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3
Systems Design: Job-Order costing
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LEARNING OBJECTIVES
After studying this chapter, you should be able to: 1. Distinguish between process costing and joborder costing and identify companies that would use each costing method. 2. Identify the documents used in a job-order costing system. 3. Compute predetermined overhead rates and explain why estimated overhead costs are used in the costing process. 4. Record the journal entries that reflect the flow of costs in a job-order costing system.
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LEARNING OBJECTIVES
After studying this chapter, you should be able to:
5. Apply overhead cost to Work in Process using a predetermined overhead rate. 6. Prepare the schedules of cost of goods manufactured and cost of goods sold that summarize the flow of costs. 7. Compute under- or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts. 8. (Appendix 3A) Explain the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.
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Many units of a single, homogeneous product flow evenly through a continuous production process.
One unit of product is indistinguishable from any other unit of product. Each unit of product is assigned the same average cost.
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Job-order Costing
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Typical job-order cost applications: Special-order printing Building construction Also used in the service industry Hospitals Law firms
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Job-Order Costing
Manufacturing overhead (OH) Direct material Applied to each job using a predetermined rate
THE JOB
Direct labour
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Schedule jobs
Order materials
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Job No. 1
Direct Labour Job No. 2 Job No. 3
Manufacturing Overhead
Charge direct material and direct labour costs to each job as work is performed.
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Job No. 1
Direct Labour Job No. 2 Job No. 3
Manufacturing Overhead
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Lets investigate
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Will E. Delite
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Will E. Delite
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Workers use time tickets to record the time spent on each job.
Lets see one
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Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct labour hour (DLH). Lets do it
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POHR =
Estimated total units in the allocation base for the coming period
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Actual overhead for the period is not known until the end of the period.
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Estimated total units in the allocation base for the coming period
$640,000
POHR =
For each direct labour hour worked on a job, $4.00 of factory overhead will be applied to the job.
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Lets summarize the document flow we have been discussing in a job-order costing system.
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Materials Requisition
Indirect material
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Lets examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.
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Mfg. Overhead
Actual Applied Indirect Materials
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Next lets add labour costs and applied manufacturing overhead to the job-order cost flows. Are you with me?
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Mfg. Overhead
Actual Applied Indirect Overhead Materials Applied to Work in Indirect Process Labour
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.
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Now lets complete the goods and sell them. Still with me?
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Finished Goods
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Lets return to PearCo and see what we will do if actual and applied overhead are not equal.
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SOLUTION
Applied Overhead = POHR Actual Direct Labour Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
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SOLUTION
Applied Overhead = POHR Actual Direct labour Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
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OR
Work in Process Finished Goods Cost of Goods Sold
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$650,000
$30,000
$680,000
$30,000 overapplied
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c. $60,000 overapplied.
d. $60,000 underapplied.
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Lets look at summary journal entries for a joborder costing system. Well omit the numbers so that we can focus on accounts.
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Increased Quality
Increased Profitabilit y
Leads to
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Scrap
The loss from scrap can be: 1. Allocated across all good units, or 2. Charged to overhead and in turn charged to all jobs.
If scrap items are sold, the recovery can then be credited to : 1. The job, or 2. Manufacturing overhead.
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Rework
When some rework is undertaken, the materials and labour involved in the rework could be charged to : 1. The job, or 2. Manufacturing overhead and spread over all the jobs.
Appendix
3A
The Predetermined Overhead Rate and Capacity
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End of Chapter 3