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Chapter 3 Systems Design: Job-Order costing. Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing  Many different.

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Presentation on theme: "Chapter 3 Systems Design: Job-Order costing. Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing  Many different."— Presentation transcript:

1 Chapter 3 Systems Design: Job-Order costing

2 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  Costs are traced or allocated to jobs.  Cost records must be maintained for each distinct product or job. Chapter 4

3 Job-Order Costing THE JOB Direct material Direct labor Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate

4 Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Application of Manufacturing Overhead Ideally, the allocation base is a cost driver that causes overhead.

5 The Need for a Predetermined Manufacturing Overhead Rate Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. $

6 Pear Co 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? Overhead Application Example

7 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Predetermined Overhead Rate $640,000 Estimated Overhead Cost 160,000 Est. Direct Labor Hours = $4.00/Direct Labor Hour

8 Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials. Job-Order System Cost Flows

9 Raw Materials Material Purchases Direct Materials Mfg. Overhead Indirect Materials Job-Order System Cost Flows Work in Process (Job Cost Sheet) Indirect Materials ActualApplied

10 Job-Order System Cost Flows Direct Labor Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Overhead Applied to Work in Process Indirect Labor Direct Labor Overhead Applied Indirect Labor Indirect Materials ActualApplied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

11 Now let’s complete the goods and sell them. Still with me? Job-Order System Cost Flows

12 Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied

13 Overhead Application Example PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. How much total overhead was applied to Pear Co’s jobs during the year? Use Pear Co’s predetermined overhead rate of $4.00 per direct labor hour and the actual direct labor hours.

14 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Applied Overhead 170,000 Direct Labor hours x $4.00/Direct Labor hour $680,000

15 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Manufacturing Overhead $ 680,000 Applied Overhead -650,000 Actual Overhead $30,000 Overapplied Overhead

16 Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

17 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. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. 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. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Overhead Application Question 1

18 Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False Overhead Application Question 2


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