Chapter 2
3 steps to PDOH
1. Determine the allocation base (cost driver). Because manufacturing overhead costs are not traceable to specific jobs, accountants must use an allocation base to assign indirect costs to products or services. Ideally, the allocation base should be a cost driver. 2. Calculate the predetermined overhead rate. Predetermined overhead rate = estimated total manufacturing overhead cost / estimated total cost driver 3. Assign manufacturing overhead using the predetermined overhead rate. Predetermined overhead rate X ACTUAL cost driver = Overhead applied to job We had to use estimated numbers to compute the predetermined overhead rate because we calculated it in advance, but the overhead cost will be applied to specific jobs as the actual work is performed.
5 T-accounts used for tracking costs in job order costing
1. Raw Materials Inventory : represents the cost of materials purchased from suppliers but not yet used in production. This account includes both direct materials that will be traced to specific jobs (lumber, piping) and the indirect materials that cannot be traced to specific jobs (screws, nails, and so on). 2. Work in process inventory: represents the total cost of jobs that are in process at any given point in time. The total cost of all jobs in process should equal the balance in Work in Process Inventory. 3. Finished goods inventory: represents the cost of jobs that have been completed but not yet sold. The cost of a completed job remains in Finished Goods Inventory until it is sold. 4. Cost of goods sold: When a job is sold, its total cost is transferred out of Finished Goods Inventory and into Cost of Goods Sold, where it will be matched up against sales revenue on the income statement. 5. Manufacturing overhead: The Manufacturing Overhead account is a temporary holding account used to record actual and applied manufacturing overhead costs.
How manufacturing costs flow through the 5 T-accounts
1. When materials are purchased, the cost is initially recorded in Raw Materials Inventory. As materials are used, the cost is transferred to either Work in Process Inventory (for direct materials) or to Manufacturing Overhead (for indirect materials. 2. Direct materials (from RM) and direct labor costs (not from any inventory account) are debited directly in the Work in Process Inventory account. All costs added to the Work in Process Inventory account must be assigned to a specific job. 3. All indirect or manufacturing overhead costs are debited to the Manufacturing Overhead account and credited from the RM account. 4. Manufacturing overhead is applied to specific jobs using a credit to MOH and a debit to WIP and based on the predetermined overhead rate and cost driver. 5. When a job is completed, its total manufacturing cost is credited out of WIP and debited into the Finished Goods Inventory account. 6. When a job is sold, the cost is transferred to the Cost of Goods Sold account where it will be matched against Sales Revenue on the income statement. 7. At the end of the reporting period, any difference between actual and applied manufacturing overhead (represented by the balance in the Manufacturing Overhead account) must be accounted for by adjusting Cost of Goods Sold and zeroing out MOH.
Under applied and over applied overhead
A debit balance in the Manufacturing Overhead account means that overhead was underapplied, or that actual overhead was greater than the amount applied. A credit balance in the Manufacturing Overhead account means that overhead was over applied, or that actual overhead was less than the amount applied.
What kind of account is MOH?
An expense account
COGM
BB in WIP + DM + DL + Applied FOH - e/b WIP = COGM
materials requisitioned form
Document used to authorize the issuance of materials into production; details the cost and quantities of all materials needed to complete specific jobs.
Total inventory =
RM + WIP + F/G
Predetermined Overhead Rate (PDOH)
Rate estimated before the accounting period begins and used throughout the period to assign overhead costs to products or services.
the total cost of all jobs in process should equal the overall balance in the
Work in Process Inventory account
Operation costing
a blend of process costing (for the common processes) and job order costing (for the unique components).
Cost driver
a measure that causes or influences the amount of manufacturing overhead cost incurred, such as machine hours, direct labor hours, machine dollars, direct labor dollars, square footage of home, etc.
GAAP requires that all manufacturing costs be treated as product costs, which means that...
manufacturing costs should be counted as inventory (an asset) until the product is sold.
Job cost sheet
provides a detailed record of the costs incurred to complete a specific job.
If labor is not traceable to a specific job, the cost is considered indirect labor and is debited to
the Manufacturing Overhead account.
If the estimates for PDOH were incorrect or the relationship between manufacturing overhead and the allocation base is less than perfect, what happens?
there will likely be some difference between actual and applied manufacturing overhead.
Total manufacturing costs = Current manufacturing costs =
Beginning balance in WIP + DM + DL + Applied FOH = Total manufacturing cost DM + DL + Applied FOH = current manufacturing cost
What are unique products or services called in accounting?
Jobs
Job order costing vs process costing (4)
1. Type of job Job order: Unique products and services, like construction projects Process: Homogeneous products and services, like soda or other mass produced items 2. Production approach Job order: customized to the needs of the client Process: Mass produced using a series of standardized processes 3. Cost accumulation Job order: cost accumulated by job Process: Cost accumulated by process 4. Major cost report Job order: job cost sheet for each unique job Process: Production report for each major production process
Difference between debit side of MOH account and credit side
Actual manufacturing overhead costs are accumulated on the debit (left-hand) side of the Manufacturing Overhead account. The credit (right-hand) side of the account shows the manufacturing overhead that is applied to specific jobs based on the predetermined overhead rate.
COGM report (12 lines)
BB RM Plus purchases of RM Less IM Less e/b RM Gives DM Plus DL Plus app. MOH Give total current manufacturing cost Plus BB WIP gives total manufacturing cost Less e/b WIP Gives COGM
Unless specified, what do we assume about actual vs applied FOH?
If 1. no dollar amount of applied FOH or 2. no PDOH is given then we assume actual FOH = applied FOH
Cost of goods manufactured, also called cost of goods completed, represents
The total cost of all jobs completed during the period. It is the total cost transferred out of Work in Process Inventory and into Finished Goods Inventory
Ultimate objective of all cost systems
to determine the cost of something specific, such as a product, a service, a department, a process, or an activity.
Who uses job order costing?
used in companies that offer customized or unique products or services. Companies use job order costing when each unit or customer differs from the next. Job order costing can also be applied to service companies that serve clients or customers with unique needs. For example, law firms, architects, and medical professionals have accounting systems to track the costs of serving individual clients.
how costs are assigned to the jobs
For direct materials, a materials requisitioned form is used. For direct labor, a labor time ticket is used For manufacturing overhead, applied manufacturing overhead is used using a predetermined overhead rate
Do non-manufacturing (period) costs flow through the inventory accounts?
Nonmanufacturing costs do not flow through the Work in Process, Finished Goods Inventory, and Cost of Goods Sold accounts, but rather are reported as an operating expense during the period incurred. These nonmanufacturing costs would be recorded in individual expense accounts. For simplicity, we combine them into a single account called Selling, General, and Administrative Expenses. The total selling, general, and administrative expense will be subtracted from gross profit on the income statement.
Who uses process costing? How does it apply cost?
Process costing is used by companies that make standardized or homogeneous products or services Process costing breaks the production process down into its basic steps, or processes, and then averages the total cost of each process over the number of units produced.
Multi-step income statement (14 lines)
Sales <sales discounts> <sales returns and allowances> <credit card discounts> Gives Net sales <COGS> Gives gross profit <S&A expenses> Gives operating income Plus other revenue <other expenses> Gives income before taxes <tax expense> Gives net income
What does the value of the PDOH rate mean?
If estimated total manufacturing overhead cost / estimated total cost driver = 3.00 for example, this means that for every unit of cost driver (whether that is machine dollars, direct labor hours, etc) there is an estimated $3.00 of indirect costs in producing the product.
Unless specified, what do we assume about materials requisitioned?
It is all direct material. Unless the problem specifically gives the amount of indirect material included in the materials requisitioned, or we can somehow determine the amount by looking at the FOH account, then we assume all the materials are direct materials and are debited into WIP.
Job order costing has how many WIP accounts? How does it keep track of multiple jobs? Process costing has how many WIP accounts? How does it keep track of multiple jobs?
Job order costing has onely 1 WIP account. Costs of specific jobs are tracked by keeping BB, DM, DL, and Applied FOH separate for each job. HOWEVER, they are all kept in the one WIP account. Process costing has as many WIP accounts as there are processes in the manufacturing process. Process costing doesn't keep track of specific jobs but rather applies cost to units by each process.
How to adjust MOH for under and over applied over head
To eliminate a under applied debit balance in the Manufacturing Overhead account, we need to credit the Manufacturing Overhead account and debit the Cost of Goods Sold account. Debiting Cost of Goods Sold increases it. Increasing Cost of Goods Sold makes sense in this case because manufacturing overhead was under-applied. In other words, we did not apply enough cost to the jobs that were completed and eventually sold. If Manufacturing Overhead was overapplied (with a credit balance), we would debit the Manufacturing Overhead account (to remove the credit balance) and credit Cost of Goods Sold. Crediting Cost of Goods Sold decreases it to reflect the fact that actual manufacturing overhead was less than the amount applied.
