Job-Order Costing and Accounting for Overhead

1
Job-Order Costing and Accounting for Overhead
6
2
Product Costing

• Job Order
• Allocate costs to products
• that are readily identifiable
• Common in construction,
• print shops, unique goods
• Accumulate costs for
• specific jobs
• Produce for sale

Process Costing Average costs over large number
of nearly identical units Common in chemical,
textiles, lumber, glass, food processing Accumula
te costs by departments Produce for inventory
3
Job-Order Costing
Direct Material Requisition Sheet

• Job Cost Sheet
• Job 963 12 units
• Direct materials 460.00
• Direct labour 267.50
• Applied factory overhead 180.00
• Total cost 907.50
• Unit cost (907.50 / 12 ) 75.625

Labour Time Ticket
Overhead Application Rate
4
Job-Costing Cost Flows

• Apply material, labour and overhead costs to work
  in process
• As goods as produced costs flow to finished goods
  inventory
• When sold, costs shift to cost of goods sold

Direct Material Inventory
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
Use Material
Buy Material
Production
Sales
Labour Costs
Overhead Control Account
Over / under applied overhead (at year end)
Overhead Costs
5
Accounting for Factory Overhead

• Overhead Application (Overhead Absorption)
• Allocation of overhead costs to products
• Budgeted Factory Overhead Rate
• Calculated at the beginning of the year and used
  to apply overhead to products throughout the year
• Six Steps in Applying Overhead
• 1. Select a cost driver for overhead
• 2. Prepare a budget for yearly overhead costs
  and yearly volume of the cost driver
• Calculate the budgeted factory overhead rate as
• Overhead rate budgeted total overhead /
  budgeted cost driver
• 4. Obtain data on the actual cost driver
• 5. Apply overhead to products
• 6. At year end, account for difference between
  actual overhead costs and applied overhead costs

6
Over / Under Application of Overhead

• Actual overhead
• a mixed cost function with variable and fixed
  costs
• Y F VX
• Applied overhead
• a variable cost function
• Applied overhead overhead rate x actual driver

Volume

Volume

Applied Overhead Actual Overhead

• Overapplied Applied gt Actual
• Underapplied Applied lt Actual
• Dispose of over/under applied
• overhead at year end

Volume
7
Fixed Manufacturing Overhead Absorption Costing

• Firms use a overhead rate to smooth the
  application of overhead to work in process and
  determine "full" product costs
• Budgeted overhead Budgeted total factory
  overhead
• application rate Budgeted total of cost driver

Actual Fixed Overhead
Applied Fixed Overhead Rate x Actual Volume
Budgeted Fixed Overhead
Fixed Overhead Spending Variance
Production-Volume Variance
Over / Under Applied Overhead

• difference between actual and applied fixed
  overhead relates to
• spending more or less than expected
• producing more or less than expected

8
Budgeted and Applied Fixed Overhead


Volume
Volume
Budgeted Fixed Overhead
Applied Fixed Overhead
9
Production Volume Variance in Absorption Costing

• Change in net income due to not producing the
  amount of output expected when we determined the
  P.O.R. at the beginning of the year
• Production Actual - Expected x Budgeted
• Volume Variance volume volume overhead
  rate

Applied Overhead Actual Overhead Budgeted
Overhead
Volume of activity
10
Dells Value Chain and ABC System
R D
Indirect costs are allocated to product lines
based on ABC cost drivers
Individual Job Direct material xxx Direct
labour xxx Applied overhead xxx Total job
cost xxx Markup xxx Job price xxx
Product Design
Production
Marketing
Distribution
Other indirect costs profit
Customer Service