21/04/2017 Costing Methods.

21/04/2017 Costing Methods

21/04/2017

Job-Order Costing Lecture 4 21/04/2017
There are several methods that can be used to accumulate manufacturing costs and determine unit product cost. One of these methods is known as a job-order cost system.

Types of Product Costing Systems
21/04/2017 Types of Product Costing Systems Process Costing Job-order Costing A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. A process cost system is best used by companies that produce many units of a single product and when one unit of output is indistinguishable from any other unit of output. Because the units of output are identical, the company will probably use an average cost system to determine product cost.

21/04/2017 Types of Product Costing Systems Process Costing Job-order Costing A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. Example companies: 1. AAA (paper manufacturing) 2. Unilever (margarine, tea, soap) 3. Coca-Cola (mixing and bottling beverages) An example of a company that may consider a process cost system is Weyerhaeuser, a manufacturer of paper products. When we think of paper manufacturing, we generally think about continuous production of a single roll of paper that may eventually be cut into sizes needed by customers. Other companies that would benefit from process costing are Reynolds Aluminum and Coca-Cola. Certainly the desire of all three of these companies is to make each unit of output consistent with the quality standards established. Coca-Cola bottled in California should taste identical to the same product bottled in New York City.

21/04/2017 Types of Product Costing Systems Process Costing Job-order Costing Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. A company would use a job order costing system when many different products are produced each period. The products are usually manufactured to customers’ specifications and are unique in nature.

21/04/2017 Types of Product Costing Systems Process Costing Job-order Costing Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Example companies: 1. Boeing (aircraft manufacturing) 2. GAMUDA (large scale construction) 3. Walt Disney Studios (movie production) Companies that may benefit from using job order cost systems include Boeing, Bechtel International, and Walt Disney Studios. Bechtel is perhaps the largest international construction company. The company works on huge projects that are unique to customer needs.

21/04/2017 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. See if you can identify those types of companies that would benefit from the use of a job-order cost system. There may be more than one company in the list.

21/04/2017 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. How did you do? The paper and ketchup manufacturers would probably use a process costing system rather than a job-order system.

Costing Approaches Actual Costing – allocates:
21/04/2017 Costing Approaches Actual Costing – allocates: Indirect costs based on the actual indirect-cost rates times the actual activity consumption Normal Costing – allocates: Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption Both methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption

Job-Order Cost Accounting
21/04/2017 Job-Order Cost Accounting Sykt ABC Job Cost Sheet Job Number A - 143 Date Initiated Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Rate Cost Summary Units Shipped Date Number Balance Total Cost Unit Product Cost The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a give job. We will look at a job cost sheet used by a hypothetical company called PearCo. PearCo has a job that calls for the construction of wooden cargo crates. You can see the separate sections for direct materials, direct labor, and manufacturing overhead. In addition, we have a section to summarize total costs of the job. A job number uniquely identifies each job. Direct material, direct labor and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account.

Materials Requisition Form
21/04/2017 Materials Requisition Form Ali bin Abu Here is the materials requisition form completed for job A dash 143. The requisition is number X7 dash The worker has requested twelve two by fours, twelve feet long, and twenty one by sixes, twelve feet long. The unit cost of the lumber is shown in the unit cost column. The quantity requested is multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the store room will issue the lumber once the materials requisition form has been properly authorized.

21/04/2017 Job-Order Cost Accounting Once the materials have been issued by the store room, they are charged to the job cost sheet for job number A dash 143. We have a proper reference for the requisition number and the total amount. If we need to look at the details of the one hundred sixteen dollar cost, we can ask to see materials requisition form X The direct materials were posted to the summary section of the job cost sheet.

Accounting for Material
21/04/2017 Accounting for Material Material Control Procedures Stores Dept functions: to order, receive and issue materials. Documents involved are: bin card (to monitor stock level), purchase requisition, purchase order (PO). Receiving: Supplier’s Delivery Note vs PO, list in GRN (Goods Received Note) and send a copy of GRN to accounts dept for payment (check again with PO). Then, accounts dept enter info into Stores Ledger Account.

Description: …………… Bin no : ……………….
21/04/2017 BIN CARD Description: …………… Bin no : ………………. Code no.: …………….. Normal quantity to order:… Maximum: ………….. Minimum:…………… Re-order level:………. Receipts Issues Balance Remarks Date GRN no. Quantity Req. no.

Stores (Purchase) requisition
21/04/2017 Stores (Purchase) requisition Material required for: No. (job or overhead account) Department: Date: Quantity Description Code no. Weight Rate RM Notes Foreman

Material:………. Code:………. Maximum quantity:……. Minimum quantity:……..
21/04/2017 Stores ledger account Material:………. Code:………. Maximum quantity:……. Minimum quantity:…….. Date Receipts Issues Stock GRN no. Quantity Unit price (RM) Amount (RM) Stores req. No.

21/04/2017 During the quarter ended 31 March, a company purchased 200 litres of liquid on the following dates: 1 February: litres at RM1 per litre 1 March: litres at RM2 per litre On 30 March, 100 litres were issued to Job X. The liquid had been placed in a tank, and it would be impossible to determine which consignment had been used.

Question: How to determine the value of closing stock ?
21/04/2017 The liquid is suitable for resale in its purchased state at RM4 per litre. Assume no labour or overhead costs and opening stock. Question: How to determine the value of closing stock ?

21/04/2017 FIFO = RM200 LIFO = RM100 Average cost = RM150

Because it takes into consideration future costs.
21/04/2017 The most acceptable method of pricing stores issues for decision-making (Management Accounting) is replacement cost. Because it takes into consideration future costs.

Employee Time Ticket 21/04/2017
Here is the time ticket for an employee who worked eight hours on job A dash 143. The employee’s hourly pay rate is eleven dollars, so the total labor cost charged to the job will be eighty-eight dollars. The time ticket, number thirty six, serves as the major source document for labor costs charged to this job. Let’s look at the labor posting to the job cost sheet.

21/04/2017 Job-Order Cost Accounting On the job cost sheet we can see that time ticket number thirty-six posted eight hours to job A dash 143. The total amount of direct labor cost is eighty-eight dollars. This amount is also posted to the summary section of the job cost sheet.

Accounting for Labour Methods of Remuneration: Time related method
21/04/2017 Accounting for Labour Methods of Remuneration: Time related method Output related method

Problems of Output Related Method:
21/04/2017 Problems of Output Related Method: Quantity recorded on the job sheet is potentially open to abuse unless there is adequate supervision. Quality of the output may not be maintained as there is a temptation to produce more units in order to get higher pay.

Piece Rate (Output) with Guaranteed Pay:
21/04/2017 Piece Rate (Output) with Guaranteed Pay: This provides a security for the employees if they are unable to achieve certain levels of output as a guaranteed minimum wage will be paid. Differential Piecework: In order to overcome the problem of employees slowing down their work on reaching a certain level of earnings, an increased piece rate is offered at different level of production.

21/04/2017 Premium Bonus Scheme It is a reward to the employees for any time saved on the production based on the standard time set. Employees will still receive normal pay in respect of the basic hours worked and the bonus is only applied to the time actually saved.

21/04/2017 Halsey Scheme Time saved may be shared between employer and employees on an agreed basis. Formulae: The employee receives 50% of the time saved. Bonus = Time allowed – Time taken x Time Rate 2

21/04/2017 Rowan Scheme Time saved is split on the ratio of time taken to time allowed. Formulae: The proportion paid to the employee is based on the ratio of time taken to time allowed. Bonus = Time taken x Time rate x Time saved Time allowed

21/04/2017 Group Bonus Scheme A reward to a group of employees where the bonus will be shared among the members of the group based on the pre-agreed basis. Advantages: ‘Group loyalty’ may result in less absenteeism and lateness.

Why Use an Allocation Base?
21/04/2017 Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: It is impossible or difficult to trace overhead costs to particular jobs. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. Part I Manufacturing overhead is applied to all jobs that are in process. We apply overhead using a base we believe causes overhead costs to be incurred. Some companies allocate manufacturing overhead using direct labor hours or machine hours. Part II We must allocate overhead costs to jobs for a variety of reasons. First, it is difficult, if not impossible, to actually trace overhead costs to a particular job. The cost of grease for machinery to manufacture our product is part of our manufacturing costs. It would be impossible to accurately trace the amount of grease consumed to manufacture one unit of output. Manufacturing overhead also includes a number of different costs and it would be very difficult to gather all of them together in time to charge them to a particular job. A job may be complete and sold before we can determine the actual overhead costs incurred. Finally, many types of overhead are fixed in nature even though output fluctuates during the period.

Manufacturing Overhead Application
21/04/2017 Manufacturing Overhead Application 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 period Estimated total units in the allocation base for the coming period POHR = To facilitate the allocation of manufacturing overhead to each job, we calculate a predetermined overhead rate before the period begins. The rate is calculated by dividing the total estimated manufacturing overhead for the coming period by the estimated total units of the allocation base. If our allocation base is machine hours, we would estimate the total number of machine hours used in production in the coming period. Ideally, the allocation base should be a cost driver, that is, it causes overhead to be incurred. Ideally, the allocation base is a cost driver that causes overhead.

21/04/2017 The Need for a POHR 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. RM Predetermined overhead rates that rely upon estimated data are often used because (1) actual overhead costs for the period are not known until the end of the period, thus inhibiting the ability to estimate job costs during the period; (2) Actual overhead costs can fluctuate seasonally, thus misleading decision makers; (3) it simplifies record keeping.

Application of Manufacturing Overhead
21/04/2017 Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity We calculate the predetermined overhead rate before the period begins. As we work on a particular job, we apply overhead by multiplying the predetermined rate times the actual level of activity. If overhead is applied on the basis of machine hours, we would apply overhead by multiplying the predetermined rate times the actual number of machine hours used on a particular job. Actual amount of the allocation based upon the actual level of activity.

Overhead Application Rate
21/04/2017 Overhead Application Rate Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = RM640,000 160,000 direct labor hours (DLH) POHR = Part I Here is our equation for calculating the predetermined manufacturing overhead rate. Part II PearCo’s predetermined overhead rate is four dollars per direct labor hour. Part III So, at PearCo each job will be charged four dollars of overhead for each one hour of direct labor worked. Let’s see how this works. POHR = RM4.00 per DLH For each direct labor hour worked on a particular job, RM4.00 of factory overhead will be applied to that job.

21/04/2017 Job-Order Cost Accounting Our predetermined overhead rate is four dollars per direct labor hour, so we will apply thirty-two dollars of overhead to job number A dash 143. The computation is shown in the manufacturing overhead section of the job cost sheet and in the summary section. On job A dash 143 we completed two wooden cargo crates at a total cost of two hundred thirty-six dollars. The total cost includes direct materials, direct labor, and manufacturing overhead. For this particular job the average cost of each crate is one hundred eighteen dollars. We calculated the average by dividing the total cost of two hundred thirty six dollars by the two crates produced.

21/04/2017 Job-Order Cost Accounting The total direct material, direct labor, and manufacturing overhead costs assigned to Job A-143 is two hundred thirty six dollars. Since this particular job included two units of production, the average cost per unit is one hundred eighteen dollars.

21/04/2017 Quick Check  Job WR53 at NW Fab, Inc. required RM200 of direct materials and 10 direct labor hours at RM15 per hour. Estimated total overhead for the year was RM760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? a. RM200. b. RM350. c. RM380. d. RM730. This problem may take a while to solve, but it will be well worth your time to work it carefully.

Job-Order Costing Document Flow Summary
21/04/2017 Job-Order Costing Document Flow Summary Let’s summarize the document flow in a job-order costing system. Now let’s look at the document flow in a job-order cost system.

21/04/2017 Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job. The entire accounting process begins when a sales order is received from a customer. Once the sales order is received, a production order is drafted to initiate work on a job.

21/04/2017 Job-Order Costing Document Flow Summary Materials used may be either direct or indirect. Direct materials Job Cost Sheets Materials Requisition From the production order, we are able to determine the direct and indirect materials we will need to requisition from the store room. We now know that the materials requisition form is a critical source document in the preparation of the job cost sheet. Direct material costs are charged to specific jobs. Indirect material costs are included in manufacturing overhead. Indirect materials Manufacturing Overhead Account

21/04/2017 Job-Order Costing Document Flow Summary An employee’s time may be either direct or indirect. Direct Labor Job Cost Sheets Employee Time Ticket As employees work on the job covered by the production order, time tickets are prepared for recording both direct and indirect labor costs. Direct labor costs are charged to specific jobs. Indirect labor costs are included in manufacturing overhead. Indirect Labor Manufacturing Overhead Account

21/04/2017 Job-Order Costing Document Flow Summary Employee Time Ticket Indirect Labor Other Actual OH Charges Manufacturing Overhead Account Applied Overhead Job Cost Sheets Indirect materials and indirect labor are parts of manufacturing overhead. Other overhead costs are charged to the manufacturing overhead account as incurred. As we have seen, overhead is applied to the job cost sheet. Indirect Material Materials Requisition

Job-Order System Cost Flows
21/04/2017 Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system. Now, let’s see how these amounts flow through the tee accounts of a company.

21/04/2017 Job-Order System Cost Flows Raw Materials Work in Process (Job Cost Sheet) Direct Materials Material Purchases Indirect Materials Mfg. Overhead Part I When raw materials are purchased they are debited to the raw materials inventory account and credited to accounts payable. Part II The cost of direct material requisitions is debited to Work in Process and added to the job cost sheet which serve as a subsidiary ledger. Part III Indirect materials are removed from raw materials inventory with a credit and debited to the manufacturing overhead account. Actual Applied

Cost Flows – Material Purchases
21/04/2017 Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account. Here is an example of the general journal entry to record the purchase of raw materials on account. We debit raw materials and credit accounts payable.

Cost Flows – Material Usage
21/04/2017 Cost Flows – Material Usage Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials. When materials are requisitioned from raw materials inventory, we debit work in process (job cost sheet) for direct materials, and debit manufacturing overhead for indirect materials.

21/04/2017 Job-Order System Cost Flows Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Labor Direct Materials Indirect Labor Mfg. Overhead Part I Direct labor is debited to Work in Process and added to the job cost sheet which serves as a subsidiary ledger and credited to salaries and wages payable. Part II Indirect labor is debited to Manufacturing Overhead and credited to salaries and wages payable. Actual Applied Indirect Materials

21/04/2017 Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead. Here is an example of the entry to charge direct and indirect labor from the salaries and wages payable account and place the amount in work in process inventory. The credit side of the entry is the various liability accounts, for example, Accounts Payable, Property Taxes Payable and other accounts.

21/04/2017 Job-Order System Cost Flows Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Labor Direct Materials Indirect Labor Direct Labor Mfg. Overhead Actual Applied Additional manufacturing overhead amounts are debited to the manufacturing overhead account. The debit side of the manufacturing overhead account represents actual overhead incurred during the period. Indirect Materials Indirect Labor Other Overhead

Cost Flows – Actual Overhead
21/04/2017 Cost Flows – Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. This journal entry represents the accumulation of other actual overhead amounts like property taxes on the manufacturing plant, insurance on the plant structure and depreciation of manufacturing assets.

21/04/2017 Job-Order System Cost Flows Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Labor Direct Materials Indirect Labor Direct Labor Mfg. Overhead Overhead Applied Overhead Applied to Work in Process Actual Applied When we apply overhead to a particular job, we debit work in process inventory (through the job cost sheet) and credit the manufacturing overhead account. Amounts on the credit side of the manufacturing overhead account represent overhead applied. It is not likely that actual and applied overhead will be equal during a period. We normally make an adjusting entry at the end of the period to equalize actual and applied overhead. Indirect Materials If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Indirect Labor Other Overhead

Cost Flows – Overhead Applied
21/04/2017 Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs. This journal entry shows the application of overhead to work in process inventory.

Nonmanufacturing Cost Flows
21/04/2017 Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. We previously discussed the treatment of selling, general, and administrative salaries expense during the period. Other nonmanufacturing costs are charged as expense in the period incurred.

Nonmanufacturing Cost Flows
21/04/2017 Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are incurred. This journal entry illustrates the expensing of nonmanufacturing costs in the current period.

21/04/2017 Job-Order System Cost Flows Work in Process (Job Cost Sheet) Finished Goods Cost of Goods Mfd. Direct Materials Direct Labor Overhead Applied The sum of all amounts transferred from work in process to finished goods represents the cost of goods manufactured for the period. As a job is completed, its costs are transferred from the work in process inventory to finished goods inventory.

Cost Flows – Cost of Goods Manufactured
21/04/2017 Cost Flows – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process. The transfer is accomplished with a debit to finished goods inventory and a credit to work in process inventory.

21/04/2017 Job-Order System Cost Flows Work in Process (Job Cost Sheet) Finished Goods Cost of Goods Sold Cost of Goods Mfd. Direct Materials Cost of Goods Mfd. Direct Labor Overhead Applied Cost of Goods Sold When a finished job is sold to the customer, the cost of that job is transferred from finished goods inventory to cost of good sold. Recall that cost of goods sold is an income statement account. If only a portion of the units associated with a particular job are shipped, then the unit cost figure from the job cost sheet is used to determine the amount of the journal entry.

21/04/2017 Cost Flows – Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods. Assuming the company uses a perpetual inventory system, two journal entries are required to record the sale. The first entry is to debit either accounts receivable or cash and credit sales for the selling price of the job completed. The second entry is to debit cost of goods sold and credit finished goods inventory for the cost incurred to complete the job. The difference between the selling price and cost is the company’s gross margin on the job.

Defining Under- and Overapplied Overhead
21/04/2017 Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period. When we apply overhead on the basis of a predetermined overhead rate, there is always the chance that the amount of overhead applied will be different from the amount of overhead actually incurred during the period. When there is a difference we refer to the amount as either underapplied overhead or overapplied overhead.

Overhead Application Example
21/04/2017 Overhead Application Example Sykt ABC’s actual overhead for the year was RM650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to Sykt ABC’s jobs during the year? Use Sykt ABC’s predetermined overhead rate of RM4.00 per direct labor hour. Part I Let’s assume that PearCo incurred actual overhead of six hundred fifty thousand dollars during the period and worked a total of one hundred seventy thousand direct labor hours. PearCo applies overhead at the rate of four dollars per direct labor hour worked. How much overhead did PearCo apply to jobs during the period? Part II PearCo would have applied six hundred eighty thousand dollars of overhead during the period. That is four dollars per direct labor hour times the one hundred seventy thousand direct labor hours actually worked. Can you see our problem? Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = RM4.00 per DLH × 170,000 DLH = RM680,000

Overhead Application Example
21/04/2017 Overhead Application Example Sykt ABC’s actual overhead for the year was RM650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to Sykt ABC’s jobs during the year? Use Sykt ABC’s predetermined overhead rate of RM4.00 per direct labor hour. Sykt ABC has overapplied overhead for the year by RM30,000. What will Sykt ABC do? The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. PearCo incurred actual overhead of six hundred fifty thousand dollars and applied six hundred and eighty thousand dollars, so the company overapplied thirty thousand dollars of overhead for the year. How do we dispose of this overapplied overhead? Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = RM4.00 per DLH × 170,000 DLH = RM680,000

21/04/2017 Quick Check  Sykt TT had actual manufacturing overhead costs of RM1,210,000 and a predetermined overhead rate of RM4.00 per machine hour. Sykt TT worked 290,000 machine hours during the period. Sykt TT’s manufacturing overhead is a. RM50,000 overapplied. b. RM50,000 underapplied. c. RM60,000 overapplied. d. RM60,000 underapplied. In this question we ask you to calculate the overapplied or underapplied overhead. Be careful with your intermediate computations.

21/04/2017 Quick Check  Sykt TT had actual manufacturing overhead costs of RM1,210,000 and a predetermined overhead rate of RM4.00 per machine hour. Sykt TT worked 290,000 machine hours during the period. Sykt TT’s manufacturing overhead is a. RM50,000 overapplied. b. RM50,000 underapplied. c. RM60,000 overapplied. d. RM60,000 underapplied. Overhead Applied RM4.00 per hour × 290,000 hours = RM1,160,000 Underapplied Overhead RM1,210,000 - RM1,160, = RM50,000 In this question we ask you to calculate the overapplied or underapplied overhead. Be careful with your intermediate computations.

Disposition of Under- or Overapplied Overhead
21/04/2017 Disposition of Under- or Overapplied Overhead RM30,000 may be closed directly to cost of goods sold. Cost of Goods Sold Sykt ABC’s Method Work in Process Finished Goods Cost of Goods Sold RM30,000 may be allocated to these accounts. OR There are two way to dispose of over- or underapplied overhead. The more complex approach is to allocate a portion of the over- or underapplied overhead to work in process inventory, finished goods inventory, and cost of goods sold. The allocation would be based on the relative dollar value in each of the three accounts involved. An easier way to deal with the problem, and the way PearCo uses, is to adjust cost of goods sold for the entire amount of the over- or underapplied overhead.

Disposition of Under- or Overapplied Overhead
21/04/2017 Disposition of Under- or Overapplied Overhead Sykt ABC’s Cost of Goods Sold Sykt ABC’s Mfg. Overhead Unadjusted Balance Actual overhead costs $650,000 Overhead applied to jobs $680,000 $30,000 Part I We know that PearCo applied six hundred eighty thousand dollars of overhead but incurred only six hundred fifty thousand dollars of actual overhead. The manufacturing overhead account has a thirty thousand dollar credit balance, representing the overapplied overhead during the year. PearCo chooses to adjust cost of goods sold for the entire amount. Part II The adjustment necessary at the end of the year is to debit the manufacturing overhead account for thirty thousand dollars and credit, or reduce, cost of goods sold by the same amount. Adjusted Balance $30,000 overapplied

Allocating Under- or Overapplied Overhead Between Accounts
21/04/2017 Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below: We may elect to allocate the over- or underapplied overhead to ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold. Let’s assume that at the end of the period PearCo had the following overhead costs in each of the accounts shown.

21/04/2017 Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of RM30,000 overapplied overhead: We will complete the following allocation of the thirty thousand dollars of overapplied overhead. We will reduce ending Work in Process Inventory by three thousand dollars, and the other accounts by the amounts shown.

21/04/2017 Allocating Under- or Overapplied Overhead Between Accounts The journal entry to record the allocation is to debit Manufacturing Overhead for thirty thousand dollars, credit Work in Process Inventory for three thousand dollars, credit Finished Goods Inventory for nine thousand dollars, and credit Cost of Goods Sold for eighteen thousand dollars.

Multiple Predetermined Overhead Rates
21/04/2017 Multiple Predetermined Overhead Rates To this point we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates. May be more complex but . . . May be more accurate because it reflects differences across departments. Part I We have assumed that the company has used one single predetermined overhead rate for the entire factory. Part II Many large companies use multiple predetermined overhead rates. Part III Using multiple overhead rates can cause more complexity. Part IV But when a company uses multiple rates it promotes accuracy in the allocation process because it gives formal recognition to differences across departments in how overhead costs are incurred.

Job-Order Costing in Service Companies
21/04/2017 Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies. In a law firm, each client represents a job. Legal forms and similar inputs represent direct materials. The time expended by attorneys represents direct labor. The costs of secretaries, clerks, rent, depreciation, and so forth, represent the overhead.

Specific orders - contract costing
21/04/2017 Specific orders - contract costing Contract costing is ‘a method of costing for specific orders in which costs are attributed to individual long-term contracts’ (Collis and Hussey, 2007, p. 262) Mainly used by businesses in the following sectors Construction (eg large housing projects, office block and other commercial/industrial premises) Civil engineering (eg roads, tunnels, bridges and dams)

21/04/2017

21/04/2017 Output Costing

Service / function Costing
21/04/2017 Service / function Costing

Exercise 1 In a particular period, for the whole production process
21/04/2017 Exercise 1 In a particular period, for the whole production process at Factory W, a total of 15,000 direct machine hours and 12,000 direct labour hours were used with total budgeted overhead amounted to RM120,000. Production involves a very machine intensive process. In order to complete Job X at Factory W, direct materials required is RM60 per unit. Direct labour rate per hour is RM30. Job X required 10 machine hours and 4 direct labour hours. Required: Calculate the cost of Job X.

Exercise 2 With reference to Exercise 1, if the production
21/04/2017 Exercise 2 With reference to Exercise 1, if the production process is labour intensive instead, what is the new cost of Job X ?

Exercise 3 Total budgeted overhead is RM200,000. Job X Job Y Job Z
21/04/2017 Exercise 3 Total budgeted overhead is RM200,000. Job X Job Y Job Z No. of units 1000 500 250 Direct materials RM50 per unit RM80 per unit RM100 per unit Direct labour hours per unit 1.5 3 4 Direct machine hours 1800 1200 2000

Exercise 4 Question 1 - Time related pay
21/04/2017 Exercise 4 Question 1 - Time related pay An employee’s basic week is 40 hours at a rate of pay of RM4 per hour. Overtime is paid at time and a half. The employees actually works 45 hours for a particular week. Required: What is the total wage cost for this employee for the week?

Exercise 5 Question 2 – Piece rate with guarantee
21/04/2017 Exercise 5 Question 2 – Piece rate with guarantee Jones is paid RM3.00 for every unit he produces. He has a weekly guarantee wage of RM600. Required: What is his weekly wage if he produces: 220 units 180 units

21/04/2017 Exercise 6

21/04/2017 Exercise 7

21/04/2017 Exercise 8

21/04/2017 THE END ADVISE & REMINDER: Now, your reading time….it’s your responsibility to read relevant chapter in the main text and related chapters in the additional recommended references !

21/04/2017 Costing Methods.

Similar presentations

Presentation on theme: "21/04/2017 Costing Methods."— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

21/04/2017 Costing Methods.

Similar presentations

Presentation on theme: "21/04/2017 Costing Methods."— Presentation transcript:

Similar presentations

About project

Feedback