost 2,800 Net loss $ 355 Overhead Utilities 1700 Supplies 3300 Ind. labor Applied End. 50 © Dale R. Geiger

52 Practical Exercise © Dale R. Geiger

53 Job Order Costing Spreadsheet © Dale R. Geiger Enter total direct labor for the period to automatically calculate overhead applied Enter estimated overhead and estimated direct labor to calculate pre-determined overhead rate

54 Job Order Costing Spreadsheet © Dale R. Geiger Itemize actual overhead incurred Over or under-applied overhead is calculated automatically

55 Screenshots © Dale R. Geiger Enter data for each job and the Inventory accounts will update automatically

56 Practical Exercise © Dale R. Geiger


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