Management Accounting: The Cornerstone for Business Decisions Chapter 5 Job-Order Costing Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives Describe the differences between job-order costing and process costing and identify the types of firms that would use each method. Compute the predetermined overhead rate and use the rate to assign overhead to units or services produced. Identify and set up the source documents used with job-order costing.

Learning Objectives Describe the cost flows associated with job-order costing.. (Appendix) Prepare the journal entries associated with job-order costing.

Distinguish Between Job-Order and Process Costing Job-Order Costing Wide Variety of Services & Products Customized, Built to Order Distinct Unit or Number of Units Cost Accumulated to Job Price Based on Cost of Job Construction, Printing, Medical & Dental Services Process Costing Mass Produced, Homogenous Products Cost of Each Unit Virtually Identical Cost Accumulated to Department Food, Cement, Petroleum, Chemicals

What are the three costs of production? Trace to Job Direct Materials Direct Labor Apply Overhead

Define Normal and Actual Costing Normal costing assigns actual costs of direct materials and direct labor to units produced while applying overhead based on a predetermined estimate. Actual costing assigns actual costs of direct materials, direct labor and overhead to units produced.

Complete the Table with Either Actual or Applied Normal Actual Direct Materials Direct Labor Overhead Applied

Discuss the Importance of Unit Costs Necessary for valuing inventory Necessary to determine income Managers need it for decision making Service firms use it in similar ways Service firms, do not accumulate inventory Helps to develop cost efficiency which is vital

How to calculate the predetermined overhead rate. 5-1 At the beginning of the year, Argus Company estimated the following costs; Overhead $480,000 Direct labor cost $960,000 Argus uses normal costing and applies overhead on the basis of direct labor cost. (Direct labor cost is equal to total direct labor hours worked multiplied by the wage rate.) For the month of March, the direct labor cost was $62,000.

How to calculate the predetermined overhead rate. 5-1 REQUIRED: Calculate the predetermined overhead rate for the year. Calculate the overhead applied to production in March. Calculation: Predetermined overhead rate = $480,000 / $960,000 =0.50 or 50% of direct labor cost Overhead applied to March production = 0.50 x $62,000 = $31,000.

Comment on the Two Types of Overhead Actual overhead is recorded as it is incurred. Applied overhead is assigned to products based upon an estimated rate & an actual driver. It is highly unlikely the two will equal each other at the end of a period. The difference is a variance. If actual is greater than applied then it is referred to as underapplied, if actual is less than applied it is referred to as overapplied. The difference is often closed to Cost of Goods Sold.

How to reconcile actual overhead with applied overhead. 5-2 At the beginning of the year, Argus Company estimated the following costs; Overhead $480,000 Direct labor cost $960,000 At the end of the year, the actual data are: Overhead $480,500 Direct labor Cost $982,000 Argus uses normal costing and applies overhead on the basis of direct labor cost. A the end of the year, Cost of Goods Sold (before adjusting for any overhead variance) is $842,000.

How to reconcile actual overhead with applied overhead. 5-2 REQUIRED: Calculate the overhead variance for the year. Dispose of the variance by adjusting Cost of Goods Sold (COGS). Calculation: Predetermined overhead rate = $480,000 / $960,000 = 0.50 of direct labor cost Overhead applied for the year = 0.50 x $982,000 = $491,000.

How to reconcile actual overhead with applied overhead. 5-2 2. Actual overhead Applied overhead Overhead variance – overapplied Unadjusted COGS Add: Overhead variance – overapplied Adjusted COGS $480,500 491,000 $ (10,500) $842,000 10,500 $831,500

Overapplied and Underapplied Overhead

How to calculate predetermined departmental overhead rates and apply them to production. 5-3 At the beginning of the year, Sorrel Company estimated the following; Machining Assembly Total Overhead $240,000 $360,000 $600,000 Direct labor hours 135,000 240,000 375,000 Machine hours 200,000 200,000 Sorrel uses departmental rates in the machining department, overhead is applied on the basis of machine hours. In the assembly department, overhead is applied on the basis of direct labor hours. Actual data for the month of July are as follows: Overhead $22,000 $33,000 $55,000 Direct labor hours 11,500 22,400 33,900 Machine hours 16,900 16,900

How to calculate predetermined departmental overhead rates and apply them to production. 5-3 REQUIRED: Calculate the predetermined overhead rate for the machining and assembly departments. Calculate the overhead applied to each department for the month of July. By how much has each department’s overhead been overapplied? Underapplied? Calculation: Machining department rate = $240,000 / 200,000 = $1.20 per machine hour Assembly department rate = $360,000 / 240,000 = $1.50 per direct labor hour

How to calculate predetermined departmental overhead rates and apply them to production. 5-3 Calculation: Overhead applied to machining in July = $1.20 x 16,900 = $20,280 Overhead applied to assembly in July = $1.50 x 22,400 = $33,600 Machining Assembly Actual Overhead $22,000 $33,000 Applied Overhead 20,280 33,600 Under(Over)applied Overhead $ 1,720 $(600)

How to convert departmental data to plantwide data to calculate the overhead rate & apply overhead to production. 5-4 At the beginning of the year, Sorrel Company estimated the following: Machining Assembly Total Overhead $240,000 $360,000 $600,000 Direct labor hours 135,000 240,000 375,000 Machine hours 200,000 200,000 Sorrel has decided to use a plantwide overhead rate based on direct labor hours. Actual data for the month of July are as follows: Overhead $22,000 $33,000 $55,000 Direct labor hours 11,500 22,400 33,900 Machine hours 16,900 16,900

How to convert departmental data to plantwide data to calculate the overhead rate & apply overhead to production. 5-4 REQUIRED: Calculated the predetermined plantwide overhead rate. Calculated the overhead applied to production for the month of July. Calculate the overhead variance for the month of July. Calculation: Predetermined plantwide overhead rate = $600,000 / 375,000 = $1.60 per direct labor hour Overhead applied in July = $1.60 x 33,900 = $54,240 Overhead variance = Actual overhead – Applied overhead = $55,000 - $54,240 = $760 overapplied

Define a Job-Order Cost Sheet It is a source document, that keeps track of the costs of a job. Each job has its own job-order cost sheet to keep track of direct materials, direct labor, and overhead.

What is a materials requisitions form? It is the source document used to assign the cost of direct materials to a job. This is often automated and helps to insure that inventory to inventory balances are always correct.

Accounting for the Flow of Costs Purchases Finished Goods Warehouse Materials Inventory Materials Requisition Form Direct Labor & Overhead Cost of Goods Manufactured Completed Units Work-in-Process Sale takes place Cost of Goods Sold

Accounting for Overhead Since most businesses use normal costing, they apply overhead using a predetermined overhead rate. Actual overhead is recorded but NEVER recorded in the Work-in-Process. Actual overhead is recorded in a control account. Actual overhead and applied overhead are reconciled at the end of the period.

Produce a Schedule of Cost of Goods Manufactured Raw materials used $1,500 Direct labor 1,530 Actual overhead $415 Less: underapplied overhead 75 Overhead applied 340 Current manufacturing costs $3,370 Add: Beginning work-in-process Total manufacturing costs Less: Ending work-in-process 1,050 Cost of goods manufactured $2,320

Prepare a Statement of Cost of Goods Sold Beginning finished goods inventory $ 0 Cost of goods manufactured 2,320 Goods available for sale $2,320 Less: Ending finished goods inventory Normal cost of goods sold Add: underapplied overhead 75 Adjusted cost of goods sold $2,395

Prepare an Income Statement Sales $3,480 Less: Cost of Goods Sold 2,395 Gross Margin $1,085 Less: selling & administrative expenses: Selling expenses $200 Administrative expenses 550 750 Net operating income $ 335

Prepare entries for Johnson Leather Goods for February Purchased raw materials on account, $3,350. Requisition materials for use in production, $3,500. Recognize direct labor costing $2,520. Show as a liability in wages payable. Raw materials 3,350 Accounts payable 3,350 2. Work-in-process 3,500 Raw materials 3,500 3. Work-in-process 2,520 Wages payable 2,520

Prepare entries for Johnson Leather Goods for February Applied overhead to production a the rate of $2 per direct labor hour. A total of 280 direct labor hours were worked. Incurred actual overhead of $535. Completed the saddlebags job and transferred to finished goods. 4. Work-in-process 560 Overhead control 560 5. Overhead control 535 Various accounts 535 6. Finished goods 7,410 Work-in-process 7,410

Prepare entries for Johnson Leather Goods for February Sold the saddlebags job at cost plus 60%. Closed overapplied overhead to Cost of Goods Sold. 7. Cost of goods sold 7,410 Raw materials 7,410 Accounts receivable 11,856 Wages payable 11,856 8. Overhead control 25 Cost of goods sold 25