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Product and Service Costing: Overhead Application and Job-Order System. Prepared by Douglas Cloud Pepperdine University. Objectives. 1. Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products. - PowerPoint PPT Presentation
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Product and Product and Service Costing: Service Costing:
Overhead Overhead Application and Application and
Job-Order SystemJob-Order SystemPrepared by
Douglas Cloud Pepperdine University
Prepared by Douglas Cloud
Pepperdine University
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1. Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products.
2. Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment.
3. Compute a predetermined overhead rate, and use the rate to assign overhead to production.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
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4. Explain the difference between job-order and process costing, and identify the source documents used in job-order costing.
5. Describe the cost flows associated with job-order costing, and prepare the journal entries.
6. Explain why multiple overhead rates may be preferred to a single, plantwide rate.
ObjectivesObjectivesObjectivesObjectives
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Continuum of Services and Continuum of Services and Manufactured ProductsManufactured Products
Continuum of Services and Continuum of Services and Manufactured ProductsManufactured Products
PureService
Manufactured Product
Bungee jumping Beauty Salon Restaurant Automobiles Software Cereals
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Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management SystemRelationship to Business
Intangibility Services cannot be stored. There are no inventory accounts.
Services cannot be protected through patents.
There is a strong ethical code.
Services cannot readily be displayed or communicated.
Prices are difficult to set. Costs must be related to entire organization.
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Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management System
Inseparability Consumer is involved in production.
Cost are accounted for by customer type.
Other customers are involved in production.
Centralized mass production of services is difficult
Systems must be generated to encourage consistent quality.
Relationship to Business
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Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management System
Heterogeneity Standardization and quality control are difficult.
A strong systems approach is needed.
Productivity measurement is ongoing.
TQM is critical.
Relationship to Business
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Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management System
Perishability Service benefit expire quickly.
There are no inventories.
Service may be repeated often for one customer.
There needs to be a standardized system to handle repeat customers.
Relationship to Business
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Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment
CostAccumulation
CostMeasurement
CostAssignment
Record Costs: Classify Costs: Assign to Cost Objects:
Product 2Product 2
Product 1Product 1Purchase materials
Direct MaterialsDirect MaterialsAssemblers’ payroll
Finishers’ payroll Direct LaborDirect Labor
OverheadOverhead
Supervisors’ Payroll
Depreciation
Utilities
Property taxes
Landscaping
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Cost AccumulationCost Accumulation
Cost accumulation refers to the recognition and recording of costs.
The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a transaction. Data from these source documents can then be recorded in a database. Well-designed source documents can supply information in a flexible way.
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There are two commonly used ways to measure the costs associated with production: actual costing and normal costing.
An actual cost system uses actual costs for direct materials, direct labor, and overhead to determine unit cost.
Normal costing systems measure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor.
Cost MeasurementCost Measurement
Cost measurement refers to classifying the cost.
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Rubber stops are made for cellos. The cost of rubber is $0.30 per ounce and two ounces are required per stop. The price of labor is $8 per hour and it takes .10 hour to make a stop. Thus, one stop should cost $1.40 calculated as follows:
Example: Prime CostsExample: Prime Costs
$0.30 x 2 = $0.60$8.00 x .10 = 0.80
$1.40
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Actual overhead $20,000 $40,000 $40,000
Actual units produced 40,000 40,000 160,000
Per-unit overhead $0.50 $1.00 $0.25
April June August
Actual overhead/Actual overhead/Actual productionActual production
Actual overhead/Actual overhead/Actual productionActual production
Example: Using Actual OverheadExample: Using Actual Overhead
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A predetermined overhead rate is calculated using the following formula:
Overhead ApplicationOverhead ApplicationOverhead ApplicationOverhead Application
A Normal Costing View
Overhead rate =Budgeted annual overhead
Budgeted annual activity level
Continuing with the cello example:
Overhead rate =$90,000
225,000= $0.40
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1. Units produced
2. Direct labor hours
3. Direct labor dollars
4. Machine hours
5. Direct materials
Overhead ApplicationOverhead ApplicationOverhead ApplicationOverhead Application
Estimated Overhead
Activity Driver
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Data on Engine HousingData on Engine Housing
Cost of operating lathe $80,000Total units produced 20,000Total machine hours used 12,500
Simple ComplicatedSimple Complicated
Number of housings 10,000 10,000Time on lathe 0.25 MHr 1 MHrOperating cost assignedusing unit produced $4.00 $4.00
Operating cost assignedusing machine hours $1.60 $6.40
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Choosing the Activity LevelChoosing the Activity LevelChoosing the Activity LevelChoosing the Activity Level
Expected activity level is simply the production level the firm expects to attain for the coming year.
Normal activity level is the average activity usage that a firm experiences in the long term (normal volume is computed over more than one year).
Theoretical activity level is the absolute maximum production activity of a manufacturing firm.
Practical activity level is the maximum output that can be realized if everything operates efficiently.
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In attempting to understand the concept of applied overhead, there are two points that should be emphasized.
1. Applied overhead is the basis for computing per-unit overhead cost.
2. Applied overhead is rarely equal to a period’s actual overhead.
Applied overhead = Overhead rate x Applied production activity
Basic Concept of Overhead ApplicationBasic Concept of Overhead ApplicationBasic Concept of Overhead ApplicationBasic Concept of Overhead Application
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Normal
Basic Concept of Overhead ApplicationBasic Concept of Overhead ApplicationBasic Concept of Overhead ApplicationBasic Concept of Overhead Application
Measures of Activity LevelNumber of Units
Time
Expected
Consumer Demand-Oriented Measures of
Activity Level
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Normal
Basic Concept of Overhead ApplicationBasic Concept of Overhead ApplicationBasic Concept of Overhead ApplicationBasic Concept of Overhead Application
Measures of Activity LevelNumber of Units
Time
Theoretical
Productive Capability Measures of Activity Level
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Suncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. Example
Suncalc, Inc. produces two unique, solar-powered products: a pocket calculator and a currency translator.
The following estimated and actual data for 2004:
Budgeted overhead $360,000Normal activity (DLH) 120,000Activity (DLH) 100,000Actual overhead $320,000
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Suncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. Example
The firm bases it predetermined overhead rate on normal activity measured in direct labor hours:
Predeterminedoverhead rate
Budgeted overhead
Normal activity=
$360,000
120,000 DLH=
$3 per DLH=
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Suncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. Example
Using the overhead rate, applied overhead for 2004 is:
Applied overhead = Overhead rate x Actual activity usage
= $3 per DLH x 100,000 DLH
= $300,000
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Suncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. ExampleSuncalc, Inc. Example
Forty percent of the actual direct labor hours worked were used to produce 80,000 units of the pocket
calculator and the remaining 60 percent was used to produced 90,000 units of the currency translator.
Pocket Calculators
Currency Translator
Units produced 80,000 90,000Direct labor hours 40,000 60,000Overhead applied to production ($3 x DLH) $120,000 $180,000Overhead per unit $1.50 $2.00
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The difference between actual overhead and applied overhead is called overhead variance. If actual overhead is greater than applied overhead, then the variance is called underapplied overhead. If applied overhead is greater than actual overhead, the the variance is called overapplied overhead.
Underapplied and Overapplied OverheadUnderapplied and Overapplied Overhead
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The overhead variance is disposed of in one of two ways.
1. All overhead variance is allocated to cost of goods sold.
2. The overhead variance is allocated among work in process, finished goods, and cost of goods sold.
Disposition of Overhead VariancesDisposition of Overhead Variances
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Disposition of Overhead VariancesDisposition of Overhead Variances
Suncalc’s accounts had the following applied overhead balances for the end of 2004: Work-in-
Process Inventory, $60,000; Finished Goods Inventory, $90,000; Cost of Goods Sold, $150,000.
Suncale had $20,000 of underapplied overhead. The amount is allocated as follows:
Work-in-Process Inventory: $60,000/$300,000 x $20,000 = $4,000
Finished Goods Inventory: $90,000/$300,000 x $20,000 = $6,000
Cost of Goods Sold: $150,000/$300,000 x $20,000 = $10,000
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A Job-Order Cost SheetA Job-Order Cost SheetA Job-Order Cost SheetA Job-Order Cost Sheet
Job Number 16Date Ordered April 2, 2004Date Completed April 24, 2004Date Shipped April 25, 2004
For Benson CompanyItem Description ValvesQuantity Completed 100
Direct Materials Direct Labor Overhead
Requisition Number Amount
Ticket Number Hours Rate Amount Hours Rate Amount
12 $300 68 8 $6 $ 48 8 $10 $ 8018 450 72 10 7 70 10 10 100
$750 $118 $180
Direct materials $750Direct labor 118Overhead 180
Total cost $1,048
Unit cost $10.48
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Material Requisition FormMaterial Requisition FormMaterial Requisition FormMaterial Requisition Form
Date
DepartmentJob Number
Authorized Signature
Description Quantity Cost/Unit Total Cost
Jim Lawson
Casing 100 $3 $300
Material Requisition Number 678April 8, 2004
62
Grinding
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Job Time TicketJob Time TicketJob Time TicketJob Time Ticket
Authorized Signature
Start Time Stop Time Total Time Hourly Rate Amount Job Number
Jim Lawson
Job Time Ticket
Number 68Employee Number
Name
Date
8:00 10:00 2 $6 $12 1610:00 11:00 1 6 6 1711:00 12:00 1 6 6 161:00 6:00 5 6 30 16
45
Ann Wilson
April 12, 2004
Department Supervisor
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Accounting for Overhead
Actual overhead costs are never assigned directly to jobs.
Overhead is applied using a predetermined overhead rate.
Actual overhead costs are never assigned directly to jobs.
Overhead is applied using a predetermined overhead rate.
Estimated OverheadOverhead rate =
Estimated Direct Labor Hours
$900,000
90,000 DLH
= $10 per direct labor hour
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1. Direct materials costing $2,500 were purchased on account.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
1 Materials Inventory 2 500 00
All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
Accounts Payable 2 500 00
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All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
2. Direct materials costing $1,500 were requisitioned for use in production.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
2 Work in Process 1 500 00
Materials Inventory 1 500 00
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All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
Job 101Materials
Req. No. Amount
1$ 300
2200
3 500
$1,000
Job 102Materials
Req. No. Amount
4$250
5250
3
$500
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All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
3. Direct labor costing $850 was recognized.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
3 Work-in-Process Inventory 850 00
Wages Payable 850 00
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All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
Job 101Materials
Ticket Hours Rate Amount
1 15 $10 $1502 20 10 2003 25 10 250
60 $600
Job 102Materials
Ticket Hours Rate Amount
4 15 $10 $1505 10 10 100
25 $250
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4. Overhead was applied to production at the rate of $4 per direct labor hour. A total of 85 direct labor hours were worked.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
4 Work-in-Process Inventory 340 00
All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
Overhead Control 340 00
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5. Actual overhead costs of $415 were incurred: lease, $200; utilities, $50; depreciation, $100; accrued wages, $65.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
5 Overhead Control 415 00
Lease Payable200 00
Utilities Payable50 00
Accumulated Depr.--Equipment100 00
Wages Payable65 00
All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
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All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
6. Job 101, with a total cost of $1,840, are completed and transferred to finished goods.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
6 Finished Goods Inventory 1 840 00
Work-in-Process Inventory 1 840 00
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Job Number 101Date Ordered Jan. 1, 2004Date Completed Jan. 2, 2004Date Shipped Jan. 15, 2004
For Housing DevelopmentItem Description Street SignsQuantity Completed 20
Materials Direct Labor Overhead
Requisition Number Amount
Ticket Number Hours Rate Amount Hours Rate Amount
1 $300 1 15 $10 $150 15 $4 $ 602 200 2 20 10 200 20 4 803 500 3 25 10 250 25 4 100
$1,000 $600 $240
Direct materials $1,000Direct labor $600Overhead $240
Total cost $1,840
Unit cost $92
All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
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7. Sold Job 101 for $2,760.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
a. Cost of Goods Sold 1 840 00
b. Accounts Receivable 2 760 00
All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
Finished Goods Inventory 1 840 00
Sales Revenue 2 760 00
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8. Underapplied overhead was closed to cost of goods sold.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
8 Cost of Goods Sold 75 00
All Signs CompanyAll Signs CompanyAll Signs CompanyAll Signs Company
Overhead Control 75 00
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All Signs CompanyAll Signs CompanySchedule of Cost of Goods ManufacturedSchedule of Cost of Goods ManufacturedFor the Month Ended January 31, 2004For the Month Ended January 31, 2004
Direct materials:Beginning direct materials inventory $ 0Purchases of direct materials 2,500Total direct materials available for use $2,500Ending direct materials 1,000Total direct materials used $1,500
Direct labor 850Manufacturing Overhead:
Lease $ 200Utilities 50Depreciation 100Indirect labor 65
$ 415ContinuedContinuedContinuedContinued
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$ 415Less: Underapplied overhead 75Overhead applied 340
Current manufacturing costs $2,690Add: Beginning work in process 0Total manufacturing cost $2,690Less: Ending work in process -1,050Cost of goods manufactured $1,840
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Beginning finished goods inventory $ 0
Cost of goods manufactured 1,840
Cost of goods available for sale $1,840
Less: Ending finished goods inventory 0
Normal cost of goods sold $1,840
Add: Underapplied overhead 75
Adjusted cost of goods sold $1,915
All Signs CompanyAll Signs CompanyStatement of Cost of Goods SoldStatement of Cost of Goods Sold
For the Month Ended January 31, 2004For the Month Ended January 31, 2004
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All Signs CompanyAll Signs CompanyIncome StatementIncome Statement
For the Month Ended January 31, 2004For the Month Ended January 31, 2004Sales $2,760Less: Cost of goods sold 1,915Gross margin $ 845Less selling and administrative expenses:
Selling expenses $200Administrative expenses 550 750
Operating income $ 95
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SINGLE VERSUS MULTIPLE OVERHEAD RATES
SINGLE VERSUS MULTIPLE OVERHEAD RATES
Department A is labor-intensive and Department B is machine-intensive.
Department A Department B TotalDepartment A Department B Total
Overhead costs $60,000 $180,000 $240,000Direct labor hours 15,000 5,000 20,000Machine hours 5,000 15,00 20,000
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SINGLE VERSUS MULTIPLE OVERHEAD RATES
SINGLE VERSUS MULTIPLE OVERHEAD RATES
Department A Department B TotalDepartment A Department B Total
Prime costs $5,000 $0 $5,000Direct labor hours 500 0 500Machine hour 1 0 1Units produced 1,000 0 1,000
Job 23Job 23
Department A Department B TotalDepartment A Department B Total
Prime costs $0 $5,000 $5,000Direct labor hours 0 1 1Machine hours 0 500 500Units produced 0 1,000 1,000
Job 24Job 24
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SINGLE VERSUS MULTIPLE OVERHEAD RATES
SINGLE VERSUS MULTIPLE OVERHEAD RATES
Department A Department BOverhead cost $60,000 $180,000Cost driver 15,000 DLH 15,000 MHrDepartment overhead rate $4/DLH $12/MHrOverhead applied to Job #23 $2,000 ---Overhead applied to Job #24 --- $6,000