Job-Order Costing and Overhead Application

Chapter 4
Job-Order Costing and

Overhead Application
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Learning Objectives
1. Allocate support department costs to producing departments

using the Direct Method and Sequential Method.
Mowen/Hansen/Heitger, Managerial Accounting: The Cornerstone of Business Decision Making, 7th Edition. © 2018 Cengage. All
Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
Producing and Supporting Departments
• Nearly every company or factory has producing departments and support
departments
• Producing departments are directly responsible for creating the products or
services sold to customers
• Example: A public accounting firm might have producing departments
devoted to auditing, tax, and management advisory services
• In a factory, producing departments are those that work directly on the
products being manufactured, such as the grinding and assembly
departments
• Support departments provide essential services for producing departments,
but they do not actually make the product or service being sold
o Examples include the maintenance, grounds, engineering, housekeeping,
personnel, and photocopying departments
Steps for Determining Product Costs Using Predetermined
Departmental Overhead Rates (1 of 2)
Once the direct overhead costs of each department are determined, the next step is to assign
the support department costs to producing departments by using causal factors (drivers):
1. Departmentalize the firm.
2. Classify each department as a support department or a producing department.
3. Trace all overhead costs in the firm to a support department or a producing department.
4. Assign support department costs to the producing departments using drivers that measure
the consumption of support department services.
5. Calculate predetermined overhead rates for producing departments.
6. Assign overhead costs to the units of individual products using the predetermined overhead
rates.
Assigning Costs of Multiple Support Departments
• The three methods of assigning costs of multiple support departments to

producing departments are:
o the Direct method
o the Sequential method
o the Reciprocal method
• Companies must determine the extent of support department interaction and
weigh the individual costs and benefits of each method
Direct Method
• All factory costs must be included in product cost
• Since support departments do not make the product sold, their costs would
not be added to unit cost if they were not included in the cost of producing
departments
• The direct method is the quickest and easiest way to do this
Using the Direct Method (1 of 5)
Objective: Distribute all maintenance and power costs to Grinding and Assembly using
the direct method.
Direct method—Allocate maintenance and power costs only to Grinding and
Assembly.
After allocation—Zero cost in Maintenance and Power; all overhead cost is in Grinding
and Assembly.
Example 4.6: How to Assign Support Department
Costs by Using the Direct Method (1 of 3)
Departmental data:
Blank Support Support Producing Producing
Departments Departments for Departments for Departments for
for Power Maintenance Grinding Assembly
Direct overhead costs $ 250,000 $ 160,000 $100,000 $60,000

Expected activity: Blank Blank Blank Blank
Kilowatt-hours — 200,000 600,000 200,000
Maintenance hours 1,000 — 4,500 4,500
*Overhead costs that arc directly traceable to the department.

Required:
Using the direct method, assign the support department costs to the producing
departments.
Example 4.6: How to Assign Support Department
Costs by Using the Direct Method (2 of 3)
Solution:
Calculate usage or allocation ratios:
Blank Grinding Assembly
Power: 600,000
( 600,000 + 200,000 ) 0.75 —
200,000
( 600,000 + 200,000 ) — 0.25
4,500
(
Maintenance: 4,500 + 4,500
) 0.50 —
4,500
( 4,500 + 4,500 ) — 0.50
Example 4.6: How to Assign Support Department Costs
by Using the Direct Method (3 of 3)
Direct overhead costs $ 250,000 $ 160,000 $ 100,000 $ 60,000
Powera (250,000) — 187,500 62,500
Maintenanceb ________ (160,000) 80,000 80,000
Total $ 0 $ 0 $ 367,500 $ 202,500
aUsing the allocation ratios for Power: 0.75 × $250,000; 0.25 × $250,000.
bUsing the allocation ratios for Maintenance: 0.50 × $160,000; 0.50 × $160,000.
Assigning Costs of Multiple Support Departments Using
the Sequential Method
• The sequential (or step) method of allocation recognizes that interactions
among support departments occur
• The sequential method does not fully account for support department
interaction
• Cost allocations are performed in a step-down fashion, following a
predetermined ranking procedure
• The sequence is defined by ranking the support departments in order of the

amount of service rendered, from the greatest to the least
• Where degree of service is measured by the direct costs of each support
department
Suppose there are two support departments, Power and Maintenance, and two
producing departments, Grinding and Assembly, each with a "bucket" of directly
traceable overhead cost.
Objective: Distribute all maintenance and power costs to Grinding and

Assembly using the sequential method.
Sequential—Step 1: Rank service departments—#1 Power, #2 Maintenance.
Step 2: Distribute power to Maintenance, Grinding, and Assembly.
Assigning Costs of Multiple Support Departments Using
the Direct Method (4 of 5)
Then, distribute maintenance to Grinding and Assembly.
After allocation—Zero cost in Maintenance and Power, all overhead cost is in
Grinding and Assembly.
Example 4.7: How to Assign Support Department Costs
by Using the Sequential Method (1 of 3)
Departmental data:
Direct overhead costs* $ 250,000 $ 160,000 $100,000 $ 60,000
Expected activity: Blank Blank Blank Blank
Kilowatt-hours — 200,000 600,000 200,000
Maintenance hours 1,000 — 4,500 4,500
*Overhead costs that arc directly traceable to the department.
Required:
Using the direct method, assign the support department costs to the producing
departments.
Example 4.7: How to Assign Support Department Costs by Using
the Sequential Method (2 of 3)
Solution:
Calculate usage ratios:
Blank Maintenance Grinding Assembly
200,000 0.20 — —
Power: ( 200,000 + 600,000 + 200,000 )
600,000 — 0.60 —
( 200,000 + 600,000 + 200,000 )
200,000 — — 0.20
( 200,000 + 600,000 + 200,000 )
4,500 — 0.50 —
Maintenance:
( 4,500 + 4,500 )
4,500 — — 0.50
( 4.500 + 4.500 )
Example 4.7: How to Assign Support Department Costs by
Using the Sequential Method (3 of 3)

Direct com $ 250,000 $160,000 $100,000 $60,000
a
Power (250,000) 50,000 150,000 50,000
b
Maintenance (210,000) 105,000 105,000
—
Blank $ 0 $ 0 $355.000 $215,000
aUsing the usage ratios for Power; 0.20 × $250,000; 0.60 × $250,000; 0.20 × $250,000.
bUsing the usage ratios for Maintenance: 0.50 × $210,000; 0.50 × $210,000.

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Chapter 4

Job-Order Costing and

1. Allocate support department costs to producing departments

• The three methods of assigning costs of multiple support departments to

Direct overhead costs $ 250,000 $ 160,000 $100,000 $60,000

*Overhead costs that arc directly traceable to the department.

• The sequence is defined by ranking the support departments in order of the

Objective: Distribute all maintenance and power costs to Grinding and

Then, distribute maintenance to Grinding and Assembly.

*Overhead costs that arc directly traceable to the department.

Blank Support Support Producing Producing

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