ACCT 2302Fundamentals of Accounting II

Spring 2011

Lecture 4

Professor Jeff Yu

Review: Manufacturing Cost Flows

Raw Material Purchases

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpenses

ManufacturingOverhead

Goods Sold

How to show product cost flows using T-accounts?

Chapter 3: Job order costing How accounting system reports costs?

Absorption Costing is the most common approach to product costing. It is required for both external financial reporting and tax reporting in this country.

Recall: in absorption costing, all manufacturing costs are assigned to the product or service (fully absorbed), regardless of whether they are fixed or variable.

Two commonly used absorption costing systems: • Job-order costing• Process costing

Job-order costing vs. Process costing

ProcessCosting

Job-order

Costing A firm mass-produces many units of a single product. Continuous flow of virtually identical units over a long period. Costs may not be directly traceable to each unit.

Instead, costs are accumulated by department to get the same average cost for each unit.

Examples: Coca-Cola, Exxon, General Mills, Kellogg

Job-order costing vs. Process costing

ProcessCosting

Job-order

Costing A firm produces many different products each period. Products are built to order rather than mass produced. The unique nature of each order requires tracing and allocating costs to each job and maintain cost records for each job.

Examples: Boeing, Walter Disney, Levi Strauss, Hallmarkconstruction firms, hospitals, law firms, advertising agencies, accounting firms, repair shops

Job-Order ProcessNumber of jobs worked Many Single ProductCost accumulated by

Individual Job Department

Average cost computed by Job Department

Job-order costing vs. Process costing

Quick Check

For each of the following companies, determine whether they are more likely to use job-order costing or process costing?

1. Scott Paper Company for Kleenex.2. Architects.3. Heinz for ketchup.4. Caterer for a wedding reception.

Product Cost Flow in Job-order Costing

FinishedGoods

Cost of GoodsSold

Direct Labor

Applied MOH

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct Materials

Work-in-Process (JOB)

THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturing Overhead

Job-order costing: cost allocation

Applied to eachjob using a

predeterminedoverhead rate

Estimated total MOH cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined at the beginning of the period.

Predetermined Overhead Rate

The allocation base is typically a cost driver that causes MOH,

e.g. DL hours, or machine hours.

Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual manufacturing overhead costs for the period is not known until the end of the period.

The Need for a POHR

$

Actual Activity: Actual amount of the allocation base,

such as direct labor hours (DLH) or machine hours (MH) incurred

during the period

OverheadApplied POHR * Actual

Activity=

Applying Manufacturing Overhead

For each direct labor hour worked on a particular job,

$4.00 of MOH will be applied to that job.

Example: POHR

POHR = $4.00 per DL hour

$640,000160,000

POHR =

Estimated total MOH for the coming period = $640,000

Estimated total DL hours for the coming period = 160,000

Example: applying MOH

Job-Order Cost Accounting

Interpreting the Average Unit Product Cost

The average product 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 less than $118. (Recall: Fixed cost per unit is decreasing as activity level increases)

Example

Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. POHR is determined annually on the basis of direct labor hours. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000.

Q: What would be recorded as the cost of job WR53?

Manufacturing Overhead Work in Process

Indirect Material

Direct MaterialApplied Overhead

If actual and applied MOH are not equal, a year-end adjustment is required. Financial statements need to

be properly stated at year end.

Indirect LaborDirect LaborApplied

OverheadOther MOH

Actual Applied

Job-Order Costing: T-accounts

Cost of Goods

Manufactured

Beg. Bal.

End. Bal.

DFW Products computes its POHR annually on the basis of machine hours. At the beginning of the year, it estimated that its total MOH costs would be $600,000 and the total machine hours would be 30,000 hours. Its actual total MOH costs for the year was $470,000 and its actual total machine hours was 25,000 hours.

1)What is DFW Products’ POHR for the year?

2)Determine the amount of MOH applied to jobs during the year.

3)What are the journal entries needed to apply MOH to jobs?

4)Is MOH for the year overapplied or underapplied? By how much?

5)What if the actual total MOH is $530,000?

Example: Job-order costing

Adjustment Method: Close to Cost of Goods Sold

MOH

Actual

Cost of Goods Sold

Unadjusted Balance

AdjustedBalance

Applied

Q: what journal entry will lead to a zero ending balance for MOH T-account?

Summary: MOH Application in job-order costing

POHR = Estimated total MOH cost / Estimated total activity level

Applied MOH = POHR * Actual activity level

Actual MOH - Applied MOH

At the beginning of the period, calculate:

During the period, calculate:

At the end of the period, calculate:

to determine whether MOH was underapplied or overapplied and do an adjustment entry to close to Cost of Goods Sold.

Practice ProblemJanna Company applies MOH using a predetermined overhead rate of 60% of direct labor cost. During the year, 4,000 DL hours were incurred at $12 per hour. A year-end calculation of actual MOH costs show the following: Indirect material costs $1,000, indirect labor costs $16,000 and other MOH costs (including factory property tax, utilities and depreciation) amount to $12,000.

Questions: (1) Is MOH overapplied or underapplied? (2) What are the journal entries to close the difference to CGS?(3) If CGM is $100,000, the beginning FG inventory is $30,000 and the ending FG inventory is $25,000, what is the CGS after the year-end adjustment entry? (4) What if actual total MOH is $28,000?

For Next Class

Review chapter 3, we will do more practice problems.

Attempt the assigned HW problems. Read chapter 5, we will proceed to cover

the basic concepts of cost behavior.

Janna Company incurred $400, 000 actual MOH, and overapplied $20,000 on MOH account for the year. If POHR is $10 per direct labor hour, how many hours did the company work during the year?

Homework Problem 1

Harwood Co. uses job-order costing and applies MOH to jobs based on machine hours. On January 1, 2009, managers estimated that the company will incur $420,000 in MOH costs and work 60,000 machine hours. Managers have the following data on 12/31/2009:

Homework Problem 2

Actual direct-labor hours 50,000Actual machine hours 70,000Direct labor cost $80,000 Indirect materials $20,000Other MOH $400,000Indirect labor cost $100,000

Q: (1) Is MOH under- or overapplied for the year? By how much? (2) What are the journal entries to close to CGS at the year-end?

01/01/08 12/31/08Raw materials inventory $ 8 7Work-in-progress inventory 6 7.5Finished goods inventory 15 21.5Purchases of raw materials 32Indirect material cost 24Direct labor cost 40Indirect labor cost 10Sales commissions 15Total machine hours used 10Other manufacturing overhead cost 14

All above data are in thousands. POHR of $5 per machine-hour was used:1) Determine cost of goods manufactured for 2008;2) Compute the amount of underapplied or overapplied MOH for 20083) Determine cost of goods sold after the year-end adjustment entry.

Homework Problem 3