Calculate Cost of Goods Sold and Ending Overhead Balance © Dale R. Geiger 20111.

© Dale R. Geiger 2011 1

Calculate Cost of Goods Sold and Ending Overhead Balance

Principles of Cost Analysis and Management


Terminal Learning Objective

• Task: Calculate Cost of Goods Sold and Ending Overhead Balance

• Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors.

• Standard: With at least 80% accuracy• Calculate cost of job given predetermined overhead rate• Calculate predetermined overhead rate• Calculate over-/ under-applied overhead• Explain causes of over-/under-applied overhead• Prove ending balances in inventory accounts


If Unit Cost is misstated, how might that affect these decisions?

Do user fees cover Unit

Cost?

On which products and services should

we expend our limited resources?

Should we increase user

fees?

Are we competitive in providing this

service?


Job Order Costing

• Provides a methodology for calculating the cost of a job

• Assumes that each job is unique and has identifiable direct costs

• Assumes that all jobs consume indirect resources in a similar manner


Job Order Costing

• Records Direct Materials and Labor for each individual job

• Work in Process consists of all jobs still in process

• Cost of job = Direct Materials + Direct Labor + Applied Overhead


Job Order Costing

• Applies Overhead on a predetermined rate•Traditional labor-based OH Rate =

Estimated Overhead $ / Estimated Direct Labor $

•Assumes that indirect costs are closely correlated to Direct Labor•OH Application =

Overhead Rate * Direct Labor $


Job Order Costing

Lends itself readily to service applications:• Legal services• Repair and maintenance services• Contract services• Others?


Overhead

The Inventory Chain


Job Order Cost Flow


Check on Learning

• What is the goal of Job Order costing?• What is the equation for the cost of a job?


Job Tickets

• Detailed information about each job is recorded on a Job Ticket:• Direct Materials• Direct Labor • Overhead Applied

• Work in Process = Total of Job Tickets for unfinished jobs

• Cost of Goods Manufactured = Total of Job Tickets for jobs completed

during the period


Job Tickets




during the period


Job Tickets




during the period


Job Order Cost FlowTotal cost of direct materials used equals

cost of materials for Job A plus cost of materials for Job B


Job Order Cost FlowTotal cost of Work in Process equals cost of

materials, labor and overhead for Job A plus cost of materials, labor and overhead for Job B


Job Order Cost FlowIf Job B is completed and transferred to Finished Goods, Cost of Goods Manufactured equals cost of Job B. Work

in Process consists of Job A, which is still unfinished.


Check on Learning

• Work in Process inventory is equal to?• Cost of Goods Manufactured is equal to?


Demonstration Problem

• The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started:

• Overhead is applied at 50% of Direct Labor• Calculate the cost of each job

Alpha Bravo Charlie

Parts 5000 4200 3600

Labor 4500 6400 3200

Overhead ? ? ?

Total ? ? ?





Alpha Bravo Charlie

Parts 5000 4200 3600

Labor 4500 6400 3200

Overhead 2250 3200 1600

Total ? ? ?





Alpha Bravo Charlie

Parts 5000 4200 3600

Labor 4500 6400 3200

Overhead 2250 3200 1600

Total 11750 13800 8400



• Alpha and Bravo are completed and transferred out. Charlie remains in process

• Calculate Cost of Goods Manufactured and ending Work in Process inventory

Alpha Bravo Charlie

Parts 5000 4200 3600

Labor 4500 6400 3200

Overhead 2250 3200 1600

Total 11750 13800 8400


Check on Learning

• How is overhead applied to each job?• What is the underlying assumption in using

direct labor as a basis for overhead application?


Perpetual Overhead Application

• Uses a Predetermined Overhead Rate: Estimated Overhead $

Estimated Direct Labor $ • Overhead is applied or added to jobs• As direct labor is incurred by jobs• In proportion to Direct Labor


Perpetual Overhead Example

• The Contract Administration Department accounts for the cost of administering contracts using a job order cost system.

• The Department Manager estimates that Overhead for the year will be $85,500 and Direct Labor on contracts will be $95,000.

• Calculate the Predetermined Overhead Rate:Estimated Overhead: $85,500 = 90%Estimated Direct Labor: $95,000


Perpetual Overhead Example

• The Contract Administration Department accounts for the cost of administering contracts using a job order cost system.

• The Department Manager estimates that Overhead for the year will be $85,500 and Direct Labor on contracts will be $95,000.

• Calculate the Predetermined Overhead Rate:Estimated Overhead: $85,500 = 90%Estimated Direct Labor: $95,000


Check on Learning

• How is the predetermined overhead rate calculated?

• Why is perpetual overhead application used in Job Order costing?


Perpetual Overhead Example (cont’d)

• The Training and Education contract requires $3,000 of direct Contract Administration labor.

• How much Overhead should be added to the cost of administering the contract?

$3,000 * 90% = $2,700• Direct Contract Administration Labor incurred on

all other contracts during June totaled $6,800• How much Overhead was applied to other

contracts? $6,800 * 90% = $6,120







contracts? $6,800 * 90% = $6,120







contracts? $6,800 * 90% = $6,120



• Contract Administration overhead incurred in June:

• Supplies$1,000

• Supervision 6,000• Facilities

1,500• Total $8,500

• Contract Administration overhead applied in June:

• T&E Contract:$2,700

• Other contracts: 6,120

• Total $8,820Incurred OH $8,500 < Applied OH $8,200Overhead is over-applied by $320


Check on Learning

• How is actual overhead calculated?• How is applied overhead calculated?


Over-applied vs. Under-applied

• Perpetual overhead application is a function of estimates• OH rate = Estimated OH$/Estimate DL$

• If our estimates are perfect, actual overhead will equal applied overhead

• Since perfection is rare, more likely the actual will differ from the estimate

• If the relationship between actual overhead and actual labor is different than estimated, overhead may be over- or under-applied



• Think of the overhead account as a bank account• Actual overhead cost incurred is like a deposit• Overhead applied to jobs is like a withdrawal

• If more overhead is applied jobs than incurred, the account is overdrawn, or over-applied

OH incurred8500

OH applied8820---------- 320

(+) (-)



• If actual overhead incurred < overhead applied, overhead is over-applied• Too much overhead was applied to each

contract. Reported cost of administering contracts is too high.

• If actual overhead incurred > overhead applied, overhead is under-applied• Not enough overhead was applied to each

contract. Reported cost of administering contracts is too low.


Is this a Serious Problem?

• If the over- or under-applied overhead amount is Material then the difference will affect decisions

• What constitutes a material amount?• It depends. If the error is more than 5% of the

total contract amount, it is probably significant• Is the error due to a significant error in

estimating either Labor $ or Overhead $?• If so, the overhead rate should be adjusted


Under- or Over-costing

• How might under-costing Contract Administration affect decisions?

• How might over-costing Contract Administration affect decisions?



• How might under-costing Contract Administration affect decisions?• If contract administration costs are significantly

under-costed (think underpriced), the demand for contract administration resources will increase and they will be over-consumed.

• How might over-costing Contract Administration affect decisions?



• How might under-costing Contract Administration affect decisions?• If contract administration costs are significantly

under-costed (think underpriced), the demand for contract administration resources will increase and they will be over-consumed.

• How might over-costing Contract Administration affect decisions?• If contract administration costs are significantly over-

costed, it may make outsourcing appear attractive.


Check on Learning

• How can perpetual overhead application result in over- or under-applied overhead?

• If actual overhead is greater than applied overhead, overhead will be -applied.


Demonstration Problem – Part 2


• Alpha and Bravo are completed and transferred out. Charlie remains in process.

Alpha Bravo Charlie

Parts 5000 4200 3600

Labor 4500 6400 3200

Overhead 2250 3200 1600

Total 11750 13800 8400



• Additional Information• Beginning Raw Materials (Parts) $1500• Ending Raw Materials (Parts) 2500• Overhead Costs Incurred:• Shop utilities $1700• Shop supplies 3300• Indirect labor 2100

• Administrative costs 2800• All jobs are sold when completed. User fees equal

Cost + 10% to cover administrative costs



Use the inventory template to:• Calculate Raw Materials Purchases• Calculate Cost of Goods Sold• Prove the ending balances in the inventory

accounts• Calculate Gross Profit and Operating Income



Raw Materials

Alpha

Finished Goods

Charlie

Beg. 1500Purchases ?

----------------End. 2500

? DMU

DL OHDM

.

.

.

Beg. COGM------------------End.

COGS

Work in Process

Bravo...

WIP - Summary

Beg. -0-DLOHDMU----------------End.

COGM



Raw Materials

Alpha

Finished Goods

Charlie

Beg. 1500Purchases 13800

----------------End. 2500

12800 DMU

DL 4500OH 2250DM 5000

3200 =14100 1600 = 7050 3600 =12800

Beg. COGM------------------End.

COGS

Work in Process

Bravo 6400 3200 4200

WIP - Summary

Beg. -0-DL 14100OH 7050DMU 12800----------------End.

COGM

Total of materials for the three jobs equals Direct Materials Used



Raw Materials

Alpha

Finished Goods

Charlie


----------------End. 2500

12800 DMU

DL 4500OH 2250DM 5000

3200 =14100 1600 = 7050 3600 =12800

Beg. COGM------------------End.

COGS

Work in Process

Bravo 6400 3200 4200

WIP - Summary

Beg. -0-DL 14100OH 7050DMU 12800----------------End.

COGM

Ending is 1000 more than Beginning; Inputs must be 1000 more than Outputs



Raw Materials

Alpha

Finished Goods

Charlie


----------------End. 2500

12800 DMU

DL 4500OH 2250DM 5000

3200 =14100 1600 = 7050 3600 =12800

Beg. COGM------------------End.

COGS

Work in Process

Bravo 6400 3200 4200

WIP - Summary

Beg. -0-DL 14100OH 7050DMU 12800----------------End.

COGM

Total of labor for the three jobs equals Direct Labor



Raw Materials

Alpha

Finished Goods

Charlie


----------------End. 2500

12800 DMU

DL 4500OH 2250DM 5000

3200 =14100 1600 = 7050 3600 =12800

Beg. COGM------------------End.

COGS

Work in Process

Bravo 6400 3200 4200

WIP - Summary

Beg. -0-DL 14100OH 7050DMU 12800----------------End.

COGM

Total of Overhead applied to for the three jobs equals Overhead Applied



Raw Materials

Alpha

Finished Goods

Charlie


----------------End. 2500

12800 DMU

DL 4500OH 2250DM 5000 11750

3200 =14100 1600 = 7050 3600 =12800

Beg. COGM 25550------------------End.

25550 COGS

Work in Process

Bravo 6400 3200 4200 13800

WIP - Summary

Beg. -0-DL 14100OH 7050DMU 12800----------------End.

25550 COGM

Alpha and Bravo are completed. COGM equals total of Alpha and Bravo



Raw Materials

Alpha

Finished Goods

Charlie


----------------End. 2500

12800 DMU

DL 4500OH 2250DM 5000 11750

3200 =14100 1600 = 7050 3600 =12800

Beg. -0-COGM 25550------------------End. -0-

25550 COGS

Work in Process

Bravo 6400 3200 4200 13800

WIP - Summary

Beg. -0-DL 14100OH 7050DMU 12800----------------End.

25550 COGM

All jobs are sold when completed. COGS equals total of Alpha and Bravo



Raw Materials

Alpha

Finished Goods

Charlie


----------------End. 2500

12800 DMU

DL 4500OH 2250DM 5000 11750

3200 =14100 1600 = 7050 3600 =12800--------- 8400

Beg. -0-COGM 25550------------------End. -0-

25550 COGS

Work in Process

Bravo 6400 3200 4200 13800

WIP - Summary

Beg. -0-DL 14100OH 7050DMU 12800----------------End. 8400

25550 COGM

Ending Balance in WIP is equal to the cost of Charlie



• Is overhead over- or under-applied?

• Actual > Applied, so under-applied

Statement of ActivitiesRevenue:User Fees $28,105Less: COGS 25,550Gross Profit 2,555Less: Admin cost 2,800Net loss $ 355

Overhead

Utilities 1700Supplies 3300Ind. labor 2100 7050 Applied ----------------End. 50


Practical Exercise


Job Order Costing Spreadsheet

Enter total direct labor for the period to automatically calculate overhead applied

Enter estimated overhead and estimated direct labor to calculate

pre-determined overhead rate


Job Order Costing SpreadsheetItemize actual

overhead incurred

Over or under-applied overhead is calculated

automatically


Screenshots

Enter data for each job and the Inventory accounts will

update automatically


Practical Exercise

Calculate Cost of Goods Sold and Ending Overhead Balance © Dale R. Geiger 20111.

Documents

process cost of job

job b dale

job order cost flow

total of job tickets

applied overhead dale

individual job work

unit cost

direct materials direct