Chapter 04 - Lecture

Chapter 4

5) Cost objects may be jobs, products, or customers. T or F.

Cost ObjectLecture Question

Answer: TRUE

Chapter 4

• Textbook Definition: Anything for which a measurement of costs is desired.

• The cost object can be a Product, Department, Customer, Machine, etc.

Cost Object

Chapter 4

4) Quality control costs may be a direct cost of the Manufacturing Department, but an indirect cost of an individual job. T or F.

Cost ObjectLecture Question

Answer: TRUE

Chapter 4

• A Cost Object can have direct costs and indirect costs.

• So, a Manufacturing Department can have direct costs that are directly associated with the department, such as supervision, rent, quality control expenses.

•But… the Manufacturing Department can be an indirect cost when assigning costs to individual Jobs or Products.

(bold items represent Cost Objects)

Cost Object

Chapter 4

• In Chapter 4, the Cost Object will be a Job or a Product.

• Remember, that the cost of a Job or Product will be the total of three distinct types of cost:

Direct Materials (DM)

Direct Labor (DL)

Overhead (OH) (also known as “Burden” or “Indirect Costs”)

Cost Object

Chapter 4

• It’s fairly easy to account for the DM and DL of a Job or Product.

• Overhead (i.e., indirect costs) is difficult to associate with a particular Job or Product.

•So… we allocate the overhead.

Overhead Allocation

Chapter 4

Overhead Allocation

• Overhead totals $84,000. • My house is house number one. I believe overhead should be allocated equally among the three houses. My specific recommendation is:

$84,000 overhead / 3 houses = $28,000 per house.

• The totals would be as follows:House 1 House 2 House 3$378,000 $228,000 $178,000

• Your house is house number three. Do you agree with this assignment of cost?

Chapter 4

Overhead Allocation

• Overhead totals $84,000. • We could assign overhead based on Direct Material usage:

$84,000 overhead / ($140,000 + $70,000 + $90,000) = $0.28 per DM dollar

• The totals would then be as follows:House 1 House 2 House 3$389,200 $219,600 $175,200

Chapter 4

Overhead Allocation

• Overhead totals $84,000. • We could assign overhead based on Direct Labor usage:

$84,000 overhead / ($210,000 + $130,000 + $60,000) = $0.21 per DL dollar

• The totals would then be as follows:House 1 House 2 House 3$394,100 $227,300 $162,600

Chapter 4

Overhead Allocation

• Overhead totals $84,000. • Based on how we assign the overhead to the houses (“cost object”), the different house costs are as follows:

House 1 House 2 House 3 Based on # of Houses $378,000 $228,000 $178,000 Based on DM $ $389,200 $219,600 $175,200 Based on DL $ $394,100 $227,300 $162,600

• Fairly sizeable variations resulting from how we allocated Overhead!

Distinguish between Process Posting and Job-Order Costing and identify companies that would use

each costing method.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

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.

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.


ProcessCosting

Job-orderCosting

Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)

Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)


ProcessCosting

Job-orderCosting

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.

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.


ProcessCosting

Job-orderCosting

Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)

Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)

Chapter 4

67) Process costing:

A) allocates all product costs, including materials and labor B) results in different costs for different units produced C) is commonly used by general contractors who construct custom-built homes D) is used exclusively in manufacturing

Process Costing vs. Job CostingLecture Question

Answer: A

Chapter 4

68) ________ costing is used by a business to price unique products for different jobs.

A) Actual B) Job C) Process D) Traditional

Process Costing vs. Job CostingLecture Question

Answer: B

Comparing Process and Job-Order Costing

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated byIndividual

Job Department

Average cost computed by Job Department

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.




Quick Check

Chapter 4

• Robinson Company manufactures and installs paper-making machines. The build many machines for different customers throughout the year.

• Their bid of $15,000 has been accepted to build a new machine desired by Western Pulp and Paper.

•The job number assigned to the project was Job WPP298.

• At the end of the year, (after the machine has been installed), Robinson would like to determine the profitability of all of their jobs for the year, including Job WPP298.

Actual Costing

See pages 101-104

Chapter 4

• The job number assigned to the project was Job WPP298.

• As Direct Materials were used to build the machine, the cost of those materials were charged to Job WPP298.

A total of $4,606 of Direct Materials were used/charged to Job WPP298.

• As Direct Labor was used to build the machine, the cost of that labor was charged to Job WPP298.

A total of 88 Direct Labor HOURS ($1,579 total amount) were used/charged to Job WPP298.

• What’s difficult is to determine the Overhead that should be charged to Job WPP298. See next slide for definition and subsequent slide for the Overhead amount that was assigned to Job WPP298.

Actual CostingSee pages 101-104

Chapter 4

To determine the Overhead cost that should be charged to Job WPP298, we first need to (1) determine the entire amount of overhead expense for the company, and then (2) determine a method to assign some of that cost to Job WPP298.

1. Robinson’s accounting records determined that $1,215,000 was the total amount of manufacturing overhead cost for the year.

This “pool” of indirect costs needs to somehow to be assigned to the jobs that Robinson completed during the year.

2. Robinson determines that the total amount of overhead costs should be allocated to jobs based on the direct labor hours used for each job.

The total direct labor hours to complete all jobs were 27,000 hours for the year.

Actual Costing

See pages 101-104

Chapter 4

Therefore, if we divide all the overhead costs ($1,215,000)by the total amount of direct labor hours (27,000 DLH’s), the resulting value ($45 per DLH) will be the rate that we will use to assign overhead to all the jobs produced during the year.

The Overhead cost allocated to Job WPP298 is $3,960, which is the 88 DLH’s multiplied by the overhead allocation rate of $45 per DLH.

Actual Costing

See pages 101-104

Chapter 4

So, now we have the entire job cost for Job WPP298:

Direct Materials: $4,606

Direct Labor: $1,579

Overhead: $3,960 -----------

Total: $10,145

Actual Costing

See pages 101-104

Chapter 4

• The previous example computed the overhead allocation rate of $45 per DLH by dividing all the actual overhead costs ($1,215,000) for the year by the total amount of actual direct labor hours (27,000 DLH’s).

• The Robinson Company would like to cost jobs more frequently than once per year. But, determining an actual overhead each month would cause different rates for each month…

…because the amount of actual overhead expense (“numerator”) would fluctuate each month (e.g., real estate taxes, heating cost, etc.)

… because the amount of DLH’s (“denominator”) will vary each month (e.g., summer shutdown, December holidays, etc.)

• Therefore, if Robinson Company computed an actual rate every month, identical jobs produced in, say, May would have a lower cost than the identical job produced in December.

Actual CostingSee pages 106-107

Chapter 4

80) Normandeau Company's actual manufacturing overhead is $1,400,000. Overhead is allocated on the basis of direct labor hours. The direct labor hours were 25,000 for the period. What is the manufacturing overhead rate?

A) $47.00 B) $56.00 C) $75.00 D) None of the above are correct.

Lecture Question

Actual Costing

Answer: B

Explanation: $1,400,000 / 25,000 = $56.00 per DLH

Chapter 4

81) Copley Enterprises manufactures digital video equipment. For each unit $1,475 of direct material is used and there is $1,500 of direct manufacturing labor at $30 per hour. Manufacturing overhead is applied at $35 per direct manufacturing labor hour. Calculate the cost of each unit.

A) $2,975 B) $4,025 C) $4,725 D) $3,150

Lecture Question

Actual Costing

Answer: C

Explanation: DM + DL + (( DLH’s )*rate) $1,475 + $1,500 + (($1,500/$30)*$35) = $75.00

Hint: A product cost is composed of DM + DL + OH

Chapter 4

• To assist in determining the cost of jobs as they are finished, we will do the same allocation process in Actual Costing, but we will estimate (budget) the total amount of overhead costs for the year and estimate (budget) the total amount of direct labor hours (or other allocation base) for the year.

• We can then calculate an overhead rate to assign to jobs as they are completed. This is called the Predetermined Overhead Rate (POR):

POR = Budgeted Annual Overhead Cost / Budgeted DLH’s

• Example for Robinson Company on page 108:

$40 per DLH = $1,120,000/ 28,000 DLH’s

Normal CostingSee pages 108-109

Chapter 4

29) Normal costing assigns indirect costs based on an actual indirect-cost rate. T or F.

Normal CostingLecture Question

Answer: FALSE

Explanation: Normal costing assigns indirect costs based on a budgeted rate.

Chapter 4

27) The budgeted indirect cost rate (POR) is the budgeted indirect costs divided by budgeted quantity of the cost allocation base. T or F.


Answer: TRUE

Chapter 4

23) To smooth fluctuating levels of output, separate indirect-cost rates should be calculated for each month. T or F.


Answer: FALSE

Explanation: To smooth seasonal costs and fluctuating levels of output, indirect-cost rates should be calculated on an annual basis.

Chapter 4

130) Using job costing, the 20X5 budgeted manufacturing overhead rate is:

A) $4.00 per machine-hour B) $4.80 per machine-hour C) $5.00 per machine-hour D) $6.00 per machine-hour

Lecture Question

Actual & Normal Costing Review

Answer: C

Explanation: $100,000 / 20,000 mh = $5 per mh

For 20X5, Marcotte's Animal Supply Manufacturing uses machine-hours as the only overhead cost-allocation base. The accounting records contain the following information:

Estimated ActualManufacturing overhead costs $100,000 $120,000Machine-hours 20,000 25,000

Chapter 4

131) Using normal costing, the amount of manufacturing overhead costs allocated to jobs during 20X5 is:

A) $150,000 B) $125,000 C) $120,000 D) $100,000

Lecture Question

Answer: B Explanation: Actual Hrs × Budgeted Allocation Rate

25,000 mh × ($100,000 / 20,000 mh) = $125,000




Chapter 4

132) Using job costing, the 20X5 actual indirect-cost rate is:

A) $4.00 per machine-hour B) $4.80 per machine-hour C) $5.00 per machine-hour D) $6.00 per machine-hour

Lecture Question

Answer: B

Explanation: Actual Cost / Actual mh’s $120,000 / 25,000 mh = $4.80 per mh




Chapter 4

133) Using actual costing, the amount of manufacturing overhead costs allocated to jobs during 20X5 is:

A) $150,000 B) $125,000 C) $120,000. D) $100,000

Lecture Question

Answer: C

Explanation: Actual Hrs × Actual Allocation Rate 25,000 mh × ($120,000 / 25,000 mh) = $120,000 per mh




Chapter 4

136) Manufacturing overhead cost estimates for this special order total:

A) $10,000 B) $30,000 C) $36,000 D) None of these answers is correct.

Lecture Question

Answer: B

Explanation: Budgeted Allocation Rate × DLH’s $60 per DLH × 500 dlh = $30,000

Joni's Kitty Supplies applies manufacturing overhead costs to products at a budgeted indirect-cost rate of $60 per direct manufacturing labor-hour. A retail outlet has requested a bid on a special order of the Toy Mouse product. Estimates for this order include: Direct materials $40,000 and 500 direct manufacturing labor-hours at $20 per hour


Chapter 4

137) Estimated total product costs for this special order equal:

A) $96,000 B) $50,000 C) $80,000 D) None of these answers is correct

Lecture Question

Answer: C

Explanation: DM $40,000 + DML (500 × $20) + MOH $30,000 = $80,000 (“DL”)

Joni's Kitty Supplies applies manufacturing overhead costs to products at a budgeted indirect-cost rate of $60 per direct manufacturing labor-hour. A retail outlet has requested a bid on a special order of the Toy Mouse product. Estimates for this order include: Direct materials $40,000 and 500 direct manufacturing labor-hours at $20 per hour


2-39

Manufacturing OverheadManufacturing Overhead

WORKIN

PROCESS

WORKIN

PROCESS

Charge Direct Material,

Direct Labor and Mfg

Overhead costs to WIP as

work is performed.

Charge Direct Material,

Direct Labor and Mfg

Overhead costs to WIP as

work is performed.

Job-Order Costing

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

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

performed.

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

performed.

Job-Order Costing—An Overview



Manufacturing Overhead,

including indirect materials and

indirect labor, are allocated to jobs

rather than directly traced to

each job.

Manufacturing Overhead,

including indirect materials and

indirect labor, are allocated to jobs

rather than directly traced to

each job.

Job-Order Costing—An Overview



Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


Chapter 4

33) The Work-in-Process Control account tracks job costs from the time jobs are started until they are completed. T or F.

Job CostingLecture Question

Answer: TRUE

Identify the documents used in a job-order costing system.

Job Cost SheetPearCo Job Cost Sheet

Job Number A-143 Date Initiated March 4Date Completed

Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials $ Date Number BalanceDirect Labor $Manufacturing Overhead $Total Cost $Unit Product Cost $

Materials Requisition FormPearCo Materials Requisition Form

Materials Requisition Number X7 - 6890 Date March 4Job Number to Be Charged A - 143Department B3

Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00

116.00$

AuthorizedSignature Will E. Delite




Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$


Employee Time TicketPearCo Employee Time Ticket

Time Ticket No. 36 Date March 5

Employee I. M. Skilled Station 42

TimeStarted Ended Completed Rate Amount Job No.

8:00 12:00 4.0 11.00$ 44.00$ A-1431:00 5:00 4.0 11.00 44.00 A-143

Totals 8.00 88.00$

Supervisor C. M. Workman




Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$ 36 8 88$


Application of Manufacturing Overhead

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.

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 a production manager’s salary.

3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Compute predetermined overhead rates and explain why estimated

overhead costs (rather than actual overhead costs) are used in the

costing process.

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.


Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

Using a predetermined overhead rate (POHR)makes it possible to estimate total job costs sooner.

Actual overhead for the period is notknown until sometime after the period has ended.

Actual overhead costs can fluctuate seasonally, thus misleading decision makers. It simplifies record

keeping.


$

Actual amount of the allocation based upon the actual level of activity (this is called a normal

costing system).

Actual amount of the allocation based upon the actual level of activity (this is called a normal

costing system).

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.


Overhead applied = POHR × Actual activity

For each direct labor hour worked on a particular job, $4.00 of factory overhead will

be applied to that job.

For each direct labor hour worked on a particular job, $4.00 of factory overhead will

be applied to that job.


POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Application of Manufacturing OverheadPearCo Job Cost Sheet



Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

Completing the Job Cost SheetPearCo Job Cost Sheet



Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials $ 116 Date Number BalanceDirect Labor $ 88 Manufacturing Overhead $ 32 Total Cost $ 236 Unit Product Cost $ 118

Interpreting the Average Unit Cost

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit were produced.

Fixed overhead would not change if another unitwere produced, so the incremental cost of

another unit may be somewhat less than $118.

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit were produced.

Fixed overhead would not change if another unitwere produced, so the incremental cost of

another unit may be somewhat less than $118.

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.




Quick Check

POHR = $760,000/20,000hours = $38

Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380Total cost $730

Let’s summarize the document flow in a

job-order costing system.

Job-Order CostingDocument Flow Summary


A sales order is the basis of issuing a

production order.

A sales order is the basis of issuing a

production order.

A production order initiates work on a job.

A production order initiates work on a job.


Job Cost Sheets

Job Cost Sheets

MaterialsRequisitionMaterials

Requisition

Manufacturing Overhead Account


Direct materials

Indirect materials

Materials usedmay be either

direct orindirect.

Materials usedmay be either

direct orindirect.


Job Cost Sheets

Job Cost Sheets

Employee Time Ticket

Employee Time Ticket



An employee’stime may be eitherdirect or indirect.

An employee’stime may be eitherdirect or indirect.

Direct Labor

Indirect Labor




OtherActual OHCharges

OtherActual OHCharges

Job Cost Sheets

Job Cost Sheets

AppliedOverhead

MaterialsRequisitionMaterials

Requisition

EmployeeTime TicketEmployee

Time Ticket

IndirectMaterial

IndirectLabor

Prepare journal entries to record costs in a job-order costing system.

Use T-accounts to show the flow of costs in a job-order costing system.

Job-Order Costing—The Flow of Costs

Let’s examine the transactions in T-account and journal entry forms

in a job-order costing system.

Raw MaterialsMaterialPurchases

Mfg. Overhead

Work in Process(Job Cost Sheet)

Actual Applied

Summary of Cost Flows

GENERAL JOURNAL

Date DescriptionPost. Ref. Debit Credit

Raw Materials XXXXX Accounts Payable XXXXX

Journal Entry – Material Purchases

Raw material purchases are recorded in an inventory account.

Raw MaterialsMaterialPurchases

Mfg. Overhead


Actual Applied

Direct Materials Direct

Materials

Indirect Materials

Indirect Materials


GENERAL JOURNAL


Work in Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX

Journal Entry – 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 decrease Raw Materials.

Chapter 4

36) Indirect materials that are requisitioned increase the Work-in-Process Control account. T or F.


Answer: FALSE

Explanation: Indirect materials that are requisitioned increase the Manufacturing Overhead Control account.

Mfg. Overhead

Salaries and Wages Payable


Direct Materials

Direct Labor

Direct Labor

IndirectLabor

Indirect Materials

Actual Applied

IndirectLabor


GENERAL JOURNAL


Work in Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX

Journal Entry – Labor Costs The cost of direct labor incurred increases Work in Process

and thecost of indirect labor increases

Manufacturing Overhead.

Mfg. Overhead

Indirect Materials

Actual Applied

IndirectLabor


OtherOverhead

In addition to indirect materials and indirect

labor, other actual manufacturing overhead costs are debited to the

Manufacturing Overhead account.

GENERAL JOURNAL


Manufacturing Overhead XXXXX Accounts Payable XXXXX Property Taxes Payable XXXXX Prepaid Insurance XXXXX Accumulated Depreciation XXXXX

Journal Entry – Actual Overhead In addition to indirect materials and indirect labor,

other manufacturing overhead costs are charged to the Manufacturing Overhead account

as they are incurred.

Chapter 4

42) For external reporting purposes, it is acceptable to allocate marketing costs to individual jobs. T or F.


Answer: FALSE

Explanation: Management may choose to allocate marketing costs to individual jobs for internal pricing, product-mix, and cost-management decisions.

Apply overhead cost to Work in Process using a

predetermined overhead rate.

Mfg. OverheadWork in Process(Job Cost Sheet)

Direct Materials

Overhead Applied

OverheadApplied to

Work inProcess

Direct Labor

Indirect Materials

Actual Applied

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

IndirectLabor

Summary of Manufacturing Overhead Cost Flows

OtherOverhead

GENERAL JOURNAL


Work in Process XXXXX Manufacturing Overhead XXXXX

Journal Entry – Overhead Applied

Work in Process is increasedwhen Manufacturing Overhead

is applied to jobs.

Accounting for Nonmanufacturing Costs

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed

in the period incurred.

Income Statement

Expense nonmanufacturing costs as incurred.

GENERAL JOURNAL


Salaries Expense XXXXX Salaries Payable XXXXX

Advertising Expense XXXXX Accounts Payable XXXXX

Journal Entry – Accounting for Nonmanufacturing Costs

Nonmanufacturing Cost Examples:1. Salary expense of employees

that work in a marketing, selling,or administrative capacity.

2. Advertising expenses are expensedin the period incurred.

Nonmanufacturing Cost Examples:1. Salary expense of employees

that work in a marketing, selling,or administrative capacity.

2. Advertising expenses are expensedin the period incurred.

Prepare schedules of cost of goods manufactured and cost of

goods sold.

Finished Goods

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Work in Process(Job Cost Sheet)Direct

MaterialsDirect Labor

Overhead Applied

Summary of Goods Manufactured Cost Flows

GENERAL JOURNAL


Finished Goods XXXXX Work in Process XXXXX

Journal Entry – Cost of Goods Manufactured

As jobs are completed, the Cost of Goods Manufactured is transferred to Finished

Goods from Work in Process.

Finished Goods

Cost of Goods Sold

Work in Process(Job Cost Sheet)Direct

MaterialsDirect Labor

Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost ofGoodsSold

Summary of Job-Order System Cost Flows

GENERAL JOURNAL


Accounts Receivable XXXXX Sales XXXXX

Cost of Goods Sold XXXXX Finished Goods XXXXX

Journal Entry – Sales When finished goods are sold, two entries are

required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

Compute underapplied or overapplied overhead cost and

prepare the journal entry to close the balance in Manufacturing Overhead

to the appropriate accounts.

Defining Under- and Overapplied Overhead

The difference between the overhead cost applied to Work in Process and the actual overhead costs

of a period is termed 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.

Underapplied overhead exists when the amount of overhead


predetermined overhead rate is less than the total amount of

overhead actually incurred during the period.

Overapplied overhead exists when the amount of overhead


predetermined overhead rate is greater than the total

amount of overhead actually incurred during the period.

Overapplied overhead exists when the amount of overhead


predetermined overhead rate is greater than the total

amount of overhead actually incurred during the period.

PearCo’s 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 PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per

direct labor hour.



direct labor hour.

Overhead Application Example

Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000



direct labor hour.



direct labor hour.

Overhead Application Example

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

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. What is Tiger’s over- or underapplied overhead?

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.






Quick Check










d. $60,000 underapplied.Actual 1,210,000 1,160,000 Applied

Underapplied 50,000


Applied Overhead$4.00 × 290,000 hours = $1,160,000

Disposition of Under- or Overapplied Overhead – Adjust directly to CGS

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

Overhead appliedto jobs

$680,000

PearCo’s Costof Goods Sold

Unadjusted Balance

AdjustedBalance

$30,000

$30,000

Quick Check

What effect will the adjustment of the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.




Quick Check

• When the Under- or Overapplied Overhead is significant, the Proration Method may be appropriate.

• The amount of over- or underapplied overhead is distributed proportionally to the WIP Inventory account, FG Inventory account and the CGS account, based on the balances in each account at the end of the period.

• For example, if we had $30,000 of underapplied Overhead and determined that we will use the proration method, we would view the period-end balances in the following accounts:

WIP Inventory $20,000 FG Inventory $40,000 CGS $340,000

Disposition of Under- or Overapplied Overhead – Proration Method

• We would allocate $30,000 * .05 = $1,500 to WIP Inventory• We would allocate $30,000 * .10 = $3,000 to FG Inventory• We would allocate $30,000 * .85 = $25,500 to CGS

• When the Under- or Overapplied Overhead is significant, the Proration Method may be appropriate.

• The amount of over- or underapplied overhead is distributed proportionally to the WIP Inventory account, FG Inventory account and the CGS account, based on the balances in each account at the end of the period.

• For example, if we had $30,000 of underapplied Overhead and determined that we will use the proration method, we would view the period-end balances in the following accounts:

WIP Inventory $20,000 ($20,000 / $400,000) = .05 FG Inventory $40,000 ($40,000 / $400,000) = .10 CGS $340,000 ($340,000 / $400,000) = .85 ------------- $400,000

Disposition of Under- or Overapplied Overhead – Proration Method

Multiple Predetermined Overhead Rates

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

overhead rate.

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.

Large companies often use multiple

predetermined overhead rates.

May be more complex but . . .

May be more complex but . . .

May be more accurate because it reflects differences across

departments.

May be more accurate because it reflects differences across

departments.We will cover in another class.

Job-Order Costing in Service Companies

Job-order costing is used in many difference types of service companies.

Job-order costing is used in many difference types of service companies.

Chapter 4

Lecture Question

Answer: A

107) What is the appropriate journal entry if $100,000 of materials were purchased on account for the month of August?

A) Materials Control 100,000 Accounts Payable Control 100,000

B) Work-in-Process Control 100,000 Accounts Payable Control 100,000

C) Manufacturing Overhead Control 100,000 Accounts Receivable Control 100,000

D) Manufacturing Allocated 100,000 Accounts Receivable Control 100,000

Chapter Review

Chapter 4

Lecture Question

Answer: D

108) What is the appropriate journal entry if direct materials of $50,000 and indirect materials of $3,000 are sent to the manufacturing plant floor?

A) Work-in-Process Control 50,000 Materials Control 50,000

B) Work-in-Process Control 53,000 Materials Control 53,000

C) Manufacturing Overhead Control 3,000 Materials Control 50,000 Work-in-Process Control 53,000

D) Work-in-Process Control 50,000 Manufacturing Overhead Control 3,000 Materials Control 53,000

Chapter Review

Chapter 4

Lecture Question

Answer: B

109) All of the following items are debited to Work-in-Process EXCEPT:

A) allocated manufacturing overhead

B) completed goods being transferred out of the plant

C) direct labor consumed

D) direct materials consumed

Chapter Review

Chapter 4

Lecture Question

Answer: A

111) Manufacturing overhead costs incurred for the month are:

Utilities $15,000Depreciation on equipment $25,000Repairs $10,000

Which is the correct journal entry assuming utilities and repairs were on account?

A) Manufacturing Overhead Control 50,000Accounts Payable Control 25,000Accumulated Depreciation Control 25,000

B) Manufacturing Overhead Control 50,000Accounts Payable Control 50,000

C) Manufacturing Overhead Control 50,000Accumulated Depreciation Control 50,000

D) Accumulated Depreciation Control 25,000 Accounts Payable Control 25,000

Manufacturing Overhead Control 50,000

Chapter Review

Chapter 4

Lecture Question

Answer: D

113) When a job is complete:

A) Work-in-Process Control is debited

B) Finished Goods Control is credited

C) the cost of the job is transferred to Manufacturing Overhead Control

D) actual direct materials, actual direct manufacturing labor, and allocated manufacturing overhead will comprise the total cost of the job

Chapter Review

Chapter 4

Lecture Question

Answer: D

118) When the allocated amount of indirect costs are less than the actual amount, indirect costs have been:

A) overabsorbed

B) underapplied

C) underallocated

D) Both underapplied and underallocated are correct

Chapter Review

Chapter 4

139) The actual amount of manufacturing overhead costs incurred in June 20X2 totals:

A) $557,000 B) $200,000 C) $110,000 D) $ 80,000

Lecture Question

Answer: C Explanation: $20,000 + $60,000 + $30,000 = $110,000

Sunny Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $15 per direct labor-hour. The following data are obtained from the accounting records for June 20X2:

Direct materials $280,000Direct labor (7,000 hours @ $11/hour) $ 77,000Indirect labor $ 20,000Plant facility rent $ 60,000Depreciation on plant machinery and equipment $ 30,000Sales commissions $ 40,000Administrative expenses $ 50,000

Chapter Review

Chapter 4

140) The amount of manufacturing overhead allocated to all jobs during June 20X2 totals:

A) $77,000 B) $105,000 C) $110,000 D) $200,000

Lecture Question

Answer: B Explanation: 7,000 × $15 per dlh = $105,000



Chapter Review

Chapter 4

141) For June 20X2, manufacturing overhead was:

A) overallocated B) underallocated C) neither overallocated nor underallocated D) indeterminable

Lecture Question

Answer: B Explanation: Underallocated: Allocated only $105,000 (7,000 × $15 per dlh) of the $110,000 actual overhead



Chapter Review

Chapter 4

a. Determine the budgeted factory overhead rate per machine-hour.

Lecture Question

Answer: $266,400/18,500 hrs. = $14.40 per hour

183) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories were as follows:

Direct materials $ 60,000WIP 190,000Finished goods 250,000Total $500,000

Chapter Review

Chapter 4

b. Compute the over/underapplied overhead.

Lecture Question

Answer: $14.40 × 19,050 hours = $274,320 - $287,920 = $13,600 underapplied overhead



Chapter Review

Chapter 4

c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold approach.

Lecture Question

Answer: Cost of Goods Sold 13,600

Factory Department Overhead Control 13,600



Chapter Review

Chapter 4

d. Prepare the journal entry to dispose of the variance using the proration approach.

Lecture Question183) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories were as follows:


Chapter Review

Chapter 4

d. Prepare the journal entry to dispose of the variance using the proration approach.

Lecture Question

Answer: $560,000 + $190,000 + $250,000 = $1,000,000

Cost of Goods Sold: $560,000/$1,000,000 = 56% × $13,600 = $7,616

WIP: $190,000/$1,000,000 = 19% × $13,600 = $2,584

Finished Goods: $250,000/$1,000,000 = 25% × $13,600 = $3,400

Cost of Goods Sold 7,616WIP Inventory 2,584Finished Goods Inventory 3,400Factory Department Overhead Control 13,600

183)

Chapter Review

Chapter 4

Lecture QuestionAnswer the following questions 146-148 using the information below:

Bauer Manufacturing uses departmental cost driver rates to allocate manufacturing overhead costs to products. Manufacturing overhead costs are allocated on the basis of machine-hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 20X3, the following estimates were provided for the coming year:

Machining AssemblyDirect labor-hours 30,000 60,000Machine-hours 80,000 20,000Direct labor cost $500,000 $900,000Manufacturing overhead costs $420,000 $240,000

The accounting records of the company show the following data for Job #316:

Machining AssemblyDirect labor-hours 120 70Machine-hours 60 5Direct material cost $300 $200Direct labor cost $100 $400

Chapter Review

Chapter 4

146) For Bauer Manufacturing, what is the annual manufacturing overhead cost-allocation rate for the Machining Department?

A) $4.00 B) $4.20 C) $4.67 D) $5.25

Lecture Question

Answer: D Explanation: $420,000/80,000mh = $5.25 per mh

Chapter Review

Chapter 4

147) What amount of manufacturing overhead costs will be allocated to Job #316?

A) $439 B) $502 C) $595 D) $532

Lecture Question

Answer: C Explanation:

($420,000 / 80,000 mh × 60 mh) + [($240,000/60,000) × 70dlh] = $595

Chapter Review

Chapter 4

148) What are the total manufacturing costs of Job #316?

A) $715 B) $880 C) $1,595 D) $1,000

Lecture Question

Answer: C Explanation: DM $500 + DML $500 + MOH $595 = $1,595

Chapter Review

End of Presentation

Chapter 04 - Lecture

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