Chapter 3

Predetermined MOH rate

(Total estimated manufacturing overhead costs) / (Total estimated amount of the allocation base)

Completing the Job Cost record and Using it to make Business Decisions

-Reducing future Job Costs -Assessing and Comparing the profitability of each model -Dealing with pricing pressure from competitors -Allowing discounts on his-volume sales -Bidding for custom orders -Preparing the financial statements

Operating Expenses

All non-manufacturing expenses (period costs) will be shown as "operating expenses" on the company's income statement.

Incurring Other Manufacturing Overhead Costs

All other indirect costs of operating the manufacturing plant during the month are also added to the Manufacturing Overhead account until they can be allocated to specific jobs

Use of Indirect Materials

Are materials used in the manufacturing plant that cannot be traced to individual jobs, and therefore are not recorded on any job cost record. MOH (Debit) RM (Credit)

Invoice

Bill from the supplier

How to determine whether manufacturing overhead had been overallocated or underallocated

Compare the amount of MOH actually incurred during the period with the amount of MOH that was allocated to jobs during the same period.

Use of Indirect Labor

Consists of the salary, wages, and benefits of all factory workers who are not directly working on individual jobs. MOH (Debit) Wages Payable (Credit)

Cost-plus pricing

Cost + Markup on cost

Allowing Discounts On High-Volume Sales

Customers will often expect discounts for high-volume sales. Figure out if its worth to do the discount

What does under allocated mean?

Did not allocate enough MOH cost to the jobs worked on during the period. The jobs worked on during the period should have had a total of $1000 more manufacturing overhead cost allocated to them than the job cost records indicated.

Materials requisition

Each time materials are needed, production personnel will fill this out. Is a document itemizing the materials currently needed form the storeroom.

Separate "Job"

Each unique product or batch of units is considered a separate Job

Closing MOH

Figure out if Under or Over allocated then zero out the MOH account. If under-allocated then debit cost of goods sold and credit MOH. If Over-allocated then the MOH would be debited and the COGs would be credited

Why the production schedule is important

Helps management determine the direct labor and direct materials needed during the period.

Over or Under allocated

If actual manufacturing overhead cost incurred is larger than MOH allocated then Underallocated manufacturing overhead

MOH costs

Include depreciation on a factory plant and equipment, utilities to run the plant, property taxes and insurance on plant, equipment maintenance, the salaries of plant janitors and supervisors, machine lubricants, and so forth

Receiving Report

Incoming shipments of raw materials are counted and recorded on a receiving report

Production Schedule

Indicates the quantity and types of inventory that are scheduled to be manufactured during the period.

The MOH account

Is a temporary account used to "pool" indirect manufacturing costs until those costs can be allocated to individual jobs.

Bill of Materials

Is like a recipe card: It simply lists all of the raw materials needed to manufacture the job.

Cost Driver

Is the primary factor that causes, or drives, a cost. For example, in many companies, manufacturing overhead costs rise and fall with the amount of work performed in the factory.

Process Costing

Is used by companies that produce extremely large numbers of identical units through a series of uniform production steps or processes

Job Costing

Is used by companies that produce unique, custom-ordered products, or relatively small batches of different products.

Bidding for Customs Orders

Management also uses product cost information to bid for custom orders.

Assessing and comparing the profitability of each model

Management will use job cost info to determine the profitability of the various models. Do unit sales price minus unit cost equals gross profit.

Steps to allocating Manufacturing overhead

Manufacturers follow four steps to implement this basic allocation system. The first three steps are taken before the year begins.

Allocating Manufacturing overhead to jobs

Means that we will be splitting up or dividing the total manufacturing overhead costs among the jobs we produced during the year.

Stock Inventory

Most companies produce stock inventory for products they sell on a regular basis. They want to have stock available to quickly fill orders

Job Costing Examples

Not limited to manufacturers. Professorial service providers such as law firms, accounting firms, consulting firms, and marketing firms use job costing to determine the cost of serving each client

Completion of Jobs

Once the job has been completed, the three manufacturing costs shown on the job cost record are summed to fin the total job cost. Finished Goods (Debit) WIP (Credit)

Purchase Order

Order to receive raw materials from suppliers that are needed

MOH allocated to a job

Predetermined MOH rate x Actual amount of allocation base used by the job.

Total MOH Allocated

Predetermined MOH rate x Actual total amount of allocation base used on all jobs

Use of Direct Materials

Primary physical components of the product. The cost of these materials must be moved into WIP inventory (Debit) and out of Raw Materials Inventory (Credit)

Flow of Inventory

Raw Materials --> WIP Inventory --> FG Inv. --> Cost of goods sold (when the products are sold)

Purchase of Raw materials

Raw Materials Inventory Accounts Payable

Raw Materials Record

Shows detailed information about each item in stock, including the number of units received, the number of units used, and the balance of units currently in stock. Also shows the cost of each unit purchased, the cost of each unit used, and the cost of the units still in the raw materials inventory.

Labor time record

Simply records the time spent by each employee on each job he or she worked on throughout the day.

Job Cost records on Incomplete Jobs

Sum to the WIP Inventory Balance

Individual raw materials record

Sum to the raw materials inventory balance

Allocating Manufacturing Overhead to Jobs

The MOH pool is increased though the addition of actual MOH costs as they are incurred, and decreased through the allocation of MOH to individual jobs

Step 4

The company allocates some manufacturing overhead to each individual job as follows

Step 3

The company calculates its predetermined manufacturing overhead (MOH) rate using the information estimated in Steps 1 and 2

Step 1

The company estimates its total manufacturing overhead costs for the coming year.

Step 2

The company selects an allocation base and estimates the total amount that will be used during the year.

Use of Direct Labor

The labor time records of individual factory workers are used to determine exactly how much time was spent directly working on Job. WIP (Debit) Wages Payable (Credit)

Sale of Units

Two journal entries are needed one is Accounts Receivable (Debit) Sales Revenue (Credit) and Cost of Goods Sold (Debit) Finished Goods Inventory (Credit)

Companies that use Job Costing

Use job costing when their products or services vary in terms of materials needed, time required to complete the job, and/or the complexity of the production process.

Dealing with Pricing pressure from competitors

When competitor drops the price then you can figure out how much you can drop the price

Job Cost Record

Will be used to accumulate all of the direct materials and direct labor used on the job, as well as the manufacturing overhead allocated to the job. Shows the number of units produced on the job, as well as the cost per unit.

Process Costing averages

manufacturing costs across all units produced so that each identical unit bears the same cost.

If jobs have been overcosted due to overallocation of MOH, then Cost of Goods Sold is

too high, so decrease cost of goods sold for the amount of the overallocation

If jobs have been undercosted due to under allocation of MOH, then Cost of Goods sold is

too low, so Increase Cost of Goods Sold for the amount of the underallocation