Systems Design: Job-Order Costing

2010 The McGraw-Hill Companies, Inc.

 Learning Objective 1

Distinguish between
process costing and job-
order costing and identify
companies that would use
each costing method.

McGraw-Hill/Irwin Slide 2
 Types of Product Costing Systems

Process Job-order
Costing Costing

A company produces many units of a single

product.
One unit of product is indistinguishable from
other units of product.
The identical nature of each unit of product enables
assigning the same average cost per unit.

McGraw-Hill/Irwin Slide 3
 Types of Product Costing Systems

Process Job-order
Costing Costing

A company produces many units of a single

product.companies:
Example
1.One
Weyerhaeuser (paper
unit of product manufacturing) from
is indistinguishable
2.other units Aluminum
Reynolds of product.(refining aluminum ingots)
3.The
Coca-Cola
identical(mixing
nature and bottling
of each unit beverages)
of product enables
assigning the same average cost per unit.

McGraw-Hill/Irwin Slide 4
 Types of Product Costing Systems

Process Job-order
Costing Costing

Many different products are produced each period.

Products are manufactured to order.
The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.

McGraw-Hill/Irwin Slide 5
 Types of Product Costing Systems

Process Job-order
Costing Costing

Many different products are produced each period.

Example companies:
1.Products are manufactured
Boeing (aircraft to order.
manufacturing)
2.The unique
Bechtel nature of each
International order
(large requires
scale tracing or
construction)
3.allocating
Walt Disneycosts to each
Studios job, and
(movie maintaining cost
production)
records for each job.

McGraw-Hill/Irwin Slide 6
 Comparing Process and Job-Order Costing

Job-Order Process
Number of jobs worked Many
Individual Single Product
Cost accumulated by Job Department
Average cost computed by Job Department

McGraw-Hill/Irwin Slide 7
 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.

McGraw-Hill/Irwin Slide 8
 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.

McGraw-Hill/Irwin Slide 9
 Learning Objective 2

Identify the documents

used in a job-order costing
system.

McGraw-Hill/Irwin Slide 10
 Job-Order Costing An Overview

Direct Materials
Charge
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Manufacturing Job No. 3 each job as
Overhead work is
performed.

McGraw-Hill/Irwin Slide 11
 Indirect Manufacturing Costs

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated
Manufacturing
to all jobs
Job No. 3
Overhead rather than
directly traced
to each job.
McGraw-Hill/Irwin Slide 12
 The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

McGraw-Hill/Irwin Slide 13
 Measuring Direct Materials Cost

Will E. Delite

McGraw-Hill/Irwin Slide 14
 Measuring Direct Materials Cost

McGraw-Hill/Irwin Slide 15
 Measuring Direct Labor Costs

McGraw-Hill/Irwin Slide 16
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 17
 Learning Objective 3
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.

McGraw-Hill/Irwin Slide 18
 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, 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.
3.Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.

McGraw-Hill/Irwin Slide 19
 Manufacturing Overhead Application
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base

is a cost driver that causes
overhead.

McGraw-Hill/Irwin Slide 20
 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.

McGraw-Hill/Irwin Slide 21
 Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated
using a three-step process.

Estimate the level of Estimate total amount Estimate total
production for the of the allocation base manufacturing
period. for the period. overhead costs.

POHR =
McGraw-Hill/Irwin Slide 22
 Application of Manufacturing Overhead

Based on estimates, and

determined before the
period begins.

Overhead applied = POHR Actual activity

Actual amount of allocation is

based upon the actual level of
activity (normal costing system).

McGraw-Hill/Irwin Slide 23
 Overhead Application Rate
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

$640,000
POHR =
160,000 direct labor hours (DLH)

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.

McGraw-Hill/Irwin Slide 24
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 25
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 26
 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 was produced.

Fixed overhead would not change if another unit

was produced, so the incremental cost of
another unit is something less than $118.

McGraw-Hill/Irwin Slide 27
 Quick Check

Job WR53 at NW Fab, Inc. required $200 of direct

materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000 and
estimated direct labor hours were 20,000. What would
be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.

McGraw-Hill/Irwin Slide 28
 Quick Check

Job WR53 at NW Fab, Inc. required $200 of direct

materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000 and
estimated direct labor hours were 20,000. What would
be recorded as the cost of job WR53?
a. $200.
POHR = $760,000/20,000 hours $38
b. $350.
c. $380. Direct materials $200
Direct labor $15 x 10 hours $150
d. $730. Manufacturing overhead $38 x 10 hours $380
Total cost $730

McGraw-Hill/Irwin Slide 29
 Learning Objective 4

Understand the flow of costs

in a job-order costing system
and prepare appropriate
journal entries to record
costs.

McGraw-Hill/Irwin Slide 30
 Job-Order Costing
Document Flow Summary

A sales order is the A production

basis of issuing a order initiates
production order. work on a job.

McGraw-Hill/Irwin Slide 31
 Job-Order Costing
Document Flow Summary

Materials
used may be Direct Job Cost
either direct or materials Sheets
indirect.
Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account

McGraw-Hill/Irwin Slide 32
 Job-Order Costing
Document Flow Summary
An
employees
time may be either Direct Job Cost
Labor Sheets
direct or
indirect.
Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

McGraw-Hill/Irwin Slide 33
 Job-Order Costing
Document Flow Summary

Materials Indirect
Requisition Material POHR
rate used
to apply
Other Manufacturing overhead Job Cost
Actual OH Overhead
Sheets
Charges Account

Employee Indirect
Time Ticket Labor

McGraw-Hill/Irwin Slide 34
 Learning Objectives 4 and 7
Understand the flow of costs in a job-
order costing system and prepare
appropriate journal entries to record
costs.

Use T-accounts to show the flow of

costs in a job-order costing system.

McGraw-Hill/Irwin Slide 35
 Job-Order Costing: The Flow of Costs

The transactions (in T-

account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated on
the following slides.

McGraw-Hill/Irwin Slide 36
 The Purchase and Issue of Raw Materials

Raw Materials Work in Process

Material Direct
(Job Cost Sheet)
Purchases Materials Direct
Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect

Materials

McGraw-Hill/Irwin Slide 37
 Cost Flows Material Purchases
Raw material purchases are recorded in an
inventory account.

McGraw-Hill/Irwin Slide 38
 Cost Flows Material Usage
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.

McGraw-Hill/Irwin Slide 39
 The Recording of Labor Costs
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor

Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
McGraw-Hill/Irwin Slide 40
 The Recording of Labor Costs
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.

McGraw-Hill/Irwin Slide 41
 Recording Actual Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor
Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
Other

Overhead
McGraw-Hill/Irwin Slide 42
 Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect labor,
other manufacturing overhead costs are charged
to the Manufacturing Overhead account as they
are incurred.

McGraw-Hill/Irwin Slide 43
 Learning Objective 5

Apply overhead cost to

Work in Process using a
predetermined overhead
rate.

McGraw-Hill/Irwin Slide 44
 Applying Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor
Overhead
Mfg. Overhead
Actual Applied Applied
Indirect
If actual and applied
Materials Overhead
manufacturing overhead
Indirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other
Process
Overhead
McGraw-Hill/Irwin Slide 45
 Applying Manufacturing Overhead
Work in Process is increased when Manufacturing
Overhead is applied to jobs.

McGraw-Hill/Irwin Slide 46
 Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to

individual jobs, rather they are expensed in the
period incurred.

Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.

McGraw-Hill/Irwin Slide 47
 Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.

McGraw-Hill/Irwin Slide 48
 Learning Objective 6

Prepare schedules of cost

of goods manufactured
and cost of goods sold.

McGraw-Hill/Irwin Slide 49
 Transferring Completed Units
Work in Process Finished Goods
(Job Cost Sheet )
Direct
Cost of
Materials Cost of
Goods
Goods Mfd.
Direct
Mfd.
Labor
Overhead
Applied

McGraw-Hill/Irwin Slide 50
 Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods from
Work in Process.

McGraw-Hill/Irwin Slide 51
 Transferring Units Sold
Work in Process Finished Goods
(Job Cost Sheet)
Direct
Cost of
Cost of

Materials Cost of
Goods Goods
Goods Mfd. Sold
Direct
Mfd.
Labor
Overhead
Applied Cost of Goods Sold
Cost of

Goods
Sold

McGraw-Hill/Irwin Slide 52
 Transferring Units Sold
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record
the Cost of Goods Sold.

McGraw-Hill/Irwin Slide 53
 Learning Objective 8
Compute underapplied or
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.

McGraw-Hill/Irwin Slide 54
 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 Overapplied 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.
McGraw-Hill/Irwin
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.
Slide 55
 Overhead Application Example

PearCos actual overhead for the year was $650,000

with a total of 170,000 direct labor hours worked on
jobs.
How much total overhead was applied to PearCos jobs
during the year? Use PearCos predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Applied During the Period
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

McGraw-Hill/Irwin Slide 56
 Overhead Application Example

PearCos actual overhead for the year was $650,000 with a

total of 170,000 direct labor hours worked on jobs.
How much total overhead was applied to PearCos jobs
during the
PearCo hasyear? Use PearCos predetermined overhead
overapplied
overheadrateforofthe
$4.00
yearper direct labor hour.
by $30,000. What will
Overhead
PearCo Applied
do? During the Period
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

McGraw-Hill/Irwin Slide 57
 Quick Check

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. Tigers
manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.

McGraw-Hill/Irwin Slide 58
 Quick Check

Tiger, Inc. had actual manufacturing overhead

costs of $1,210,000 andOverhead
a predetermined
Applied overhead
rate of $4.00 per machine$4.00
hour.
per Tiger, Inc. worked
hour 290,000 hours
290,000 machine hours during the period. Tigers
= $1,160,000
manufacturing overhead is
Underapplied Overhead
$1,210,000 - $1,160,000
a. $50,000 overapplied. = $50,000
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.

McGraw-Hill/Irwin Slide 59
 Disposition of Under- or Overapplied
Overhead
PearCos Method

$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold

McGraw-Hill/Irwin Slide 60
 Disposition of
Under- or Overapplied Overhead

PearCos Cost PearCos

of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied

McGraw-Hill/Irwin Slide 61
 Allocating Under- or Overapplied
Overhead Between Accounts
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

McGraw-Hill/Irwin Slide 62
 Allocating Under- or Overapplied
Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:

Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

10% $30,000

McGraw-Hill/Irwin Slide 63
 Allocating Under- or Overapplied
Overhead Between Accounts
Percent of Allocation of
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

McGraw-Hill/Irwin Slide 64
 Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCos
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

More accurate but more complex to compute.

McGraw-Hill/Irwin Slide 65
 Quick Check

What effect will the overapplied overhead have

on PearCos net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.

McGraw-Hill/Irwin Slide 66
 Quick Check

What effect will the overapplied overhead have

on PearCos net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.

McGraw-Hill/Irwin Slide 67
 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 May be more complex

often use multiple but . . .
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.

McGraw-Hill/Irwin Slide 68
 Job-Order Costing in Service Companies

Job-order costing is used in many different

types of service companies.

McGraw-Hill/Irwin Slide 69
 The Use of Information Technology

Technology plays an important part in many

job-order cost systems. When combined with
Electronic Data Interchange (EDI) or a web-based
programming language called Extensible Markup
Language (XML), bar coding eliminates the
inefficiencies and inaccuracies associated with
manual clerical processes.

McGraw-Hill/Irwin Slide 70
The Predetermined Overhead Rate
and Capacity
Appendix 3A

2010 The McGraw-Hill Companies, Inc.

 Learning Objective 9
(Appendix 3A)
Understand the implications of
basing the predetermined
overhead rate on activity at
capacity rather than on
estimated activity for the period.

McGraw-Hill/Irwin Slide 72
 Predetermined Overhead Rate and Capacity
Calculating predetermined overhead rates using an
estimated, or budgeted amount of the allocation base
has been criticized because:
1.Basing the predetermined overhead rate upon
budgeted activity results in product costs that fluctuate
depending upon the activity level.
2.Calculating predetermined rates based upon
budgeted activity charges products for costs that they
do not use.

McGraw-Hill/Irwin Slide 73
 Capacity-Based Overhead Rates

Criticisms can be overcome by using

estimated total units in the allocation base
at capacity in the denominator of the
predetermined overhead rate calculation.

Lets look at the difference!

McGraw-Hill/Irwin Slide 74
 An Example
Equipment is leased for $100,000 per
year. Running at full capacity, 50,000
units may be produced. The company
estimates that 40,000 units will be
produced and sold next year. What is
the predetermined overhead rate?

McGraw-Hill/Irwin Slide 75
 An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year.

Traditional $100,000
= = $2.50 per unit
Method 40,000

Capacity $100,000
= = $2.00 per unit
Method 50,000

McGraw-Hill/Irwin Slide 76
 Quick Check
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. At full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin Slide 77
 Quick Check
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. At full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin Slide 78
 Quick Check
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. At full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin Slide 79
 Quick Check
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. At full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin Slide 80
 Quick Check
When capacity is used in the denominator of the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a.The predetermined overhead rate goes up when activity
goes down.
b.The predetermined overhead rate stays the same because it
is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity
goes down.

McGraw-Hill/Irwin Slide 81
 Quick Check
When capacity is used in the denominator of the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a.The predetermined overhead rate goes up when activity
goes down.
b.The predetermined overhead rate stays the same because it
is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity
goes down.

McGraw-Hill/Irwin Slide 82
 Quick Check
When estimated activity is used in the
denominator of the predetermined rate, what
happens to the predetermined overhead rate as
estimated activity decreases?
a.The predetermined overhead rate goes up when
activity goes down.
b.The predetermined overhead rate stays the same
because it is not affected by changes in activity.
c.The predetermined overhead rate goes down when
activity goes down.

McGraw-Hill/Irwin Slide 83
 Quick Check
When estimated activity is used in the
denominator of the predetermined rate, what
happens to the predetermined overhead rate as
estimated activity decreases?
a.The predetermined overhead rate goes up when
activity goes down.
b.The predetermined overhead rate stays the same
because it is not affected by changes in activity.
c.The predetermined overhead rate goes down when
activity goes down.

McGraw-Hill/Irwin Slide 84
 Income Statement Preparation Capacity
Actual volume 40,000 cases
Selling price $40.00 per case
Variable production cost $24.00 per case
Fixed manufacturing overhead $100,000 per year
Capacity 50,000 cases
Predetermined overhead rate $2.00 per case
Fixed selling and admin. expense $500,000 per year

Revenue $ 1,600,000
Cost of goods sold 1,040,000
Gross margin 560,000
Cost of idle capacity 20,000
Selling and admin. expense 500,000
Net operating income $ 40,000

McGraw-Hill/Irwin Slide 85
 Income Statement Preparation Traditional
Actual volume 40,000 cases
Selling price $40.00 per case
Variable production cost $24.00 per case
Fixed manufacturing overhead $100,000 per year
Capacity 40,000 cases
Predetermined overhead rate $2.50 per case
Fixed selling and admin. expense $500,000 per year

Revenue $ 1,600,000
Cost of goods sold 1,060,000
Gross margin 540,000
Cost of idle capacity -
Selling and admin. expense 500,000
Net operating income $ 40,000

McGraw-Hill/Irwin Slide 86
 End of Chapter 3

McGraw-Hill/Irwin Slide 87