© 2002 Pearson Education Canada Inc. Slide 6-1 Job-Costing Systems 6

© 2002 Pearson Education Canada Inc. Slide 6-2 Product Costing Job Order Allocate costs to products that are readily identifiable Common in construction, print shops, unique goods Accumulate costs for specific jobs Produce for sale Process Costing Average costs over large number of nearly identical units Common in chemical, textiles, lumber, glass, food processing Accumulate costs by departments Produce for inventory

© 2002 Pearson Education Canada Inc. Slide 6-3 Job-Order Costing Job Cost Sheet Job # units Direct materials$ Direct labour Applied factory overhead Total cost$ Unit cost ($ / 12 )$ Overhead Application Rate Labour Time Ticket Direct Material Requisition Sheet

© 2002 Pearson Education Canada Inc. Slide 6-4 Job-Costing Cost Flows Apply material, labour and overhead costs to work in process As goods as produced costs flow to finished goods inventory When sold, costs shift to cost of goods sold Direct Material Inventory Buy Material Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Use Material Labour Costs Overhead Costs ProductionSales Overhead Control Account Over / under applied overhead (at year end)

© 2002 Pearson Education Canada Inc. Slide 6-5 Accounting for Factory Overhead Overhead Application (Overhead Absorption) Allocation of overhead costs to products Budgeted Factory Overhead Rate Calculated at the beginning of the year and used to apply overhead to products throughout the year Six Steps in Applying Overhead 1. Select a cost driver for overhead 2. Prepare a budget for yearly overhead costs and yearly volume of the cost driver 3.Calculate the budgeted factory overhead rate as Overhead rate = budgeted total overhead / budgeted cost driver 4. Obtain data on the actual cost driver 5. Apply overhead to products 6. At year end, account for difference between actual overhead costs and applied overhead costs

© 2002 Pearson Education Canada Inc. Slide 6-6 Over / Under Application of Overhead Actual overhead a mixed cost function with variable and fixed costs Y = F + VX Applied overhead a variable cost function Applied overhead = overhead rate x actual driver Overapplied: Applied > Actual Underapplied: Applied < Actual Dispose of over/under applied overhead at year end $ Volume Applied Overhead Actual Overhead Volume $ $

© 2002 Pearson Education Canada Inc. Slide 6-7 Fixed Manufacturing Overhead & Absorption Costing Firms use a overhead rate to smooth the application of overhead to work in process and determine "full" product costs Budgeted overhead =Budgeted total factory overhead application rateBudgeted total of cost driver difference between actual and applied fixed overhead relates to: spending more or less than expected producing more or less than expected Actual Fixed Overhead Budgeted Fixed Overhead Applied Fixed Overhead Rate x Actual Volume Fixed Overhead Spending VarianceProduction-Volume Variance Over / Under Applied Overhead

© 2002 Pearson Education Canada Inc. Slide 6-8 Budgeted and Applied Fixed Overhead $ Volume Budgeted Fixed Overhead $ Volume Applied Fixed Overhead

© 2002 Pearson Education Canada Inc. Slide 6-9 Production Volume Variance in Absorption Costing Change in net income due to not producing the amount of output expected when we determined the P.O.R. at the beginning of the year Production=Actual-Expected x Budgeted Volume Variancevolumevolume overhead rate $ Volume of activity Applied Overhead Actual Overhead Budgeted Overhead

© 2002 Pearson Education Canada Inc. Slide 6-10 Dell’s Value Chain and ABC System R & D Product Design Production Marketing Distribution Customer Service Indirect costs are allocated to product lines based on ABC cost drivers Individual Job Direct material$xxx Direct labourxxx Applied overheadxxx Total job costxxx Markupxxx Job price$xxx Other indirect costs + profit

© 2002 Pearson Education Canada Inc. Slide 6-11 Example: September production resulted in the following activity in a key account of Colebury Costing Company (in thousands) Job Order 13N and 37Q, with total costs of $70 and $54 thousand, respectively were completed in September. 1.Journalize the completed production in September 2.Compute the balance in WIP inventory, Sept 30 after recording the completed production 3.Journalize the credit sale of Job 13N for $101,000

© 2002 Pearson Education Canada Inc. Slide 6-12 Suggested Problems Questions all even (page 264) Problems 6, 8, 10, 14, 20 (page 266) Assignment Problems 13, 15, 17 (page 269 )