CostAcc Procurement No.

of orders or cost of
materials
Departmentalization requires the use of Receiving Cost of materials, number of
different overhead rates for applying
units, number of orders.
manufacturing overhead.
Storeroom Cost of materials, number of
Two kinds of Departments requisition filled, number of
Producing Departments are those units handled
departments that are directly engaged in the Factory Office Number of employees, labor
manufacturing activities. hours, labor costs
Service Departments are those Personnel Number of employees, labor
departments that assist indirectly by hours, labor costs
rendering services. Building Floor space occupied
maintenance
Procedures of Departmentalization Power plant Kilowatt Hours of power
1. Calculate departmental predetermined
usage
overhead application rates.
2. Apply the predetermined overhead rates
Three Methods of Distributing or Reallocating
to production on a departmental basis.
Resources
3. Record actual manufacturing overhead
costs by departments in the Departmental
Direct Method the costs of each service
Overhead Analysis sheet.
department are allocated only to the
producing departments. It is the most often
Direct Departmental Overhead Costs are
used in practice because it is simple to apply.
those that can be easily traced to specific
(See page 238 for the computations)
departments. Examples:
Repairs and Maintenance
Step Method allocates service department
Indirect Labor
cost to all service departments as well as
Indirect Materials
producing departments. This method ignores
Depreciation of Equipment
the fact that the reciprocal services are used
between some service departments. (See
Indirect Departmental Cost allocating can
page 239 for the computations.)
be done through a survey of facilities and
Comprehensive Illustrations (See page 242
resources.
for the computations)
Indirect Departmental Distribution
Procedures:
Costs Bases 1. Select the service department serving the
Factory Rent Square Footage most other service departments. If they are
Depreciation - Factory Square Footage equal, select the department with the
Building highest costs.
Fire insurance on building Square Footage 2. Allocate the cost of the service
Repairs and maintenance Square Footage departments selected in step 1 to the
Telephone No. of producing departments and other service
employees or departments based on a relative
No. of telephone appointment level of the apportionment
Light Kilowatt hour base.
Freight-In Materials used 3. Allocate the costs of each remaining
service department selected in the same
Service Departmental Cost reallocated to manner as described in step 1.
the producing departments since these cost 4. Costs of service departments are never
cannot be directly identified to the products allocated to departments whose costs have
manufactured. already been collected.

Service Allocation Bases Reciprocal Method a way to adjust for the

reciprocal services provided among the
Departments
service departments. Service department
costs and service department reciprocal
service relationships are described by an
algebraic equation. The error is minimized.
(See page 240-241 for the computations.)
Journal Entry:
Work in Process
Applied Manufacturing Overhead
Dept.
To record the applied manufacturing
overhead charged to Dept. X
Manufacturing Overhead Dept. X
Manufacturing Overhead Control
To record the actual manufacturing overhead
charged to Dept. X
Traditional Costing System cost assigned to
products or services are estimated.
Activity Based Costing (ABC) measures a
variety of different factory activities and their
relationship to overhead costs. The reason
behind the system of coat allocation:
Products consume activities ; activities
consume resources. Most accurate method
so far.
Unit Costs under ABC
Procedure:
1. Identify the major activities that pertain to
the manufacture of specific products and
allocate manufacturing overhead costs to
activity centers.
2. Identify the costs drivers that accurately
measure each activitys contribution to the
finished product and compute the activity
based overhead rate.
3. Allocate manufacturing overhead costs for
each activity centers to products using the
activity-based overhead rates. (See page 273
276 for the computations)
Activity centers or activity pools a list of
individual activities may be quiet lengthy so
activities are group.
Cost drivers are usually organized by
categories rather than departments and the
number of drivers depends on the company
and the products its produces.
Identify the activities that cause the
overhead costs to be incurred.
Activity Based = Estimated Overhead
per Activity
Overhead Rate Expected Use of Cost of
Drivers per Act.
Advantages of ABC
1. ABC leads more costs pool used to allocate
overhead costs.
2. ABC leads to enhanced control overhead
costs.
3. ABC leads to better management
decisions.
Disadvantages of ABC
1. ABC can be expensive to use.
2. Some arbitrary allocations continue.
Factors in Implementing ABC Systems
1. Significant amount of indirect costs are
allocated using only one cost pool.
2. Product lines are greatly in volume and
manufacturing is complex.
3. Product line are numerous and require
different degrees of support services.
4. Products that a company Is well suited to
make and sell, show small profits; whereas
products that a company is less suited to
produce and sell show large profits.
5. The manufacturing process or the number
of products has changed significantly.
It is impractical to used ABC System when
the prime cost (Direct Materials plus Direct
Labor) is already 90%.
ABC in Service and Merchandising similar to
the ABC approach in manufacturing.
Completing the Cost Cycle
Recording the Cost Completed
Recorded in the Job Cost Sheet (Document
13)
Procedure:
1. All columns of the job cost sheet are
totaled and entered in the summary section.
2. The total cost of the job completed is
computed.
3. The unit cost is determined.
Journal Entry:
Finished Goods Inventory
Work In Process
To record the costs of completed job.
Cash/Accounts receivable
Sales
To record sales.
Cost of Goods Sold
Finished Goods Inventory
To record cost of goods sold.
Accounting for the Production Losses in a Job
Order
1. Scrap is the residue of manufacturing
process.
Journal entry:
At the Time of its Sale Scrap is low or
immaterial
Cash/Accounts receivable
Scrap Revenue
To record sale of scrap.
Scrap Attributable to a Specific Job
Cash/Accounts receivable
Work In Process Inventory
To record sale of scrap.
Scrap Common to All Jobs
Cash/Accounts receivable
Manufacturing Overhead Control
To record sale of scrap.
Recognizing Scrap at the Time of Its
Production
Scrap Attributable to a Specific Inventory
Scrap Inventory
Work In Process Inventory
To record scrap returned to storeroom.
Scrap Common to All Jobs
Scrap Inventory
Manufacturing Overhead Control
To record scrap returned to storeroom.
When the scrap is sold
Cash/Accounts Receivable
Scrap Inventory
To record sale of scrap.
Cash/Accounts Receivable
Work in Process inventory
Scrap Inventory
To record sale of scrap at less than its
recorded sale.
Materials
Manufacturing Overhead Control
To record scrap returned to storeroom.
Work in Process Inventory
Materials
To record reuse of scrap.
2. Spoiled Goods goods that have been
damaged through imperfect machining or
processing.
Journal Entry:
Spoilage Attributable to a Specific Job (Due
to Customers Specifications) page 308
Spoiled Goods inventory
Work in Process Inventory
To removed estimated disposal value of
spoiled goods from Work in Process.
Cash or Accounts Receivable
Spoiled Goods Inventory
To record sales of spoiled goods at net
disposal value.
Spoilage Common to All Jobs (Due to Internal
Failure)
Spoiled Goods inventory
Manufacturing Overhead Control
Work In Process Inventory
To removed estimated sales value of spoiled
goods and charged loss to Manufacturing
Overhead Control
(See Page 310 for the computations)
3. Defective Goods units of production that
fail to meet production standards but that
can be brought up to standard by adding
more materials, labor and overhead.
Rework costs- additional cost required to
bring these goods up to standard.
Journal Entry
Before considering rework costs
Work in Process Inventory
Materials
Payroll
Applied Mfg. Overhead
To record cost
Rework Cost charged to a Specific Job
 If the rework is normal and specific Applied Mfg. Overhead
job, the rework costs are charged in the To record cost of reworked defective units to
usual manner to the rework job. Manufacturing Overhead

Rework Cost charged to All Jobs (See page 313 for the computations)
If it is not attributable to a specific job,
the costs of the rework are charged to
manufacturing overhead and spread through
overhead allocation.

Manufacturing Overhead Control

Materials
Payroll