Professional Documents
Culture Documents
Chapter Three
McGraw-Hill/Irwin
3-2
Learning Objective 1
Distinguish between process costing and joborder costing and identify companies that would use each costing method.
McGraw-Hill/Irwin
3-3
Job-order Costing
A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.
Copyright 2008, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
3-4
Job-order Costing
A company produces many units of a single product. Example companies: unit of product is indistinguishable 1.One Weyerhaeuser (paper manufacturing) from units Aluminum of product. 2.other Reynolds (refining aluminum ingots) identical nature and of each unit beverages) of product enables 3.The Coca-Cola (mixing bottling assigning the same average cost per unit.
McGraw-Hill/Irwin
3-5
Job-order Costing
Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
McGraw-Hill/Irwin
3-6
Job-order Costing
Example companies: Products are manufactured to order. 1. Boeing (aircraft manufacturing) unique nature of each order requires tracing or 2.The Bechtel International (large scale construction) allocating costs to each job, and maintaining cost 3.records Walt Disney Studios for each job. (movie production)
McGraw-Hill/Irwin
3-7
Job-Order Number of jobs worked Cost accumulated by Average cost computed by Many Individual Job Job
McGraw-Hill/Irwin
3-8
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
3-9
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
3-10
Learning Objective 2
McGraw-Hill/Irwin
3-11
Direct Materials
Job No. 1
Direct Labor Job No. 2 Job No. 3
Manufacturing Overhead
Charge direct material and direct labor costs to each job as work is performed.
Copyright 2008, The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
3-12
Direct Materials
Job No. 1
Direct Labor Job No. 2 Job No. 3
Manufacturing Overhead
McGraw-Hill/Irwin
3-13
Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
McGraw-Hill/Irwin
3-14
Will E. Delite
McGraw-Hill/Irwin
3-15
McGraw-Hill/Irwin
3-16
McGraw-Hill/Irwin
3-17
McGraw-Hill/Irwin
3-18
Learning Objective 3
Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
McGraw-Hill/Irwin
3-19
3-20
POHR =
3-21
Actual overhead for the period is not known until the end of the period.
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
3-22
McGraw-Hill/Irwin
3-23
POHR =
Estimated total units in the allocation base for the coming period
$640,000 160,000 direct labor hours (DLH)
POHR =
POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
3-24
McGraw-Hill/Irwin
3-25
McGraw-Hill/Irwin
3-26
The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.
McGraw-Hill/Irwin
3-27
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
3-28
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? Pred. ovhd. rate $760,000/20,000hours $38 a. $200. materials $200 b. $350. Direct Direct labor $15 x 10 hours $150 c. $380. Manufacturing overhead $38 x 10 hours $380 Total cost $730 d. $730.
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
3-29
Learning Objective 4
Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs.
McGraw-Hill/Irwin
3-30
McGraw-Hill/Irwin
3-31
Direct materials
McGraw-Hill/Irwin
3-32
Direct Labor
McGraw-Hill/Irwin
3-33
Indirect Labor
Materials Requisition
McGraw-Hill/Irwin
Indirect Material
Copyright 2008, The McGraw-Hill Companies, Inc.
3-34
Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs. Use T-accounts to show the flow of costs in a job-order costing system.
McGraw-Hill/Irwin
3-35
The transactions (in Taccount and journal entry form) that capture the flow of costs in a joborder costing system are illustrated on the following slides.
McGraw-Hill/Irwin
3-36
Mfg. Overhead
Actual Applied Indirect Materials
McGraw-Hill/Irwin
3-37
McGraw-Hill/Irwin
3-38
McGraw-Hill/Irwin
3-39
Mfg. Overhead
Actual Indirect Materials Indirect Labor
McGraw-Hill/Irwin
Applied
3-40
McGraw-Hill/Irwin
3-41
Mfg. Overhead
Actual Applied Indirect Materials Indirect Labor Other Overhead McGraw-Hill/Irwin
3-42
McGraw-Hill/Irwin
3-43
Learning Objective 5
McGraw-Hill/Irwin
3-44
Mfg. Overhead
Actual Applied Indirect Materials Overhead Indirect Applied to Labor Work in Other Process Overhead McGraw-Hill/Irwin
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.
Copyright 2008, The McGraw-Hill Companies, Inc.
3-45
McGraw-Hill/Irwin
3-46
Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
3-47
McGraw-Hill/Irwin
3-48
Learning Objective 6
McGraw-Hill/Irwin
3-49
Finished Goods
Cost of Goods Mfd.
McGraw-Hill/Irwin
3-50
McGraw-Hill/Irwin
3-51
Finished Goods
Cost of Goods Mfd.
McGraw-Hill/Irwin
3-52
McGraw-Hill/Irwin
3-53
Learning Objective 8
Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.
McGraw-Hill/Irwin
3-54
Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.
Copyright 2008, The McGraw-Hill Companies, Inc.
3-55
3-56
3-57
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tigers manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.
McGraw-Hill/Irwin
3-58
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined Overhead Applied overhead rate of $4.00 per machine Tiger, $4.00 per hour hour. 290,000 hours = $1,160,000 Inc. worked 290,000 machine hours during the Underapplied Overhead is period. Tigers manufacturing overhead a. $50,000 overapplied. c. $60,000 overapplied. d. $60,000 underapplied.
$1,210,000 - $1,160,000 = $50,000
b. $50,000 underapplied.
McGraw-Hill/Irwin
3-59
OR
Work in Process Finished Goods Cost of Goods Sold
Copyright 2008, The McGraw-Hill Companies, Inc.
3-60
McGraw-Hill/Irwin
3-61
McGraw-Hill/Irwin
3-62
McGraw-Hill/Irwin
3-63
McGraw-Hill/Irwin
3-64
McGraw-Hill/Irwin
3-65
Quick Check
What effect will the overapplied overhead have on PearCos net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.
McGraw-Hill/Irwin
3-66
Quick Check
What effect will the overapplied overhead have on PearCos net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.
McGraw-Hill/Irwin
3-67
McGraw-Hill/Irwin
3-68
McGraw-Hill/Irwin
3-69
McGraw-Hill/Irwin
McGraw-Hill/Irwin
3-71
Learning Objective 9
(Appendix 3A)
Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.
McGraw-Hill/Irwin
3-72
McGraw-Hill/Irwin
3-73
McGraw-Hill/Irwin
3-74
An Example
Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?
McGraw-Hill/Irwin
3-75
An Example
Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?
Traditional = Method $100,000 40,000 = $2.50 per unit
Capacity Method
McGraw-Hill/Irwin
$100,000 50,000
3-76
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.
McGraw-Hill/Irwin
3-77
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.
McGraw-Hill/Irwin
3-78
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.
McGraw-Hill/Irwin
3-79
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.
McGraw-Hill/Irwin
3-80
Quick Check
When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.
McGraw-Hill/Irwin
3-81
Quick Check
When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.
McGraw-Hill/Irwin
3-82
Quick Check
When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.
McGraw-Hill/Irwin
3-83
Quick Check
When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.
McGraw-Hill/Irwin
3-84
40,000 $40.00 $24.00 $100,000 50,000 $2.00 $500,000 $ 1,600,000 1,040,000 560,000 20,000 500,000 $ 40,000
cases per case per case per year cases per case per year
3-85
40,000 $40.00 $24.00 $100,000 40,000 $2.50 $500,000 $ 1,600,000 1,060,000 540,000 500,000 $ 40,000
cases per case per case per year cases per case per year
3-86
End of Chapter 3
McGraw-Hill/Irwin