1. Copyright © 2012 The McGraw-Hill Companies, Inc. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Job Order Cost Systems and Overhead Allocations Chapter 17

2. 17-2 Planning and control functions Providing products or services to customers Assessing the efficiency and effectiveness of operations Determining unit manufacturing costs Cost accounting systems provide information supporting decisions making the business successful Cost Accounting Systems

3. 17-3 Disclose inventories and cost of goods sold Track resources consumed by products and services Manage activities that consume resources Evaluate and reward employee performance Cost Accounting Systems Cost accounting systems are the procedures and techniques used by management

4. 17-4 Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job. Job Order Costing Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms

5. 17-5 THE JOB Direct materials Direct labor Traced directly to each job Job Order Cost Systems and the Creation of Goods and Services Manufacturing overhead (OH) Applied to each job using a predetermined rate (POHR)

6. 17-6 Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Direct Materials Direct Labor Apply overhead to each job using a predetermined rate. Job Order Cost Systems and the Creation of Goods and Services

7. 17-7 Estimated total manufacturing overhead cost for the coming period Estimated total units in the activity base for the coming period POHR = The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Ideally, the activity base is a cost driver that causes overhead. Overhead Application Rates

8. 17-8 Overhead applied = POHR × Actual activity Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the period. Based on estimates, and determined before the period begins. Overhead Application Rates

9. 17-9 A materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Flow of Costs in Job Costing Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Direct Material Indirect Material Materials Requisitioin Material Requisitioin Materials Requisitioni Materials Requisition

10. 17-10 Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Direct Labor Indirect Labor Employee Time Ticket Flow of Costs in Job Costing

11. 17-11 Employee Time Ticket Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Overhead Applied with POHR Manufacturing Overhead Account Job Cost Sheets Flow of Costs in Job Costing

12. 17-12 Over- or Underapplied Overhead

13. 17-13 Level of Complexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing Activity-Based Costing (ABC) A C B In the ABC method, we recognize that many activities within a department drive overhead costs.

14. 17-14 The Benefits of ABC More detailed measures of costs. Better understanding of activities. More accurate product costs for...  Pricing decisions.  Product elimination decisions.  Managing activities that cause costs. Benefits should always be compared to costs of implementation. A C B

15. 17-15 Identifying Cost Drivers Most cost drivers are related to either volume or complexity of production. Examples: machine time, machine setups, purchase orders, production orders. Three factors are considered in choosing a cost driver: Causal relationship. Benefits received. Reasonableness.

16. 17-16 Overhead Actual Rate Activity × Activity-Based Costing Procedures Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each activity. Compute overhead rate for each cost pool: Assign costs to products: Rate = Estimated overhead costs in activity cost pool Estimated number of activity units

17. 17-17 End of Chapter 17