Financial

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Financial Managerial Accounting

• The Basis for Business Decisions

FOURTEENTH EDITION

Williams Haka Bettner Carcello
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Chapter17
JOB ORDER COST SYSTEMS ANDOVERHEAD ALLOCATIONS
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Learning Objective
To explain thepurposes of costaccounting
systems.
LO1
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Cost Accounting Systems
Determining unitmanufacturingcosts
Planning andcontrolfunctions
Cost accounting systems provide information
supporting decisions making the business
successful
Assessing theefficiency andeffectivenessof
operations
Providingproducts or services tocustomers
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Cost Accounting Systems
Evaluate andrewardemployeeperformance
Discloseinventoriesand cost ofgoods sold
Cost accounting systems are the proceduresand
techniques used by management
Manage activitiesthat consumeresources
Track resourcesconsumed byproducts andservices
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Learning Objective
To identify the processesfor creating goods
andservices that are suitedto job order costing.
LO2
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Job Order Costing

• 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.

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Job Order Costing
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Job Order Costing
Directmaterials
Traced directly to each job
THE JOB
Traced directly to each job
Direct labor
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Job Order Costing
Charge direct material and direct labor costs to
each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Job Order Costing
Direct Materials
Apply overhead to each job using a predeter-mined
rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Learning Objective
To explain the purposeand computation
ofoverhead applicationrates for job order
costing.
LO3
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Overhead Application Rates

• The predetermined overhead rate (POHR) used to
  apply overhead to jobs is determined before the
  period begins.

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Overhead Application Rates

• Using a predetermined rate makes itpossible to
  estimate total job costs sooner.
• Actual overhead for the period is
  notknown until the end of the period.

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Overhead Application Rates
Based on estimates, and determined before the
period begins.
Actual amount of the cost driver such as units
produced, direct labor hours, or machine hours
incurred during the period.
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Overhead Application Rates

• 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 Compulines
  predetermined overhead rate per hour?

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Overhead Application Rates
For each direct labor hour worked on a job,
12.00 of manufacturing overhead will be applied
to the job.
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Learning Objective
To describe the purposeand the content ofa job
cost sheet.
LO4
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Job Order Costing

• The primary document for tracking the costs
  associated with a given job is the job cost sheet.

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The Job Cost Sheet
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The Job Cost Sheet
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The Job Cost Sheet
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The Job Cost Sheet
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Job Order CostingDocument Flow Summary
The materials requisition indicates the cost of
direct materialto charge tojobsand the cost of
indirect material to charge to overhead.
Direct Labor
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Indirect Labor
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Job Order CostingDocument Flow Summary
Direct Labor
Employee time tickets indicate the cost of direct
laborto charge tojobsand the cost of indirect
labor to charge to overhead.
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Indirect Labor
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Job Order CostingDocument Flow Summary
IndirectLabor
EmployeeTime Ticket
Overhead AppliedwithPOHR
OtherActual OHCharges
Manufacturing Overhead Account
Job Cost Sheets
MaterialsRequisition
IndirectMaterial
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Learning Objective
To account for the flowof costs when usingjob
order costing.
LO5
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Flow of Costs in Job Costing
Lets examine the cost flows in ajob order
costing system. We will use T-accounts and start
with materials.
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Flow of Costs in Job Costing
Work in Process(Job Cost Sheet)
Materials Inventory

• Direct Material

• Direct Material

• Material
• Purchases

• Indirect Material

Mfg. Overhead

• Indirect Material

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Flow of Costs in Job Costing
Next lets add labor costs and applied
manufacturing overhead to the job order cost
flows. Are you with me?
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Flow of Costs in Job Costing
Work in Process(Job Cost Sheet)
Labor

• Direct Labor

• Direct Material

• Direct Labor

• IndirectLabor

• Overhead Applied

Mfg. Overhead

• Indirect Material

• OverheadApplied to Work inProcess

• IndirectLabor

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Over- or Underapplied Overhead
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Flow of Costs in Job Costing
Now lets complete the goods and sell them.
Still with me?
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Flow of Costs in Job Costing
Work in Process(Job Cost Sheet)
Finished Goods

• Direct Material

• Cost ofGoodsMfd.

• Cost ofGoodsMfd.

• Cost ofGoodsSold

• Direct Labor

• Overhead Applied

Cost of Goods Sold

• Cost ofGoodsSold

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Learning Objective
To define overhead-relatedactivity cost
poolsand provide severalexamples.
LO6
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Activity-Based Costing (ABC)

• 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.

I agree!
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Activity-Based Costing (ABC)
Activity-Based Costing
Departmental Overhead Rates
Level of Complexity
Plantwide Overhead Rate
Overhead Allocation
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Activity-Based Costing (ABC)
In the ABC method, we recognize that many
activities within a department drive overhead
costs.
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Activity-Based Costing (ABC)

• Identify activity cost pools and assign indirect
  costs to those pools.
• Central idea . . .
• Products require activities.
• Activities consume resources.

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The Benefits of ABC

• More 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 compared tocosts of
  implementation.

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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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Activity-Based CostingProcedures

• 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

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Learning Objective
To demonstrate how activitybases are used to
assign activity cost pools to unitsproduced.
LO7
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Traditional Costing vs. ABCExample

• 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

First, determine the unit cost of each model
using traditional costing methods.
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Traditional Costing
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Traditional Costing
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Activity-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.

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Activity-Based Costing
400 deluxe 800 regular 1,200 total
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Activity-Based Costing
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Activity-Based Costing
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Activity-Based Costing
Lets completethe table.
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Activity-Based Costing
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Activity-Based Costing
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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Activity-Based Costing
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Activity-Based Costing
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.
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Costs and Cost Drivers inActivity-Based Costing
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Ethics, Fraud, andCorporate Governance
In addition to allocating manufacturing overhead
costs to products, many companies allocate
corporate overhead charges to theirsegments or
divisions.
Failure to allocate corporate overhead properly
can result in misleading financial statement
information.
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End of Chapter 17