Contents BASIC DEFINITIONS

Contents BASIC DEFINITIONS
COST PRICE MODULE (FOR CONSTRUCTION CONTRACTS) COST ESTIMATING PROCESS & PROCEDURE COST ESTIMATING CLASSIFICATION COST ESTIMATING METHODOLOGIES FACTORS AFFECTING COST ESTIMATING ACCURACY CASE STUDIES

Basic Definitions CAPITAL COST ESTIMATE (CAPEX) REPRESENTS THE TOTAL CAPITAL COST OF THE PROJECT, INCLUDING ENGINEERING, MATERIAL, CONSTRUCTION, AND MANAGEMENT COSTS. ALLOWANCES: 2 Types: Escalation & Contingency Escalation: is allowance to provide for future increases in Known Uncertainties - that are likely to occur due to the variance in time between the development of the estimate and the delivery and installation of the items. Sources: (A) Market Conditions (B) Technological Changes (New materials such as corrosion resistance) (C) Governmental Action (special treatment of wastes ) (D) General Inflation

Basic Definitions CONTINGENCIES USED TO REDUCE THE RISK OF OVERRUN DUE TO “POTENTIAL” UNCERTAINTIES specific provision for un-foreseeable elements of cost within the defined project scope; It is never an allowance for changes that have already occurred and is not intended to cover substantial changes in the project scope (change orders). Contingency varies for only one reason - a change in the degree of uncertainty associated with an item. Sources INCOMPLETE PROJECT DEFINITION (quantities, specifications…) CURRENCY FLUCTUATION ERRORS ACTS OF GOD (RISK)

Basic Definitions DIRECT COSTS
COSTS DIRECTLY ATTRIBUTED TO A JOB OR A PIECE OF PROJECT EQUIPMENT

Basic Definitions INDIRECT COSTS
THESE ARE OFTEN REFERRED TO AS “OVERHEAD” COSTS AND CANNOT EASILY BE ALLOCATED TO ONE JOB OR PROJECTS. THE PROCESS OF RECOVERING OVERHEADS IS KNOWN AS “ ABSORPTION COSTING” . CLIENTS FOR LARGE CAPITAL PROJECTS ARE VERY INTERESTED IN PROPOSED OVERHEAD RATES, CHARGEABLE TO PROJECTS AND REQUIRED DETAILED OF HOW THE OVERHEADS ARE TO BE ALLOCATED.

Basic Definitions FIXED COSTS
COSTS ARE SAID TO BE FIXED WHEN THEY REMAIN UNCHANGED AND MUST CONTINUE TO BE INCURRED, EVEN THOUGH THE WORKLOAD FLUCTUATES, (eg. MANAGEMENT, SALARIES , RENT INSURANCE….ETC.

Basic Definitions VARIABLE COST
THESE ARE COSTS WHICH ARE INCURRED AT A RATE DEPENDING ON THE LEVEL OF THE WORK ACTIVITY. E.G - MATERIAL - CONSUMABLES - SPARE PARTS - UTILITIES (POWER, WATER, STEAM)

Cost Price Modle + + = COST DIRECT PRICE INDIRECT PROFIT DESIGN
MARKETING SALES ACCOUNTING PURCHASING MANAGEMENT WARRANTY LIABILITY ADMINISTRATION LABOUR MATERIAL COMPONENTS TOOLING MATCH SAFE INVESTMENT

Cost - Price Model X + + = + = CONSTRUCTION EQUIP.
DURATION (HOURS) X RATE $/HR X CONSUMABLE FACTOR + LABOR COST LABOR (MHRS) X $/HR X SUPERVISION FACTOR + MATERIAL COST + DELIVERY COST + PURCHASING & INSPECTION COST MATERIAL COST = DIRECT COST TOTAL DIRECT COST + OVERHEAD, MOB. & DEMOB., TEMPORARY FACILITIES , INSURANCE, ADMINISTRATION, MANAGEMENT, ENGINEERING,…ETC INDIRECT COST = TOTAL COST COST X PROFIT FACTOR PRICE PRICE

Cost - Price Model BP = MC + LEC + a + b + MU + contingencies
MC = cost of all materials supplied by contractor LEC = costs of labor and equipment to needed a = overhead elements inherent to this specific project type (e.g.. timing) b = common overhead elements inherent to almost any kind of contract x = coefficient relating BP to "a“, so that a = xBP y = coefficient relating BP to "b“, so that b = yBP MU = mark-up, where MU = zBP

Cost - Price Model BP = 1-z MC + LEC + contingency [1- (x + y + z)] OR
MC + LEC + a + b BP = + contingency 1-z Z will depend on market and economic factors (Interest, Competition, ROI, Business trend

Cost Estimating Process 1.0 Cost Estimation Purposes
BUDGET UPDATING/ REVISION NEW BUDGET PROPOSALS REVIEW BIDDERS RATES EVALUATE ALTERNATIVES / OPTIONS

Cost Estimating Process 2.0 Capital Cost Major Component
Screening Studies Basic Engineering (FEED) Detailed Engineering Procurement Services ENGINEERING Major Equipment Bulk Material Freight & Transportation DIRECT COST MATERIAL Preliminaries (Mobilisation, Site Facilities, Site Running Costs) Civil, Mechanical, E&I Works etc. Pre-commissioning / Commissioning CONSTRUCTION Owner Management Housing/Camp Fees Services INDIRECT COST OWNER COST

Cost Estimating Process 3.0 In-House Cost Estimate
Review / Discuss Scope of Work Basis / Strategy Exclusions Estimate Methodology Required Accuracy Review & Check Develop Cost Estimate Issue Estimate Customer Input / Request Output Quality Risks Contingency Cost Data Purchase Order Vendor Quotes Completed Projects Escalation Rates Construction Unit Rates Cost Est. Software Excel Worksheet Computer Tools

Cost Estimating Process
4.0 Estimating Procedure PREPARE ESTIMATING REQUIREMENTS PLANNING THE ESTIMATE STRUCTURE THE ESTIMATE DEVELOPING THE ESTIMATE DEVELOPING CONTINGENCY DOCUMENTING REVIEW / ISSUE ESTIMATE

Cost Estimate Classification
International Classification Practices Association of Cost Engineers (UK) ACostE Norwegian Project Management Association (NFP) American Society of Professional Estimators (ASPE) AACE Classification Standard ANSI Standard Z94.0 AACE Pre-1972 ADCO EMPD Classification Concession Estimate Class 4 +40/-20% Screening / Feasibility Order of Magnitude Estimate -30/+50 Order of Magnitude Estimate Order of Magnitude Estimate Class IV-30/+30 Class 5 Exploration Estimate Level 1 Feasibility Estimate Class 3 +30/-15% Conceptual / Prelim. Budget Study Estimate Study Estimate Class III -20/+20 Class 4 Authorization Estimate INCREASING PROJECT DEFINITION Budget Estimate -15/+30 Level 2 Class 3 Preliminary Estimate Budget Estimate Class II-10/+10 Class 2 +20/-10% Master Budget Master Control Estimate Level 3 Definitive Estimate Level 4 Class 2 Definitive Estimate -5/+15 Definitive Estimate Class I-5/+5 Class 1 +10/-5% Definitive / Control Budget Current Control Estimate Level 5 Detailed Estimate Class 1 Level 6 Extracted from “AACE International Recommended Practices and Standards”

Estimating Classification Order-of- Magnitude Method
1.0 Conceptual Estimates Order-of- Magnitude Method PREPARED BEFORE PROJECT STARTS HAZY INFORMATION DETAILS OF PROJECT YET TO BE DEVELOPED USEFUL FOR QUICK SCREENING AND PLANNING DECISIONS INTENDED ACCURACY + 35%

order-of- magnitude END-PRODUCT UNITS, THE RATIO METHOD, and
PHYSICAL DIMENSIONS IMETHOD. Order of magnitude estimates are very inaccurate. While the level of accuracy usually depends on the amount and quality of information available as well as the judgment and experience of the estimator, it is recommended that they be prepared with care, their limitations be recognized, and they be used with caution.

END-PRODUCT UNITS This methodology is generally used when enough historical data exists from similar projects in order to relate the end-product (capacity units) of a project to its costs. Examples of the relationship between costs and end-product units are: • The cost of building an electric generating plant and the plant's capacity in kilowatts; • The construction cost of a hospital and the number of patient beds; • The development cost of a software program and the number of function points (screens, reports, calculations, etc.) to be included in the application; and • The construction cost of a parking lot and the number of parking spaces required.

THE RATIO METHOD (Capacity Factoring)
is one in which the cost of a new proposed project is derived from the cost of a similar project of a known capacity. $B/$A = (CapB / CapA)e The exponent "e" (or the capacity factor) is actually the slope of the log-curve that is drawn to reflect the relationship between actual costs and capacities of two or more completed projects. If “e” < 1: economies of scale

The Physical Dimensions Method
This type of order of magnitude estimate is the most popular of all Commonly used for estimating a variety of projects in the building construction industry. It is usually based on some physical dimensions such as square foot, cubic foot or linear foot (or meters) or its volume in cubic feet; pipe lines may be estimated on a linear foot or mile basis.

Estimating Classification
2.0 Study Estimate Parametric Estimates PREPARED DURING PROJECT STUDY AND SCREENING PHASE BASED ON A GOOD OUTLINE PROJECT DEFINITION MAJOR PROJECT ELEMENTS SIZE / CAPACITY /VOLUME /AREA USEFUL FOR: SCREENING ALTERNATIVES /OPTIONS PRELIMINARY FEASIBILITY STUDY MANAGEMENT DECISION INTENDED ACCURACY + 20%

Parametric Estimates A parametric estimating model is a mathematical representation of one or more cost estimating relationships (CER's) that provide a logical and predictable correlation between the functional or physical characteristics of a project and its costs. (Gross enclosed floor area, Number of floors, Interior partitions, Roof area.) The key is to identify the significant project design parameters that can be defined with reasonable accuracy early in project scope development, and that are correlated with statistical significance to project costs. Both cost and design scope information must be identified and collected. It should be normalized for time, location, site conditions, project specifications, and cost scope.

it is necessary to do the following:
Parametric Estimates Drive regression of cost versus selected design parameters to identify the key cost drivers. it is necessary to do the following: • Have an effective cost accounting system. • Prepare a database from the accounting history. • Identify the different multipliers required to normalize the data (location factors, inflation factors, and project type factors). • Exclude outliers. • Do statistical analysis to find cost estimating relationships. • Apply required multipliers. • Prepare a template.

3.0 Budget Estimate DEVELOPED DURING ENGINEERING PHASE 10-20% OF ENGINEERING BASED ON - WELL DEFINED DESIGN CRITERIA. INTENDED ACCURACY + 15%

Budget Estimate It should be in considerable detail to conform to the project data that has been made available from continuing project engineering and design studies on the important features and from more extensive engineering geological investigations of site conditions. mainly for use in the proper preparation of construction plans and specifications, and a review of project economics. unexpected site and foundation conditions should be practically resolved It should be clear by now that a sound and realistic cost estimate, depends greatly on the accuracy and completeness of the information that is made available, and the time allowed for doing the work.

4.0 Definitive Estimate MOST DESIGN WORK COMPLETED. ALL MAJOR CONTRACTS / PURCHASE ORDER HAVE BEEN PLACED. USED TO UPDATE BUDGET FOR THE THE PURPOSE OF COST CONTROL. INTENDED ACCURACY %

more advanced and precise cost estimates
Definitive Estimate more advanced and precise cost estimates based on complete plans and specifications included a complete list of the definite work items in the bid forms, which are used mainly as the basis for awarding contracts and for making payments on contract work

Cost Engineering, Vol. 46, No. 08, AACE International, 2004
General Case The Process of Estimating the Construction Cost of a Secondary Clarifier for a Wastewater Treatment Plant James L. Matthews Adapted from Cost Engineering, Vol. 46, No. 08, AACE International, 2004

The secondary clarifier's function is to
separate solids from wastewater by serving as a settling tank.

The purpose of this case is to better explain the process that the estimator must go through to properly prepare a detailed estimate of a wastewater treatment plant process unit. The unit as outlined is one of the main treatment steps in treating raw wastewater prior to discharge to streams or river or in some cases recycled to be used as irrigation water. The clarifier is one of the simpler units but the conditions which the estimator must take into account in determining the actual construction cost are more defined in relationship to the surrounding area, adjacent process units and overall constructability of the unit. The estimator must address several conditions during the process and conferring with the design team is a must in determining the actual scope of the design.

The estimator should pay close attention to the structural aspects of the tank and the excavation requirements as these will be a major portion of the overall cost of the project. Circular wall construction is in many ways more costly than rectangular wall construction and both the labor productivity and materials must be addressed at the time of take-off. Also, any special requirements and other tie-ins to other process units need to be accounted for before the final estimate is produced. For the purpose of this case, assume that the project will consist of a single 100-foot diameter secondary clarifier.

CSI Subdivisions Administrative Requirements Temporary Facilities and Controls Earthwork Foundation and Load Bearing Elements Concrete Forms and Accessories Concrete Reinforcement Cast-in-Place Concrete Metal Fabrications 07100 – Damp-proofing and Waterproofing Paints and Coatings Wastewater Treatment and

Disposal Equipment Piping Valves Electrical

01300 Administrative Requirements
Day, Week or Month 01500 Temporary Facilities and Controls 02300 Earthwork Cubic Yard (cy) 02450 Foundation and Load Bearing Elements - Piles Vertical Linear Feet (vlf) 03100 Concrete Forms and Accessories Square Foot of Contact Area (sfca) 03200 Concrete Reinforcement Tons or Pounds (lbs) 03300 Cast-In-Place Concrete 05500 Metal Fabrications Each (ea) or Tons 07100 Dampproofing and Waterproofing Square Foot (sf) 09900 Paints and Coatings 11300 Wastewater Treatment and Disposal Equip. Each (ea) 15100 Piping Linear Foot (lf) 15110 Valves 16100 Electrical Each (ea), Linear Foot (lf) or Lump Sum (ls)

Estimating Steps Before beginning the estimate, the estimator must become familiar with the project scope, drawings, and specifications. The estimator should meet with the design team to review these items in detail and ensure the documents are clear, prior to preparing quantity take-offs. If there are issues either above ground or underground that the contractor will encounter during construction, or any other circumstances that will affect the bid price, the estimator should take care of. (Normalization for this specific project) verify the local wage rates, including all fringes, so he or she can adjust the rate table used in preparation of the estimate for the particular project area.

In the conceptual stage of the project
the estimator will need to make assumptions on materials, quantities, overall size of some of the piping determine the need for piles or special dewatering during construction. excavation, storage, and disposal of earthen material review the equipment specifications prepare the information to send to the appropriate vendors to request actual budget quotes to use in the estimate.

In the actual quantity take-offs.
excavation Rebar crew productivity Wall construction the concrete pour requirements quantity of concrete finishing

Effects of Geographical and Site Specific Location of Process
Wage rate, Transportation, Existence of other utilities, Surrounding area. All this may affect the design and/or the method of construction used, hence the cost.

Season/Schedule Effects of the Process Work
Seasonal weather, Process schedule (night shifts only), Labor productivity, Bulk Material delivery schedule,

Assembling the take-off quantities and material list.
Site demolition, Excavation (hand or mechanical), Backfilling (Swell factor for un-compacted fill), Hauling Foundation Requirements Are piles needed, Pile driving machines, Under-slab piping, Encasement, Formwork bracing

Clarifier mechanism needs to be estimated
Request a unit price from manufacturer, add assembly labor, cranes (may be add to overall if needed), welding material, Determining the Electrical Requirement. Power & control wiring for the drive unit, valves, lighting. Corrosive environment,

Contingencies Depth of the process unit excavation,
Unexpected groundwater intrusion because of depth, Unsuitable soil conditions resulting in piles, Installation of sheet-piling versus laid back slopes, Material pricing and delivery schedule, Work force availability, Existing utilities encountered and mandated shut downs for tie-ins, and Contractor familiarity with this type of construction

Cost Estimating Methodology
Example: (Process Equipment)

Cost Estimating Methodology What is Process Equipment
Package Units chemical Dosing Water Treatment HVAC Equipment PROCESS EQUIPMENT Engineered Equipment Columns Vessels Reactors Tanks Standard Equipment Pumps Compressors Fans

Estimating Equipment Cost Methodologies
(Direct Cost) BUDGET PRICE PRICE TABLES PURCHASE ORDERS (FROM PREVIOUS JOBS) PRICE CURVES CALCULATION BASED EXPONENTIAL METHODS (COSTS SCALING)

Estimating Methodologies Equipment Cost (Direct Cost)
ADJUSTMENT TO THE NEW NEW CONDITIONS Cost of Spare Parts Freight, Insurance, Transportation Cost Currency & Exchange Rate Exclusions Escalation Formula Scaling Factor SOURCE OF DATA BUDGET PRICE PURCHASE ORDER BUDGET QUOTATION COST CURVES

Estimating Methodologies Estimating Equipment (Scaling Factor)
COST E2 E1 x COST E2 = COST E1 X (size E2/ size E1) SIZE

Estimating Methodologies Estimating Equipment Cost Calculation
VESSEL WIGHT MANHOLE NOZZLES Shell weight =  x D x L x t x s.g. = W1 Kg Heads weight = 2 x 1.3 x D x t x s.g.= W2 Kg Others: Internals = W3 Kg Supports = W4 Kg Nozzles = W5 Kg Manhole = W6 Kg Total Weight W Kg Estimated Cost = W (Kg) X Unit Cost (Cost/Kg) D HEAD SHELL L

Material Selection Impact on Equipment
FOB-COST VS WEIGHT CURVE - PRESS. VESSEL FOB-VALUE S.STEEL V1 C.STEEL V2 W WEIGHT Kg

Factors Affecting Project Final Cost
1.0 SCOPE OF WORK CLARITY OF SCOPE DEFINITION CHANGES IN SCOPE 2.0 TECHNICAL FACTORS DESIGN STANDARDS & PRACTICES SAFETY & ENVIRONMENT REQUIREMENTS SKILLS/COMPETENCIES 3.0 OTHERS PROJECT TIME FRAME/SCHEDULE INTERFACES WITH OTHER OPCOS PROJECT ORGANIZATION CURRENCY EXCHANGE RATES MARKET CONDITIONS

Case Study 1 + 7.00 mtr T- 1001 + 5.0 mtr + 0.00 mtr
TANK T-1001 NEEDS TO BE RE-PAINTED (EXTERNAL). MAINTENANCE RECEIVED A QUOTATION FOR BLAST-CLEANING AND PAINTING OF THE TANK. THE QUOTE EXCLUDES THE PROVISION OF THE SCAFFOLDING, ASSUMED TO BE PROVIDED BY THE OWNER. THE JOB IS PLANNED TO START ON MONDAY 1ST MAY AND WILL TAKE 10 WORKING DAYS. THE MAINTENANCE DEPARTMENT REQUESTED YOU TO PROVIDE AN ESTIMATE OF THE COST FOR THE SCAFFOLDING.

Case Study 1 THERE IS A CURRENT ‘SCHEDULE OF RATES’ CONTRACT WITH A SPECIALIZE COMPANY FOR PROVIDING OF SCAFFOLDING

Case Study 1

Case Study 1 STEPS TO BE TAKEN 1.0 MAKE A (SIMPLE) WORK PLAN
2.0 DEVELOP SCOPE OF WORK 3.0 CALCULATE QUANTITY OF EACH ACTIVITY 4.0 APPLY APPLICABLE UNIT RATES 5.0 CALCULATE TOTAL COST

Case Study 1 WORKPLAN: SCAFFOLDING FOR BLASTING/PAINTING T-1001.Dia 5 Mtr H =7 Mtr 1.0 ERECT STANDARD SCAFFOLDING (NO HEAVY EQT. ETC. INVOLVED) AROUND TANK. 2.0 PROVIDE WORKING FLOORS. FOR EASY WORKING AT VERTICAL CENTERS OF 2.0 Mtr. 3.0 FOR ENVIRONMENTAL REASONS PROVIDE FLEXIBLE SHEETING AROUND SCAFFOLDING. 4.0 PROVIDE 3 LADDERS 5.0 APPROVAL SAFETY ADVISER 6.0 SCAFFOLDING SHOULD BE READY BEFORE START OF THE WORK ON MONDAY 1ST MAY (WK18).

Case Study 1 WORK SCHEDULE: START 1/5 WK17 WK18 W/E WK19 W/E WK 20
Blasting/painting Scaffolding Ready Start Dismantling Scaffolding Renting Period Scaffolding (16 Calendar Days )

Case Study 1 D (=d+4) d Volume Scaffolding: Õ/4 (D2 - d2) x H
Õ/4( ) x 7 = 307 m3 (S400) Work Floor: each: Õ/4(D2 - d2) Õ/4(92- 52)= 44m2 Total 3 x44m2 = 132m2 (WFR) Flexible Sheeting ÕD x H Õ x 9 x m (ZR) Ladder: 3 x 6 m1 = 18m (LA) +9 +6 Work Floor +4 +2

Case Study 1 Cost Estimate Details

Case Study 1 POINTERS UNDERSTAND PROJECT REQUIREMENTS BEFORE DEFINING SCOPE. UNDERSTAND METHOD OF MEASUREMENT OF A ‘SCHEDULE OF RATE CONTRACT. SELECT OPTIMUM IMPLEMENTATION PLAN.

Case Study 2 THE FOLLOWING COST INFORMATION IS AVAILABLE OF A SPECIFIC EQUIPMENT ITEM: SIZE F.O.B COST 100 M3/hr US$ 50,000 200 M3/hr US$ 80,000 QUESTION: WHAT IS THE ESTIMATED COST FOR THE EQUIPMENT ITEM WITH A CAPACITY OF 300 M3/HR?

Estimating Equipment Cost Calculation
Direct Cost Estimating Equipment Cost Calculation COST E2 E1 x COST E2 = COST E1 X (size E2/ size E1) SIZE

Case Study 2 THE SOLUTION: 1) = 80,000 50,000 2) 2 = 1.60
1) = 80,000 50,000 2) = 1.60 3) LOG2 x (X) = LOG 1.60 4) x (X) = 0.204 5) (X) =0.678 Estimated Cost: X US$80, = US$105,000 (X) (X) (0.678)

Job-Order Production and Costing
Firms operating in job-order industries produce a wide-variety of services or products that are quite distinct from each other. Example industries: Printing Furniture making Automobile repair Medical and dental services Beautician services Construction

Job-Order Production and Costing
The key feature is that the cost of one job differs from that of another job and must be kept track of separately.

Process Production and Costing
Firms in process industries mass-produce large quantities of similar or homogeneous products. Example industries: Food Cement Petroleum Chemicals

Process Production and Costing
The key feature is that the cost of one unit of a product is identical to the cost of another.

Production Costs in Job-Order Costing
Direct Materials Direct Labor Job #1 Job #2 Job #3 Direct materials and direct labor are fairly easy to trace to individual jobs.

Production Costs in Job-Order Costing
Overhead Overhead is not so easy to trace to individual jobs. Instead overhead is applied to production.

Actual Costing Actual costs of direct materials, direct labor, and overhead are used to determine unit cost. Actual overhead can be hard to track

Problems With Actual Costing and Overhead
Many overhead costs are not incurred uniformly through the year Uneven production levels Give rise to fluctuating unit overhead costs

Normal Costing Determines unit cost by adding actual direct materials, actual direct labor, and estimated overhead. Virtually all firms use normal costing.

Importance of Unit Costs to Manufacturing Firms
Unit costs are essential for: Valuing inventory Determining income Making important decisions

Importance of Unit Costs to Service Firms
Unit costs are used to determine: profitability Feasibility of introducing new services

Normal Costing and Estimating Overhead
Applying overhead is a three step process: Calculate the predetermined overhead rate. Apply overhead to production throughout the year. Reconcile the difference between the total actual overhead incurred during the year and the total overhead applied to production.

Calculate the Predetermined Overhead Rate
Formula: Estimated Annual Overhead Overhead Rate = Firm’s best estimate of manufacturing-related costs, such as factory-related costs, indirect materials, and indirect labor.

Formula: Estimated Annual Overhead Overhead Rate = Estimated Annual Activity Level Also called the “Cost Driver”

Formula: Estimated Annual Overhead Overhead Rate = Estimated Annual Activity Level Both overhead and activity level are estimated because the overhead rate must be calculated at the beginning of the year.

Applying Overhead to Production
Formula: Applied Overhead Predetermined overhead rate Actual activity level = x

Over or Underapplied Overhead
Actual Overhead Applied Overhead Underapplied Overhead > = Actual Overhead Applied Overhead Overapplied Overhead < =

Disposition of Overhead Variance
At year end, costs reported on the financial statements must be actual, not estimated, amounts. Overhead Variance is assigned to Cost of Goods Sold

Disposition of Under and Overapplied Overhead
Actual Overhead Applied Overhead Underapplied Overhead > = The amount of the underapplied overhead would be ADDED to Cost of Goods Sold

Disposition of Under and Overapplied Overhead
Actual Overhead Applied Overhead Underapplied Overhead > = Actual Overhead Applied Overhead Overapplied Overhead < = The amount of the overapplied overhead would be SUBTRACTED from Cost of Goods Sold

Departmental Overhead Rates
Plantwide Overhead Rate A single overhead rate calculated using all estimated overhead for a factory and dividing by the estimated activity for the entire plant Departmental Overhead Rate Estimated overhead for a department divided by the estimated activity level for that same department

Overhead Rates Machining Dept. overhead rate Estimated Overhead =
Estimated Machine Hours Machining Department’s overhead is applied on the basis of machine hours

Unit Costs in the Job-Order System
Unit cost of a job is the total cost of: Materials used on the job (Direct Materials) Labor worked on the job (Direct Labor) Applied overhead

Job-Order Cost Sheet Contains all information pertinent to a job
Job description Cost of materials, labor, and overhead Jobs are named or numbered Total of all unfinished job-order cost sheets should equal the ending balance of the Work in Process account

Materials Requisition Form
Provides information for assigning direct materials costs to jobs Useful for maintaining proper control over a firm’s inventory of direct materials

Job Time Tickets Employees fill out a time ticket that identifies:
His or her name Wage rate Hours worked on each job Cost accounting department posts the cost of direct labor to individual jobs

Source Documents as Sources for Account Balances
Work in Process Total of all the job-order cost sheets for the unfinished jobs. Finished Goods Total of all the job-order cost sheets for the finished but unsold jobs. Cost of Goods Sold Total of all the job-order cost sheets for the sold jobs.

Accounting for Materials
Purchases are added to Raw Materials Inventory account As they are used in production, direct materials are moved from Raw Materials to Work in Process Materials used in production are classified by job and recorded in job-order cost sheets Raw Materials Purchases Direct Materials used in production

Accounting for Direct Labor Cost
Time tickets indicate the amount of labor spent on each job These labor costs are added to the job-order cost sheets Total of all the direct labor from all the jobs is recorded as a debit in the Work in Process account Work in Process Direct Materials Direct Labor

Accounting for Overhead
Normal costing is used Actual overhead is not assigned directly to jobs Overhead is applied to each job using a predetermined rate. Work in Process Direct Materials Direct Labor Applied Overhead

Accounting for Actual Overhead Costs
Never enters the Work in Process account Costs are recorded as debits in the Manufacturing Overhead control account At the end of the period, actual overhead is reconciled with applied overhead

Accounting for Finished Goods
Costs of completed jobs are transferred from the Work in Process account to the Finished Goods account Work in Process Finished Goods Direct Materials Completed jobs Completed jobs Direct Labor Applied Overhead

Accounting for Sold Goods
Once the job is sold, it is added to the cost of goods sold which is reported on the Income Statement Finished Goods Cost of Goods Sold Completed jobs Sold jobs Sold jobs

Cost of Goods Manufactured Statement
To ensure the accuracy in computing these costs, a cost of goods manufactured statement is prepared

Accounting for Cost of Goods Sold
When jobs are sold, Finished Goods inventory is decreased Cost of Goods Sold is increased The selling price is recognized by: Increasing (crediting) Sales Revenue Increasing (debiting) Accounts Receivable (or Cash)

Normal and Adjusted Cost of Goods Sold
Normal Cost of Goods Sold Cost of Goods Sold before an adjustment for an overhead variance Adjusted Cost of Goods Sold Cost of Goods Sold after adjusting for an overhead variance

Accounting for Nonmanufacturing Costs
Manufacturing costs are not the only costs incurred by a firm Selling and general administrative are period costs These period costs are shown on the Income Statement

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