chapter 4 © 2008 mcgraw-hill ryerson limited.. types of costing systems used to determine product...
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CHAPTER 4
© 2008 McGraw-Hill Ryerson Limited.
© 2008 McGraw-Hill Ryerson Limited.
Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Chapter 5
© 2008 McGraw-Hill Ryerson Limited.
Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Job production
•Car repair after major accident•Custom built-in library shelves•Wedding Cake
Continuous production
•original production of the automobile•mass produced book shelves bought at Wal Mart•Cakes made at a commercial bakery
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Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
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Job-Order Costing
THE JOB
Directmaterial
Traced directly to each job
Direct labour
Traced directly
to each job
Manufacturingoverhead (OH)
Applied to eachjob using a
predeterminedrate
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Job-Order Cost Accounting
The primary document for tracking the costs associated with a given job is the
job cost sheet.
Let’s investigate
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PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 2Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LabourManufacturing OverheadTotal CostUnit Cost
Job-Order Cost Accounting
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Job-Order Cost AccountingPearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 2Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LabourManufacturing OverheadTotal CostUnit Cost
Let’s see one
A materials requisition form is used to
authorize the use of materials on a job.
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Materials Requisition Form
Will E. Delite
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Materials Requisition Form
Will E. Delite
Type, quantity, and total cost of material charged to job A-143.
Cost of material is charged to job A-143.
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Note
materials requisition form – Maintain control of assets.
• Prevent pilferage, loss, and waste.• Prevent supervisors from stockpiling materials “just
in case the stockroom runs out.”
– Trace costs of materials to particular jobs.– The materials requisition form, like all the
others illustrated today, can be electronic rather than hardcopy.
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Job-Order Cost Accounting
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Job-Order Cost Accounting
Workers use time tickets to record the time spent on each
job.
Let’s see one
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Employee Time Ticket
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Job-Order Cost Accounting
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Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct
labour hour (DLH).Let’s do it
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Job-Order Cost Accounting
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Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation 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.
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Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
Actual amount of the allocation base such as units produced, direct
labour hours, or machine hours incurred during the period.
Based on estimates, and determined before the
period begins.
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Application of Manufacturing Overhead
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity
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The Need for a Predetermined Manufacturing Overhead Rate
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
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Note
If we wait until the end of the period, we will know the actual TOTAL overhead cost. However, still we won’t know the actual overhead cost of a particular job. Why?– Overhead consists of costs that are either difficult or
impossible to trace to particular jobs.• Difficult-to-trace costs include the cost of indirect materials
like glue in a furniture factory.• Impossible-to-trace costs include fixed common costs like the
property taxes on the factory building and land.
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PearCo applies overhead based on direct labour hours. Total estimated overhead for the year is $640,000. Total estimated
labour cost is $1,400,000 and total estimated labour hours are 160,000.
What is PearCo’s predetermined overhead rate per hour?
Overhead Application Example
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For each direct labour hour worked on a job, $4.00 of factory overhead will be
applied to the job.
Overhead Application Example
POHR = $4.00 per DLH
$640,000
160,000 direct labour hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
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Overhead Application Example
What amount of overhead willPearCo apply to Job X-32?
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Overhead Application Example
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Overhead Application Example
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
MaterialsRequisition
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedmay be either
direct orindirect.
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
Direct Labour
Indirect Labour
An employee’stime may be eitherdirect or indirect.
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Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
OtherActual OHCharges
Job Cost Sheets
AppliedOverhead
MaterialsRequisition
IndirectMaterial
EmployeeTime Ticket
IndirectLabour
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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
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Job-Order System Cost FlowsWork in Process(Job Cost Sheet)
Direct Materials
Direct Materials
Indirect Materials
Indirect Materials
Actual Applied
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Job-Order System Cost Flows
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)Direct
Materials
Overhead Applied
Overheadapplied to Work inProcess
Direct Labour
Direct Labour
IndirectLabour
IndirectLabour
Indirect Materials
Actual AppliedIf actual and applied
manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
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Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost of Goods Sold
Cost ofGoodsSold
Cost ofGoodsSold
Job-Order System Cost FlowsWork in Process(Job Cost Sheet)Direct
MaterialsDirect Labour
Overhead Applied
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Overhead Application Example
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labour 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 labour hour.
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Overhead Application Example
SOLUTIONApplied Overhead = POHR × Actual Direct Labour 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 labour 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 labour hour.
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SOLUTIONApplied Overhead = POHR × Actual Direct Labour 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 labour 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 labour hour,
Overhead Application Example
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
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Work inProcess
FinishedGoods
Cost of Goods Sold
$30,000may be allocated
to these accounts.
Overapplied and Underapplied Manufacturing Overhead
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
PearCo’s Method
OR
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Overapplied and Underapplied Manufacturing Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
$30,000
$30,000
AdjustedBalance
OverheadAppliedto jobs
$680,000
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Quick Check What effect will the overapplied overhead have
on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
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Quick Check What effect will the overapplied overhead have
on PearCo’s net income?
a. Net income will increase.
b. Net income will be unaffected.
c. Net income will decrease.
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Overapplied and Underapplied Manufacturing Overhead: Summary
If ManufacturingOverhead is . . .
UNDERAPPLIED INCREASECost of Goods Sold
(Applied OH is lessthan actual OH)
OVERAPPLIED DECREASECost of Goods Sold
(Applied OH is greaterthan actual OH)
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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.
Quick Check
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Let’s look at summary journal entries for a job-
order costing system. We’ll omit
the numbers so that we can focus
on accounts.
Job-Order Costing: Typical Accounting Entries
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Cost Flows: Material Purchases
Raw material purchases are recorded in aninventory account.
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Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
Cost Flows: Material Usage
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Cost Flows: Labour
The cost of direct labour incurred increases Work in Process and the cost of indirect labour
increases Manufacturing Overhead.
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Cost Flows: Actual Overhead
In addition to indirect materials and indirect labour, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they
are incurred.
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Cost Flows: Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.
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Cost Flows: Period Expenses
Non-manufacturing costs (period expenses) are charged to expense as they are incurred.
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Cost Flows: Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods
from Work in Process.
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Cost Flows: Sales
When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods.