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Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Many different products are produced each period.
Products are manufactured to order.
Cost are traced or allocated to jobs.
Cost records must be maintained for each distinct product or job.
Chapter 4
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Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
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
THE JOB
Directmaterial
Direct labor
Traced directly to each job
Traced directly
to each job
Manufacturingoverhead (OH)
Applied to eachjob using a
predeterminedrate
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Manufacturing Overhead
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.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
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Apply overhead to
each job using a
predeter-mined rate.
Apply overhead to
each job using a
predeter-mined rate.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
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Job-Order Cost Accounting
The primary document for
tracking the costs associated with a
given job is the job cost sheet.
Let’s investigate
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PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost
Job-Order Cost Accounting
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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost
Let’s see one
A materials requisition form is used to
authorize the use of materials on a job.
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Materials Requisition Form
Will E. Delite
Type, quantity, and total cost of material charged to job A-143.
Cost of material is charged to job A-143.
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
MaterialsRequisition
Direct materials
Indirect materials
Manufacturing Overhead Account
Materials usedmay be either
direct orindirect.
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Job-Order Cost Accounting
Workers use time tickets to record the time spent on each
job.
Let’s see one
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
Direct Labor
Indirect Labor
An employee’stime may be eitherdirect or indirect.
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Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct
labor hour (DLH).Let’s do it
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Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Application of Manufacturing Overhead
Ideally, the allocation base is a cost driver that causes overhead.
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Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
Actual amount of the cost driver such as units produced, direct labor hours, or machine hours.
Incurred during the period.
Based on estimates, and determined before the
period begins.
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Application of Manufacturing Overhead
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity
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Job-Order CostingDocument Flow Summary
EmployeeTime Ticket
Job Cost Sheets
MaterialsRequisition
OtherActual OHCharges
IndirectMaterial
IndirectLabor
AppliedOverhead
Manufacturing Overhead Account
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The Need for a Predetermined Manufacturing Overhead Rate
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
$$
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PearCo applies overhead based on direct labor hours. Total estimated overhead
for the year is $640,000. Total estimated labor cost is $1,400,000 and total
estimated labor hours are 160,000.
What is PearCo’s predetermined overhead rate per hour?
Overhead Application Example
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For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
Overhead Application Example
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 =
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Overhead Application Example
What amount of overhead willPearCo apply to Job X-32?
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Let’s examine the cost flows in a
job-order costing system. We will use T-accounts and start with
materials.
Job-Order System Cost Flows
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Raw MaterialsMaterial
Purchases
Direct Materials
Direct Materials
Mfg. Overhead
Indirect Materials
Job-Order System Cost FlowsWork in Process(Job Cost Sheet)
Indirect Materials
Actual Applied
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Next let’s add labor costs and
applied manufacturing overhead to the job-order cost flows. Are you
with me?
Job-Order System Cost Flows
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Job-Order System Cost Flows
Direct Labor
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
OverheadApplied to
Work inProcess
IndirectLabor
Others
Direct Labor
Overhead Applied
IndirectLabor
Indirect Materials
Actual AppliedIf 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.
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Now let’s complete the
goods and sell them. Still with
me?
Job-Order System Cost Flows
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Cost ofGoodsMfd.
Finished Goods
Cost ofGoodsSold
Cost ofGoodsMfd.
Cost of Goods Sold
Cost ofGoodsSold
Job-Order System Cost FlowsWork in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
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Let’s return to PearCo and see
what we will do if actual and
applied overhead are not equal.
Job-Order System Cost Flows
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Overhead Application Example
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours.
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.
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Overhead Application Example
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours.
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.
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SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours.
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,
Overhead Application Example
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
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Work inProcess
FinishedGoods
Cost of Goods Sold
$30,000may be allocated
to these accounts.
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
Overapplied and Underapplied Manufacturing Overhead
PearCo’s Method
OR
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Overapplied and Underapplied Manufacturing Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
$30,000
$30,000
AdjustedBalance
OverheadAppliedto jobs
$680,000
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Overapplied and Underapplied Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’s Method
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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. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
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. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Overhead Application Question 1
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Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.
a. True
b. False
Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.
a. True
b. False
Overhead Application Question 2
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Let’s look at summary journal entries for a job-
order costing system. We’ll omit
the numbers so that we can focus
on accounts.
Job-Order Costing – Typical Accounting Entries
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Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
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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.
Cost Flows – Material Usage
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Cost Flows – Labor
The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases
Manufacturing Overhead.
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Cost Flows – 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.
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Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.
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Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
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Cost Flows – Cost of Goods Manufactured
As jobs are completed, the cost of goods manufactured is transferred to Finished Goods
from Work in Process.
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Cost Flows – Sales
When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods.
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