2 Learning ObjectivesDescribe the differences between job-order costing and process costing and identify the types of firms that would use each method.Compute the predetermined overhead rate and use the rate to assign overhead to units or services produced.Identify and set up the source documents used with job-order costing.
3 Learning ObjectivesDescribe the cost flows associated with job-order costing..(Appendix) Prepare the journal entries associated with job-order costing.
4 Distinguish Between Job-Order and Process Costing Job-Order CostingWide Variety of Services & ProductsCustomized, Built to OrderDistinct Unit or Number of UnitsCost Accumulated to JobPrice Based on Cost of JobConstruction, Printing, Medical & Dental ServicesProcess CostingMass Produced, Homogenous ProductsCost of Each Unit Virtually IdenticalCost Accumulated to DepartmentFood, Cement, Petroleum, Chemicals
5 What are the three costs of production? Trace to JobDirect MaterialsDirect LaborApplyOverhead
6 Define Normal and Actual Costing Normal costing assigns actual costs of direct materials and direct labor to units produced while applying overhead based on a predetermined estimate.Actual costing assigns actual costs of direct materials, direct labor and overhead to units produced.
7 Complete the Table with Either Actual or Applied NormalActualDirect MaterialsDirect LaborOverheadApplied
8 Discuss the Importance of Unit Costs Necessary for valuing inventoryNecessary to determine incomeManagers need it for decision makingService firms use it in similar waysService firms, do not accumulate inventoryHelps to develop cost efficiency which is vital
9 How to calculate the predetermined overhead rate. 5-1At the beginning of the year, Argus Company estimated the following costs;Overhead $480,000Direct labor cost $960,000Argus uses normal costing and applies overhead on the basis of direct labor cost. (Direct labor cost is equal to total direct labor hours worked multiplied by the wage rate.) For the month of March, the direct labor cost was $62,000.
10 How to calculate the predetermined overhead rate. 5-1REQUIRED:Calculate the predetermined overhead rate for the year.Calculate the overhead applied to production in March.Calculation:Predetermined overhead rate = $480,000 / $960,000 =0.50 or 50% of direct labor costOverhead applied to March production = 0.50 x $62,000 = $31,000.
11 Comment on the Two Types of Overhead Actual overhead is recorded as it is incurred.Applied overhead is assigned to products based upon an estimated rate & an actual driver.It is highly unlikely the two will equal each other at the end of a period.The difference is a variance. If actual is greater than applied then it is referred to as underapplied, if actual is less than applied it is referred to as overapplied.The difference is often closed to Cost of Goods Sold.
12 How to reconcile actual overhead with applied overhead. 5-2At the beginning of the year, Argus Company estimated the following costs;Overhead $480,000Direct labor cost $960,000At the end of the year, the actual data are:Overhead $480,500Direct labor Cost $982,000Argus uses normal costing and applies overhead on the basis of direct labor cost. A the end of the year, Cost of Goods Sold (before adjusting for any overhead variance) is $842,000.
13 How to reconcile actual overhead with applied overhead. 5-2REQUIRED:Calculate the overhead variance for the year.Dispose of the variance by adjusting Cost of Goods Sold (COGS).Calculation:Predetermined overhead rate = $480,000 / $960,000 = 0.50 of direct labor costOverhead applied for the year = 0.50 x $982,000 = $491,000.
14 How to reconcile actual overhead with applied overhead. 5-22. Actual overheadApplied overheadOverhead variance – overappliedUnadjusted COGSAdd: Overhead variance – overappliedAdjusted COGS$480,500491,000$ (10,500)$842,00010,500$831,500
16 How to calculate predetermined departmental overhead rates and apply them to production. 5-3At the beginning of the year, Sorrel Company estimated the following;Machining Assembly TotalOverhead $240,000 $360,000 $600,000Direct labor hours 135, , ,000Machine hours 200, ,000Sorrel uses departmental rates in the machining department, overhead is applied on the basis of machine hours. In the assembly department, overhead is applied on the basis of direct labor hours. Actual data for the month of July are as follows:Overhead $22,000 $33,000 $55,000Direct labor hours 11, , ,900Machine hours 16, ,900
17 How to calculate predetermined departmental overhead rates and apply them to production. 5-3REQUIRED:Calculate the predetermined overhead rate for the machining and assembly departments.Calculate the overhead applied to each department for the month of July.By how much has each department’s overhead been overapplied? Underapplied?Calculation:Machining department rate = $240,000 / 200,000 = $1.20 per machine hourAssembly department rate = $360,000 / 240,000 = $1.50 per direct labor hour
18 How to calculate predetermined departmental overhead rates and apply them to production. 5-3Calculation:Overhead applied to machining in July = $1.20 x 16,900 = $20,280Overhead applied to assembly in July = $1.50 x 22,400 = $33,600MachiningAssemblyActual Overhead$22,000$33,000Applied Overhead20,28033,600Under(Over)applied Overhead$ 1,720$(600)
19 How to convert departmental data to plantwide data to calculate the overhead rate & apply overhead to production.5-4At the beginning of the year, Sorrel Company estimated the following:Machining Assembly TotalOverhead $240,000 $360,000 $600,000Direct labor hours 135, , ,000Machine hours 200, ,000Sorrel has decided to use a plantwide overhead rate based on direct labor hours. Actual data for the month of July are as follows:Overhead $22,000 $33,000 $55,000Direct labor hours 11, , ,900Machine hours 16, ,900
20 How to convert departmental data to plantwide data to calculate the overhead rate & apply overhead to production.5-4REQUIRED:Calculated the predetermined plantwide overhead rate.Calculated the overhead applied to production for the month of July.Calculate the overhead variance for the month of July.Calculation:Predetermined plantwide overhead rate = $600,000 / 375,000 = $1.60 per direct labor hourOverhead applied in July = $1.60 x 33,900 = $54,240Overhead variance = Actual overhead – Applied overhead = $55,000 - $54,240 = $760 overapplied
21 Define a Job-Order Cost Sheet It is a source document, thatkeeps track of the costs of a job.Each job has its own job-order costsheet to keep trackof direct materials, direct labor,and overhead.
22 What is a materials requisitions form? It is the source document used to assign the cost of direct materials to a job.This is often automated and helps to insure that inventory to inventory balances are always correct.
23 Accounting for the Flow of Costs PurchasesFinished Goods WarehouseMaterials InventoryMaterials Requisition FormDirect Labor & OverheadCost of Goods ManufacturedCompleted UnitsWork-in-ProcessSale takes placeCost of Goods Sold
24 Accounting for Overhead Since most businesses use normal costing, they apply overhead using a predetermined overhead rate.Actual overhead is recorded but NEVER recorded in the Work-in-Process.Actual overhead is recorded in a control account.Actual overhead and applied overhead are reconciled at the end of the period.
25 Produce a Schedule of Cost of Goods Manufactured Raw materials used$1,500Direct labor1,530Actual overhead$415Less: underapplied overhead75Overhead applied340Current manufacturing costs$3,370Add: Beginning work-in-processTotal manufacturing costsLess: Ending work-in-process1,050Cost of goods manufactured$2,320
26 Prepare a Statement of Cost of Goods Sold Beginning finished goods inventory$Cost of goods manufactured2,320Goods available for sale$2,320Less: Ending finished goods inventoryNormal cost of goods soldAdd: underapplied overhead75Adjusted cost of goods sold$2,395
27 Prepare an Income Statement Sales$3,480Less: Cost of Goods Sold2,395Gross Margin$1,085Less: selling & administrative expenses:Selling expenses$200Administrative expenses550750Net operating income$ 335
28 Prepare entries for Johnson Leather Goods for February Purchased raw materials on account, $3,350.Requisition materials for use in production, $3,500.Recognize direct labor costing $2,520. Show as a liability in wages payable.Raw materials 3,350Accounts payable 3,3502. Work-in-process 3,500Raw materials 3,5003. Work-in-process 2,520Wages payable 2,520
29 Prepare entries for Johnson Leather Goods for February Applied overhead to production a the rate of $2 per direct labor hour. A total of 280 direct labor hours were worked.Incurred actual overhead of $535.Completed the saddlebags job and transferred to finished goods.4. Work-in-processOverhead control5. Overhead controlVarious accounts6. Finished goods 7,410Work-in-process 7,410
30 Prepare entries for Johnson Leather Goods for February Sold the saddlebags job at cost plus 60%.Closed overapplied overhead to Cost of Goods Sold.7. Cost of goods sold 7,410Raw materials 7,410Accounts receivable ,856Wages payable ,8568. Overhead controlCost of goods sold