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Job-Order Costing

Basic Costing Terminology


Several key points from prior lecture:
Cost Objects - including date, departments, customers, products, etc. Direct costs and tracing materials and labor Indirect costs and allocation - overhead

logically extended
Cost Pool any logical grouping of related cost objects Cost-allocation base a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs.

Costing Systems
Job-Costing: system accounting for distinct cost objects called Jobs. Each job may be different from the next, and consumes different resources
Wedding announcements, aircraft, televisions

Process-Costing: system accounting for mass production of identical or similar products


Oil refining, orange juice, soda pop

Job-Order Costing An Overview


Direct Materials

Job No. 1
Direct Labor Job No. 2 Job No. 3

Charge direct material and direct labor costs to each job as work is performed.

Manufacturing Overhead

Direct Manufacturing Costs


Direct Materials

Job No. 1
Direct Labor Job No. 2 Job No. 3

Manufacturing Overhead

Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.

The Job Cost Sheet


PearCo Job Cost Sheet
Job Number A - 143 Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount Date Initiated 3-4-05 Date Completed Units Completed Manufacturing Overhead Hours Rate Amount

Direct Labor Ticket Hours Amount

Cost Summary

Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

Units Shipped Date Number Balance

Measuring Direct Materials Cost

Will E. Delite

Measuring Direct Materials Cost

Measuring Direct Labor Costs

Job-Order Cost Accounting

Why Use an Allocation Base?


Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, direct material dollars or machine hours, is used to assign manufacturing overhead to individual jobs.

We use an allocation base because: 1. It is impossible or difficult to trace overhead costs to particular jobs.

2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production managers salary.

Manufacturing Overhead Application


The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
POHR =
Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period

Ideally, the allocation base is a cost driver that causes overhead.

The Need for a POHR


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.

Application of Manufacturing Overhead


Based on estimates, and determined before the period begins.

Overhead applied = POHR Actual activity


Actual amount of the allocation based upon the actual level of activity.

Overhead Application Rate


POHR =
Estimated total manufacturing overhead cost for the coming period

Estimated total units in the allocation base for the coming period
$640,000 160,000 direct labor hours (DLH)

POHR =

POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.

Job-Order Cost Accounting

Job-Order Cost Accounting

Interpreting the Average Unit Cost


The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.

Problems of Overhead Application


The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead.

Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.

Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

Practice with Overhead


Actual manufacturing overhead Budgeted machine hours Budgeted direct labor hours Budgeted direct labor rate Budgeted manufacturing oh Actual machine hours Actual direct labor hours Actual direct labor rate
POHR - Machine hours POHR - direct labor hours POHR - direct labor dollars

$340,000 10,000 20,000 $14 $364,000 11,000 18,000 $15

Job-Order System Cost Flows Word Documents


Fisher Company

Journal Entries
T-Accounts Over/Under-applied Overhead Cost of Goods Manufactured

Cost of Goods Sold


Income Statement

Overapplied and Underapplied Manufacturing Overhead - Summary


If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) DECREASE Cost of Goods Sold Close to Cost of Goods Sold INCREASE Cost of Goods Sold

Multiple Predetermined Overhead Rates


To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate.

Large companies often use multiple predetermined overhead rates.

May be more complex but ...

May be more accurate because it reflects differences across departments.