Chapter 2

The Predetermined Overhead Rate

(Estimated total manufacturing overhead cost)/ (Estimated total amount of the allocation base)

The formula used to apply overhead to a specific job is:

(Predetermined overhead rate) x (Actual amount of allocation base used to complete the job)

Unit Product Cost

Unit Product Cost = (Total product cost)/# of units

2. Assigning direct labor costs-

Workers use time tickets to record the amount of time that they spent on each job and the total cost assigned to each job. The accounting department records the labor costs from the time tickets.

If an entire job is done all at once it goes straight in to the ______ of _____ ______ account

cost of goods solf

Underapplied Overhead

When applied overhead is less than actual overhead costs. Since you didn't apply enough overhead costs to work in process you have to add underapplied overhead to unadjusted cost of goods sold.

A unit product cost is defined as

a valuation of unsold units in ending inventory and costs of goods sold

Predetermined Overhead Rates are computed at the ________________ of the given period before any results have emerged

beginning

examples of overhead costs

-depreciation -utilities -indirect labor -indirect materials

cost driver examples

-direct labor hours -machine hours -overhead costs assigned to jobs -beds occupied -computer time

the allocation base is a __________ _____________ that reflects how jobs consume overhead sources

cost driver

How costs are accumulated on the job sheet

1. Assigning direct materials cost 2. Assigning direct labor costs 3. Assigning manufacturing overhead costs

How to compute predetermined overhead rate

1. Estimate the total amount of the allocation base (demoninator) 2 Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base (numerator) 3. Use the formula Y = a +bX to estimate the total manufacturing overhead cost for the coming period 4. Compute the predetermined overhead rate by dividing the numerator by the denominator

Job-Order Costing Systems are used when

1. Many different products (each with unique features) are produced each period 2. Products are manufactured to order 3. Costs are traced to each job. Records are maintained for each job.

Business that use job-order costing

1. clothing factories 2. air craft manufacturing companies 3. book publishers

Job-order Costing In Service Companies

i. Although our attention has focused upon manufacturing applications, it bears re-emphasizing that job-order costing is also used in services industries. 1. Examples: in an accounting firm, each client represents a "job." The time expended by accountants represents direct labor. The costs of support staff represent overhead. Note that personal service industries will not always have direct materials.

applied overhead is greater than actual overhead

overapplied overhead

Applied overhead equation

overhead applied to a particular job = (predetermined overhead rate) x (amount of the allocation base incurred by the job)

Manufacturing Costs Assigned to job-order costing

Direct costs --Direct Materials --Direct Labor Indirect Costs --Manufacturing Overhead (indirect materials and indirect labor allocated to jobs)

3. Assigning manufacturing overhead costs

Overhead costs are indirect costs making it impractical to trace to specific jobs. Thus, a predetermined overhead rate will be used to allocate overhead costs to jobs.

Overhead rates can be computed on an __________ or less frequent basis

annual -if annual, job and cost will not be known until the end of the year

job order costing systems must allocate _____________ ____________ costs to jobs

manufacturing overhead

Actual Overhead Costs

Actual overhead costs and the overhead applied to work in process will typically be different because the overhead applied was based on estimated overhead costs. The difference is either underapplied or overapplied

Overapplied Overhead

When applied overhead is greater than actual overhead costs. Since you applied too much in overhead costs to work in process you have to subtract overapplied overhead from unadjusted cost of goods sold.

Cost of Goods Manufactured

Sum of all amounts transferred from work in process account to finished goods account

1. Assigning direct materials cost

The Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials to be drawn from the storeroom, and the job number to which the cost of the materials is to be charged. The accounting department records the total on the job cost sheet.

The Job Cost Sheet

The sheet used by the accounting department to track the costs of a job. Each job is given a unique number.

Totals of direct material, direct labor, & manufacturing overhead are transfered to the cost summary portion of the job cost sheet and added together to obtain the total cost for the job

Total Product cost

At the End of the period, underapplied or overappled overhead equals

Underapplied or overapplied overhead = (actual total manufacturing cost) - (total manufacturing overhead applied)

Flow of Cost

i. Raw materials purchases are recorded in the Raw Materials inventory account. ii. When raw materials are used in production, their costs are transferred to the Work in Process inventory account as direct materials. (Work in Process refers to partially completed goods) iii. Direct labor costs are added directly to Work in Process. iv. Manufacturing overhead costs are applied to Work in Process by multiplying the predetermined overhead rate by the actual quantity of the allocation base consumed by each job. v. When goods are completed, their costs are transferred from Work in Process to Finished Goods. These are goods that haven't been sold yet. vi. The amount transferred from Work in Process to Finished Goods is referred to as the cost of goods manufactured. vii. As goods are sold, their costs are transferred from Finished Goods to Cost of Goods Sold. At that point they become an expense. viii. Period costs (or selling and administrative expenses) are not assigned to products. They are recorded as expenses on the income statement in the period incurred. III. Schedule of cost of goods manufactured and cost of goods sold

applied overhead is less than actual overhead

underapplied overhead

Used to determine how much product cost should be removed from finished goods and charged to costs of goods sold

unit product cost