1. 4-1 Product and Service Costing: Overhead Application and Job-Order System Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University

2. 4-2 1.Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products. 2.Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment. 3.Compute a predetermined overhead rate, and use the rate to assign overhead to production. ObjectivesObjectives After studying this chapter, you should be able to:

3. 4-3 4.Explain the difference between job-order and process costing, and identify the source documents used in job-order costing. 5.Describe the cost flows associated with job- order costing, and prepare the journal entries. 6.Explain why multiple overhead rates may be preferred to a single, plantwide rate. ObjectivesObjectives

4. 4-4 Continuum of Services and Manufactured Products Pure Service Manufactured Product Bungee jumping Beauty Salon Restaurant Automobiles Software Cereals

5. 4-5 Features of Service Firms and Their Interface with the Cost Management System Feature Impact on Cost Management System Relationship to Business IntangibilityServices cannot be stored.There are no inventory accounts. Services cannot be protected through patents. There is a strong ethical code. Services cannot readily be displayed or communicated. Prices are difficult to set.Costs must be related to entire organization.

6. 4-6 Features of Service Firms and Their Interface with the Cost Management System Feature Impact on Cost Management System InseparabilityConsumer is involved in production. Cost are accounted for by customer type. Other customers are involved in production. Centralized mass production of services is difficult Systems must be generated to encourage consistent quality. Relationship to Business

7. 4-7 Features of Service Firms and Their Interface with the Cost Management System Feature Impact on Cost Management System HeterogeneityStandardization and quality control are difficult. A strong systems approach is needed. Productivity measurement is ongoing. TQM is critical. Relationship to Business

8. 4-8 Features of Service Firms and Their Interface with the Cost Management System Feature Impact on Cost Management System PerishabilityService benefit expire quickly. There are no inventories. Service may be repeated often for one customer. There needs to be a standardized system to handle repeat customers. Relationship to Business

9. 4-9 Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment Cost Accumulation Cost Measurement Cost Assignment Record Costs: Classify Costs: Assign to Cost Objects: Product 2 Product 1 Purchase materials Direct Materials Assemblers’ payroll Finishers’ payroll Direct Labor Overhead Supervisors’ Payroll Depreciation Utilities Property taxes Landscaping

10. 4-10 Cost Accumulation Cost accumulation refers to the recognition and recording of costs. The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a transaction. Data from these source documents can then be recorded in a database. Well-designed source documents can supply information in a flexible way.

11. 4-11 There are two commonly used ways to measure the costs associated with production: actual costing and normal costing. An actual cost system uses actual costs for direct materials, direct labor, and overhead to determine unit cost. Normal costing systems measure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor. Cost Measurement Cost measurement refers to classifying the cost.

12. 4-12 Rubber stops are made for cellos. The cost of rubber is $0.30 per ounce and two ounces are required per stop. The price of labor is $8 per hour and it takes.10 hour to make a stop. Thus, one stop should cost $1.40 calculated as follows: Example: Prime Costs $0.30 x 2 = $0.60 $8.00 x.10 = 0.80 $1.40

13. 4-13 Actual overhead$20,000$40,000$40,000 Actual units produced40,00040,000160,000 Per-unit overhead$0.50$1.00$0.25 April June August Actual overhead/ Actual production Actual overhead/ Actual production Example: Using Actual Overhead

14. 4-14 A predetermined overhead rate is calculated using the following formula: Overhead Application A Normal Costing View Overhead rate = Budgeted annual overhead Budgeted annual activity level Continuing with the cello example: Overhead rate = $90,000 225,000 = $0.40

15. 4-15 1.Units produced 2.Direct labor hours 3.Direct labor dollars 4.Machine hours 5.Direct materials Overhead Application Estimated Overhead Activity Driver

16. 4-16 Data on Engine Housing Cost of operating lathe$80,000 Total units produced20,000 Total machine hours used12,500 Simple Complicated Number of housings10,00010,000 Time on lathe0.25 MHr1 MHr Operating cost assigned using unit produced$4.00$4.00 Operating cost assigned using machine hours$1.60$6.40

17. 4-17 Choosing the Activity Level Expected activity level is simply the production level the firm expects to attain for the coming year. Normal activity level is the average activity usage that a firm experiences in the long term (normal volume is computed over more than one year). Theoretical activity level is the absolute maximum production activity of a manufacturing firm. Practical activity level is the maximum output that can be realized if everything operates efficiently.

18. 4-18 In attempting to understand the concept of applied overhead, there are two points that should be emphasized. 1.Applied overhead is the basis for computing per-unit overhead cost. 2.Applied overhead is rarely equal to a period’s actual overhead. Applied overhead = Overhead rate x Applied production activity Basic Concept of Overhead Application

19. 4-19 Normal Basic Concept of Overhead Application Measures of Activity Level Number of Units Time Expected Consumer Demand- Oriented Measures of Activity Level

20. 4-20 Normal Basic Concept of Overhead Application Measures of Activity Level Number of Units Time Theoretical Productive Capability Measures of Activity Level

21. 4-21 Suncalc, Inc. Example Suncalc, Inc. produces two unique, solar-powered products: a pocket calculator and a currency translator. The following estimated and actual data for 2004: Budgeted overhead$360,000 Normal activity (DLH)120,000 Activity (DLH)100,000 Actual overhead$320,000

22. 4-22 Suncalc, Inc. Example The firm bases it predetermined overhead rate on normal activity measured in direct labor hours: Predetermined overhead rate Budgeted overhead Normal activity = $360,000 120,000 DLH = $3 per DLH=

23. 4-23 Suncalc, Inc. Example Using the overhead rate, applied overhead for 2004 is: Applied overhead = Overhead rate x Actual activity usage = $3 per DLH x 100,000 DLH = $300,000

24. 4-24 Suncalc, Inc. Example Forty percent of the actual direct labor hours worked were used to produce 80,000 units of the pocket calculator and the remaining 60 percent was used to produced 90,000 units of the currency translator. Pocket Calculators Currency Translator Units produced80,00090,000 Direct labor hours40,00060,000 Overhead applied to production ($3 x DLH)$120,000$180,000 Overhead per unit$1.50$2.00

25. 4-25 The difference between actual overhead and applied overhead is called overhead variance. If actual overhead is greater than applied overhead, then the variance is called underapplied overhead. If applied overhead is greater than actual overhead, the the variance is called overapplied overhead. Underapplied and Overapplied Overhead

26. 4-26 The overhead variance is disposed of in one of two ways. 1.All overhead variance is allocated to cost of goods sold. 2.The overhead variance is allocated among work in process, finished goods, and cost of goods sold. Disposition of Overhead Variances

27. 4-27 Disposition of Overhead Variances Suncalc’s accounts had the following applied overhead balances for the end of 2004: Work-in- Process Inventory, $60,000; Finished Goods Inventory, $90,000; Cost of Goods Sold, $150,000. Suncale had $20,000 of underapplied overhead. The amount is allocated as follows: Work-in-Process Inventory: $60,000/$300,000 x $20,000 = $4,000 Finished Goods Inventory: $90,000/$300,000 x $20,000= $6,000 Cost of Goods Sold: $150,000/$300,000 x $20,000 = $10,000

28. 4-28 A Job-Order Cost Sheet Job Number 16 Date Ordered April 2, 2004 Date Completed April 24, 2004 Date Shipped April 25, 2004 For Benson Company Item Description Valves Quantity Completed 100 Direct Materials Direct Labor Overhead Requisition Number Amount Ticket Number Hours Rate Amount 12$300688$6$ 48 8$10$ 80 18 45072107 701010 100 $750$118$180 Direct materials$750 Direct labor118 Overhead180 Total cost $1,048 Unit cost $10.48

29. 4-29 Material Requisition Form Date Department Job Number Authorized Signature Description Quantity Cost/Unit Total Cost Jim Lawson Casing 100 $3 $300 Material Requisition Number 678 April 8, 2004 62 Grinding

30. 4-30 Job Time Ticket Authorized Signature Start Time Stop Time Total Time Hourly Rate Amount Job Number Jim Lawson Job Time Ticket Number 68 Employee Number Name Date 8:0010:002$6$1216 10:0011:0016617 11:0012:0016616 1:006:00563016 45 Ann Wilson April 12, 2004 Department Supervisor

31. 4-31 Accounting for Overhead Actual overhead costs are never assigned directly to jobs. Overhead is applied using a predetermined overhead rate. Estimated Overhead Overhead rate = Estimated Direct Labor Hours $900,000 90,000 DLH = $10 per direct labor hour

32. 4-32 1. Direct materials costing $2,500 were purchased on account. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 1 Materials Inventory 2 500 00 All Signs Company Accounts Payable 2 500 00

33. 4-33 All Signs Company 2.Direct materials costing $1,500 were requisitioned for use in production. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 2 Work in Process 1 500 00 Materials Inventory 1 500 00

34. 4-34 All Signs Company Job 101 Materials Req. No.Amount 1$ 300 2200 3 500 $1,000 Job 102 Materials Req. No.Amount 4$250 5250 3 $500

35. 4-35 All Signs Company 3.Direct labor costing $850 was recognized. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 3 Work-in-Process Inventory 850 00 Wages Payable 850 00

36. 4-36 All Signs Company Job 101 Materials Ticket Hours Rate Amount 115$10$150 22010200 32510 250 60$600 Job 102 Materials Ticket Hours Rate Amount 415$10$150 51010 100 25$250

37. 4-37 4.Overhead was applied to production at the rate of $4 per direct labor hour. A total of 85 direct labor hours were worked. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 4 Work-in-Process Inventory 340 00 All Signs Company Overhead Control 340 00

38. 4-38 5. Actual overhead costs of $415 were incurred: lease, $200; utilities, $50; depreciation, $100; accrued wages, $65. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 5Overhead Control 415 00 Lease Payable200 00 Utilities Payable50 00 Accumulated Depr.--Equipment100 00 Wages Payable65 00 All Signs Company

39. 4-39 All Signs Company 6. Job 101, with a total cost of $1,840, are completed and transferred to finished goods. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 6 Finished Goods Inventory 1 840 00 Work-in-Process Inventory 1 840 00

40. 4-40 Job Number 101 Date Ordered Jan. 1, 2004 Date Completed Jan. 2, 2004 Date Shipped Jan. 15, 2004 For Housing Development Item Description Street Signs Quantity Completed 20 Materials Direct Labor Overhead Requisition Number Amount Ticket Number Hours Rate Amount 1$300115$10$15015$4$ 60 220022010 200204 80 3 50032510250254100 $1,000$600$240 Direct materials$1,000 Direct labor$600 Overhead$240 Total cost $1,840 Unit cost $92 All Signs Company

41. 4-41 7.Sold Job 101 for $2,760. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. a. Cost of Goods Sold 1 840 00 b. Accounts Receivable 2 760 00 All Signs Company Finished Goods Inventory 1 840 00 Sales Revenue 2 760 00

42. 4-42 8. Underapplied overhead was closed to cost of goods sold. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 8 Cost of Goods Sold 75 00 All Signs Company Overhead Control 75 00

43. 4-43 All Signs Company Schedule of Cost of Goods Manufactured For the Month Ended January 31, 2004 Direct materials: Beginning direct materials inventory$ 0 Purchases of direct materials 2,500 Total direct materials available for use$2,500 Ending direct materials 1,000 Total direct materials used$1,500 Direct labor850 Manufacturing Overhead: Lease$ 200 Utilities50 Depreciation100 Indirect labor 65 $ 415 ContinuedContinued

44. 4-44 $ 415 Less: Underapplied overhead 75 Overhead applied 340 Current manufacturing costs$2,690 Add: Beginning work in process 0 Total manufacturing cost$2,690 Less: Ending work in process-1,050 Cost of goods manufactured$1,840

45. 4-45 Beginning finished goods inventory$ 0 Cost of goods manufactured 1,840 Cost of goods available for sale$1,840 Less: Ending finished goods inventory 0 Normal cost of goods sold$1,840 Add: Underapplied overhead 75 Adjusted cost of goods sold$1,915 All Signs Company Statement of Cost of Goods Sold For the Month Ended January 31, 2004

46. 4-46 All Signs Company Income Statement For the Month Ended January 31, 2004 Sales$2,760 Less: Cost of goods sold 1,915 Gross margin$ 845 Less selling and administrative expenses: Selling expenses$200 Administrative expenses 550 750 Operating income$ 95

47. 4-47 SINGLE VERSUS MULTIPLE OVERHEAD RATES Department A is labor-intensive and Department B is machine-intensive. Department A Department B Total Department A Department B Total Overhead costs$60,000$180,000$240,000 Direct labor hours15,0005,00020,000 Machine hours5,00015,0020,000

48. 4-48 SINGLE VERSUS MULTIPLE OVERHEAD RATES Department A Department B Total Department A Department B Total Prime costs$5,000$0$5,000 Direct labor hours5000500 Machine hour101 Units produced1,00001,000 Job 23 Department A Department B Total Department A Department B Total Prime costs$0$5,000$5,000 Direct labor hours011 Machine hours0500500 Units produced01,0001,000 Job 24

49. 4-49 SINGLE VERSUS MULTIPLE OVERHEAD RATES Department A Department B Overhead cost$60,000$180,000 Cost driver15,000 DLH15,000 MHr Department overhead rate$4/DLH$12/MHr Overhead applied to Job #23$2,000--- Overhead applied to Job #24---$6,000

50. 4-50 Chapter End of

51. 4-51