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Job-Order Costing: Types of Costing Systems for Product Costs

This chapter explores job-order costing and different costing systems used to determine product costs. Topics covered include process costing, job-order costing, and the application of manufacturing overhead.

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Job-Order Costing: Types of Costing Systems for Product Costs

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  1. Chapter 3 Systems Design:Job-Order costing

  2. Types of Costing Systems Used to Determine Product Costs ProcessCosting Job-orderCosting Chapter 4 • Many different products are produced each period. • Products are manufactured to order. • Costs are traced or allocated to jobs. • Cost records must be maintained for each distinct product or job.

  3. THE JOB Job-Order Costing Manufacturingoverhead (OH) Applied to eachjob using apredeterminedrate Directmaterial Traced directly to each job Traced directly to each job Direct labor

  4. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period Application of Manufacturing Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead.

  5. The Need for a Predetermined Manufacturing Overhead Rate Using a predetermined rate makes itpossible toestimatetotal job costs sooner. Actual overheadfor the period is notknown until the end of the period. $

  6. Overhead Application Example Pear Co applies overhead based on direct labor hours. Totalestimated overhead for the year is $640,000. Totalestimatedlabor cost is $1,400,000 and total estimated labor hours are 160,000.What is Pear Co’s predetermined overhead rate per hour?

  7. Predetermined Overhead Rate • $640,000 Estimated Overhead Cost • 160,000 Est. Direct Labor Hours • = $4.00/Direct Labor Hour

  8. Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start withmaterials.

  9. Job-Order System Cost Flows Work in Process(Job Cost Sheet) Raw Materials • Direct Materials • Direct Materials • Material • Purchases • Indirect Materials Mfg. Overhead Actual Applied • Indirect Materials

  10. Job-Order System Cost Flows Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor • Overhead Applied Mfg. Overhead Actual Applied If actual and applied manufacturing overheadare not equal, a year-end adjustment is required. • Indirect Materials • OverheadApplied to Work inProcess • IndirectLabor

  11. Job-Order System Cost Flows Now let’s complete the goods and sell them. Still with me?

  12. Job-Order System Cost Flows Work in Process(Job Cost Sheet) Finished Goods • Direct Materials • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labor • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold

  13. Overhead Application Example PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. How much total overhead was applied to Pear Co’s jobs during the year? Use Pear Co’s predetermined overhead rate of $4.00 per direct labor hour and the actual direct labor hours.

  14. Applied Overhead 170,000 Direct Labor hours x $4.00/Direct Labor hour $680,000

  15. Manufacturing Overhead • $680,000 Applied Overhead • -650,000 Actual Overhead • $30,000 Overapplied Overhead

  16. Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

  17. Overhead Application Question 1 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. Tiger’s manufacturing overhead is a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.

  18. Overhead Application Question 2 Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decreasecost of goods sold by $60,000. a. True b. False

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