2Types of Costing Systems Used to Determine Product Costs Process CostingJob-order CostingChapter 4Many 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.
3Job-Order Costing THE JOB Manufacturing overhead (OH) Applied to each job using a predetermined rateDirect materialTraced directly to each jobTHE JOBTraced directly to each jobDirect labor
4Application of Manufacturing Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.Estimated total manufacturing overhead cost for the coming periodEstimated total units in the allocation base for the coming periodPOHR =Ideally, the allocation base is a cost driver that causes overhead.
5The 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.$
6Overhead Application Example 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?
7Predetermined Overhead Rate $640,000 Estimated Overhead Cost160,000 Est. Direct Labor Hours= $4.00/Direct Labor Hour
8Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.
9Job-Order System Cost Flows Work in Process (Job Cost Sheet)Raw MaterialsDirect MaterialsDirect MaterialsMaterialPurchasesIndirect MaterialsMfg. OverheadActualAppliedIndirect Materials
10Salaries and Wages Payable Overhead Applied to Work in Process Job-Order System Cost FlowsWork in Process (Job Cost Sheet)Salaries and Wages PayableDirect LaborDirect MaterialsIndirect LaborDirect LaborOverhead AppliedMfg. OverheadActualAppliedIf actual and applied manufacturing overhead are not equal, a year-end adjustment is required.Indirect MaterialsOverhead Applied to Work in ProcessIndirect Labor
11Now let’s complete the goods and sell them. Still with me? Job-Order System Cost FlowsNow let’s complete the goods and sell them. Still with me?
12Job-Order System Cost Flows Work in Process (Job Cost Sheet)Finished GoodsDirect MaterialsCost of Goods Mfd.Cost of Goods Mfd.Cost of Goods SoldDirect LaborOverhead AppliedCost of Goods SoldCost of Goods Sold
13Overhead 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.
14Applied Overhead 170,000 Direct Labor hours x $4.00/Direct Labor hour $680,000
15Manufacturing Overhead $680,000 Applied Overhead-650,000 Actual Overhead$30,000 Overapplied Overhead
16Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method
17Overhead Application Question 1 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 isa. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.
18Overhead Application Question 2 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. Trueb. False