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Product and Service Costing: Overhead Application and Job-Order System. Prepared by Douglas Cloud Pepperdine University. Objectives. 1. Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products.

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Product and Service Costing: Overhead Application and Job-Order System

Prepared by

Douglas Cloud Pepperdine University


Objectives Job-Order System

1. Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products.

2. Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment.

3. Compute a predetermined overhead rate, and use the rate to assign overhead to production.

After studying this chapter, you should be able to:


Objectives Job-Order System

4. Explain the difference between job-order and process costing, and identify the source documents used in job-order costing.

5. Describe the cost flows associated with job-order costing, and prepare the journal entries.

6. Explain why multiple overhead rates may be preferred to a single, plantwide rate.


Continuum of Services and Manufactured Products Job-Order System

Pure

Service

Manufactured Product

Bungee jumping Beauty Salon Restaurant Automobiles

Software Cereals


Intangibility Job-Order System

Services cannot be stored.

There are no inventory accounts.

Services cannot be protected through patents.

Services cannot readily be displayed or communicated.

Prices are difficult to set.

There is a strong ethical code.

Costs must be related to entire organization.

Features of Service Firms and Their Interface with the Cost Management System

Impact on Cost Management System

Feature

Relationship to Business


Inseparability Job-Order System

Consumer is involved in production.

Cost are accounted for by customer type.

Centralized mass production of services is difficult

Systems must be generated to encourage consistent quality.

Features of Service Firms and Their Interface with the Cost Management System

Impact on Cost Management System

Feature

Relationship to Business

Other customers are involved in production.


Heterogeneity Job-Order System

Standardization and quality control are difficult.

A strong systems approach is needed.

Features of Service Firms and Their Interface with the Cost Management System

Impact on Cost Management System

Feature

Relationship to Business

Productivity measurement is ongoing.

TQM is critical.


Perishability Job-Order System

Service benefit expire quickly.

Service may be repeated often for one customer.

There are no inventories.

There needs to be a standardized system to handle repeat customers.

Features of Service Firms and Their Interface with the Cost Management System

Impact on Cost Management System

Feature

Relationship to Business


Relationship of cost accumulation cost measurement and cost assignment
Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment

Direct Materials

Product 1

Purchase materials

Assemblers’ payroll

Finishers’ payroll

Direct Labor

Supervisors’ Payroll

Depreciation

Utilities

Property taxes

Landscaping

Product 2

Overhead

Cost

Measurement

Cost

Assignment

Cost

Accumulation

Record Costs: Classify Costs: Assign to Cost Objects:


Cost accumulation
Cost Accumulation Cost Assignment

Cost accumulationrefers to the recognition and recording of costs.

The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a transaction. Data from these source documents can then be recorded in a database. Well-designed source documents can supply information in a flexible way.


Cost measurement
Cost Measurement Cost Assignment

Cost measurement refers to classifying the cost.

There are two commonly used ways to measure the costs associated with production: actual costing and normal costing.

An actual cost system uses actual costs for direct materials, direct labor, and overhead to determine unit cost.

Normal costing systemsmeasure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor.


$0.30 x 2 = $0.60 Cost Assignment

$8.00 x .10 = 0.80

$1.40

Example: Prime Costs

Rubber stops are made for cellos. The cost of rubber is $0.30 per ounce and two ounces are required per stop. The price of labor is $8 per hour and it takes .10 hour to make a stop. Thus, one stop should cost $1.40 calculated as follows:


Example: Using Actual Overhead Cost Assignment

April June August

Actual overhead $20,000 $40,000 $40,000

Actual units produced 40,000 40,000 160,000

Per-unit overhead $0.50 $1.00 $0.25

Actual overhead/

Actual production


Budgeted annual overhead Cost Assignment

Budgeted annual activity level

Overhead rate =

$90,000

225,000

Overhead rate =

Overhead Application

A Normal Costing View

A predetermined overhead rate is calculated using the following formula:

Continuing with the celloexample:

= $0.40


Overhead Application Cost Assignment

1. Units produced

2. Direct labor hours

3. Direct labor dollars

4. Machine hours

5. Direct materials

Estimated Overhead

Activity Driver


Data on Engine Housing Cost Assignment

Cost of operating lathe $80,000

Total units produced 20,000

Total machine hours used 12,500

Simple Complicated

Number of housings 10,000 10,000

Time on lathe 0.25 MHr 1 MHr

Operating cost assigned

using unit produced $4.00 $4.00

Operating cost assigned

using machine hours $1.60 $6.40


Choosing the activity level
Choosing the Activity Level Cost Assignment

Expected activity levelis simply the production level the firm expects to attain for the coming year.

Normal activity level is the average activity usage that a firm experiences in the long term (normal volume is computed over more than one year).

Theoretical activity level is the absolute maximum production activity of a manufacturing firm.

Practical activity level is the maximum output that can be realized if everything operates efficiently.


Basic Concept of Overhead Application Cost Assignment

In attempting to understand the concept of applied overhead, there are two points that should be emphasized.

1. Applied overhead is the basis for computing per-unit overhead cost.

2. Applied overhead is rarely equal to a period’s actual overhead.

Applied overhead = Overhead rate x Applied production activity


Expected Cost Assignment

Normal

Basic Concept of Overhead Application

Measures of Activity Level

Number of Units

Consumer Demand-Oriented Measures of Activity Level

Time


Theoretical Cost Assignment

Normal

Basic Concept of Overhead Application

Measures of Activity Level

Number of Units

Time

Productive Capability Measures of Activity Level


Suncalc, Inc. Example Cost Assignment

Suncalc, Inc. produces two unique, solar-powered products: a pocket calculator and a currency translator. The following estimated and actual data for 2004:

Budgeted overhead $360,000

Normal activity (DLH) 120,000

Activity (DLH) 100,000

Actual overhead $320,000


Budgeted overhead Cost Assignment

Normal activity

Predetermined

overhead rate

=

$360,000

120,000 DLH

=

$3 per DLH

=

Suncalc, Inc. Example

The firm bases it predetermined overhead rate on normal activity measured in direct labor hours:


Suncalc, Inc. Example Cost Assignment

Using the overhead rate, applied overhead for 2004 is:

Applied overhead = Overhead rate x Actual activity usage

= $3 per DLH x 100,000 DLH

= $300,000


Pocket Calculators Cost Assignment

Currency Translator

Units produced 80,000 90,000

Direct labor hours 40,000 60,000

Overhead applied to production

($3 x DLH) $120,000 $180,000

Overhead per unit $1.50 $2.00

Suncalc, Inc. Example

Forty percent of the actual direct labor hours worked were used to produce 80,000 units of the pocket calculator and the remaining 60 percent was used to produced 90,000 units of the currency translator.


Underapplied and Overapplied Overhead Cost Assignment

The difference between actual overhead and applied overhead is called overhead variance. If actual overhead is greater than applied overhead, then the variance is called underapplied overhead. If applied overhead is greater than actual overhead, the the variance is called overapplied overhead.


Disposition of Overhead Variances Cost Assignment

The overhead variance is disposed of in one of two ways.

1.All overhead variance is allocated to cost of goods sold.

2.The overhead variance is allocated among work in process, finished goods, and cost of goods sold.


Disposition of Overhead Variances Cost Assignment

Suncalc’s accounts had the following applied overhead balances for the end of 2004: Work-in-Process Inventory, $60,000; Finished Goods Inventory, $90,000; Cost of Goods Sold, $150,000. Suncale had $20,000 of underapplied overhead. The amount is allocated as follows:

Work-in-Process Inventory: $60,000/$300,000 x $20,000 = $4,000

Finished Goods Inventory: $90,000/$300,000 x $20,000 = $6,000

Cost of Goods Sold: $150,000/$300,000 x $20,000 = $10,000


A job order cost sheet
A Job-Order Cost Sheet Cost Assignment

Job Number 16

Date Ordered April 2, 2004

Date Completed April 24, 2004

Date Shipped April 25, 2004

For Benson Company

Item Description Valves

Quantity Completed 100

Direct Materials Direct Labor Overhead

Ticket Number

Requisition Number

Amount

Hours Rate Amount Hours Rate Amount

12 $300 68 8 $6 $ 48 8 $10 $ 80

18 450 72 10 7 70 10 10 100

$750 $118 $180

Direct materials $750

Direct labor 118

Overhead 180

Total cost $1,048

Unit cost $10.48


Material Requisition Form Cost Assignment

Date

Department

Job Number

Material Requisition Number 678

April 8, 2004

Grinding

62

Description Quantity Cost/Unit Total Cost

Casing 100 $3 $300

Jim Lawson

Authorized Signature


Job Time Ticket Cost Assignment

45

Ann Wilson

April 12, 2004

Employee Number

Name

Date

Job Time Ticket

Number 68

Start Time Stop Time Total Time Hourly Rate Amount Job Number

8:00 10:00 2 $6 $12 16

10:00 11:00 1 6 6 17

11:00 12:00 1 6 6 16

1:00 6:00 5 6 30 16

Jim Lawson

Authorized Signature

Department Supervisor


Estimated Overhead Cost Assignment

Overhead rate =

Estimated Direct Labor Hours

Accounting for Overhead

Actual overhead costs are never assigned directly to jobs. Overhead is applied using a predetermined overhead rate.

$900,000

90,000 DLH

= $10 per direct labor hour


2 500 00 Cost Assignment

Accounts Payable

All Signs Company

1 Materials Inventory 2 500 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

1. Direct materials costing $2,500 were purchased on account.


1 500 00 Cost Assignment

Materials Inventory

All Signs Company

2 Work in Process 1 500 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

2. Direct materials costing $1,500 were requisitioned for use in production.


All Signs Company Cost Assignment

Job 101

Materials

Job 102

Materials

Req. No.

Amount

Req. No.

Amount

  • 1 $ 300

  • 2 200

  • 3 500

  • $1,000

  • 4 $250

  • 5 250

  • 3

  • $500


850 00 Cost Assignment

Wages Payable

All Signs Company

3 Work-in-Process Inventory 850 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

3. Direct labor costing $850 was recognized.


Job 101 Cost Assignment

Materials

Job 102

Materials

Ticket

Hours Rate Amount

  • 1 15 $10 $150

  • 2 20 10 200

  • 3 25 10 250

  • 60 $600

Ticket

Hours Rate Amount

  • 4 15 $10 $150

  • 5 10 10 100

  • 25 $250

All Signs Company


340 00 Cost Assignment

Overhead Control

All Signs Company

4 Work-in-Process Inventory 340 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

4. Overhead was applied to production at the rate of $4 per direct labor hour. A total of 85 direct labor hours were worked.


All Signs Company Cost Assignment

5 Overhead Control 415 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

Lease Payable 200 00

Utilities Payable 50 00

Accumulated Depr.--Equipment 100 00

Wages Payable 65 00

5. Actual overhead costs of $415 were incurred: lease, $200; utilities, $50; depreciation, $100; accrued wages, $65.


1 840 00 Cost Assignment

Work-in-Process Inventory

All Signs Company

6 Finished Goods Inventory 1 840 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

6. Job 101, with a total cost of $1,840, are completed and transferred to finished goods.


Job Number 101 Cost Assignment

Date Ordered Jan. 1, 2004

Date Completed Jan. 2, 2004

Date Shipped Jan. 15, 2004

All Signs Company

For Housing Development

Item Description Street Signs

Quantity Completed 20

Materials Direct Labor Overhead

Ticket Number

Requisition Number

Amount

Hours Rate Amount Hours Rate Amount

1 $300 1 15 $10 $150 15 $4 $ 60

2 200 2 20 10 200 20 4 80

3 500 3 25 10 250 25 4 100 $1,000 $600 $240

Direct materials $1,000

Direct labor $600

Overhead $240

Total cost $1,840

Unit cost $92


1 840 00 Cost Assignment

2 760 00

Finished Goods Inventory

Sales Revenue

All Signs Company

a. Cost of Goods Sold 1 840 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

b. Accounts Receivable 2 760 00

7. Sold Job 101 for $2,760.


75 00 Cost Assignment

Overhead Control

All Signs Company

8 Cost of Goods Sold 75 00

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

8. Underapplied overhead was closed to cost of goods sold.


All Signs Company Cost Assignment

Schedule of Cost of Goods Manufactured

For the Month Ended January 31, 2004

Direct materials:

Beginning direct materials inventory $ 0

Purchases of direct materials 2,500

Total direct materials available for use $2,500

Ending direct materials 1,000

Total direct materials used $1,500

Direct labor 850

Manufacturing Overhead:

Lease $ 200

Utilities 50

Depreciation 100

Indirect labor 65

$ 415

Continued


$ 415 Cost Assignment

Less: Underapplied overhead 75

Overhead applied 340

Current manufacturing costs $2,690

Add: Beginning work in process 0

Total manufacturing cost $2,690

Less: Ending work in process -1,050

Cost of goods manufactured $1,840


All Signs Company Cost Assignment

Statement of Cost of Goods Sold

For the Month Ended January 31, 2004

Beginning finished goods inventory $ 0

Cost of goods manufactured 1,840

Cost of goods available for sale $1,840

Less: Ending finished goods inventory 0

Normal cost of goods sold $1,840

Add: Underapplied overhead 75

Adjusted cost of goods sold $1,915


All Signs Company Cost Assignment

Income Statement

For the Month Ended January 31, 2004

Sales $2,760

Less: Cost of goods sold 1,915

Gross margin $ 845

Less selling and administrative expenses:

Selling expenses $200

Administrative expenses 550 750

Operating income $ 95


SINGLE VERSUS MULTIPLE OVERHEAD RATES Cost Assignment

Department A Department B Total

Overhead costs $60,000 $180,000 $240,000

Direct labor hours 15,000 5,000 20,000

Machine hours 5,000 15,00 20,000

Department A is labor-intensive and Department B is machine-intensive.


Job 23 Cost Assignment

Job 24

Department A Department B Total

Department A Department B Total

Prime costs $5,000 $0 $5,000

Direct labor hours 500 0 500

Machine hour 1 0 1

Units produced 1,000 0 1,000

Prime costs $0 $5,000 $5,000

Direct labor hours 0 1 1

Machine hours 0 500 500

Units produced 0 1,000 1,000

SINGLE VERSUS MULTIPLE OVERHEAD RATES


SINGLE VERSUS MULTIPLE OVERHEAD RATES Cost Assignment

Department A Department B

Overhead cost $60,000 $180,000

Cost driver 15,000 DLH 15,000 MHr

Department overhead

rate $4/DLH $12/MHr

Overhead applied to

Job #23 $2,000 ---

Overhead applied to

Job #24 --- $6,000


End of Cost Assignment

Chapter


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