Copyright © 2012 The McGraw-Hill Companies, Inc.
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Job Order Cost Systems Job Order Cost Systems and Overhead Allocationsand Overhead Allocations
Chapter 17
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Planning andcontrol
functions
Providingproducts or services tocustomers
Assessing theefficiency andeffectivenessof operations
Determining unitmanufacturing
costs
Cost accounting systems provide information supporting decisions making the business successful
Cost Accounting SystemsCost Accounting Systems
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Discloseinventoriesand cost ofgoods sold
Track resourcesconsumed byproducts and
services
Manage activitiesthat consume
resources
Evaluate andreward
employeeperformance
Cost Accounting SystemsCost Accounting Systems
Cost accounting systems are the proceduresand techniques used by management
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Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.
Job Order CostingJob Order Costing
Typical job order cost applications:
Special-order printing Building construction
Also used in service industry Hospitals Law firms
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Receive orders from customers
Begin production
Ordermaterials
Schedulejobs
Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services
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THE JOB
Directmaterials
Direct labor
Traced directly to each job
Traced directly
to each job
Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services Manufacturing
overhead (OH)
Applied to eachjob using a
predeterminedrate (POHR)
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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.
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Apply overhead to each job using a predetermined rate.
Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services
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Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theactivity base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to
jobs is determined before the period begins.
Ideally, the activity base is a cost driver that causes overhead.
Overhead Application Overhead Application RatesRates
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Using a predetermined rate makes it
possible to estimate total job costs. sooner.
Actual overhead for the period is not
known until the end of the period.
Overhead Application Overhead Application RatesRates
$
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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.
Overhead Application Overhead Application RatesRates
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Compuline, Inc., applies overhead based on direct labor hours. Total estimated
overhead for the year is $360,000. Total estimated labor hours are 30,000.
What is Compuline’s predetermined overhead rate per hour?
Overhead Application Overhead Application RatesRates
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For each direct labor hour worked on a job, $12.00 of manufacturing overhead
will be applied to the job.
POHR = $12.00 per DLH
$360,000
30,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Overhead Application Overhead Application RatesRates
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Job Order CostingJob Order Costing
The primary document for
tracking the costs associated with a
given job is the job cost sheet.
Let’s investigate
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The Job Cost SheetThe Job Cost Sheet
831
Product: French Court Dining Tables Date started 1/03/11
Number of units: 100 Date Completed 1/21/11
Manufacturing DirectDepartment Materials Hours Cost Rate
Milling 10,000$ 70 14,000$ 150% 21,000$ Finishing 15,000 300 6,000 150% 9,000
Cost Summary Total Cost Unit CostDirect materials used 25,000$ 250$ Direct Labor 20,000 200 Manufacturing overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) 75,000$ 750$
Cost AppliedManufacturing Overhead
Job Cost SheetOak and Glass Furniture Co.
Direct Labor
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The Job Cost SheetThe Job Cost Sheet
831
Product: French Court Dining Tables Date started 1/03/11
Number of units: 100 Date Completed 1/21/11
Manufacturing DirectDepartment Materials Hours Cost Rate
Milling 10,000$ 70 14,000$ 150% 21,000$ Finishing 15,000 300 6,000 150% 9,000
Cost Summary Total Cost Unit CostDirect materials used 25,000$ 250$ Direct Labor 20,000 200 Manufacturing overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) 75,000$ 750$
Cost AppliedManufacturing Overhead
Job Cost SheetOak and Glass Furniture Co.
Direct LaborA materials requisition
form is used to authorize the use of materials on a job.
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831
Product: French Court Dining Tables Date started 1/03/11
Number of units: 100 Date Completed 1/21/11
Manufacturing DirectDepartment Materials Hours Cost Rate
Milling 10,000$ 70 14,000$ 150% 21,000$ Finishing 15,000 300 6,000 150% 9,000
Cost Summary Total Cost Unit CostDirect materials used 25,000$ 250$ Direct Labor 20,000 200 Manufacturing overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) 75,000$ 750$
Cost AppliedManufacturing Overhead
Job Cost SheetOak and Glass Furniture Co.
Direct Labor
The Job Cost SheetThe Job Cost Sheet
Accumulate direct labor
costs by means of a
work record, such as a time ticket, for each
employee.
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831
Product: French Court Dining Tables Date started 1/03/11
Number of units: 100 Date Completed 1/21/11
Manufacturing DirectDepartment Materials Hours Cost Rate
Milling 10,000$ 70 14,000$ 150% 21,000$ Finishing 15,000 300 6,000 150% 9,000
Cost Summary Total Cost Unit CostDirect materials used 25,000$ 250$ Direct Labor 20,000 200 Manufacturing overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) 75,000$ 750$
Cost AppliedManufacturing Overhead
Job Cost SheetOak and Glass Furniture Co.
Direct Labor
The Job Cost SheetThe Job Cost Sheet
Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on
direct labor cost.
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A materials requisition
indicates the cost of direct
materialto charge to
jobsand the cost of
indirect material to charge to
overhead.
Flow of Costs in Job Flow of Costs in Job CostingCosting
Job Cost Sheets
Manufacturing Overhead Account
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Direct Material
Indirect Material
MaterialsRequisitioinMaterial
RequisitioinMaterialsRequisitioniMaterials
Requisition
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Employee time tickets indicate
the cost of direct laborto charge to
jobsand the cost of indirect
labor to charge to overhead.
Job Cost Sheets
Manufacturing Overhead Account
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Direct Labor
Indirect Labor
Employee Time TicketEmployee Time
TicketEmployee Time TicketEmployee Time
Ticket
Flow of Costs in Job Flow of Costs in Job CostingCosting
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EmployeeTime
Ticket
MaterialsRequisition
OtherActual OHCharges
IndirectMaterial
IndirectLabor
OverheadApplied
withPOHR
Manufacturing Overhead Account
Job Cost Sheets
Flow of Costs in Job Flow of Costs in Job CostingCosting
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•MaterialPurchases
•Direct Material
•Direct Material
Mfg. Overhead•Indirect Material
Work in Process(Job Cost Sheet)
•Indirect Material
Materials Inventory
Flow of Costs in Job Flow of Costs in Job CostingCosting
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•Direct Labor
Mfg. Overhead
Work in Process(Job Cost Sheet)
•Indirect Material
•Direct Material
•OverheadApplied to
Work inProcess
•IndirectLabor
•Direct Labor
•Overhead Applied
•IndirectLabor
the difference is closed to cost of goods sold.
When Actual Applied factory factoryoverhead overhead
=/
Labor
Flow of Costs in Job Flow of Costs in Job CostingCosting
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•Cost ofGoodsMfd.
Finished Goods
•Cost ofGoodsSold
•Cost ofGoodsMfd.
Cost of Goods Sold
•Cost ofGoodsSold
Work in Process(Job Cost Sheet)•Direct
Material•Direct Labor
•Overhead Applied
Flow of Costs in Job Flow of Costs in Job CostingCosting
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If Manufacturing Effect of Closing toOverhead is . . . Cost of Goods Sold
UNDERAPPLIED INCREASE(Applied OH is less Cost of Goods Sold
than actual OH)
OVERAPPLIED DECREASE(Applied OH is greater Cost of Goods Sold
than actual OH)
Over- or Underapplied Over- or Underapplied OverheadOverhead
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Activity-Based Costing Activity-Based Costing (ABC)(ABC)
Assigningoverhead is
difficult. I agree!
One of the most difficult tasks in
computing accurate unit costs lies in determining the
proper amount of overhead cost to
assign to each job.
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Level of C
omplexity
Overhead Allocation
Plantwide Overhead Rate
DepartmentalOverhead Rates
Activity-Based Costing
Activity-Based Costing Activity-Based Costing (ABC)(ABC)
ACB
In the ABC method, we recognize that many activities within a
department drive overhead costs.
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The Benefits of ABCThe Benefits of ABCMore detailed measures of costs.Better understanding of activities.More accurate product costs for . . .
Pricing decisions.Product elimination decisions.Managing activities that cause costs.
Benefits should always be comparedto costs of implementation.
ACB
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Identifying Cost Drivers Identifying Cost Drivers Most cost drivers are related to either
volume or complexity of production.Examples: machine time, machine setups,
purchase orders, production orders.
Three factors are considered in choosing a cost driver: Causal relationship. Benefits received.Reasonableness.
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Overhead Actual Rate Activity
×
Activity-Based Costing Activity-Based Costing ProceduresProcedures Identify activities that consume resources. Assign costs to a cost pool for each
activity. Identify cost drivers associated with each
activity. Compute overhead rate for each cost pool:
Assign costs to products:
Rate = Estimated overhead costs in activity cost pool
Estimated number of activity units
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ABC Versus a Single ABC Versus a Single Application Rate: A Application Rate: A ComparisonComparison Pear Company manufactures a product in
regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Budgeted overhead for the current year is $2,000,000. Other
information:Deluxe RegularModel Model
Direct Material 150$ 112$ Direct Labor Cost 16 8 Direct Labor Time 1.6 hours 0.8 hoursExpected Volume (units) 5,000 40,000
First, determine the unit cost of each modelusing a single application rate.
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DirectLabor Hours
Deluxe Model 5,000 units @ 1.6 hours 8,000 Regular Model 40,000 units @ 0.8 hours 32,000
Total Direct Labor Hours (DLH) 40,000
Overhead Estimated overhead costs Rate Estimated activity
=
Overhead $2,000,000 Rate 40,000 DLH
= = $50 per DLH
Single Application RateSingle Application Rate
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Deluxe RegularModel Model
Direct Material 150$ 112$ Direct Labor 16 8 Manufacturing Overhead$50 per hour × 1.6 hours 80 $50 per hour × 0.8 hours 40 Total Unit Cost 246$ 160$
ABC will have differentoverhead cost per unit.
Single Application RateSingle Application Rate
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Activity-Based CostingActivity-Based Costing Pear Company plans to adopt activity-based costing. Using the
following activity center data, determine the unit cost of the two
products using activity-based costing.Overhead
Activity Cost Cost for Units of ActivityCost Pool Driver Activity Deluxe Regular
Purchasing Orders 84,000$ 400 800 Scrap Rework Orders 216,000 300 600 Testing Tests 450,000 4,000 11,000 Machine Related Hours 1,250,000 20,000 30,000 Total Overhead 2,000,000$
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Overhead UnitsActivity Cost Cost for of
Cost Pool Driver Activity Activity RatePurchasing Orders 84,000$ 1,200 Scrap Rework Orders 216,000 900 Testing Tests 450,000 15,000 Machine Related Hours 1,250,000 50,000 Total Overhead 2,000,000$
Activity-Based CostingActivity-Based Costing
400 deluxe + 800 regular = 1,200 total
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Overhead UnitsActivity Cost Cost for of
Cost Pool Driver Activity Activity RatePurchasing Orders 84,000$ 1,200 $ 70 per orderScrap Rework Orders 216,000 900 $240 per orderTesting Tests 450,000 15,000 $ 30 per testMachine Related Hours 1,250,000 50,000 $ 25 per hourTotal Overhead 2,000,000$
Rate = Overhead Cost for Activity ÷ Units of Activity
Activity-Based CostingActivity-Based Costing
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Let’s completethe table.
Activity-Based CostingActivity-Based Costing
Deluxe Model Regular ModelActual Cost Actual Cost
Activity Units of Allocated Units of AllocatedCost Pool Rate Activity to Product Activity to Product
Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 ? 600 ?Testing $ 30/test 4,000 ? 11,000 ?Machine Related $ 25/hour 20,000 ? 30,000 ?Total Overhead ? ?
Cost Allocated to Product = Actual Units of Activity × Rate
$70 × 400 = $28,000
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Deluxe Model Regular ModelActual Cost Actual Cost
Activity Units of Allocated Units of AllocatedCost Pool Rate Activity to Product Activity to Product
Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$
Cost Allocated to Product = Actual Units of Activity × Rate
Activity-Based CostingActivity-Based Costing
Total overhead = $720,000 + $1,280,000 = $2,000,000Recall that $2,000,000 was the original amount of
overhead assigned to the products using traditional overhead costing.
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Overhead Costs Assigned to Products: Deluxe Model $720,000 ÷ 5,000 units = $144 per unit Regular Model $1,280,000 ÷ 40,000 units = $32 per unit
Deluxe RegularModel Model
Direct Materials 150$ 112$ Direct Labor 16 8 Manufacturing Overhead 144 32 Total Unit Cost 310$ 152$
Activity-Based CostingActivity-Based Costing
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This result is not uncommon when activity-based costing is used. Many companies have found that
low-volume, specialized products have greater overhead costs than previously realized.
ABCDeluxe Regular Deluxe RegularModel Model Model Model
Direct materials 150$ 112$ 150$ 112$ Direct labor 16 8 16 8 Overhead 80 40 144 32 Total cost 246$ 160$ 310$ 152$
Single Rate
ABC Versus a Single ABC Versus a Single Application Rate: A Application Rate: A ComparisonComparison
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Cost Cost DriverMaterials purchasing Number of purchase ordersMaterials handling Number of materials
requisitionsPersonnel processing Number of employees hired
or laid offEquipment depreciation Number of products
produced or hours of useQuality inspection Number of units inspectedIndirect labor for Number of setups required equipment setupsEngineering costs for Number of modifications product modifications
Costs and Cost Drivers inCosts and Cost Drivers inActivity-Based CostingActivity-Based Costing
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Ethics, Fraud, and Ethics, Fraud, and Corporate GovernanceCorporate Governance
In addition to allocating manufacturing overhead costs to
products, many companies allocate corporate overhead charges to their
segments or divisions.
Failure to allocate corporate overhead properly can result in misleading financial statement
information.
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End of Chapter 17End of Chapter 17
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