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Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Chapter Three
Systems Design: Job-Order Costing
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3-2
Learning Objective 1
Distinguish between Distinguish between process costing and job-process costing and job-order costing and identify order costing and identify companies that would use companies that would use
each costing method.each costing method.
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)
Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)
Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)
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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
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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.
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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.
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Learning Objective 2
Identify the documents Identify the documents used in a job-order costing used in a job-order costing
system.system.
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Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge Charge direct direct
material and material and direct labor direct labor
costs to costs to each job as each job as
work is work is performed.performed.
Charge Charge direct direct
material and material and direct labor direct labor
costs to costs to each job as each job as
work is work is performed.performed.
Job-Order Costing – An Overview
Direct MaterialsDirect Materials
Direct LaborDirect Labor
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Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Direct Manufacturing Costs
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
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PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
The Job Cost Sheet
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Measuring Direct Materials Cost
Will E. Delite
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Measuring Direct Materials Cost
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Measuring Direct Labor Costs
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Job-Order Cost Accounting
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Learning Objective 3
Compute predetermined Compute predetermined overhead rates and overhead rates and
explain why estimated explain why estimated overhead costs (rather overhead costs (rather than actual overhead than actual overhead costs) are used in the costs) are used in the
costing process.costing process.
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Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as
direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign
manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as
direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign
manufacturing overhead to individual jobs.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 production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
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The predetermined overhead rate (POHR) used to apply overhead to jobs is
determined before the period begins.
Manufacturing Overhead Application
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.
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Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
The Need for a POHR
$
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Actual amount of the allocation based upon the actual level of
activity.
Actual amount of the allocation based upon the actual level of
activity.
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
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For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
Overhead Application Rate
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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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.
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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.
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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.
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Learning Objective 4
Understand the flow of Understand the flow of costs in a job-order costing costs in a job-order costing
system and prepare system and prepare appropriate journal entries appropriate journal entries
to record costs.to record costs.
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3-30 Job-Order CostingDocument Flow Summary
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A production A production order initiates order initiates work on a job.work on a job.
A production A production order initiates order initiates work on a job.work on a job.
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3-31 Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
MaterialsRequisition
MaterialsRequisition
Manufacturing Overhead Account
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedMaterials usedmay be eithermay be either
direct ordirect orindirect.indirect.
Materials usedMaterials usedmay be eithermay be either
direct ordirect orindirect.indirect.
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3-32 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
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3-33 Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
Manufacturing Overhead Account
OtherActual OHCharges
OtherActual OHCharges
Job Cost Sheets
Job Cost Sheets
AppliedOverhead
MaterialsRequisition
MaterialsRequisition
EmployeeTime Ticket
EmployeeTime Ticket
IndirectMaterial
IndirectLabor
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Learning Objectives 4 & 7
Understand the flow of costs Understand the flow of costs in a job-order costing system in a job-order costing system
and prepare appropriate and prepare appropriate journal entries to record costs. journal entries to record costs.
Use T-accounts to show the Use T-accounts to show the flow of costs in a job-order flow of costs in a job-order
costing system.costing system.
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Job-Order Costing: The Flow of Costs
The transactions (in T-account and journal entry
form) that capture the flow of costs in a job-
order costing system are illustrated on the following slides.
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
The Purchase and Issue of Raw Materials
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Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
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Cost Flows – Material Usage
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
The Recording of Labor Costs
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The Recording of Labor Costs
The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases
Manufacturing Overhead.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Recording Actual Manufacturing Overhead
OtherOverhead
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Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to
the Manufacturing Overhead account as they are incurred.
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Learning Objective 5
Apply overhead cost to Apply overhead cost to Work in Process using a Work in Process using a predetermined overhead predetermined overhead
rate.rate.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Applying Manufacturing Overhead
OtherOverhead
Overhead Applied
OverheadApplied to
Work inProcess
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
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Applying Manufacturing Overhead
Work in Process is increased when Manufacturing Overhead is applied to jobs.
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Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to individual jobs; rather they are expensed in the
period incurred.
Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees
who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees
who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
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Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
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Learning Objective 6
Prepare schedules of cost Prepare schedules of cost of goods manufactured of goods manufactured and cost of goods sold.and cost of goods sold.
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Finished GoodsWork in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Transferring Completed Units
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Transferring Completed Units
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods
from Work in Process.
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Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost ofGoodsSold
Cost ofGoodsSold
Transferring Units Sold
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Transferring Units Sold
When finished goods are sold, two entries are required: (1) to record the sale, and (2) to
record COGS and reduce Finished Goods.
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Learning Objective 8
Compute underapplied or Compute underapplied or overapplied overhead cost overapplied overhead cost
and prepare the journal and prepare the journal entry to close the balance entry to close the balance
in Manufacturing in Manufacturing Overhead to the Overhead to the
appropriate accounts.appropriate accounts.
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Problems of Overhead Application
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a
period is referred to as either underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor
hours worked on jobs.hours worked on jobs.
How much total overhead was applied to How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of $4.00 per direct labor hour. $4.00 per direct labor hour.
PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor
hours worked on jobs.hours worked on jobs.
How much total overhead was applied to How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of $4.00 per direct labor hour. $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor
hours worked on jobs.hours worked on jobs.
How much total overhead was applied to How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of $4.00 per direct labor hour. $4.00 per direct labor hour.
PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor
hours worked on jobs.hours worked on jobs.
How much total overhead was applied to How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of $4.00 per direct labor hour. $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
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Disposition of Under- or Overapplied Overhead
$30,000 may be$30,000 may beclosed directly toclosed directly to
cost of goods sold. cost of goods sold.
Cost of Goods Sold
Cost of Goods Sold
PearCo’s MethodPearCo’s Method
Work inProcessWork inProcess
FinishedGoods
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
$30,000$30,000may be allocatedmay be allocated
to these accounts.to these accounts.
OROROROR
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Disposition of Under- or Overapplied Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
Overhead appliedto jobs
$680,000
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3-61 Allocating Under- or Overapplied Overhead Between Accounts
Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
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3-62 Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
We would complete the following allocation of $30,000 overapplied overhead:
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3-63 Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
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3-64Overapplied and Underapplied Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’s Method
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3-65
Quick Check
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
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3-66
Quick Check
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
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3-67
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a To this point, we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a
plantwide overhead rate.plantwide overhead rate.
To this point, we have assumed that there is a To this point, we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a
plantwide overhead rate.plantwide overhead rate.
Large companies Large companies often use multiple often use multiple predetermined predetermined overhead rates.overhead rates.
Large companies Large companies often use multiple often use multiple predetermined predetermined overhead rates.overhead rates.
May be more May be more complex but . . .complex but . . .May be more May be more complex but . . .complex but . . .
May be more accurate May be more accurate because it reflects because it reflects differences across differences across
departmentsdepartments..
May be more accurate May be more accurate because it reflects because it reflects differences across differences across
departmentsdepartments..
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3-68
Job-Order Costing in Service Companies
Job-order costing is used in many Job-order costing is used in many different types of service companies.different types of service companies.
Job-order costing is used in many Job-order costing is used in many different types of service companies.different types of service companies.
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3-69
The Use of Information Technology
Technology plays an important part in many Technology plays an important part in many job-order cost systems. When combined with job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-Electronic Data Interchange (EDI) or a web-
based programming language called based programming language called Extensible Markup Language (XML), bar Extensible Markup Language (XML), bar coding eliminates the inefficiencies and coding eliminates the inefficiencies and
inaccuracies associated with manual clerical inaccuracies associated with manual clerical processes.processes.
Technology plays an important part in many Technology plays an important part in many job-order cost systems. When combined with job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-Electronic Data Interchange (EDI) or a web-
based programming language called based programming language called Extensible Markup Language (XML), bar Extensible Markup Language (XML), bar coding eliminates the inefficiencies and coding eliminates the inefficiencies and
inaccuracies associated with manual clerical inaccuracies associated with manual clerical processes.processes.
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Appendix 3A
The Predetermined Overhead Rate & Capacity
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Learning Objective 9
(Appendix 3A)(Appendix 3A)
Understand the implications of Understand the implications of basing the predetermined basing the predetermined
overhead rate on activity at overhead rate on activity at capacity rather than on capacity rather than on
estimated activity for the estimated activity for the period.period.
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3-72
Predetermined Overhead Rate and Capacity
Calculating predetermined overhead rates using Calculating predetermined overhead rates using an estimated, or budgeted amount of the an estimated, or budgeted amount of the allocation base has been criticized because:allocation base has been criticized because:
1.1. Basing the predetermined overhead rate upon Basing the predetermined overhead rate upon budgeted activity results in product costs that budgeted activity results in product costs that fluctuate depending upon the activity level.fluctuate depending upon the activity level.
2.2. Calculating predetermined rates based upon Calculating predetermined rates based upon budgeted activity charges products for costs that budgeted activity charges products for costs that they do not use.they do not use.
Calculating predetermined overhead rates using Calculating predetermined overhead rates using an estimated, or budgeted amount of the an estimated, or budgeted amount of the allocation base has been criticized because:allocation base has been criticized because:
1.1. Basing the predetermined overhead rate upon Basing the predetermined overhead rate upon budgeted activity results in product costs that budgeted activity results in product costs that fluctuate depending upon the activity level.fluctuate depending upon the activity level.
2.2. Calculating predetermined rates based upon Calculating predetermined rates based upon budgeted activity charges products for costs that budgeted activity charges products for costs that they do not use.they do not use.
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3-73
Capacity-Based Overhead Rates
Criticisms can be overcome by using Criticisms can be overcome by using estimated total units in the allocation base at estimated total units in the allocation base at
capacity in the denominator of the capacity in the denominator of the predetermined overhead rate calculation.predetermined overhead rate calculation.
Criticisms can be overcome by using Criticisms can be overcome by using estimated total units in the allocation base at estimated total units in the allocation base at
capacity in the denominator of the capacity in the denominator of the predetermined overhead rate calculation.predetermined overhead rate calculation.
Let’s look at the difference!Let’s look at the difference!
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3-74
An Example
Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units will be produced and sold next year. What is the
predetermined overhead rate?
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3-75
An Example
Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units will be produced and sold next year. What is the
predetermined overhead rate?
TraditionalMethod
= $2.50 per unit$100,000
40,000=
Capacity Method
= $2.00 per unit$100,000
50,000=
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3-76
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
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3-77
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
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3-78
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
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3-79
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
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3-80
Quick Check
When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a. The predetermined overhead rate goes up when activity goes down.
b. The predetermined overhead rate stays the same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity goes down.
When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a. The predetermined overhead rate goes up when activity goes down.
b. The predetermined overhead rate stays the same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity goes down.
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3-81
Quick Check
When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a. The predetermined overhead rate goes up when activity goes down.
b. The predetermined overhead rate stays the same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity goes down.
When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a. The predetermined overhead rate goes up when activity goes down.
b. The predetermined overhead rate stays the same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity goes down.
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3-82
Quick Check
When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a.The predetermined overhead rate goes up when activity goes down.
b.The predetermined overhead rate stays the same; it is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity goes down.
When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a.The predetermined overhead rate goes up when activity goes down.
b.The predetermined overhead rate stays the same; it is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity goes down.
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3-83
Quick Check
When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a.The predetermined overhead rate goes up when activity goes down.
b.The predetermined overhead rate stays the same; it is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity goes down.
When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a.The predetermined overhead rate goes up when activity goes down.
b.The predetermined overhead rate stays the same; it is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity goes down.
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3-84
Income Statement Preparation
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 50,000 casesPredetermined overhead rate $2.00 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,040,000 Gross margin 560,000 Cost of idle capacity 20,000 Selling and admin. expense 500,000 Net operating income 40,000$
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3-85
Income Statement Preparation
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 40,000 casesPredetermined overhead rate $2.50 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,060,000 Gross margin 540,000 Cost of idle capacity - Selling and admin. expense 500,000 Net operating income 40,000$
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3-86
End of Chapter 3
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