© 2010 The McGraw-Hill Companies, Inc. Systems Design: Process Costing Chapter 4.
© 2010 The McGraw-Hill Companies, Inc. Systems Design: Job-Order Costing Chapter 3.
Transcript of © 2010 The McGraw-Hill Companies, Inc. Systems Design: Job-Order Costing Chapter 3.
© 2010 The McGraw-Hill Companies, Inc.
Systems Design: Job-Order Costing
Chapter 3
McGraw-Hill/Irwin Slide 2
Learning Objective 1
Distinguish between Distinguish between process costing and job-process costing and job-order costing and identify order costing and identify companies that would use companies that would use
each costing method.each costing method.
McGraw-Hill/Irwin Slide 3
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
McGraw-Hill/Irwin Slide 4
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)
Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)
McGraw-Hill/Irwin Slide 5
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
McGraw-Hill/Irwin Slide 6
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)
Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)
McGraw-Hill/Irwin Slide 7
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
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.
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
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.
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 10
Learning Objective 2
Identify the documents Identify the documents used in a job-order costing used in a job-order costing
system.system.
McGraw-Hill/Irwin Slide 11
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.
Job-Order Costing – An Overview
Direct MaterialsDirect Materials
Direct LaborDirect Labor
McGraw-Hill/Irwin Slide 12
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Indirect Manufacturing Costs
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
McGraw-Hill/Irwin Slide 13
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09Date 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 Product Cost
The Job Cost Sheet
McGraw-Hill/Irwin Slide 14
Measuring Direct Materials Cost
Will E. Delite
McGraw-Hill/Irwin Slide 15
Measuring Direct Materials Cost
McGraw-Hill/Irwin Slide 16
Measuring Direct Labor Costs
McGraw-Hill/Irwin Slide 17
Job-Order Cost Accounting
McGraw-Hill/Irwin Slide 18
Learning Objective 3
Compute predetermined Compute predetermined overhead rates and explain overhead rates and explain
why estimated overhead why estimated overhead costs (rather than actual costs (rather than actual
overhead costs) are used in overhead costs) are used in the costing process.the costing process.
McGraw-Hill/Irwin Slide 19
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to
individual jobs.individual jobs.
Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to
individual jobs.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 manager’s salary.
3.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
McGraw-Hill/Irwin Slide 20
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before
the period begins.
Manufacturing Overhead Application
McGraw-Hill/Irwin Slide 21
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.
The Need for a POHR
McGraw-Hill/Irwin Slide 22
Determining Predetermined Overhead RatesPredetermined overhead rates are calculated
using a three-step process.
Estimate the level of
production for the period.
Estimate the level of
production for the period.
Estimate total amount of the allocation base
for the period.
Estimate total amount of the allocation base
for the period.
Estimate total manufacturing
overhead costs.
Estimate total manufacturing
overhead costs.
POHR = ÷
McGraw-Hill/Irwin Slide 23
Actual amount of allocation is based upon the actual level of
activity (normal costing system).
Actual amount of allocation is based upon the actual level of
activity (normal costing system).
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
McGraw-Hill/Irwin Slide 24
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.
Overhead Application Rate
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 =
McGraw-Hill/Irwin Slide 25
Job-Order Cost Accounting
McGraw-Hill/Irwin Slide 26
Job-Order Cost Accounting
McGraw-Hill/Irwin Slide 27
Interpreting the Average Unit Cost
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit was produced.
Fixed overhead would not change if another unitwas produced, so the incremental cost of another unit is something less than $118.
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit was produced.
Fixed overhead would not change if another unitwas produced, so the incremental cost of another unit is something less than $118.
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.b. $350.c. $380.d. $730.
McGraw-Hill/Irwin Slide 29
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
McGraw-Hill/Irwin Slide 30
Learning Objective 4
Understand the flow of costs Understand the flow of costs in a job-order costing system in a job-order costing system
and prepare appropriate and prepare appropriate journal entries to record journal entries to record
costs.costs.
McGraw-Hill/Irwin Slide 31
Job-Order Costing Document Flow Summary
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A production A production order initiates order initiates work on a job.work on a job.
A production A production order initiates order initiates work on a job.work on a job.
McGraw-Hill/Irwin Slide 32
Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
MaterialsRequisitionMaterials
Requisition
Manufacturing Overhead Account
Manufacturing Overhead Account
Direct materials
Indirect materials
MaterialsMaterialsused may beused may be
either direct oreither direct orindirect.indirect.
MaterialsMaterialsused may beused may be
either direct oreither direct orindirect.indirect.
McGraw-Hill/Irwin Slide 33
Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Manufacturing Overhead Account
Anemployee’s
time may be eitherdirect orindirect.
Anemployee’s
time may be eitherdirect orindirect.
Direct Labor
Indirect Labor
McGraw-Hill/Irwin Slide 34
Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
Manufacturing Overhead Account
OtherActual OHCharges
OtherActual OHCharges
Job Cost Sheets
Job Cost Sheets
POHR rate used to apply overhead
MaterialsRequisitionMaterials
Requisition
EmployeeTime TicketEmployee
Time TicketIndirectLabor
IndirectMaterial
McGraw-Hill/Irwin Slide 35
Learning Objectives 4 and 7
Understand the flow of costs in a job-Understand the flow of costs in a job-order costing system and prepare order costing system and prepare
appropriate journal entries to record appropriate journal entries to record costs. costs.
Use T-accounts to show the flow of Use T-accounts to show the flow of costs in a job-order costing system.costs in a job-order costing system.
McGraw-Hill/Irwin Slide 36
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 37
Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
The Purchase and Issue of Raw Materials
McGraw-Hill/Irwin Slide 38
Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
McGraw-Hill/Irwin Slide 39
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 40
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
The Recording of Labor Costs
McGraw-Hill/Irwin Slide 41
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 42
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Recording Actual Manufacturing Overhead
OtherOverhead
McGraw-Hill/Irwin Slide 43
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 44
Learning Objective 5
Apply overhead cost to Apply overhead cost to Work in Process using a Work in Process using a predetermined overhead predetermined overhead
rate.rate.
McGraw-Hill/Irwin Slide 45
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Applying Manufacturing Overhead
OtherOverhead
Overhead Applied
OverheadApplied to
Work inProcess
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.
McGraw-Hill/Irwin Slide 46
Applying Manufacturing Overhead
Work in Process is increased when Manufacturing Overhead is applied to jobs.
McGraw-Hill/Irwin Slide 47
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the
period incurred.
Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees
who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees
who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
McGraw-Hill/Irwin Slide 48
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
McGraw-Hill/Irwin Slide 49
Learning Objective 6
Prepare schedules of cost Prepare schedules of cost of goods manufactured of goods manufactured and cost of goods sold.and cost of goods sold.
McGraw-Hill/Irwin Slide 50
Finished GoodsWork in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Transferring Completed Units
McGraw-Hill/Irwin Slide 51
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 52
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
Transferring Units Sold
McGraw-Hill/Irwin Slide 53
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 54
Learning Objective 8
Compute underapplied or Compute underapplied or overapplied overhead cost and overapplied overhead cost and
prepare the journal entry to prepare the journal entry to close the balance in close the balance in
Manufacturing Overhead to the Manufacturing Overhead to the appropriate accounts.appropriate accounts.
McGraw-Hill/Irwin Slide 55
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 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 applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
McGraw-Hill/Irwin Slide 56
PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours worked on direct labor hours worked on
jobs.jobs.
How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. overhead rate of $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
McGraw-Hill/Irwin Slide 57
PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor
hours worked on jobs.hours worked on jobs.
How much total overhead was applied to PearCo’s How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s
predetermined overhead rate of $4.00 per predetermined overhead rate of $4.00 per direct labor hour. 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
Overhead Application Example
McGraw-Hill/Irwin Slide 58
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.
Quick Check
McGraw-Hill/Irwin Slide 59
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.
Quick Check
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
McGraw-Hill/Irwin Slide 60
Disposition of Under- or Overapplied Overhead
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
Cost of Goods Sold
PearCo’s Method
Work inProcessWork inProcess
FinishedGoods
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
$30,000may be allocated
to these accounts.
OROROROR
McGraw-Hill/Irwin Slide 61
Disposition of Under- or Overapplied Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
Overhead appliedto jobs
$680,000
McGraw-Hill/Irwin Slide 62
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:
Amount Percent of
Total Allocation 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 63
Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation 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$
We would complete the following allocation of $30,000 overapplied overhead:
10% × $30,00010% × $30,000
McGraw-Hill/Irwin Slide 64
Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation 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 65
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
More accurate but more complex to compute.More accurate but more complex to compute.
McGraw-Hill/Irwin Slide 66
Quick Check
What effect will 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.
What effect will 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.
McGraw-Hill/Irwin Slide 67
Quick Check
What effect will 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.
What effect will 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.
McGraw-Hill/Irwin Slide 68
May be more complex May be more complex but . . .but . . .
May be more complex May be more complex but . . .but . . .
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide
overhead rate.overhead rate.
To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide
overhead rate.overhead rate.
Large companies Large companies often use multiple often use multiple
predetermined predetermined overhead rates.overhead rates.
Large companies Large companies often use multiple often use multiple
predetermined predetermined overhead rates.overhead rates.
May be more accurate because May be more accurate because it reflects differences across it reflects differences across
departments.departments.
May be more accurate because May be more accurate because it reflects differences across it reflects differences across
departments.departments.
McGraw-Hill/Irwin Slide 69
Job-Order Costing in Service Companies
Job-order costing is used in many different Job-order costing is used in many different types of service companies.types of service companies.
Job-order costing is used in many different Job-order costing is used in many different types of service companies.types of service companies.
McGraw-Hill/Irwin Slide 70
The Use of Information Technology
Technology plays an important part in manyjob-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.
Technology plays an important part in manyjob-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.
© 2010 The McGraw-Hill Companies, Inc.
The Predetermined Overhead Rate and Capacity
Appendix 3A
McGraw-Hill/Irwin Slide 72
Learning Objective 9
(Appendix 3A)(Appendix 3A)
Understand the implications of Understand the implications of basing the predetermined basing the predetermined
overhead rate on activity at overhead rate on activity at capacity rather than on capacity rather than on
estimated activity for the period.estimated activity for the period.
McGraw-Hill/Irwin Slide 73
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.
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 74
Capacity-Based Overhead Rates
Criticisms can be overcome by using Criticisms can be overcome by using estimated total units in the allocation base estimated total units in the allocation base
at capacity in the denominator of the at capacity in the denominator of the predetermined overhead rate calculation.predetermined overhead rate calculation.
Criticisms can be overcome by using Criticisms can be overcome by using estimated total units in the allocation base estimated total units in the allocation base
at capacity in the denominator of the at capacity in the denominator of the predetermined overhead rate calculation.predetermined overhead rate calculation.
Let’s look at the difference!Let’s look at the difference!
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. What is
the predetermined overhead rate?
McGraw-Hill/Irwin Slide 76
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.
TraditionalMethod
= $2.50 per unit$100,000
40,000=
Capacity Method
= $2.00 per unit$100,000
50,000=
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.
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
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.
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.
Quick Check
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
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.
Quick Check
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.
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
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.
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.
Quick Check
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
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.
Quick Check
McGraw-Hill/Irwin Slide 85
Income Statement Preparation – Capacity
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 50,000 casesPredetermined overhead rate $2.00 per caseFixed 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 86
Income Statement Preparation – Traditional
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 40,000 casesPredetermined overhead rate $2.50 per caseFixed 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$