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Chapter 4
5) Cost objects may be jobs, products, or customers. T or F.
Cost ObjectLecture Question
Answer: TRUE
Chapter 4
• Textbook Definition: Anything for which a measurement of costs is desired.
• The cost object can be a Product, Department, Customer, Machine, etc.
Cost Object
Chapter 4
4) Quality control costs may be a direct cost of the Manufacturing Department, but an indirect cost of an individual job. T or F.
Cost ObjectLecture Question
Answer: TRUE
Chapter 4
• A Cost Object can have direct costs and indirect costs.
• So, a Manufacturing Department can have direct costs that are directly associated with the department, such as supervision, rent, quality control expenses.
•But… the Manufacturing Department can be an indirect cost when assigning costs to individual Jobs or Products.
(bold items represent Cost Objects)
Cost Object
Chapter 4
• In Chapter 4, the Cost Object will be a Job or a Product.
• Remember, that the cost of a Job or Product will be the total of three distinct types of cost:
Direct Materials (DM)
Direct Labor (DL)
Overhead (OH) (also known as “Burden” or “Indirect Costs”)
Cost Object
Chapter 4
• It’s fairly easy to account for the DM and DL of a Job or Product.
• Overhead (i.e., indirect costs) is difficult to associate with a particular Job or Product.
•So… we allocate the overhead.
Overhead Allocation
Chapter 4
Overhead Allocation
• Overhead totals $84,000. • My house is house number one. I believe overhead should be allocated equally among the three houses. My specific recommendation is:
$84,000 overhead / 3 houses = $28,000 per house.
• The totals would be as follows:House 1 House 2 House 3$378,000 $228,000 $178,000
• Your house is house number three. Do you agree with this assignment of cost?
Chapter 4
Overhead Allocation
• Overhead totals $84,000. • We could assign overhead based on Direct Material usage:
$84,000 overhead / ($140,000 + $70,000 + $90,000) = $0.28 per DM dollar
• The totals would then be as follows:House 1 House 2 House 3$389,200 $219,600 $175,200
Chapter 4
Overhead Allocation
• Overhead totals $84,000. • We could assign overhead based on Direct Labor usage:
$84,000 overhead / ($210,000 + $130,000 + $60,000) = $0.21 per DL dollar
• The totals would then be as follows:House 1 House 2 House 3$394,100 $227,300 $162,600
Chapter 4
Overhead Allocation
• Overhead totals $84,000. • Based on how we assign the overhead to the houses (“cost object”), the different house costs are as follows:
House 1 House 2 House 3 Based on # of Houses $378,000 $228,000 $178,000 Based on DM $ $389,200 $219,600 $175,200 Based on DL $ $394,100 $227,300 $162,600
• Fairly sizeable variations resulting from how we allocated Overhead!
Distinguish between Process Posting and Job-Order Costing and identify companies that would use
each costing method.
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.
A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)
Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)
Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)
Chapter 4
67) Process costing:
A) allocates all product costs, including materials and labor B) results in different costs for different units produced C) is commonly used by general contractors who construct custom-built homes D) is used exclusively in manufacturing
Process Costing vs. Job CostingLecture Question
Answer: A
Chapter 4
68) ________ costing is used by a business to price unique products for different jobs.
A) Actual B) Job C) Process D) Traditional
Process Costing vs. Job CostingLecture Question
Answer: B
Comparing Process and Job-Order Costing
Job-Order Process
Number of jobs worked Many Single Product
Cost accumulated byIndividual
Job Department
Average cost computed by Job Department
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
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.
Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
Quick Check
Chapter 4
• Robinson Company manufactures and installs paper-making machines. The build many machines for different customers throughout the year.
• Their bid of $15,000 has been accepted to build a new machine desired by Western Pulp and Paper.
•The job number assigned to the project was Job WPP298.
• At the end of the year, (after the machine has been installed), Robinson would like to determine the profitability of all of their jobs for the year, including Job WPP298.
Actual Costing
See pages 101-104
Chapter 4
• The job number assigned to the project was Job WPP298.
• As Direct Materials were used to build the machine, the cost of those materials were charged to Job WPP298.
A total of $4,606 of Direct Materials were used/charged to Job WPP298.
• As Direct Labor was used to build the machine, the cost of that labor was charged to Job WPP298.
A total of 88 Direct Labor HOURS ($1,579 total amount) were used/charged to Job WPP298.
• What’s difficult is to determine the Overhead that should be charged to Job WPP298. See next slide for definition and subsequent slide for the Overhead amount that was assigned to Job WPP298.
Actual CostingSee pages 101-104
Chapter 4
To determine the Overhead cost that should be charged to Job WPP298, we first need to (1) determine the entire amount of overhead expense for the company, and then (2) determine a method to assign some of that cost to Job WPP298.
1. Robinson’s accounting records determined that $1,215,000 was the total amount of manufacturing overhead cost for the year.
This “pool” of indirect costs needs to somehow to be assigned to the jobs that Robinson completed during the year.
2. Robinson determines that the total amount of overhead costs should be allocated to jobs based on the direct labor hours used for each job.
The total direct labor hours to complete all jobs were 27,000 hours for the year.
Actual Costing
See pages 101-104
Chapter 4
Therefore, if we divide all the overhead costs ($1,215,000)by the total amount of direct labor hours (27,000 DLH’s), the resulting value ($45 per DLH) will be the rate that we will use to assign overhead to all the jobs produced during the year.
The Overhead cost allocated to Job WPP298 is $3,960, which is the 88 DLH’s multiplied by the overhead allocation rate of $45 per DLH.
Actual Costing
See pages 101-104
Chapter 4
So, now we have the entire job cost for Job WPP298:
Direct Materials: $4,606
Direct Labor: $1,579
Overhead: $3,960 -----------
Total: $10,145
Actual Costing
See pages 101-104
Chapter 4
• The previous example computed the overhead allocation rate of $45 per DLH by dividing all the actual overhead costs ($1,215,000) for the year by the total amount of actual direct labor hours (27,000 DLH’s).
• The Robinson Company would like to cost jobs more frequently than once per year. But, determining an actual overhead each month would cause different rates for each month…
…because the amount of actual overhead expense (“numerator”) would fluctuate each month (e.g., real estate taxes, heating cost, etc.)
… because the amount of DLH’s (“denominator”) will vary each month (e.g., summer shutdown, December holidays, etc.)
• Therefore, if Robinson Company computed an actual rate every month, identical jobs produced in, say, May would have a lower cost than the identical job produced in December.
Actual CostingSee pages 106-107
Chapter 4
80) Normandeau Company's actual manufacturing overhead is $1,400,000. Overhead is allocated on the basis of direct labor hours. The direct labor hours were 25,000 for the period. What is the manufacturing overhead rate?
A) $47.00 B) $56.00 C) $75.00 D) None of the above are correct.
Lecture Question
Actual Costing
Answer: B
Explanation: $1,400,000 / 25,000 = $56.00 per DLH
Chapter 4
81) Copley Enterprises manufactures digital video equipment. For each unit $1,475 of direct material is used and there is $1,500 of direct manufacturing labor at $30 per hour. Manufacturing overhead is applied at $35 per direct manufacturing labor hour. Calculate the cost of each unit.
A) $2,975 B) $4,025 C) $4,725 D) $3,150
Lecture Question
Actual Costing
Answer: C
Explanation: DM + DL + (( DLH’s )*rate) $1,475 + $1,500 + (($1,500/$30)*$35) = $75.00
Hint: A product cost is composed of DM + DL + OH
Chapter 4
• To assist in determining the cost of jobs as they are finished, we will do the same allocation process in Actual Costing, but we will estimate (budget) the total amount of overhead costs for the year and estimate (budget) the total amount of direct labor hours (or other allocation base) for the year.
• We can then calculate an overhead rate to assign to jobs as they are completed. This is called the Predetermined Overhead Rate (POR):
POR = Budgeted Annual Overhead Cost / Budgeted DLH’s
• Example for Robinson Company on page 108:
$40 per DLH = $1,120,000/ 28,000 DLH’s
Normal CostingSee pages 108-109
Chapter 4
29) Normal costing assigns indirect costs based on an actual indirect-cost rate. T or F.
Normal CostingLecture Question
Answer: FALSE
Explanation: Normal costing assigns indirect costs based on a budgeted rate.
Chapter 4
27) The budgeted indirect cost rate (POR) is the budgeted indirect costs divided by budgeted quantity of the cost allocation base. T or F.
Normal CostingLecture Question
Answer: TRUE
Chapter 4
23) To smooth fluctuating levels of output, separate indirect-cost rates should be calculated for each month. T or F.
Normal CostingLecture Question
Answer: FALSE
Explanation: To smooth seasonal costs and fluctuating levels of output, indirect-cost rates should be calculated on an annual basis.
Chapter 4
130) Using job costing, the 20X5 budgeted manufacturing overhead rate is:
A) $4.00 per machine-hour B) $4.80 per machine-hour C) $5.00 per machine-hour D) $6.00 per machine-hour
Lecture Question
Actual & Normal Costing Review
Answer: C
Explanation: $100,000 / 20,000 mh = $5 per mh
For 20X5, Marcotte's Animal Supply Manufacturing uses machine-hours as the only overhead cost-allocation base. The accounting records contain the following information:
Estimated ActualManufacturing overhead costs $100,000 $120,000Machine-hours 20,000 25,000
Chapter 4
131) Using normal costing, the amount of manufacturing overhead costs allocated to jobs during 20X5 is:
A) $150,000 B) $125,000 C) $120,000 D) $100,000
Lecture Question
Answer: B Explanation: Actual Hrs × Budgeted Allocation Rate
25,000 mh × ($100,000 / 20,000 mh) = $125,000
For 20X5, Marcotte's Animal Supply Manufacturing uses machine-hours as the only overhead cost-allocation base. The accounting records contain the following information:
Estimated ActualManufacturing overhead costs $100,000 $120,000Machine-hours 20,000 25,000
Actual & Normal Costing Review
Chapter 4
132) Using job costing, the 20X5 actual indirect-cost rate is:
A) $4.00 per machine-hour B) $4.80 per machine-hour C) $5.00 per machine-hour D) $6.00 per machine-hour
Lecture Question
Answer: B
Explanation: Actual Cost / Actual mh’s $120,000 / 25,000 mh = $4.80 per mh
For 20X5, Marcotte's Animal Supply Manufacturing uses machine-hours as the only overhead cost-allocation base. The accounting records contain the following information:
Estimated ActualManufacturing overhead costs $100,000 $120,000Machine-hours 20,000 25,000
Actual & Normal Costing Review
Chapter 4
133) Using actual costing, the amount of manufacturing overhead costs allocated to jobs during 20X5 is:
A) $150,000 B) $125,000 C) $120,000. D) $100,000
Lecture Question
Answer: C
Explanation: Actual Hrs × Actual Allocation Rate 25,000 mh × ($120,000 / 25,000 mh) = $120,000 per mh
For 20X5, Marcotte's Animal Supply Manufacturing uses machine-hours as the only overhead cost-allocation base. The accounting records contain the following information:
Estimated ActualManufacturing overhead costs $100,000 $120,000Machine-hours 20,000 25,000
Actual & Normal Costing Review
Chapter 4
136) Manufacturing overhead cost estimates for this special order total:
A) $10,000 B) $30,000 C) $36,000 D) None of these answers is correct.
Lecture Question
Answer: B
Explanation: Budgeted Allocation Rate × DLH’s $60 per DLH × 500 dlh = $30,000
Joni's Kitty Supplies applies manufacturing overhead costs to products at a budgeted indirect-cost rate of $60 per direct manufacturing labor-hour. A retail outlet has requested a bid on a special order of the Toy Mouse product. Estimates for this order include: Direct materials $40,000 and 500 direct manufacturing labor-hours at $20 per hour
Actual & Normal Costing Review
Chapter 4
137) Estimated total product costs for this special order equal:
A) $96,000 B) $50,000 C) $80,000 D) None of these answers is correct
Lecture Question
Answer: C
Explanation: DM $40,000 + DML (500 × $20) + MOH $30,000 = $80,000 (“DL”)
Joni's Kitty Supplies applies manufacturing overhead costs to products at a budgeted indirect-cost rate of $60 per direct manufacturing labor-hour. A retail outlet has requested a bid on a special order of the Toy Mouse product. Estimates for this order include: Direct materials $40,000 and 500 direct manufacturing labor-hours at $20 per hour
Actual & Normal Costing Review
2-39
Manufacturing OverheadManufacturing Overhead
WORKIN
PROCESS
WORKIN
PROCESS
Charge Direct Material,
Direct Labor and Mfg
Overhead costs to WIP as
work is performed.
Charge Direct Material,
Direct Labor and Mfg
Overhead costs to WIP as
work is performed.
Job-Order Costing
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Manufacturing Overhead
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
Manufacturing Overhead,
including indirect materials and
indirect labor, are allocated to jobs
rather than directly traced to
each job.
Manufacturing Overhead,
including indirect materials and
indirect labor, are allocated to jobs
rather than directly traced to
each job.
Job-Order Costing—An Overview
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
Chapter 4
33) The Work-in-Process Control account tracks job costs from the time jobs are started until they are completed. T or F.
Job CostingLecture Question
Answer: TRUE
Identify the documents used in a job-order costing system.
Job Cost SheetPearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials $ Date Number BalanceDirect Labor $Manufacturing Overhead $Total Cost $Unit Product Cost $
Materials Requisition FormPearCo Materials Requisition Form
Materials Requisition Number X7 - 6890 Date March 4Job Number to Be Charged A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
AuthorizedSignature Will E. Delite
Job Cost SheetPearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$
Cost Summary Units ShippedDirect Materials $ Date Number BalanceDirect Labor $Manufacturing Overhead $Total Cost $Unit Product Cost $
Employee Time TicketPearCo Employee Time Ticket
Time Ticket No. 36 Date March 5
Employee I. M. Skilled Station 42
TimeStarted Ended Completed Rate Amount Job No.
8:00 12:00 4.0 11.00$ 44.00$ A-1431:00 5:00 4.0 11.00 44.00 A-143
Totals 8.00 88.00$
Supervisor C. M. Workman
Job Cost SheetPearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$ 36 8 88$
Cost Summary Units ShippedDirect Materials $ Date Number BalanceDirect Labor $Manufacturing Overhead $Total Cost $Unit Product Cost $
Application of Manufacturing Overhead
Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor
hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to
individual jobs.
Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor
hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to
individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
Compute predetermined overhead rates and explain why estimated
overhead costs (rather than actual overhead costs) are used in the
costing process.
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Application of Manufacturing Overhead
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes
overhead.
Ideally, the allocation base is a cost driver that causes
overhead.
Using a predetermined overhead rate (POHR)makes it possible to estimate total job costs sooner.
Actual overhead for the period is notknown until sometime after the period has ended.
Actual overhead costs can fluctuate seasonally, thus misleading decision makers. It simplifies record
keeping.
Application of Manufacturing Overhead
$
Actual amount of the allocation based upon the actual level of activity (this is called a normal
costing system).
Actual amount of the allocation based upon the actual level of activity (this is called a normal
costing system).
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
For each direct labor hour worked on a particular job, $4.00 of factory overhead will
be applied to that job.
For each direct labor hour worked on a particular job, $4.00 of factory overhead will
be applied to that job.
Application of Manufacturing Overhead
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Application of Manufacturing OverheadPearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Completing the Job Cost SheetPearCo Job Cost Sheet
Job Number A-143 Date Initiated March 4Date Completed
Department B3 Units CompletedItem 2 Wooden cargo cratesFor Stock
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7 - 6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedDirect Materials $ 116 Date Number BalanceDirect Labor $ 88 Manufacturing Overhead $ 32 Total Cost $ 236 Unit Product Cost $ 118
Interpreting the Average Unit Cost
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of
another unit may be somewhat less than $118.
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of
another unit may be somewhat less than $118.
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730.
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.
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.
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730.
Quick Check
POHR = $760,000/20,000hours = $38
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380Total cost $730
Let’s summarize the document flow in a
job-order costing system.
Job-Order CostingDocument Flow Summary
Job-Order CostingDocument Flow Summary
A sales order is the basis of issuing a
production order.
A sales order is the basis of issuing a
production order.
A production order initiates work on a job.
A production order initiates work on a job.
Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
MaterialsRequisitionMaterials
Requisition
Manufacturing Overhead Account
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedmay be either
direct orindirect.
Materials usedmay be either
direct orindirect.
Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Manufacturing Overhead Account
An employee’stime may be eitherdirect or indirect.
An employee’stime may be eitherdirect or indirect.
Direct Labor
Indirect Labor
Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
Manufacturing Overhead Account
OtherActual OHCharges
OtherActual OHCharges
Job Cost Sheets
Job Cost Sheets
AppliedOverhead
MaterialsRequisitionMaterials
Requisition
EmployeeTime TicketEmployee
Time Ticket
IndirectMaterial
IndirectLabor
Prepare journal entries to record costs in a job-order costing system.
Use T-accounts to show the flow of costs in a job-order costing system.
Job-Order Costing—The Flow of Costs
Let’s examine the transactions in T-account and journal entry forms
in a job-order costing system.
Raw MaterialsMaterialPurchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Summary of Cost Flows
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Raw Materials XXXXX Accounts Payable XXXXX
Journal Entry – Material Purchases
Raw material purchases are recorded in an inventory account.
Raw MaterialsMaterialPurchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
Summary of Cost Flows
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX
Journal Entry – Material Usage Direct materials issued to a job increase Work in
Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing
Overhead and decrease Raw Materials.
Chapter 4
36) Indirect materials that are requisitioned increase the Work-in-Process Control account. T or F.
Job CostingLecture Question
Answer: FALSE
Explanation: Indirect materials that are requisitioned increase the Manufacturing Overhead Control account.
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct Materials
Direct Labor
Direct Labor
IndirectLabor
Indirect Materials
Actual Applied
IndirectLabor
Summary of Cost Flows
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX
Journal Entry – Labor Costs The cost of direct labor incurred increases Work in Process
and thecost of indirect labor increases
Manufacturing Overhead.
Mfg. Overhead
Indirect Materials
Actual Applied
IndirectLabor
Summary of Cost Flows
OtherOverhead
In addition to indirect materials and indirect
labor, other actual manufacturing overhead costs are debited to the
Manufacturing Overhead account.
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Manufacturing Overhead XXXXX Accounts Payable XXXXX Property Taxes Payable XXXXX Prepaid Insurance XXXXX Accumulated Depreciation XXXXX
Journal Entry – Actual Overhead In addition to indirect materials and indirect labor,
other manufacturing overhead costs are charged to the Manufacturing Overhead account
as they are incurred.
Chapter 4
42) For external reporting purposes, it is acceptable to allocate marketing costs to individual jobs. T or F.
Job CostingLecture Question
Answer: FALSE
Explanation: Management may choose to allocate marketing costs to individual jobs for internal pricing, product-mix, and cost-management decisions.
Apply overhead cost to Work in Process using a
predetermined overhead rate.
Mfg. OverheadWork in Process(Job Cost Sheet)
Direct Materials
Overhead Applied
OverheadApplied to
Work inProcess
Direct Labor
Indirect Materials
Actual Applied
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
IndirectLabor
Summary of Manufacturing Overhead Cost Flows
OtherOverhead
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXX Manufacturing Overhead XXXXX
Journal Entry – Overhead Applied
Work in Process is increasedwhen Manufacturing Overhead
is applied to jobs.
Accounting for Nonmanufacturing Costs
Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed
in the period incurred.
Income Statement
Expense nonmanufacturing costs as incurred.
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Salaries Expense XXXXX Salaries Payable XXXXX
Advertising Expense XXXXX Accounts Payable XXXXX
Journal Entry – Accounting for Nonmanufacturing Costs
Nonmanufacturing Cost Examples:1. Salary expense of employees
that work in a marketing, selling,or administrative capacity.
2. Advertising expenses are expensedin the period incurred.
Nonmanufacturing Cost Examples:1. Salary expense of employees
that work in a marketing, selling,or administrative capacity.
2. Advertising expenses are expensedin the period incurred.
Prepare schedules of cost of goods manufactured and cost of
goods sold.
Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Work in Process(Job Cost Sheet)Direct
MaterialsDirect Labor
Overhead Applied
Summary of Goods Manufactured Cost Flows
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX Work in Process XXXXX
Journal Entry – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished
Goods from Work in Process.
Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost ofGoodsSold
Cost ofGoodsSold
Summary of Job-Order System Cost Flows
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX Sales XXXXX
Cost of Goods Sold XXXXX Finished Goods XXXXX
Journal Entry – Sales When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.
Compute underapplied or overapplied overhead cost and
prepare the journal entry to close the balance in Manufacturing Overhead
to the appropriate accounts.
Defining Under- and Overapplied Overhead
The difference between the overhead cost applied to Work in Process and the actual overhead costs
of a period is termed either underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead
applied to jobs during the period using the
predetermined overhead rate is less than the total amount of
overhead actually incurred during the period.
Underapplied overhead exists when the amount of overhead
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 overhead exists when the amount of overhead
applied to jobs during the period using the
predetermined overhead rate is greater than the total
amount of overhead actually incurred during the period.
Overapplied overhead exists when the amount of overhead
applied to jobs during the period using the
predetermined overhead rate is greater than the total
amount of overhead actually incurred during the period.
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct
labor hours worked on jobs.How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per
direct labor hour.
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct
labor hours worked on jobs.How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per
direct labor hour.
Overhead Application Example
Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct
labor hours worked on jobs.How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per
direct labor hour.
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct
labor hours worked on jobs.How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per
direct labor hour.
Overhead Application Example
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.Actual 1,210,000 1,160,000 Applied
Underapplied 50,000
Manufacturing Overhead
Applied Overhead$4.00 × 290,000 hours = $1,160,000
Disposition of Under- or Overapplied Overhead – Adjust directly to CGS
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
Overhead appliedto jobs
$680,000
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
Quick Check
What effect will the adjustment of the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
What effect will the adjustment of the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
What effect will the adjustment of the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
What effect will the adjustment of the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
Quick Check
• When the Under- or Overapplied Overhead is significant, the Proration Method may be appropriate.
• The amount of over- or underapplied overhead is distributed proportionally to the WIP Inventory account, FG Inventory account and the CGS account, based on the balances in each account at the end of the period.
• For example, if we had $30,000 of underapplied Overhead and determined that we will use the proration method, we would view the period-end balances in the following accounts:
WIP Inventory $20,000 FG Inventory $40,000 CGS $340,000
Disposition of Under- or Overapplied Overhead – Proration Method
• We would allocate $30,000 * .05 = $1,500 to WIP Inventory• We would allocate $30,000 * .10 = $3,000 to FG Inventory• We would allocate $30,000 * .85 = $25,500 to CGS
• When the Under- or Overapplied Overhead is significant, the Proration Method may be appropriate.
• The amount of over- or underapplied overhead is distributed proportionally to the WIP Inventory account, FG Inventory account and the CGS account, based on the balances in each account at the end of the period.
• For example, if we had $30,000 of underapplied Overhead and determined that we will use the proration method, we would view the period-end balances in the following accounts:
WIP Inventory $20,000 ($20,000 / $400,000) = .05 FG Inventory $40,000 ($40,000 / $400,000) = .10 CGS $340,000 ($340,000 / $400,000) = .85 ------------- $400,000
Disposition of Under- or Overapplied Overhead – Proration Method
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single predetermined overhead rate called a plantwide
overhead rate.
To this point, we have assumed that there is a single predetermined overhead rate called a plantwide
overhead rate.
Large companies often use multiple
predetermined overhead rates.
Large companies often use multiple
predetermined overhead rates.
May be more complex but . . .
May be more complex but . . .
May be more accurate because it reflects differences across
departments.
May be more accurate because it reflects differences across
departments.We will cover in another class.
Job-Order Costing in Service Companies
Job-order costing is used in many difference types of service companies.
Job-order costing is used in many difference types of service companies.
Chapter 4
Lecture Question
Answer: A
107) What is the appropriate journal entry if $100,000 of materials were purchased on account for the month of August?
A) Materials Control 100,000 Accounts Payable Control 100,000
B) Work-in-Process Control 100,000 Accounts Payable Control 100,000
C) Manufacturing Overhead Control 100,000 Accounts Receivable Control 100,000
D) Manufacturing Allocated 100,000 Accounts Receivable Control 100,000
Chapter Review
Chapter 4
Lecture Question
Answer: D
108) What is the appropriate journal entry if direct materials of $50,000 and indirect materials of $3,000 are sent to the manufacturing plant floor?
A) Work-in-Process Control 50,000 Materials Control 50,000
B) Work-in-Process Control 53,000 Materials Control 53,000
C) Manufacturing Overhead Control 3,000 Materials Control 50,000 Work-in-Process Control 53,000
D) Work-in-Process Control 50,000 Manufacturing Overhead Control 3,000 Materials Control 53,000
Chapter Review
Chapter 4
Lecture Question
Answer: B
109) All of the following items are debited to Work-in-Process EXCEPT:
A) allocated manufacturing overhead
B) completed goods being transferred out of the plant
C) direct labor consumed
D) direct materials consumed
Chapter Review
Chapter 4
Lecture Question
Answer: A
111) Manufacturing overhead costs incurred for the month are:
Utilities $15,000Depreciation on equipment $25,000Repairs $10,000
Which is the correct journal entry assuming utilities and repairs were on account?
A) Manufacturing Overhead Control 50,000Accounts Payable Control 25,000Accumulated Depreciation Control 25,000
B) Manufacturing Overhead Control 50,000Accounts Payable Control 50,000
C) Manufacturing Overhead Control 50,000Accumulated Depreciation Control 50,000
D) Accumulated Depreciation Control 25,000 Accounts Payable Control 25,000
Manufacturing Overhead Control 50,000
Chapter Review
Chapter 4
Lecture Question
Answer: D
113) When a job is complete:
A) Work-in-Process Control is debited
B) Finished Goods Control is credited
C) the cost of the job is transferred to Manufacturing Overhead Control
D) actual direct materials, actual direct manufacturing labor, and allocated manufacturing overhead will comprise the total cost of the job
Chapter Review
Chapter 4
Lecture Question
Answer: D
118) When the allocated amount of indirect costs are less than the actual amount, indirect costs have been:
A) overabsorbed
B) underapplied
C) underallocated
D) Both underapplied and underallocated are correct
Chapter Review
Chapter 4
139) The actual amount of manufacturing overhead costs incurred in June 20X2 totals:
A) $557,000 B) $200,000 C) $110,000 D) $ 80,000
Lecture Question
Answer: C Explanation: $20,000 + $60,000 + $30,000 = $110,000
Sunny Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $15 per direct labor-hour. The following data are obtained from the accounting records for June 20X2:
Direct materials $280,000Direct labor (7,000 hours @ $11/hour) $ 77,000Indirect labor $ 20,000Plant facility rent $ 60,000Depreciation on plant machinery and equipment $ 30,000Sales commissions $ 40,000Administrative expenses $ 50,000
Chapter Review
Chapter 4
140) The amount of manufacturing overhead allocated to all jobs during June 20X2 totals:
A) $77,000 B) $105,000 C) $110,000 D) $200,000
Lecture Question
Answer: B Explanation: 7,000 × $15 per dlh = $105,000
Sunny Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $15 per direct labor-hour. The following data are obtained from the accounting records for June 20X2:
Direct materials $280,000Direct labor (7,000 hours @ $11/hour) $ 77,000Indirect labor $ 20,000Plant facility rent $ 60,000Depreciation on plant machinery and equipment $ 30,000Sales commissions $ 40,000Administrative expenses $ 50,000
Chapter Review
Chapter 4
141) For June 20X2, manufacturing overhead was:
A) overallocated B) underallocated C) neither overallocated nor underallocated D) indeterminable
Lecture Question
Answer: B Explanation: Underallocated: Allocated only $105,000 (7,000 × $15 per dlh) of the $110,000 actual overhead
Sunny Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $15 per direct labor-hour. The following data are obtained from the accounting records for June 20X2:
Direct materials $280,000Direct labor (7,000 hours @ $11/hour) $ 77,000Indirect labor $ 20,000Plant facility rent $ 60,000Depreciation on plant machinery and equipment $ 30,000Sales commissions $ 40,000Administrative expenses $ 50,000
Chapter Review
Chapter 4
a. Determine the budgeted factory overhead rate per machine-hour.
Lecture Question
Answer: $266,400/18,500 hrs. = $14.40 per hour
183) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories were as follows:
Direct materials $ 60,000WIP 190,000Finished goods 250,000Total $500,000
Chapter Review
Chapter 4
b. Compute the over/underapplied overhead.
Lecture Question
Answer: $14.40 × 19,050 hours = $274,320 - $287,920 = $13,600 underapplied overhead
183) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories were as follows:
Direct materials $ 60,000WIP 190,000Finished goods 250,000Total $500,000
Chapter Review
Chapter 4
c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold approach.
Lecture Question
Answer: Cost of Goods Sold 13,600
Factory Department Overhead Control 13,600
183) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories were as follows:
Direct materials $ 60,000WIP 190,000Finished goods 250,000Total $500,000
Chapter Review
Chapter 4
d. Prepare the journal entry to dispose of the variance using the proration approach.
Lecture Question183) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories were as follows:
Direct materials $ 60,000WIP 190,000Finished goods 250,000Total $500,000
Chapter Review
Chapter 4
d. Prepare the journal entry to dispose of the variance using the proration approach.
Lecture Question
Answer: $560,000 + $190,000 + $250,000 = $1,000,000
Cost of Goods Sold: $560,000/$1,000,000 = 56% × $13,600 = $7,616
WIP: $190,000/$1,000,000 = 19% × $13,600 = $2,584
Finished Goods: $250,000/$1,000,000 = 25% × $13,600 = $3,400
Cost of Goods Sold 7,616WIP Inventory 2,584Finished Goods Inventory 3,400Factory Department Overhead Control 13,600
183)
Chapter Review
Chapter 4
Lecture QuestionAnswer the following questions 146-148 using the information below:
Bauer Manufacturing uses departmental cost driver rates to allocate manufacturing overhead costs to products. Manufacturing overhead costs are allocated on the basis of machine-hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 20X3, the following estimates were provided for the coming year:
Machining AssemblyDirect labor-hours 30,000 60,000Machine-hours 80,000 20,000Direct labor cost $500,000 $900,000Manufacturing overhead costs $420,000 $240,000
The accounting records of the company show the following data for Job #316:
Machining AssemblyDirect labor-hours 120 70Machine-hours 60 5Direct material cost $300 $200Direct labor cost $100 $400
Chapter Review
Chapter 4
146) For Bauer Manufacturing, what is the annual manufacturing overhead cost-allocation rate for the Machining Department?
A) $4.00 B) $4.20 C) $4.67 D) $5.25
Lecture Question
Answer: D Explanation: $420,000/80,000mh = $5.25 per mh
Chapter Review
Chapter 4
147) What amount of manufacturing overhead costs will be allocated to Job #316?
A) $439 B) $502 C) $595 D) $532
Lecture Question
Answer: C Explanation:
($420,000 / 80,000 mh × 60 mh) + [($240,000/60,000) × 70dlh] = $595
Chapter Review
Chapter 4
148) What are the total manufacturing costs of Job #316?
A) $715 B) $880 C) $1,595 D) $1,000
Lecture Question
Answer: C Explanation: DM $500 + DML $500 + MOH $595 = $1,595
Chapter Review
End of Presentation