Product and Service Costing:  Overhead Application and Job-Order System
This presentation is the property of its rightful owner.
Sponsored Links
1 / 51

Product and Service Costing: Overhead Application and Job-Order System PowerPoint PPT Presentation


  • 82 Views
  • Uploaded on
  • Presentation posted in: General

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.

Download Presentation

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

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Product and service costing overhead application and job order system

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

Prepared by

Douglas Cloud Pepperdine University


Product and service costing overhead application and job order system

Objectives

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:


Product and service costing overhead application and job order system

Objectives

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.


Product and service costing overhead application and job order system

Continuum of Services and Manufactured Products

Pure

Service

Manufactured Product

Bungee jumping Beauty Salon Restaurant Automobiles

Software Cereals


Product and service costing overhead application and job order system

Intangibility

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


Product and service costing overhead application and job order system

Inseparability

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.


Product and service costing overhead application and job order system

Heterogeneity

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.


Product and service costing overhead application and job order system

Perishability

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 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 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.


Product and service costing overhead application and job order system

$0.30 x 2 = $0.60

$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:


Product and service costing overhead application and job order system

Example: Using Actual Overhead

April June August

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

Actual units produced40,00040,000160,000

Per-unit overhead$0.50$1.00$0.25

Actual overhead/

Actual production


Product and service costing overhead application and job order system

Budgeted annual overhead

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


Product and service costing overhead application and job order system

Overhead Application

1.Units produced

2.Direct labor hours

3.Direct labor dollars

4.Machine hours

5.Direct materials

Estimated Overhead

Activity Driver


Product and service costing overhead application and job order system

Data on Engine Housing

Cost of operating lathe$80,000

Total units produced20,000

Total machine hours used12,500

Simple Complicated

Number of housings10,00010,000

Time on lathe0.25 MHr1 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

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.


Product and service costing overhead application and job order system

Basic Concept of Overhead Application

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


Product and service costing overhead application and job order system

Expected

Normal

Basic Concept of Overhead Application

Measures of Activity Level

Number of Units

Consumer Demand-Oriented Measures of Activity Level

Time


Product and service costing overhead application and job order system

Theoretical

Normal

Basic Concept of Overhead Application

Measures of Activity Level

Number of Units

Time

Productive Capability Measures of Activity Level


Product and service costing overhead application and job order system

Suncalc, Inc. Example

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


Product and service costing overhead application and job order system

Budgeted overhead

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:


Product and service costing overhead application and job order system

Suncalc, Inc. Example

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


Product and service costing overhead application and job order system

Pocket Calculators

Currency Translator

Units produced80,00090,000

Direct labor hours40,00060,000

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.


Product and service costing overhead application and job order system

Underapplied and Overapplied Overhead

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.


Product and service costing overhead application and job order system

Disposition of Overhead Variances

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.


Product and service costing overhead application and job order system

Disposition of Overhead Variances

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

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$300688$6$ 48 8$10$ 80

18 45072107 701010 100

$750$118$180

Direct materials$750

Direct labor118

Overhead180

Total cost $1,048

Unit cost $10.48


Product and service costing overhead application and job order system

Material Requisition Form

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


Product and service costing overhead application and job order system

Job Time Ticket

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

8:0010:002$6$1216

10:0011:0016617

11:0012:0016616

1:006:00563016

Jim Lawson

Authorized Signature

Department Supervisor


Product and service costing overhead application and job order system

Estimated Overhead

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


Product and service costing overhead application and job order system

2 500 00

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.


Product and service costing overhead application and job order system

1 500 00

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.


Product and service costing overhead application and job order system

All Signs Company

Job 101

Materials

Job 102

Materials

Req. No.

Amount

Req. No.

Amount

  • 1$ 300

  • 2200

  • 3 500

  • $1,000

  • 4$250

  • 5250

  • 3

  • $500


Product and service costing overhead application and job order system

850 00

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.


Product and service costing overhead application and job order system

Job 101

Materials

Job 102

Materials

Ticket

Hours Rate Amount

  • 115$10$150

  • 22010200

  • 32510 250

  • 60$600

Ticket

Hours Rate Amount

  • 415$10$150

  • 51010 100

  • 25$250

All Signs Company


Product and service costing overhead application and job order system

340 00

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.


Product and service costing overhead application and job order system

All Signs Company

5Overhead Control 415 00

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

Lease Payable200 00

Utilities Payable50 00

Accumulated Depr.--Equipment100 00

Wages Payable65 00

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


Product and service costing overhead application and job order system

1 840 00

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.


Product and service costing overhead application and job order system

Job Number 101

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$300115$10$15015$4$ 60

220022010 200204 80

3 50032510250254100$1,000$600$240

Direct materials$1,000

Direct labor$600

Overhead$240

Total cost $1,840

Unit cost $92


Product and service costing overhead application and job order system

1 840 00

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.


Product and service costing overhead application and job order system

75 00

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.


Product and service costing overhead application and job order system

All Signs Company

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 labor850

Manufacturing Overhead:

Lease$ 200

Utilities50

Depreciation100

Indirect labor 65

$ 415

Continued


Product and service costing overhead application and job order system

$ 415

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


Product and service costing overhead application and job order system

All Signs Company

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


Product and service costing overhead application and job order system

All Signs Company

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


Product and service costing overhead application and job order system

SINGLE VERSUS MULTIPLE OVERHEAD RATES

Department A Department B Total

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

Direct labor hours15,0005,00020,000

Machine hours5,00015,0020,000

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


Product and service costing overhead application and job order system

Job 23

Job 24

Department A Department B Total

Department A Department B Total

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

Direct labor hours5000500

Machine hour101

Units produced1,00001,000

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

Direct labor hours011

Machine hours0500500

Units produced01,0001,000

SINGLE VERSUS MULTIPLE OVERHEAD RATES


Product and service costing overhead application and job order system

SINGLE VERSUS MULTIPLE OVERHEAD RATES

Department A Department B

Overhead cost$60,000$180,000

Cost driver15,000 DLH15,000 MHr

Department overhead

rate$4/DLH$12/MHr

Overhead applied to

Job #23$2,000---

Overhead applied to

Job #24---$6,000


Product and service costing overhead application and job order system

End of

Chapter


  • Login