Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Job Order Cost Systems and Overhead Allocations Chapter 17

17-2 Planning and control functions Providing products or services to customers Assessing the efficiency and effectiveness of operations Determining unit manufacturing costs Cost accounting systems provide information supporting decisions making the business successful Cost Accounting Systems

17-3 Disclose inventories and cost of goods sold Track resources consumed by products and services Manage activities that consume resources Evaluate and reward employee performance Cost Accounting Systems Cost accounting systems are the procedures and techniques used by management

17-4 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. Job Order Costing Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms

17-5 Receive orders from customers Begin production Order materials Schedule jobs Job Order Cost Systems and the Creation of Goods and Services

17-6 THE JOB Direct materials Direct labor Traced directly to each job Job Order Cost Systems and the Creation of Goods and Services Manufacturing overhead (OH) Applied to each job using a predetermined rate (POHR)

17-7 Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Direct Materials Direct Labor Apply overhead to each job using a predetermined rate. Job Order Cost Systems and the Creation of Goods and Services

17-8 Estimated total manufacturing overhead cost for the coming period Estimated total units in the activity base for the coming period POHR = The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Ideally, the activity base is a cost driver that causes overhead. Overhead Application Rates

17-9 Using a predetermined rate makes it possible to estimate total job costs. sooner. Actual overhead for the period is not known until the end of the period. Overhead Application Rates $

17-10 Overhead applied = POHR × Actual activity Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the period. Based on estimates, and determined before the period begins. Overhead Application Rates

17-11 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 Compuline’s predetermined overhead rate per hour? Overhead Application Rates

17-12 For each direct labor hour worked on a job, $12.00 of manufacturing overhead will be applied to the job. POHR = $12.00 per DLH $360,000 30,000 direct labor hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Overhead Application Rates

17-13 Job Order Costing The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate

17-14 The Job Cost Sheet

17-15 The Job Cost Sheet A materials requisition form is used to authorize the use of materials on a job.

17-16 The Job Cost Sheet Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.

17-17 The Job Cost Sheet Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on direct labor cost.

17-18 A materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Flow of Costs in Job Costing Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Direct Material Indirect Material Materials Requisitioin Material Requisitioin Materials Requisitioni Materials Requisition

17-19 Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Job Cost Sheets Manufacturing Overhead Account Job Cost Sheets Direct Labor Indirect Labor Employee Time Ticket Flow of Costs in Job Costing

17-20 Employee Time Ticket Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Overhead Applied with POHR Manufacturing Overhead Account Job Cost Sheets Flow of Costs in Job Costing

17-21 Material Purchases Direct Material Mfg. Overhead Indirect Material Work in Process (Job Cost Sheet) Indirect Material Materials Inventory Flow of Costs in Job Costing

17-22 Direct Labor Mfg. Overhead Work in Process (Job Cost Sheet) Indirect Material Direct Material Overhead Applied to Work in Process Indirect Labor Direct Labor Overhead Applied Indirect Labor the difference is closed to cost of goods sold. When Actual Applied factory factory overhead overhead = / Labor Flow of Costs in Job Costing

17-23 Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Material Direct Labor Overhead Applied Flow of Costs in Job Costing

17-24 Over- or Underapplied Overhead

17-25 Activity-Based Costing (ABC) Assigning overhead is difficult. I agree! 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.

17-26 Level of Complexity Overhead Allocation Plantwide Overhead Rate Departmental Overhead Rates Activity-Based Costing Activity-Based Costing (ABC) A C B In the ABC method, we recognize that many activities within a department drive overhead costs.

17-27 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 to costs of implementation. A C B

17-28 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.

17-29 Overhead Actual Rate Activity × Activity-Based Costing Procedures 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: Rate = Estimated overhead costs in activity cost pool Estimated number of activity units

17-30 ABC Versus a Single Application Rate: A Comparison 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 a single application rate.

17-31 Overhead Estimated overhead costs Rate Estimated activity = Overhead $2,000,000 Rate 40,000 DLH == $50 per DLH Single Application Rate

17-32 ABC will have different overhead cost per unit. Single Application Rate

17-33 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.

17-34 Activity-Based Costing 400 deluxe regular = 1,200 total

17-35 Activity-Based Costing

17-36 Let’s complete the table. Activity-Based Costing $70 × 400 = $28,000

17-37 Activity-Based Costing Total overhead = $720,000 + $1,280,000 = $2,000,000 Recall that $2,000,000 was the original amount of overhead assigned to the products using traditional overhead costing.

17-38 Activity-Based Costing

17-39 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. ABC Versus a Single Application Rate: A Comparison

17-40 Costs and Cost Drivers in Activity-Based Costing

17-41 Ethics, Fraud, and Corporate Governance In addition to allocating manufacturing overhead costs to products, many companies allocate corporate overhead charges to their segments or divisions. Failure to allocate corporate overhead properly can result in misleading financial statement information.

17-42 End of Chapter 17