Principles of Accounting Chapter 17 ppt

Copyright © 2012 The McGraw-Hill Companies, Inc.

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Job Order Cost Systems Job Order Cost Systems and Overhead Allocationsand Overhead Allocations

Chapter 17

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Planning andcontrol

functions

Providingproducts or services tocustomers

Assessing theefficiency andeffectivenessof operations

Determining unitmanufacturing

costs

Cost accounting systems provide information supporting decisions making the business successful

Cost Accounting SystemsCost Accounting Systems

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Discloseinventoriesand cost ofgoods sold

Track resourcesconsumed byproducts and

services

Manage activitiesthat consume

resources

Evaluate andreward

employeeperformance

Cost Accounting SystemsCost Accounting Systems

Cost accounting systems are the proceduresand techniques used by management

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Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.

Job Order CostingJob Order Costing

Typical job order cost applications:

Special-order printing Building construction

Also used in service industry Hospitals Law firms

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Receive orders from customers

Begin production

Ordermaterials

Schedulejobs

Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services

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THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services Manufacturing

overhead (OH)

Applied to eachjob using a

predeterminedrate (POHR)

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Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct material and direct labor costs to each job as work is performed.

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Apply overhead to each job using a predetermined rate.

Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services

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Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theactivity base for the coming period

POHR =

The predetermined overhead rate (POHR) used to apply overhead to

jobs is determined before the period begins.

Ideally, the activity base is a cost driver that causes overhead.

Overhead Application Overhead Application RatesRates

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Using a predetermined rate makes it

possible to estimate total job costs. sooner.

Actual overhead for the period is not

known until the end of the period.


$

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Overhead applied = POHR × Actual activity

Actual amount of the cost driver such as units produced, direct labor hours, or machine hours

incurred during the period.

Based on estimates, and determined before

the period begins.


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Compuline, Inc., applies overhead based on direct labor hours. Total estimated

overhead for the year is $360,000. Total estimated labor hours are 30,000.

What is Compuline’s predetermined overhead rate per hour?


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For each direct labor hour worked on a job, $12.00 of manufacturing overhead

will be applied to the job.

POHR = $12.00 per DLH

$360,000

30,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =


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Job Order CostingJob Order Costing

The primary document for

tracking the costs associated with a

given job is the job cost sheet.

Let’s investigate

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The Job Cost SheetThe Job Cost Sheet

831

Product: French Court Dining Tables Date started 1/03/11

Number of units: 100 Date Completed 1/21/11

Manufacturing DirectDepartment Materials Hours Cost Rate

Milling 10,000$ 70 14,000$ 150% 21,000$ Finishing 15,000 300 6,000 150% 9,000

Cost Summary Total Cost Unit CostDirect materials used 25,000$ 250$ Direct Labor 20,000 200 Manufacturing overhead applied 30,000 300 Cost of finished goods manufactured (100 tables) 75,000$ 750$

Cost AppliedManufacturing Overhead

Job Cost SheetOak and Glass Furniture Co.

Direct Labor

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831








Direct LaborA materials requisition

form is used to authorize the use of materials on a job.

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831








Direct Labor


Accumulate direct labor

costs by means of a

work record, such as a time ticket, for each

employee.

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831








Direct Labor


Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on

direct labor cost.

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A materials requisition

indicates the cost of direct

materialto charge to

jobsand the cost of

indirect material to charge to

overhead.

Flow of Costs in Job Flow of Costs in Job CostingCosting

Job Cost Sheets

Manufacturing Overhead Account

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Direct Material

Indirect Material

MaterialsRequisitioinMaterial

RequisitioinMaterialsRequisitioniMaterials

Requisition

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Employee time tickets indicate

the cost of direct laborto charge to

jobsand the cost of indirect

labor to charge to overhead.

Job Cost Sheets


Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Direct Labor

Indirect Labor

Employee Time TicketEmployee Time

TicketEmployee Time TicketEmployee Time

Ticket


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EmployeeTime

Ticket

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

OverheadApplied

withPOHR


Job Cost Sheets


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•MaterialPurchases

•Direct Material

•Direct Material

Mfg. Overhead•Indirect Material

Work in Process(Job Cost Sheet)

•Indirect Material

Materials Inventory


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•Direct Labor

Mfg. Overhead

Work in Process(Job Cost Sheet)

•Indirect Material

•Direct Material

•OverheadApplied to

Work inProcess

•IndirectLabor

•Direct Labor

•Overhead Applied

•IndirectLabor

the difference is closed to cost of goods sold.

When Actual Applied factory factoryoverhead overhead

=/

Labor


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•Cost ofGoodsMfd.

Finished Goods

•Cost ofGoodsSold

•Cost ofGoodsMfd.

Cost of Goods Sold

•Cost ofGoodsSold

Work in Process(Job Cost Sheet)•Direct

Material•Direct Labor

•Overhead Applied


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If Manufacturing Effect of Closing toOverhead is . . . Cost of Goods Sold

UNDERAPPLIED INCREASE(Applied OH is less Cost of Goods Sold

than actual OH)

OVERAPPLIED DECREASE(Applied OH is greater Cost of Goods Sold

than actual OH)

Over- or Underapplied Over- or Underapplied OverheadOverhead

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Activity-Based Costing Activity-Based Costing (ABC)(ABC)

Assigningoverhead is

difficult. I agree!

One of the most difficult tasks in

computing accurate unit costs lies in determining the

proper amount of overhead cost to

assign to each job.

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Level of C

omplexity

Overhead Allocation

Plantwide Overhead Rate

DepartmentalOverhead Rates

Activity-Based Costing

Activity-Based Costing Activity-Based Costing (ABC)(ABC)

ACB

In the ABC method, we recognize that many activities within a

department drive overhead costs.

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The Benefits of ABCThe Benefits of ABCMore detailed measures of costs.Better understanding of activities.More accurate product costs for . . .

Pricing decisions.Product elimination decisions.Managing activities that cause costs.

Benefits should always be comparedto costs of implementation.

ACB

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Identifying Cost Drivers Identifying Cost Drivers Most cost drivers are related to either

volume or complexity of production.Examples: machine time, machine setups,

purchase orders, production orders.

Three factors are considered in choosing a cost driver: Causal relationship. Benefits received.Reasonableness.

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Overhead Actual Rate Activity

×

Activity-Based Costing Activity-Based Costing ProceduresProcedures Identify activities that consume resources. Assign costs to a cost pool for each

activity. Identify cost drivers associated with each

activity. Compute overhead rate for each cost pool:

Assign costs to products:

Rate = Estimated overhead costs in activity cost pool

Estimated number of activity units

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ABC Versus a Single ABC Versus a Single Application Rate: A Application Rate: A ComparisonComparison

Pear Company manufactures a product in regular and deluxe models. Overhead is

assigned on the basis of direct labor hours. Budgeted overhead for the current year is $2,000,000. Other

information:Deluxe RegularModel Model

Direct Material 150$ 112$ Direct Labor Cost 16 8 Direct Labor Time 1.6 hours 0.8 hoursExpected Volume (units) 5,000 40,000

First, determine the unit cost of each modelusing a single application rate.

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DirectLabor Hours

Deluxe Model 5,000 units @ 1.6 hours 8,000 Regular Model 40,000 units @ 0.8 hours 32,000

Total Direct Labor Hours (DLH) 40,000

Overhead Estimated overhead costs Rate Estimated activity

=

Overhead $2,000,000 Rate 40,000 DLH

= = $50 per DLH

Single Application RateSingle Application Rate

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Deluxe RegularModel Model

Direct Material 150$ 112$ Direct Labor 16 8 Manufacturing Overhead$50 per hour × 1.6 hours 80 $50 per hour × 0.8 hours 40 Total Unit Cost 246$ 160$

ABC will have differentoverhead cost per unit.

Single Application RateSingle Application Rate

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Activity-Based CostingActivity-Based Costing Pear Company plans to adopt activity-based costing. Using the

following activity center data, determine the unit cost of the two

products using activity-based costing.Overhead

Activity Cost Cost for Units of ActivityCost Pool Driver Activity Deluxe Regular

Purchasing Orders 84,000$ 400 800 Scrap Rework Orders 216,000 300 600 Testing Tests 450,000 4,000 11,000 Machine Related Hours 1,250,000 20,000 30,000 Total Overhead 2,000,000$

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Overhead UnitsActivity Cost Cost for of

Cost Pool Driver Activity Activity RatePurchasing Orders 84,000$ 1,200 Scrap Rework Orders 216,000 900 Testing Tests 450,000 15,000 Machine Related Hours 1,250,000 50,000 Total Overhead 2,000,000$

Activity-Based CostingActivity-Based Costing

400 deluxe + 800 regular = 1,200 total

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Overhead UnitsActivity Cost Cost for of

Cost Pool Driver Activity Activity RatePurchasing Orders 84,000$ 1,200 $ 70 per orderScrap Rework Orders 216,000 900 $240 per orderTesting Tests 450,000 15,000 $ 30 per testMachine Related Hours 1,250,000 50,000 $ 25 per hourTotal Overhead 2,000,000$

Rate = Overhead Cost for Activity ÷ Units of Activity


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Let’s completethe table.


Deluxe Model Regular ModelActual Cost Actual Cost

Activity Units of Allocated Units of AllocatedCost Pool Rate Activity to Product Activity to Product

Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 ? 600 ?Testing $ 30/test 4,000 ? 11,000 ?Machine Related $ 25/hour 20,000 ? 30,000 ?Total Overhead ? ?

Cost Allocated to Product = Actual Units of Activity × Rate

$70 × 400 = $28,000

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Deluxe Model Regular ModelActual Cost Actual Cost

Activity Units of Allocated Units of AllocatedCost Pool Rate Activity to Product Activity to Product

Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$

Cost Allocated to Product = Actual Units of Activity × Rate


Total overhead = $720,000 + $1,280,000 = $2,000,000Recall that $2,000,000 was the original amount of

overhead assigned to the products using traditional overhead costing.

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Overhead Costs Assigned to Products: Deluxe Model $720,000 ÷ 5,000 units = $144 per unit Regular Model $1,280,000 ÷ 40,000 units = $32 per unit

Deluxe RegularModel Model

Direct Materials 150$ 112$ Direct Labor 16 8 Manufacturing Overhead 144 32 Total Unit Cost 310$ 152$


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This result is not uncommon when activity-based costing is used. Many companies have found that

low-volume, specialized products have greater overhead costs than previously realized.

ABCDeluxe Regular Deluxe RegularModel Model Model Model

Direct materials 150$ 112$ 150$ 112$ Direct labor 16 8 16 8 Overhead 80 40 144 32 Total cost 246$ 160$ 310$ 152$

Single Rate

ABC Versus a Single ABC Versus a Single Application Rate: A Application Rate: A ComparisonComparison

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Cost Cost DriverMaterials purchasing Number of purchase ordersMaterials handling Number of materials

requisitionsPersonnel processing Number of employees hired

or laid offEquipment depreciation Number of products

produced or hours of useQuality inspection Number of units inspectedIndirect labor for Number of setups required equipment setupsEngineering costs for Number of modifications product modifications

Costs and Cost Drivers inCosts and Cost Drivers inActivity-Based CostingActivity-Based Costing

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Ethics, Fraud, and Ethics, Fraud, and Corporate GovernanceCorporate Governance

In addition to allocating manufacturing overhead costs to

products, many companies allocate corporate overhead charges to their

segments or divisions.

Failure to allocate corporate overhead properly can result in misleading financial statement

information.

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End of Chapter 17End of Chapter 17

Principles of Accounting Chapter 17 ppt

Documents

single application

finished goods

job cost sheet

job cost sheetoak

direct labor

predetermined

indirect labor

manufacturing