1. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Financial & Managerial Accounting The Basis for Business Decisions FOURTEENTH EDITION Williams Haka Bettner Carcello

2. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin JOB ORDER COST SYSTEMS AND OVERHEAD ALLOCATIONS Chapter 17

3. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 To explain the purposes of cost accounting systems.

4. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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

5. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 are the procedures and techniques used by management Cost Accounting Systems

6. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 To identify the processes for creating goods and services that are suited to job order costing.

7. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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. 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 Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms

8. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Receive orders from customers Begin production Order materials Schedule jobs Job Order Costing

9. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin THE JOB Direct materials Direct labor Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate (POHR) Job Order Costing

10. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 Job Order Costing

11. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Apply overhead to each job using a predeter- mined rate. Job Order Costing Manufacturing Overhead Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3

12. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 To explain the purpose and computation of overhead application rates for job order costing.

13. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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

14. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 Rates

15. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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

16. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Compuline, Inc., applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor hours are 30,000. What is Compuline’s predetermined overhead rate per hour? Overhead Application Rates

17. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin For each direct labor hour worked on a job, $12.00 of manufacturing overhead will be applied to the job. POHR = $12.00 per DLH $360,000 30,000 direct labor hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Overhead Application Rates

18. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 To describe the purpose and the content of a job cost sheet.

19. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate Job Order Costing

20. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Job Cost Sheet

21. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Job Cost Sheet A materials requisition form is used to authorize the use of materials on a job.

22. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Job Cost Sheet Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.

23. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Job Cost Sheet Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on direct labor cost.

24. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Job Order Costing Document Flow Summary Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Direct Labor Indirect Labor Employee Time Ticket

25. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 Job Order Costing Document Flow Summary

26. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Employee Time Ticket Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Overhead Applied with POHR Manufacturing Overhead Account Job Cost Sheets Job Order Costing Document Flow Summary

27. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To account for the flow of costs when using job order costing.

28. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Let’s examine the cost flows in a job order costing system. We will use T-accounts and start with materials. Flow of Costs in Job Costing

29. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Material Purchases Direct Material Mfg. Overhead Indirect Material Work in Process (Job Cost Sheet) Indirect Material Materials Inventory Flow of Costs in Job Costing

30. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Next let’s add labor costs and applied manufacturing overhead to the job order cost flows. Are you with me? Flow of Costs in Job Costing

31. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Direct Labor Mfg. Overhead Work in Process (Job Cost Sheet) Indirect Material Direct Material Overhead Applied to Work in Process Indirect Labor Direct Labor Overhead Applied Indirect Labor the difference is closed to cost of goods sold. When Actual Applied factory factory overhead overhead = / Labor Flow of Costs in Job Costing

32. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Over- or Underapplied Overhead

33. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Now let’s complete the goods and sell them. Still with me? Flow of Costs in Job Costing

34. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Material Direct Labor Overhead Applied Flow of Costs in Job Costing

35. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To define overhead-related activity cost pools and provide several examples.

36. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin One of the most difficult tasks in computing accurate unit costs lies in determining the proper amount of overhead cost to assign to each job. Assigning overhead is difficult. I agree! Activity-Based Costing (ABC)

37. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Level of Complexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing Activity-Based Costing (ABC)

38. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin In the ABC method, we recognize that many activities within a department drive overhead costs. In the ABC method, we recognize that many activities within a department drive overhead costs. A BC A C B Activity-Based Costing (ABC)

39. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Identify activity cost pools and assign indirect costs to those pools. Central idea... Products require activities. Activities consume resources. Activity-Based Costing (ABC) A BC A C B

40. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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. 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. The Benefits of ABC

41. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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. 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. Identifying Cost Drivers

42. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Overhead Actual Rate Activity × Rate = Estimated overhead costs in activity cost pool Estimated number of activity units 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: Activity-Based Costing Procedures

43. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO7 To demonstrate how activity bases are used to assign activity cost pools to units produced.

44. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Pear Company manufactures a product in regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Budgeted overhead for the current year is $2,000,000. Other information: First, determine the unit cost of each model using traditional costing methods. Traditional Costing vs. ABC Example

45. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Overhead Estimated overhead costs Rate Estimated activity = Overhead $2,000,000 Rate 40,000 DLH == $50 per DLH Traditional Costing

46. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin ABC will have different overhead per unit. Traditional Costing

47. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Pear Company plans to adopt activity-based costing. Using the following activity center data, determine the unit cost of the two products using activity-based costing. Activity-Based Costing

48. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Activity-Based Costing 400 deluxe + 800 regular = 1,200 total

49. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Activity-Based Costing

50. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Activity-Based Costing

51. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Let’s complete the table. Activity-Based Costing

52. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Activity-Based Costing

53. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Total overhead = $720,000 + $1,280,000 = $2,000,000 Recall that $2,000,000 was the original amount of overhead assigned to the products using traditional overhead costing. Activity-Based Costing

54. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Activity-Based Costing

55. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin This result is not uncommon when activity-based costing is used. Many companies have found that low- volume, specialized products have greater overhead costs than previously realized. Activity-Based Costing

56. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Costs and Cost Drivers in Activity-Based Costing

57. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ethics, Fraud, and Corporate Governance In addition to allocating manufacturing overhead costs to products, many companies allocate corporate overhead charges to their segments or divisions. Failure to allocate corporate overhead properly can result in misleading financial statement information.

58. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 17