Job order and process costing ppt
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![Page 1: Job order and process costing ppt](https://reader033.fdocuments.net/reader033/viewer/2022061111/54551e81af79590b088b471f/html5/thumbnails/1.jpg)
Job-Costing SystemsJob-Costing Systems
Chapter 3Chapter 3
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Slide 3.2
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Introduction
• How much does it cost?
• Managers ask this question for many purposes, including formulating overall strategies, product and service-emphasis decisions and pricing decisions.
• This chapter presents basic concepts of job costing.
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Slide 3.3
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objectives
1 Describe the building block concept of costing systems
2 Distinguish between job costing and process costing
3 Outline a six-step approach to job costing
4 Distinguish actual costing from normal costing
5 Understand job costing in service and manufacturing contexts
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Slide 3.4
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objectives (Continued)
6 Describe key source documents used in job- costing systems
7 Understand how the steps in the production process are tracked in a job-costing system
8 Describe alternative methods of dealing with period-end under- or overallocated indirect costs.
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Slide 3.5
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 1
Describe the building block concept of costing systems
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Slide 3.6
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Building Block Conceptsof Costing Systems
• The following five terms constitute the building blocks that will be used in this chapter:
1 A cost object is anything for which a separate measurement of costs is desired.
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Slide 3.7
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Building Block Conceptsof Costing Systems (Continued)
2 Direct costs of a cost object are costs that are related to the particular cost object and can be traced to it in an economically feasible way.
3 Indirect costs of a cost object are costs that are related to the particular cost object but cannot be traced to it in an economically feasible way.
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Slide 3.8
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Building Block Conceptsof Costing Systems (Continued)
• The relationship among these three concepts is as follows:
Direct Costs
Cost Tracing
Cost Objec
tIndirect Costs
Cost Allocation
Cost Assignment
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Slide 3.9
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Building Block Conceptsof Costing Systems (Continued)
4 Cost pool is a grouping of individual cost items.
5 Cost allocation base is a factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object.
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Slide 3.10
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 2
Distinguish between jobcosting and process costing
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Slide 3.11
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Job-Costing and Process-Costing Systems
• There are two basic systems used to assign costs to products or services:
1 Job costing
2 Process costing
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Slide 3.12
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Job-Costing and Process-Costing Systems (Continued)
• In a job-costing system, the cost object is an individual unit, batch or lot of a distinct product or service called a job.
• In process costing, the cost object is masses of identical or similar units or a product or service.
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Slide 3.13
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Job-Costing and Process-Costing Systems (Continued)
• Process costing allocates costs among all the products manufactured during that period.
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Slide 3.14
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Job-Costing and Process-Costing Systems (Continued)
Job-costing Process-costing system system Distinct units Masses of identical of a product or similar units of a or service product or service
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Slide 3.15
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 3
Outline a six-step approachto job costing
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Slide 3.16
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to Job Costing
• The following six-step approach is used to assign actual costs to individual jobs:
1 Identify the chosen cost object(s).
2 Identify the direct costs of the job.
3 Select the cost-allocation base(s).
4 Identify the indirect costs associated with each cost-allocation base.
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Slide 3.17
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
5 Compute the rate per unit of each cost-allocation base used to allocate indirect coststo the job.
6 Compute the cost of the job by adding all direct and indirect costs assigned to it.
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Slide 3.18
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
• D.L. Sports manufactures various sporting goods.
• D.L. is planning to sell a batch of 25 special machines (Job No. 100) to Healthy Gym for £104,800.
• A key issue for D.L. Sports in determining this price is the cost of doing the job.
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Slide 3.19
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
• Step 1: The cost object is Job No. 100.
• Step 2: Identify the direct costs of Job No. 100.
• Direct material = £45,000
• Direct manufacturing labour = £14,000
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Slide 3.20
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
• Step 3: Select the cost-allocation base.
• D.L. chose machine hours as the only allocation base for linking all indirect manufacturing costs to jobs.
• Job No. 100 used 500 machine hours.
• 2,480 machine hours were used by all jobs.
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Slide 3.21
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
• Step 4: Identify the indirect costs.
• Actual manufacturing overhead costs were £65,100.
• Step 5: Compute the rate per unit.
• Actual indirect cost rate is £65,100 ÷ 2,480 = £26.25 per machine hour.
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Slide 3.22
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
• Step 6: Compute the indirect costs allocated to the job.
• £26.25 per machine hour × 500 hours = £13,125.
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Slide 3.23
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
• Step 7: Compute the cost of Job No. 100.
Direct materials £45,000
Direct labour 14,000
Factory overhead 13,125
Total £72,125
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Slide 3.24
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Approach to JobCosting (Continued)
• What is the gross margin of this job?
Revenues £104,800
Cost of goods sold 72,125
Gross margin £ 32,675
What is the gross margin percentage?
£32,675 ÷ £104,800 = 31.2%
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Slide 3.25
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Two Major Cost Objects
1 Products
2 Responsibility centres
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Slide 3.26
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 4
Distinguish actual costingfrom normal costing
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Slide 3.27
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Actual Costing System
Actual costing system is a job-costing system that uses actual costs to determine the cost of individual jobs.
• Actual costing is a method of job costing that traces indirect costs to a cost object by using the actual direct-cost rate(s) times the actual quantity of the direct cost input(s).
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Slide 3.28
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Normal Costing
Normal costing is a costing method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).
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Slide 3.29
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Normal Costing (Continued)
• Assume that D.L. Sports budgets £60,000 for total manufacturing overhead costs and 2,400 machine hours.
• What is the budgeted indirect-cost rate?
• £60,000 ÷ 2,400 = £25 per hour
• How much indirect cost was allocated to Job No. 100?
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Slide 3.30
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Normal Costing (Continued)
• 500 machine hours × £25 = £12,500
• What is the cost of Job No. 100 under normal costing?
• Direct materials 45,000 Direct labour 14,000 Factory overhead 12,500
Total £71,500
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Slide 3.31
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Longer Time Period Used to Compute Indirect-Cost Rates
• The numerator reason (indirect costs):
• The shorter the period, the greater the influence of seasonal patterns on the level of costs.
• The denominator reason (quantity of the allocation base):
• The need to spread monthly fixed indirect costs over fluctuating levels of output.
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Slide 3.32
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 5
Understand job costing in service and manufacturing contexts
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Slide 3.33
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Variations of Normal Costing
• Service industries perform jobs that differ from each other.
• Job costing is very useful in these industries.
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Slide 3.34
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Variations of Normal Costing (Continued)
• Carmen and Associates provide home health services.
• Their budget includes the following:
• Total direct labour costs: £400,000
• Total indirect costs: £96,000
• Total direct (professional) labour hours: 16,000
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Slide 3.35
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Variations of Normal Costing (Continued)
• What is the budgeted direct labour cost rate?
• £400,000 ÷ 16,000 = £25
• What is the budgeted indirect cost rate?
• £96,000 ÷ 16,000 = £6
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Slide 3.36
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Variations of Normal Costing (Continued)
• Suppose a patient uses 25 direct labour hours.
• Assuming no other direct costs, what is the cost to Carmen and Associates?
• Direct labour: 25 hours × £25 = £625
Indirect costs: 25 hours × £ 6 = 150 Total
£775
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Slide 3.37
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Management Control and Technology
• In what ways can modern technology help managers in making decisions?
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Slide 3.38
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Management Control and Technology (Continued)
• Modern technology provides managers with quick and accurate product-cost information that facilitates the management and control of jobs.
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Slide 3.39
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 6
Describe key source documentsused in job-costing systems
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Slide 3.40
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
What are Source Documents?
• Source documents are the original records that support journal entries in an accounting system.
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Slide 3.41
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
What is a Job Cost Record?
• Job cost record is a document that recordsand accumulates all the costs assigned to a specific job.
• It is the basic record for product costing.
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Slide 3.42
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
What is a MaterialsRequisition Record?
• A material requisition record is the form used to charge job cost records and departments for the cost of direct materials used on specific jobs.
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Slide 3.43
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
What is a Labour Time Record?
• A labour time record is used to charge job cost records and departments for labour time used on specific jobs.
• It shows the time each employee spent on individual jobs.
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Slide 3.44
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 7
Understand how the steps in the production process are tracked in a
job-costing system
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Slide 3.45
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
General Ledger andSubsidiary Ledgers
• The Work-in-Progress Control account presents the totals of the separate job-cost records pertaining to all unfinished jobs.
• The job-cost record and Work-in-Progress Control account track job costs from the time jobs are started until they are completed.
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Slide 3.46
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions
Purchase of materials Conversion into and other work-in-progress manufacturing stock inputs
Conversion into Sale of finished finished goods stock goods
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Slide 3.47
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Purchase of £80,000 worth of materials (direct and indirect) on credit.
• Materials Accounts Payable Control Control 1. 80,000 1. 80,000
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Slide 3.48
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Materials costing £70,000 were sent to the manufacturing plant floor.
• £45,000 were issued to Job No. 100 and £10,000 to Job No. 102.
• £15,000 of indirect materials were issued.
• What is the journal entry?
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Slide 3.49
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Work-in-Progress Control: Job No. 10045,000 Job No. 102
10,000 Factory Overhead Control 15,000 Materials Control 70,000
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Slide 3.50
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
Materials Work-in-Progress Control Control 1. 80,000 2. 70,000 2. 55,000
Manufacturing Overhead Control Job No. 100 2. 15,000 2. 45,000
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Slide 3.51
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Total manufacturing payroll for the period was £22,000.
• Job No. 100 incurred direct labour costs of £14,000 and Job No. 102 incurred direct labour costs of £3,000.
• £5,000 of indirect labour was also incurred.
• What is the journal entry?
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Slide 3.52
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Work-in-Progress Control: Job No. 10014,000 Job No. 102
3,000 Manufacturing Overhead Control 5,000 Wages Payable
22,000
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Slide 3.53
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
Wages Payable Work-in-Progress Control Control 3. 22,000 2. 55,000 3. 17,000
Manufacturing Overhead Control Job 100 2. 15,000 2. 45,000 3. 5,000 3. 14,000
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Slide 3.54
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Wages payable were paid.
• Wages Payable Control 22,000 Cash Control 22,000
• Wages Payable Cash Control Control 4. 22,000 3. 22,000 4. 22,000
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Slide 3.55
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Assume that depreciation for the period is £26,000.
• Other manufacturing overhead incurred amounted to £19,100.
• What is the journal entry?
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Manufacturing Overhead Control 45,100 Accumulated Depreciation Control
26,000 Various Accounts19,100
• What is the balance of the Manufacturing Overhead Control?
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Manufacturing Overhead Control 2. 15,000 3.
5,000 5. 45,100 Balance 65,100
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• £62,000 of overhead was allocated to the various jobs of which £12,500 went to Job No. 100.
• What is the journal entry?
• Work-in-Progress Control 62,000 Manufacturing Overhead Control 62,000
• What are the balances of the control accounts?
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Manufacturing Overhead Work-in-Progress Control Control 2. 15,000 6. 62,000 2. 55,000 3. 5,000 3. 17,000 5. 45,100 6. 62,000 Bal. 3,100 Bal. 134,000
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• The cost of Job 100 is:
Job No. 100 2.45,000 3. 14,000 6. 12,500 Bal. 71,500
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Jobs costing £104,000 were completed and transferred to finished goods, including Job No. 100.
• What effect does this have on the control accounts?
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
Work-in-Progress Finished Goods
Control Control 2. 55,000 7. 104,000 7. 104,000 3. 17,000 6. 62,000 Bal. 30,000
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• What is the journal entry to transfer Job No. 100?
• Finished Goods Control 71,500 Work-in-Progress Control 71,500
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Job No. 100 was sold for £104,800.
• What is the journal entry?
• Accounts Receivable Control104,800 Revenues 104,800 Cost of Goods Sold 71,500 Finished Goods Control
71,500
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• What is the balance in the Finished Goods Control account?
• £104,000 – £71,500 = £32,500
• Assume that marketing and administrative salaries were £9,000 and £10,000.
• What is the journal entry?
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Transactions (Continued)
• Marketing and Administrative Costs 19,000 Salaries Payable Control 19,000
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Learning Objective 8
Describe alternative methods of dealing with period-end under- or
overallocated indirect costs
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Budgeted Indirect Costs
• Budgeted indirect-cost rates can be assigned to individual jobs on an ongoing and timely basis.
• However, budgeted rates are based on estimates made up to 12 months before actual costs are incurred.
• Adjustments may need to be made by year end.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End-of-Period Adjustments
• Underallocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred.
• Overallocated indirect costs occur when the allocated amount of indirect costs is greater than the actual amount incurred.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End-of-Period Adjustments (Continued)
• Under- or overallocated indirect costs =Indirect costs incurred – Indirect costs allocated
• Underapplied (or overapplied) indirect costs and underabsorbed (or overabsorbed) indirect costs are equivalent terms.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End-of-Period Adjustments (Continued)
• Assume the following annual data for D.L. Sports: Manufacturing Overhead Control Bal. 65,100
Manufacturing Overhead Applied Bal. 62,000
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End-of-Period Adjustments (Continued)
• How was the allocated overhead determined?
• 2,480 machine hours × £25 budgeted rate
= £62,000
• £65,100 – £62,000 = £3,100 (under-allocated)
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End-of-Period Adjustments (Continued)
• Reasons for the underallocated amount:
– Numerator reason (indirect costs)
– Denominator reason (quantity of allocation base)
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End-of-Period Adjustments (Continued)
• Actual manufacturing overhead costs of £65,100 are more than the budgeted amount of £60,000.
• Actual machine hours of 2,480 are more than the budgeted amount of 2,400 hours.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End-of-Period Adjustments (Continued)
• Approaches to disposing underallocated or overallocated overhead:
1 Adjusted allocation rate approach
2 Proration approaches
3 Immediate write-off to Cost of Goods Sold approach
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Adjusted Allocation Rate Approach
• Adjusted allocation rate approach restates all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted cost rates.
• Actual indirect-cost rate is computed at the end of the year.
• Every job to which indirect costs were allocated during the year has its amount recomputed.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Adjusted Allocation RateApproach (Continued)
• Actual manufacturing overhead (£65,100) exceeds manufacturing overhead allocated (£62,000) by 5%.
• 3,100 ÷ 62,000 = 5%
• Actual manufacturing overhead rate is £26.25 per machine hour (£65,100 ÷ 2,480) rather than the budgeted £25.00.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Adjusted Allocation Rate Approach
• D.L. Sports could increase the manufacturing overhead allocated to each job by 5%.
• Manufacturing overhead allocated to Job No. 100 under normal costing is £12,500.
• £12,500 × 5% = £625
• £12,500 + £625 = £13,125 which equals actual manufacturing overhead.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Proration Approach
• Proration is the spreading of under- or over-allocated overhead among ending Work-in- Progress, Finished Goods and Cost of Goods Sold.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Proration Approach (Continued)
• Basis to prorate underallocated or overallocated overhead:
1 Total amount of manufacturing overhead allocated (before proration)
2 Ending balances of Work-in-Progress, Finished Goods and Cost of Goods Sold
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Proration Approach “A”
• Manufacturing overhead component of year-end balances (before proration):
• Work-in-Progress £23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total
£62,000 100%
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Proration Approach “A” (Continued)
• £3,100 × 38% = £1,178 to Work-in-Progress
• £3,100 × 42% = £1,302 to Finished Goods
• £3,100 × 20% = £620 to Cost of Goods Sold
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Proration Approach “A” (Continued)
Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 1,302
0 33,802 Cost of Goods Sold Work-in-Progress 71,500
30,000 620 1,178 72,120
31,178
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Proration Approach “B”
• Ending balance of Work-in-Progress, Finished Goods and Cost of Goods Sold
• Work-in-Progress £30,000 22% Finished Goods 32,500 24% Cost of Goods Sold 71,500 54% Total
£134,000 100%
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Slide 3.85
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Proration Approach “B” (Continued)
Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100
744 0 33,244 Cost of Goods Sold Work-in-Progress 71,500 30,000 1,674 682 73,174 30,682
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Immediate Write-off to Cost of Goods Sold Approach
Manufacturing Overhead 65,100 62,000 3,100 0 Cost of Goods Sold
71,500 3,100 74,600
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Slide 3.87
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
Choosing Among Approaches
• The adjusted allocation rate approach provides the most accurate record of individual job costs.
• Indirect-cost-allocated components provide the most accurate stock and cost of goods sold figures.
• Immediate write-off approach is the simplest.
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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End of Chapter 3End of Chapter 3