Chapter 3-Job-Order Costing
The under/over applied balance in the Manufacturing Overhead account at the end of the period is treated in one of two ways
1. Closed out to COGS 2. Allocated among the Work in Process, Finished Goods, and COGs accounts in proportion to the overhead applied during the current period in ending balances
Manufacturing Overhead needs to be recorded on the job-cost sheet but there are difficulties .
1. Manufacturing Overhead is an indirect cost, difficult to trace costs to a specific job. 2. Consists of many different items ranging from the grease used in machines to the annual salary of a production manager. 3. Fixed costs in MO, total MO costs tend to remain relatively constant from one period to the net even though the number of units can fluctuate widely.
Example COGS
10,000 + 158,000=168,000-49,500=118,500 + 5,000= 123,500
Example COGS manufactured
7,000 + 60,000=67,000-15,000=52,000 -2,000=50,000 + 60,000 + 90,000=200,000 + 30,000-230,000 -72,000= 158,000
Bigger example : Company A has an estimated 40,000 direct labor-hours are used to support the production planned, the total manufacturing overhead costs would be $320,000 at that level of activity. The predetermined overhead rate for the year would be $8 USD
=320,000/40,000(direct labor hours) =8 dollars
Unit Product Cost
=Total Manufacturing Cost/Total Units Produced
COGS
AS finished goods are shipped to customers, their accumulated costs are transferred from the Finished Goods account to the COGS account. In most cases, only a portion of the units involved in a particular job will be immediately sold. The unit product cost must be used to determine how much product cost should be removed from Finished Goods and charged to COGs.
The Concept of Clearing Account: Manufacturing Overhead account operates as a clearing account.
Actual overhead costs are charged to this account as they are incurred throughout the period (D). Overhead is applied to Work in Process using the predetermined overhead rate (C)
Job Cost Sheet
After the production order has been issued ---> a job cost sheet is a form prepared for a job that records the materials, labor, and manufacturing overhead costs charged to that job.
Absorption Costing
All manufacturing costs, both fixed and variable, are assigned to units of product-units are said to fully absorb manufacturing costs. Product costs include all manufacturing costs. Things like rent, and monthly based payments cannot be directly traced to any particular product. These costs are assigned to products and services by averaging across time and across products.
Cost of Goods Sold
Beginning Finished goods Inventory + Costs of Good Manufactured=Goods Available for Sale -Finished Goods Inventory, ending = Unadjusted COGs + Underapplied Overhead= Adjusted COGs
Cost of Goods Manufactured
Beginning Raw Materials + Purchases= Total Raw Materials available - Ending Raw Materials Inventory=Raw Materials used in Production-Indirect Materials included in MO+ Direct Labor + MO applied to Work Process=Total Manufacturing Costs + Beginning Work in Process Inventory - Ending Work in Process Inventory = COGS
Closed out to COGs
COGs 5,000 (D) Manufacturing Overhead 5,000 (C) *Note that because the Manufacturing Overhead account has a debit balance, Manufacturing Overhead must be credited to close out the account. This increased COGs by 5,000.
How are costs allocated in a job-order costing system?
Costs are traced and allocated to jobs and then the cots of the job are dived by the number of units in the job to arrive at an average cost per unit. Many different projects.
Deprecation on office equipment during April was 7,000.
Depreciation Expense 7,000 (D) Accumulated Depreciation 7,000 (C)
A multiple predetermined overhead rate system
Each production department may have its own predetermined overhead rate. It is more accurate because it can reflect differences across departments in how overhead costs are incurred.
Measuring direct labor cost
Easy to connect to the product cost.
Predetermined overhead rate =
Estimated total manufacturing overhead cost/Estimated total amount of allocation base
If the base in the predetermined overhead rate does not "drive" overhead costs, products costs will be distorted.
Example: If direct labor hours is used to allocated overhead, but in reality overhead has little to do with direct labor hours, then products with high direct labor-hour requirements will be overcosted.
When is job-order costing used?
Extensively used in service industries, like law firms, movie studios, accounting firms.
Transfer from Work-in-Process Account into the Finished Goods account. The sum of both FG and WIP accounts represents the COGS of goods manufactured for the period.
Finished Goods 158,000 (D) Work in Process 158,000 (C) *This also represents the COGS Manufactured for the month
Allocated between accounts: This is more accurate.
It assigns overhead costs to where they would have gone in the first place had it not been for the errors in estimating the predetermined overhead rate. Use percentages.
Example: Assume 750 of 1,000 Gold Medallions in Job A were shipped to customers by the end of the month for total sales revenue of 225,000. 1,000 units were produced and a total cost of the job from the job cost sheet was 158,000, the unit product cost was 158.
Journal Entry 1: Accounts Receivable 225,000 (D) Sales: 225,000 (C) Journal Entry 2. COGs 118,500 (D) Finished Goods 118,500 (C) *(750*158=118,500)
The company recognized 18,000 in depreciation on factory equipment during April.
Manufacturing Overhead 18,000 (D) Accumulated Depreciation (Contra-Asset) 18,000 (C)
April, Ruger Corporation recognized 13,000 in accrued property taxes and that 7,000 in prepaid insurance expired on factory buildings and equipment.
Manufacturing Overhead 20,000 (D) Property Taxes Payable 13,000 (C) Prepaid Insurance 7,000 (C)
Incurrence of these costs
Manufacturing Overhead 40,000 (D) Accounts Payable 40,000 (C)
Example: If the predetermined overhead rate is $8 per direct labor hour, then $8 of overhead cost is applied to a job for each direct labor-hour incurred on the job. The formula becomes:
Overhead applied to a particular job= Predetermined overhead rate * Actual direct labor-hours charged to the job
Overhead cost applied to apply to a particular job is:
Overhead applied to a particular job= Predetermined overhead rate * Amount of the allocation based incurred by the job.
Example: The predetermined overhead rate is 6 dollars per hour which was used to apply 90,000 of overhead cost to Work-in-Process, whereas actual overhead costs for April proved 95,000.
Overhead was underapplied by 5,000 dollars.
MO is commonly applied to products using a _______________.
Predetermined overhead rate
Actual manufacturing overhead costs are charged to MO not Work in Process, then how are manufacturing overhead costs assigned to Work in Process?
Predetermined overhead rate which is used to apply overhead costs to jobs.
The Purchase of Raw Materials JE
Raw Materials (D) Accounts Payable (C)
Manufacturing Overhead Costs
Remember indirect costs are entered directly into the Manufacturing Overhead account as they are incurred.
Non-Manufacturing Costs (Selling and Administrative Costs) Directly to the IS. Example: Ruger Corporation incurred 30,000 in selling and administrative expenses.
Salaries Expense 30,000 (D) Salaries and Wages Payable 30,000 (C)
Income Statement
Sales: 225,000 COGs (118,500 + 5,000)=123,500 Gross Margin 101,500 Deduct: Salaries Expense 30,000, 7,000, 42,000, 8,000= 87, 500. Net Operating Income: 14,500
$5,000 debit balance in manufacturing overhead. (debits represent actual overhead costs incurred, whereas credit entries represent overhead costs applied to jobs).
The actual overhead costs exceeded the overhead costs applied to jobs by 5,000, hence the debit balance.
Which method should be used for disposing of underapplied or overapplied overhead?
The allocation method is generally considered more accurate than simply closing out the underapplied or oveapplied overhead to COGs.
Why is there underapplied and overapplied overhead?
The predetermined rate is established before the period begins and is based entirely on estimated data, the overhead cost is applied to Work in Process will generally differ from the amount of overhead cost actually incurred.
Imagine: Overhead costs for the period are 5,000 greater than the overhead cost that has been applied to Work in Process, resulting a 5,000 debit balance in the Manufacturing Overhead account.
This needs to be solved but remember Actual Overhead costs are not charged to jobs; actual overhead costs do not appear on the job cost sheet nor do they appear in the Work in Process Account. Only the applied overhead cost, based on the predetermined overhead rate, salon the job cost sheet and in the work-in-process account.
Rule
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.
Note
Under-applied overhead is added to COGs. If overhead were over-applied, it would be deducted from COGs.
Main Challenges
Underapplied and overapplied overhead, and the dispostion of any balance remaining in the Manufacturing Overhead account at the end of the period.
The Accounting Department calculated the _______ _____________ for each entry on the time ticket and then enters the direct labor-hours and costs on individual job cost sheets.
Wage Cost
Issue of Direct and Indirect Materials: During April 52,000 in raw materials were requisitioned from the storeroom for use in production. These raw materials included 50,000 of direct and 2,000 of indirect materials.
Work in Process 50,000 (D) Manufacturing Overhead 2,000 (D) Raw Materials 52,000 (C)
In April $60,000 was recorded for direct labor and $15,000 for indirect labor.
Work in Process 60,000 (D) Manufacturing Overhead 15,000 (D) Salaries and Wages Payable 75,000 (C)
Example: Ruger Corporation's predetermined overhead rate is $6 per machine hour. Also assume that during April, 10,000 hours were worked on Job A and 5,000 jobs were worked on Job B (total 15,000). Overhead cost is 90,000 (6*15,000). Entry recording the application of Manufacturing Overhead to Work in Process.
Work in Process 90,000 (D) Manufacturing Overhead 90,000 (C)
Time ticket
Workers used time time tickets to record the time they spend on each job and task. An hour-by-hour summary of the employee's activities throughout the day.
Materials Requisition Form
a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials. The form is used to control the flow of materials into production and also for making entries in the accounting records.
Production order
an agreement has been reached with the customer concerning the quantities, prices and shipment date for the order.
A normal cost system
applies overhead to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation based incurred by the jobs.
Predetermined overhead rate is
computed before the period begins. First step determine the amount of allocation base, then estimate total manufacturing cost at that level of activity. Then compute.
Bill of materials
is a document that lists the type and quantity of each type of direct material needed to complete a unit of product.
Cost Driver
is a factor, such as machine hours, beds occupied, computer time, or flight hours, that causes overhead costs.
Allocation base
is a measure such as direct labor hour or machine hours that is used to assign overhead costs to products and services. The most widely used allocation based in manufacturing are direct labor hours, direct labor cost, machine hours and units of product.
Job-Order Costing
is used in situations where many different products are produced each period. (Levi Strauss)
In larger companies, __________ ___________ ________________ are used.
multiple predetermined rates
If there is a credit balance in the Manufacturing Overhead account of Y dollars, then the overhead is _________________ by Y dollars.
overapplied
Technology and indirect labor workers (engineers) are changing
the allocation base based on direct labor.
If there is a debit balance in the Manufacturing Overhead account of x dollars then the overhead is ______________ by x dollars.
underapplied
Process Costing
used in companies that produce many units of a single product for long periods. Ex: Coca-cola, Oscar-Meyer Homogeneous products that flow through the production process on a continuous basis.
