Systems Design: Job-Order costing Chapter 3 Systems Design: Job-Order costing

Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Chapter 4 Many 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.

Job-Order Costing THE JOB Manufacturing overhead (OH) Applied to each job using a predetermined rate Direct material Traced directly to each job THE JOB Traced directly to each job Direct labor

Application 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 period Estimated total units in the allocation base for the coming period POHR = Ideally, the allocation base is a cost driver that causes overhead.

The 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. $

Overhead 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?

Predetermined Overhead Rate $640,000 Estimated Overhead Cost 160,000 Est. Direct Labor Hours = $4.00/Direct Labor Hour

Job-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.

Job-Order System Cost Flows Work in Process (Job Cost Sheet) Raw Materials Direct Materials Direct Materials Material Purchases Indirect Materials Mfg. Overhead Actual Applied Indirect Materials

Salaries and Wages Payable Overhead Applied to Work in Process Job-Order System Cost Flows Work in Process (Job Cost Sheet) Salaries and Wages Payable Direct Labor Direct Materials Indirect Labor Direct Labor Overhead Applied Mfg. Overhead Actual Applied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Indirect Materials Overhead Applied to Work in Process Indirect Labor

Now let’s complete the goods and sell them. Still with me? Job-Order System Cost Flows Now let’s complete the goods and sell them. Still with me?

Job-Order System Cost Flows Work in Process (Job Cost Sheet) Finished Goods Direct Materials Cost of Goods Mfd. Cost of Goods Mfd. Cost of Goods Sold Direct Labor Overhead Applied Cost of Goods Sold Cost of Goods Sold

Overhead 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.

Applied Overhead 170,000 Direct Labor hours x $4.00/Direct Labor hour $680,000

Manufacturing Overhead $680,000 Applied Overhead -650,000 Actual Overhead $30,000 Overapplied Overhead

Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

Overhead 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 is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.

Overhead 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. True b. False