3-1 Copyright © 2012 McGraw-Hill Ryerson Limited Why Use an Allocation Base? An allocation base, such as direct labour hours, direct labour dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: 1.It is impossible or difficult to trace overhead costs to particular jobs. 2.Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary. 3.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. LO 3

3-2 Copyright © 2012 McGraw-Hill Ryerson Limited The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Manufacturing Overhead Application LO 3 Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Ideally, the allocation base is a cost driver that causes overhead.

3-3 Copyright © 2012 McGraw-Hill Ryerson Limited 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. The Need for a POHR LO 3

3-4 Copyright © 2012 McGraw-Hill Ryerson Limited Actual amount of the allocation based upon the actual level of activity. Based on estimates, and determined before the period begins. Application of Manufacturing Overhead Overhead applied = POHR × Actual activity LO 3

3-5 Copyright © 2012 McGraw-Hill Ryerson Limited For each direct labour hour worked on a particular job, $4.00 of factory overhead will be applied to that job. Overhead Application Rate POHR = $4.00 per DLH $640, ,000 direct labour hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = LO 3

3-6 Copyright © 2012 McGraw-Hill Ryerson Limited Job-Order Cost Accounting LO 3

3-7 Copyright © 2012 McGraw-Hill Ryerson Limited Job-Order Cost Accounting LO 3

3-8 Copyright © 2012 McGraw-Hill Ryerson Limited Job-Order Cost Accounting LO 3

3-9 Copyright © 2012 McGraw-Hill Ryerson Limited Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118. The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118. LO 3

3-10 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. LO 3

3-11 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. LO 3

3-12 Copyright © 2012 McGraw-Hill Ryerson Limited Let’s summarize the document flow in a job-order costing system. Job-Order Costing Document Flow Summary LO 3

3-13 Copyright © 2012 McGraw-Hill Ryerson Limited Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job. LO 3

3-14 Copyright © 2012 McGraw-Hill Ryerson Limited Job-Order Costing Document Flow Summary Job Cost Sheets Materials Requisition Manufacturing Overhead Account Direct materials Indirect materials Materials used may be either direct or indirect. LO 3

3-15 Copyright © 2012 McGraw-Hill Ryerson Limited Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account An employee’s time may be either direct or indirect. Direct Labour Indirect Labour LO 3

3-16 Copyright © 2012 McGraw-Hill Ryerson Limited Job-Order Costing Document Flow Summary Manufacturing Overhead Account Other Actual OH Charges Job Cost Sheets Applied Overhead Materials Requisition Employee Time Ticket Indirect Material Indirect Labour LO 3