Systems Design: Job-Order costing Chapter 3

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  Cost are traced or allocated to jobs.  Cost records must be maintained for each distinct product or job. Chapter 4

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical job order cost applications:  Special-order printing  Building construction Also used in the service industry  Hospitals  Law firms

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Job-Order Costing THE JOB Direct material Direct labor Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Sequence of Events in a Job-Order Costing System Receive orders from customers Schedule jobs Order materials Begin production

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 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. Sequence of Events in a Job-Order Costing System Direct Materials Direct Labor

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Apply overhead to each job using a predeter- mined rate. Sequence of Events in a Job-Order Costing System Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Job-Order Costing Document Flow Summary Job Cost Sheets Materials Requisition Direct material s Indirect materials Manufacturing Overhead Account Materials used may be either direct or indirect.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account Direct Labor Indirect Labor An employee’s time may be either direct or indirect.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Job-Order Costing Document Flow Summary Employee Time Ticket Job Cost Sheets Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Applied Overhead Manufacturing Overhead Account

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Application of Manufacturing Overhead Ideally, the allocation base is a cost driver that causes overhead.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Application of Manufacturing Overhead 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.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 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. $

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill PearCo 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 PearCo’s predetermined overhead rate per hour? Overhead Application Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 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 PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Application of Manufacturing Overhead Overhead applied = $4 per DLH × 8 DLH = $32 Overhead applied = POHR × Actual activity

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Raw Materials Material Purchases Direct Materials Mfg. Overhead Indirect Materials Job-Order System Cost Flows Work in Process (Job Cost Sheet) Indirect Materials ActualApplied

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Job-Order System Cost Flows Direct Labor Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Overhead Applied to Work in Process Indirect Labor Direct Labor Overhead Applied Indirect Labor Indirect Materials ActualApplied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 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 PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour, Overhead Application Example PearCo has overapplied overhead for the year by $30,000. What will PearCo do?

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold Overapplied and Underapplied Manufacturing Overhead PearCo’s Method OR

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Overapplied and Underapplied Manufacturing Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance $30,000 Adjusted Balance Overhead Applied to jobs $680,000

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 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. 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 1

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 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 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 Overhead Application Question 2