Accounting 231: Chapter 2
THE NEED FOR POHR: Predetermined overhead rates that rely upon estimated data are often used because:
1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. 2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers.
Examples of companies that would use job-order costing include:
1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)
The predetermined overhead rate is computed before the period begins using a four-step process. 1. 2.
1. Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base.
Job-order costing systems are used when :
1. Many different products are produced each period. 2. Products are manufactured to order. Many service industries use job-order costing. 3. The unique nature of each order requires tracing and allocating costs to each job, and maintaining cost records for each job.
FINANCIAL ADJUSTMENT FOR OVERHEAD APPLIED: The cost of goods sold reported on a company's income statement must be adjusted to reflect underapplied or overapplied overhead.
1. The adjustment for UNDERAPPLIED overhead INCREASES COST OF GOODS and decreases net operating income. 2. The adjustment for OVERAPPLIED overhead DECREASES COST OF GOODS SOLD and increases net operating income.
JOB- ORDER COSTING FOR FINANCIAL STATEMENTS TO EXTERNAL PARTIES: The amount of overhead applied to all jobs during a period will differ from the actual amount of overhead costs incurred during the period
1. When a company applies less overhead to production than it actually incurs, it creates what is known as UNDERAPPLIED OVERHEAD. 2. When it applies more overhead to production than it actually incurs, it results in OVERAPPLIED OVERHEAD.
One computerized approach to creating time tickets uses barcodes to capture data. Each employee and each job has a unique barcode. When beginning work on a job, the employee scans three bar codes using a handheld device much like the bar code readers at grocery store checkout stands.
1. the first bar code indicates that a task is being started; 2. the second is the unique bar code on the employee's identity badge; 3. the third is the unique bar code of the job itself. This information is fed automatically via an electronic network to a computer that notes the time and records all of the data. When the task is completed, the employee scans a bar code indicating the task is complete, the bar code on his or her identity badge, and the bar code attached to the job. This information is relayed to the computer that again notes the time, and a time ticket is automatically prepared. Because all of the source data is already in computer files, the labor costs can be automatically posted to job cost sheets.
The predetermined overhead rate is computed before the period begins using a four-step process. 3.
3. Use the following equation to estimate the total amount of manufacturing overhead: Y = a + bX Where, Y = The estimated total manufacturing overhead cost a = The estimated total FIXED manufacturing overhead cost b = The estimated VARIABLE manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base.
LO2:
Apply overhead cost to jobs using a predetermined overhead rate.
LO1:
Compute a predetermined overhead rate.
LO3:
Compute the total cost and the unit product cost of a job using a plantwide predetermined overhead rate.
LO4:
Compute the total cost and the unit product cost of a job using multiple predetermined overhead rates.
CONCEPT CHECK 1: 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.
D. $730 POHR= 760,000/20,000 hours... $38 Direct materials= $200 Direct labor= $15/10hrs= $200 Manufacturing overhead: $38/10hrs= $380 Total cost= $730
POHR formula:
Estimated total manufacturing overhead cost for the coming period / Estimated total units in the allocation base for the coming period
Example of job-order costing:
For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 boot-cut men's blue denim jeans, style number A312. This order of 1,000 jeans is called a JOB. In a job-order costing system, costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit. - This average cost per unit is also referred to as the unit product cost.
Materials request form --> job cost sheet (example):
Not that, for example, that the $660 cost for direct materials shown earlier on the materials requisition form has been charged to Job 2B47 on its job cost sheet. The requisition number 14873 from the materials requisition form appears on the job cost sheet to make it easier to identify the source document for the direct materials charge.
POHR stands for:
Predetermined Overhead Rate Manufacturing overhead is commonly assigned to products using a predetermined overhead rate.
Overhead application:
The process of assigning overhead cost to jobs.
Actvity-based costing:
When a company creates overhead rates based on the activities that it performs.
OVERHEAD APPLICATION RATE- Example: PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period's estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor-hour.
Y = a + bX Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours) Y = $200,000 + $440,000 Y = $640,000 POHR= $640,000 estimated total manufacturing overhead / 160,000 estimated direct labor hours (DLH) POHR = $4.00 per direct labor-hour
Job-order costing:
a costing system used in situations where many different products, jobs, or services are produced each period
bill of materials:
a document that lists the quantity of each type of direct material needed to complete a unit of product
materials requisition form:
a document that... - specifies the type and quantity of materials to be drawn from the storeroom - identifies the job that will be charged for the cost of the materials
Job Cost Sheet:
a form that records the materials, labor, and manufacturing overhead costs charged to that job
When an agreement has been reached with the customer concerning the quantities, prices, and shipment date for the order....
a production order is issued. The Production Department then prepares a materials requisition form.
Plantwide overhead rate:
a single predetermined overhead rate that is used throughout a plant
Time ticket:
an hour-by-hour summary of the employee's activities throughout the day - Most companies rely on computerized systems to maintain employee time tickets.
Ideally the the allocation base is a _______ ______ that causes overhead.
cost driver
Absorption Costing:
costing method that includes all manufacturing costs, both fixed and variable, are assigned to units of product—units are said to fully absorb manufacturing costs.
After a production order has been issued, the Accounting Department's job-order costing software system automatically generates a...
job cost sheet. After direct materials are issued, the cost of these materials are automatically recorded on the job cost sheet.
CALCULATING UNIT PRODUCT COST:
the total product cost ($2,390) is divided by the number of units (2) to obtain the unit product cost ($1,195). - As indicated earlier, this unit product cost is an average cost and should not be interpreted as the cost that would actually be incurred if another unit were produced. The incremental cost of an additional unit is something less than the average unit cost of $1,195 because much of the actual overhead costs would not change if another unit were produced.
CALCULATING TOTAL COST OF JOB:
the totals for - direct materials, - direct labor, and - manufacturing overhead are transferred to the Cost Summary section of the job cost sheet and added together ...to obtain the total cost for the job
The predetermined overhead rate is computed before the period begins using a four-step process. 4.
4. Compute the predetermined overhead rate.
What is the predetermined overhead rate?
= Estimated total manufacturing overhead cost + Estimated total amount of the allocation baset used to apply overhead to jobs is determined before the period begins
Multiple predetermined overhead rates:
A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead cost pool.
Why Use an Allocation Base?
A. It is impossible or difficult to trace overhead costs to particular jobs. B. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary. C. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
MULTIPLE PREDETERMINED OVERHEAD RATES- AN ACTIVITY BASED APPROACH: When a company creates overhead rates based on the activities that it performs, it is employing an approach called ________-_________ ________.
Activity-based costing
Allocation base:
An allocation base, such as direct labor-hours, direct labor-dollars, or machine-hours, is used to assign manufacturing overhead to individual jobs.
Activity-based costing:
An alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.