1. Calculate Cost of Goods Sold, Gross Profit and Operating Income
Principles of Cost Analysis and Management
Show Slide #1: Calculate Cost of Goods Sold, Gross Profit and Operating Income
References:
FM Financial Management Operations, Apr 14
Handouts and Excel Spreadsheets
Facilitator Material: Each primary facilitator should possess a lesson plan, slide deck, course handouts, and practical exercises with the answer key, and a summary sheet containing FM 1-06 Financial Management Operations, Apr 14. All required printed reference material, and technical manuals will be provided by the Schoolhouse.
Learner Material: Learners should possess all required printed reference material, course handouts, and a summary sheet containing FM 1-06 Financial Management Operations, Apr 14 and standard classroom supplies.

2. If Unit Cost is misstated, how might that affect these decisions?
Do user fees cover Unit Cost?
On which products and services should we expend our limited resources?
Should we increase user fees?
Are we competitive in providing this service?
Show Slide #2: Concrete Experience (If Unit Cost is misstated, how might that affect these decisions?)
Facilitator’s Note: (Concrete Experience 5 minutes) Discuss with learners about the following Scenario. Explain the “If Unit Cost is misstated, how might that affect these decisions” scenario. How does it relate to your business model as per the planning, assuming, and executing of plans and/or products.
Facilitator’s Note: (Publish and Process 5 minutes) The critical portion of this part of the ELM process is to force the learners to reflect. Ask a series of thought influencing questions, for example:
Introduction:
If Unit Cost is misstated, how might that affect these decisions?
Are we competitive in providing this service? If we don’t have an accurate unit cost, we can’t even answer this question.
Do user fees cover Unit Cost? This is a very important question for revolving funds. If we set our user fees based on erroneous information, then we might not break even.
On which products and services should we expend our limited resources? If our resources are limited, we want to channel those resources toward the products and services where we are most cost-effective (or most profitable).
Should we increase user fees? Again, we can’t even begin to answer this question without good cost information.

3. Terminal Learning Objective
Action: Calculate Cost of Goods Sold, Gross Profit and Operating Income
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for International learners):
Overview of Job Order Costing
Calculate cost of job given predetermined overhead rate
Calculate and Explain causes of over-/ under-applied overhead
Prove ending balances in inventory accounts
Show Slide #3: Terminal Learning Objective (TLO)
Facilitator’s Note: Read the TLO
Action: Calculate Cost of Goods Sold, Gross Profit and Operating Income
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: with at least 80% accuracy (70% for International learners)
Overview of Job Order Costing
Calculate cost of job given predetermined overhead rate
Calculate and Explain causes of over-/ under-applied overhead
Prove ending balances in inventory accounts
Facilitator’s Note: Throughout this lesson, solicit from learners the challenges they experienced in the current operational environment (OE) and what they did to resolve them. Encourage learners to apply at least 1 of the 8 critical variables: physical environment, political stability of the state, sociological demographics, infrastructure, military capabilities, information, time, and economics.
Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM , Risk Management. Leaders will complete a DD Form 2977 DELIBERATE RISK ASSESSMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations (METT-TC). Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the work/rest cycles and water replacement guidelines IAW TRADOC Regulation
Risk Assessment Level: Low. Hazard Identification: Electrical Shock, Fire, Slippery Floors, Physical Injure/Strain, Tripping Tight Spaces in Classroom, and Influenza. Hazard controls: Primary Instructor (PI) will ensure: All electrical cords are properly stored under desks, liquid containers have lids on them and all spills are immediately cleaned and mopped and allowed to completely dry before allowing learners/personnel to walk on them. All chairs are ergonomically designed, adjust to individual preference and that all learners are awake and paying attention in class. All cables/cords are properly plugged in, sheathed, and secured along tables, walls, and ceilings. No damaged or frayed cords/cables will be used. PI will brief proper hand washing techniques, the use of hand sanitizer, and evacuation procedures. All trash will be removed daily.
Environmental Statement: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM Environmental Considerations and GTA ENVIRONMENTAL-RELATED RISK ASSESSMENT.
Evaluation: Learners will take the Principles of cost Analysis and Management 1 Exam at the end of Week One. Learners must score 80% or higher and International officers must score 70% or higher.
Instructional Lead in: If Unit Cost is misstated, how might that affect these decisions?
Are we competitive in providing this service? If we don’t have an accurate unit cost, we can’t even answer this question.
Do user fees cover Unit Cost? This is a very important question for revolving funds. If we set our user fees based on erroneous information, then we might not break even.
On which products and services should we expend our limited resources? If our resources are limited, we want to channel those resources toward the products and services where we are most cost-effective (or most profitable). Should we increase user fees? Again, we can’t even begin to answer this question without good cost information.

4. Job Order Costing
Provides a methodology for calculating the cost of a job.
Assumes that each job is unique and has identifiable direct costs
Assumes that all jobs consume indirect resources in a similar manner
Records Direct Materials and Labor for each individual job
Work in Process consists of all jobs still in process
Cost of job = Direct Materials + Direct Labor + Applied Overhead
Show Slide #4: Overview of Job Order Costing
Learning Step/Activity #1: Overview of Job Order Costing
Method of Instruction: DSL-Discussion (small or large group discussion)
Facilitator to Student Ratio: 2:25
Time of Instruction: 15 Minutes
Media: PowerPoint, Printed Reference Material
Facilitator’s Note: All handouts and learner materials for this lesson are located in Tab 23.
Facilitator's Note: Before facilitating this lesson, ask the learners which of the 21st Century Soldier (Learner) Competency do they think pertain to this lesson? Facilitate a discussion on the answers given and at the end of the lesson revisit it and see if the learners still believe their choice are the same. For this lesson these competencies should be talked about.
1. Character and accountability
6. Communication and engagement (oral, written, and negotiation)
7. Critical thinking and problem solving
9. Tactical and technical competence (full spectrum capable)
Facilitator’s Note: Provides a methodology for calculating the cost of a job. Job order costing is a way to get that unit cost information that we need. It is a method of cost measurement that is useful given the following assumptions:
Assumes that each job is unique and has identifiable direct costs.
Each job is unique: If all jobs are the same then some sort of average cost method would probably be more useful.
Each job has identifiable costs: There must be some direct costs such as materials and labor that are clearly identifiable to individual jobs. That is, when a worker is working, he or she is only working on one job at a time. Materials are used on only one job. The “parts and labor” method of pricing that your auto mechanic uses is a type of job order costing.
Assumes that all jobs consume indirect resources in a similar manner. The materials, labor and other overhead costs that are not identifiable to specific jobs are consumed by jobs in a similar manner. Most job order cost systems assume that jobs consume overhead resources in direct proportion to Direct Labor.
Records Direct Materials and Labor for each individual job. Job order costing keeps detailed records of materials and labor that are directly identified to individual jobs. Some job order costing systems keep paper records. More sophisticated systems have barcode scanners to track materials as they are added to jobs. Workers scan their ID badges as they move from job to job and the system tracks the time worked on each job, as well as the hourly rate for each worker. Under job order costing, Work in Process consists of all jobs still in process. The Work in Process inventory account is the summary of all of the individual jobs in process.
Cost of job = Direct Materials + Direct Labor + Applied Overhead
* The Direct Materials and Direct Labor are calculated from the detailed records. The Overhead is “Applied” or assigned.

5. Job Order Costing (Cont.)
Applies Overhead on a predetermined rate
Traditional labor-based OH Rate = Estimated Overhead $ / Estimated Direct Labor $
Assumes that indirect costs are closely correlated to Direct Labor
OH Application = Overhead Rate * Direct Labor $
Show Slide #5: Overview of Job Order Costing (Cont.)
Facilitator’s Note: Applies Overhead on a predetermined rate. Since jobs are completed at various times during the period, it’s not practical to wait until the end of the period to assign overhead to jobs. It’s necessary to use a pre-determined rate. This rate is based on estimates, and the estimates are based on past experience.
Traditional labor-based OH Rate = Estimated Overhead $ / Estimated Direct Labor $
This will yield a percentage. Example, if Estimated OH is $200,000 and Estimated direct labor is $250,000 then the predetermined overhead rate is $200,000/$250,000 = .8 or 80%. We would say that overhead is applied at 80% of direct labor.
Assumes that indirect costs are closely correlated to Direct Labor. That is to say, we assume that the more direct labor a job consumes, the more of the indirect resources it consumes.
OH Application = Overhead Rate * Direct Labor $
If the overhead application rate is 80%, a job that uses $100 of direct labor would be assigned $80 in overhead.

6. Job Order Costing (Cont.)
Lends itself readily to service applications:
Legal services
Repair and maintenance services
Contract services
Others?
Show Slide #6: Overview of Job Order Costing (Cont.)
Facilitator’s Note: Job order costing lends itself readily to service applications: Legal services (direct labor for a particular case or “job” can be measured), Repair and maintenance services (parts and labor can be measured), Contract services (labor on a particular contract can be measured), Others? See if the learners can suggest other services where job order costing would be appropriate.

7. The Inventory Chain Overhead
Show Slide #7: Overview of Job Order Costing (Cont.)
Facilitator’s Note: Review of the inventory chain. Remember that resources flow from left to right: inputs on the left, outputs on the right. The input to raw materials is purchases. The output is Direct Materials Used. The inputs to Work in process are labor, Direct Materials Used, and overhead. The output is Cost of Goods Manufactured, which is also the input to Finished goods. The output from Finished goods is Cost of Goods Sold.
Overhead

8. Job Order Cost Flow Raw Materials Job A Finished Goods Job B Materials
Purchased
Materials Used DL OH DM
Goods Mfd
Goods Sold
Work in Process
Show Slide #8: Overview of Job Order Costing (Cont.)
Facilitator’s Note: The same cost flow applies to Job Order Costing. We still have the raw materials inventory account. The materials used are identified with two separate jobs. Some of the materials go to Job A, some go to Job B. Direct Labor and Overhead are added individually to Job A and Job B. Together Job A and Job B comprise Work in Process Inventory. When Job A and Job B are finished, they will be transferred to Finished goods as “Cost of goods manufactured.”

9. LSA #1 Check on Learning
Q1. What is the goal of Job Order costing? Q2. What is the equation for the cost of a job?
A1. To provide a methodology to measure the cost of a job.
Show Slide #9: LSA #1 Check on Learning
Facilitator’s Note: Ask the following Questions; LSA Summary will be given at the end of LSA 3 lesson.
Q1. What is the goal of Job Order costing?
A1. To provide a methodology to measure the cost of a job.
Q2. What is the equation for the cost of a job?
A2. Direct Materials + Direct Labor + Applied Overhead.
A2. Direct Materials + Direct Labor + Applied Overhead.

10. Job Tickets Total of Job Tickets for jobs completed during the period
Detailed information about each job is recorded on a Job Ticket:
Direct Materials
Direct Labor
Overhead Applied
Work in Process =
Total of Job Tickets for unfinished jobs
Cost of Goods Manufactured =
Total of Job Tickets for jobs completed during the period
Show Slide #10: Calculate cost of job given predetermined overhead rate
2. Learning Step/Activity #2: Calculate cost of job given predetermined overhead rate
Method of Instruction: DSL-Discussion (small or large group discussion)
Facilitator to Student Ratio: 2:25
Time of Instruction: 20 Minutes
Media: PowerPoint, Printed Reference Material
Facilitator’s Note: Detailed information about each job is recorded on a Job Ticket: Direct Materials, Direct Labor, Overhead Applied. The job ticket may be a literal paper record, or as, we described before, a record that is kept on a computer and updated using barcode scanning technology. (Some hospitals use barcode scanning technology so that the patient’s bracelet is scanned each time materials are issued to that patient. The computer uses this data to compile the patient’s itemized bill, which is essentially a job ticket.)

11. Job Tickets
Detailed information about each job is recorded on a Job Ticket:
Direct Materials
Direct Labor
Overhead Applied
Work in Process =
Total of Job Tickets for unfinished jobs
Cost of Goods Manufactured =
Total of Job Tickets for jobs completed during the period
Detailed information about each job is recorded on a Job Ticket:
Direct Materials
Direct Labor
Overhead Applied
Work in Process =
Total of Job Tickets for unfinished jobs
Cost of Goods Manufactured =
Total of Job Tickets for jobs completed during the period
Show Slide #11: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: Work in Process = Total of Job Tickets for unfinished jobs. The dollar value reported as Work in process inventory would be equal to all of the materials, labor, and overhead currently invested into jobs in process. As jobs are completed, the job tickets are transferred out of Work in Process and into finished goods.
Therefore, Cost of Goods Manufactured = Total of Job Tickets for jobs completed during the period. The cost of the jobs completed is subtracted from Work in Process and added to Finished Goods. The costs will be carried as an asset until the job is sold.

12. Job Order Cost Flow
Total cost of direct materials used equals cost of materials for Job A plus cost of materials for Job B
Raw Materials
Job A
Finished Goods
Job B
Materials
Purchased
DMU 4000
DL 2000
OH 1600
DM 1500
5100
DL 3000
OH 2400
DM 2500
7900
Goods Mfd
Goods Sold
Work in Process =
13,000
Show Slide #12: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: Total cost of direct materials used equals cost of materials for Job A plus cost of materials for Job B.
Explanation: Two jobs are in process, Job A and Job B.
A total of $4000 in direct materials are issued from the raw materials inventory. $1500 is put into Job A, $2500 into Job B. Direct Labor is added (2000 to Job A, 3000 to Job B) and overhead is added at 80% of direct labor. OH to Job A = DL 2000 * .8 = OH to Job B = DL 3000 * .8 = 2400.
The total cost of Job A is DL OH DM 1500 = 5100
The total cost of Job B is DL OH DM 2500 = 7900

13. Job Order Cost Flow (Cont.)
Total cost of Work in Process equals cost of materials, labor and overhead for Job A plus cost of materials, labor and overhead for Job B
Raw Materials
Job A
Finished Goods
Job B
Materials
Purchased
DMU 4000
DL 2000
OH 1600
DM 1500
5100
DL 3000
OH 2400
DM 2500
7900
Goods Mfd
Goods Sold
Work in Process =
13,000
Show Slide #13: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: Total cost of Work in Process equals cost of materials, labor and overhead for Job A plus cost of materials, labor and overhead for Job B.
The total cost of Job A is DL OH DM 1500 = 5100
The total cost of Job B is DL OH DM 2500 = 7900
The sum of the two jobs together = which is the total of Work in Process.

14. Job Order Cost Flow (Cont.)
If Job B is completed and transferred to Finished Goods, Cost of Goods Manufactured equals cost of Job B. Work in Process consists of Job A, which is still unfinished.
Raw Materials
Job A
Finished Goods
Job B
Materials
Purchased
DMU 4000
DL 2000
OH 1600
DM 1500
5100
DL 3000
OH 2400
DM 2500
Goods Mfd
7900
Goods Sold
Work in Process =
Show Slide #14: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: If Job B is completed and transferred to Finished Goods, Cost of Goods Manufactured equals cost of Job B. Work in Process consists of Job A, which is still unfinished.
During the period Job B is completed and transferred to Finished Goods.
Cost of Goods Manufactured is equal to the cost of Job B.
Job A remains unfinished, and constitutes Work in Process.

15. Demonstration Problem
The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started:
Overhead is applied at 50% of Direct Labor.
Calculate the cost of each job.
Alpha
Bravo
Charlie
Parts
5000
4200
3600
Labor
4500
6400
3200
Overhead
2250
1600
Total
11750
13800
8400
Alpha
Bravo
Charlie
Parts
5000
4200
3600
Labor
4500
6400
3200
Overhead ?
Total
Alpha
Bravo
Charlie
Parts
5000
4200
3600
Labor
4500
6400
3200
Overhead
2250
1600
Total ?
Show Slide #15: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: This is a demonstration problem:
The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started:
Overhead is applied at 50% of Direct Labor.
Calculate the cost of each job.
Overhead is 50% of direct labor for each job.
For Alpha: 4500*.5=2250
For Bravo: 6400*.5=3200
For Charlie: 3200*.5=1600
Cost of a job is DM (parts) + DL + OH
Alpha = = 11750
Bravo = = 13800
Charlie = = 8400

16. Demonstration Problem (Cont.)
Alpha and Bravo are completed and transferred out. Charlie remains in process
Calculate Cost of Goods Manufactured and ending Work in Process inventory
Alpha
Bravo
Charlie
Parts
5000
4200
3600
Labor
4500
6400
3200
Overhead
2250
1600
Total
11750
13800
8400
Show Slide #16: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: Demonstration Problem (Cont.)
Jobs Alpha and Bravo are completed. Job Charlie remains in process. Calculate Cost of Goods Manufactured and ending Work in Process inventory:
Cost of Goods Manufactured = Alpha + Bravo (jobs transferred)
11, ,800 = 25,550
Work in Process inventory = Charlie 8,400

17. Perpetual Overhead Application
Uses a Predetermined Overhead Rate: Estimated Overhead $
Estimated Direct Labor $
Overhead is applied or added to jobs
As direct labor is incurred by jobs
In proportion to Direct Labor
Show Slide #17: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: Perpetual Overhead Application is the method used for Job Order costing. It’s called perpetual overhead application because overhead is applied to jobs throughout the period, not just at the end of the period. Perpetual overhead application uses a Predetermined Overhead Rate, such as the one we used in the previous problem. The overhead rate is calculated as:
Estimated Overhead $
Estimated Direct Labor $
Overhead is applied or added to jobs as direct labor is incurred by jobs In proportion to Direct Labor.

18. Perpetual Overhead (Example)
The Contract Administration Department accounts for the cost of administering contracts using a job order cost system.
The Department Manager estimates that Overhead for the year will be $85,500 and Direct Labor on contracts will be $95,000.
Calculate the Predetermined Overhead Rate:
Estimated Overhead: $85,500 = 90%
Estimated Direct Labor: $95,000
The Contract Administration Department accounts for the cost of administering contracts using a job order cost system.
The Department Manager estimates that Overhead for the year will be $85,500 and Direct Labor on contracts will be $95,000.
Calculate the Predetermined Overhead Rate:
Estimated Overhead: $85,500
Estimated Direct Labor: $95,000
Show Slide #18: Calculate cost of job given predetermined overhead rate (Cont.)
Facilitator’s Note: The Contract Administration Department accounts for the cost of administering contracts using a job order cost system.
The Department Manager estimates that Overhead for the year will be $85,500 and Direct Labor on contracts will be $95,000.
Calculate the Predetermined Overhead Rate:
Facilitator’s Note: Estimated Overhead: $85,500 = 90%
Estimated Direct Labor: $95,000

19. LSA #2 Check on Learning
Q1. How is the predetermined overhead rate calculated? Q2. Why is perpetual overhead application used in Job Order costing? Q3. How is overhead applied to each job?
A1. Estimated OH$ / Estimated DL$
A2. Because jobs are completed throughout the period and it’s not practical to wait until the end of the period.
Show Slide #19: LSA #2 Check on Learning
Facilitator’s Note: Ask the following Questions; LSA Summary will be given at the end of LSA 3 lesson.
Q1. How is the predetermined overhead rate calculated?
A1. Estimated OH$ / Estimated DL$
Q2. Why is perpetual overhead application used in Job Order costing?
A2. Because jobs are completed throughout the period and it’s not practical to wait until the end of the period.
Q3. How is overhead applied to each job?
A3. As a percentage of direct labor dollars
A3. As a percentage of direct labor dollars

20. Perpetual Overhead Example (Cont.)
The Training and Education contract requires $3,000 of direct Contract Administration labor.
How much Overhead should be added to the cost of administering the contract?
$3,000 * 90% = $2,700
Direct Contract Administration Labor incurred on all other contracts during June totaled $6,800
How much Overhead was applied to other contracts?
$6,800 * 90% = $6,120
The Training and Education contract requires $3,000 of direct Contract Administration labor.
How much Overhead should be added to the cost of administering the contract?
$3,000 * 90% = $2,700
Direct Contract Administration Labor incurred on all other contracts during June totaled $6,800
How much Overhead was applied to other contracts?
$6,800 * 90% = $6,120
The Training and Education contract requires $3,000 of direct Contract Administration labor.
How much Overhead should be added to the cost of administering the contract?
$3,000 * 90% = $2,700
Direct Contract Administration Labor incurred on all other contracts during June totaled $6,800
How much Overhead was applied to other contracts?
$6,800 * 90% = $6,120
Show Slide #20: Calculate and Explain causes of over-/ under-applied overhead
3. Learning Step Activity 3: Calculate and Explain causes of over-/ under-applied overhead
Method of Instruction: DSL-Discussion (small or large group discussion)
Facilitator to Student Ratio: 2:25
Time of Instruction: 20 Minutes
Media: PowerPoint, Printed Reference Material
Facilitator’s Note: The Training and Education contract requires $3,000 of direct Contract Administration labor. How much Overhead should be added to the cost of administering the contract? (Remember, we calculated a 90% OH application rate in the first part of the example).
$3,000 * 90% = $2,700
Facilitator’s Note: Solve: How much Overhead was applied to other contracts?
$6,800 * 90% = $6,120

21. Perpetual Overhead Example (Cont.)
Contract Administration overhead incurred in June:
Supplies $1,000
Supervision 6,000
Facilities 1,500
Total $8,500
Contract Administration overhead applied in June:
T&E Contract: $2,700
Other contracts: 6,120
Total $8,820
Show Slide #21: Calculate and Explain causes of over-/ under-applied overhead
Facilitator’s Note: Contract Administration overhead incurred in June:
Supplies: $1,000
Supervision: 6,000
Facilities: 1,500
Total: $8,500
These are the actual costs incurred.
Contract Administration overhead applied in June:
T&E Contract: $2,700
Other contracts: 6,120
Total $8,820
These are the totals applied to jobs. $2700 was applied to the training and education contract. (90% of the direct labor for the contract)
$6210 was applied to the other contracts (90% of the direct labor for those contracts.)
The difference between the actual OH incurred and the OH applied to jobs is $320.
Incurred OH $8,500 < Applied OH $8,200
Overhead is over-applied by $320
That means that the overhead applied to jobs exceeds the incurred overhead by $320.
Incurred OH $8,500 < Applied OH $8,200
Overhead is over-applied by $320

22. Over-applied vs. Under-applied
Perpetual overhead application is a function of estimates.
OH rate = Estimated OH$/Estimate DL$
If our estimates are perfect, actual overhead will equal applied overhead.
Since perfection is rare, more likely the actual will differ from the estimate.
If the relationship between actual overhead and actual labor is different than estimated, overhead may be over- or under-applied.
Show Slide #22: Calculate and Explain causes of over-/ under-applied overhead
Facilitator’s Note: Perpetual overhead application is a function of estimates.
If our estimates are perfect, actual overhead will equal applied overhead.
OH rate = Estimated OH$/Estimate DL$
Since perfection is rare, more likely the actual will differ from the estimate.
If the relationship between actual overhead and actual labor is different than estimated, overhead may be over- or under-applied.
Even if the actual amount of overhead incurred is significantly more than expected, if the direct labor also increases, maintaining the same relationship, the overhead will not be over- or under-applied. In other words, we estimated a relationship of overhead to direct labor of 90%. The ratio could be 900 to 1000 or 9 million to 10 million. As long as the ratio remains the same, overhead will not be significantly over- or under-applied. The problem would come if the relationship changes. For example, if the relationship of overhead incurred to actual direct labor was 100%, and we were applying overhead at 90%, we would end up being under applied. If the actual ratio was 80% and we applied at 90%, we would end up over-applied.

23. Over-applied vs. Under-applied (Cont.)
Think of the overhead account as a bank account.
Actual overhead cost incurred is like a deposit.
Overhead applied to jobs is like a withdrawal.
If more overhead is applied jobs than incurred, the account is overdrawn, or over-applied.
Show Slide #23: Calculate and Explain causes of over-/ under-applied overhead
Facilitator’s Note: Think of the overhead account as a bank account. Actual overhead costs incurred are like deposits. Overhead applied to jobs are like withdrawals. If more overhead is applied jobs than incurred, the account is overdrawn, or over-applied.
(+) (-)
OH incurred
8500
OH applied
8820
320

24. Over-applied vs. Under-applied (Cont.)
If actual overhead incurred < overhead applied, overhead is over-applied.
Too much overhead was applied to each contract. Reported cost of administering contracts is too high.
If actual overhead incurred > overhead applied, overhead is under-applied
Not enough overhead was applied to each contract. Reported cost of administering contracts is too low.
Show Slide #24: Calculate and Explain causes of over-/ under-applied overhead
Facilitator’s Note:
If actual overhead incurred < overhead applied, overhead is over-applied.
Too much overhead was applied to each contract. Reported cost of administering contracts is too high.
If actual overhead incurred > overhead applied, overhead is under-applied.
Not enough overhead was applied to each contract. Reported cost of administering contracts is too low.

25. Is this a Serious Problem?
If the over- or under-applied overhead amount is Material then the difference will affect decisions
What constitutes a material amount?
It depends. If the error is more than 5% of the total contract amount, it is probably significant
Is the error due to a significant error in estimating either Labor $ or Overhead $?
If so, the overhead rate should be adjusted
Show Slide #25: Calculate and Explain causes of over-/ under-applied overhead
Facilitator’s Note:
If the over- or under-applied overhead amount is Material then the difference will affect decisions. Remember the Materiality constraint from day 1. Amounts that are significant enough to affect users decisions are MATERIAL.
What constitutes a material amount? What is material is subjective and
It depends. If the error is more than 5% of the total contract amount, it is probably significant
Is the error due to a significant error in estimating either Labor $ or Overhead $?
Most of the time the error is due to timing. Expenditures for overhead might not exactly coincide with labor on jobs. In that case, the overhead might be over-applied one period and under-applied the next. As long as the long-term relationship between actual overhead and actual direct labor remains the same, this is not a serious problem.
If the relationship is NOT maintained over time, then the overhead rate should be adjusted.

26. Under- or Over-costing
How might under-costing Contract Administration affect decisions?
How might over-costing Contract Administration affect decisions?
If contract administration costs are significantly under-costed (think underpriced), the demand for contract administration resources will increase and they will be over-consumed.
Show Slide #26: Calculate and Explain causes of over-/ under-applied overhead
Facilitator’s Note:
How might under-costing Contract Administration affect decisions? If contract administration costs are significantly under-costed (think underpriced), the demand for contract administration resources will increase and they will be over-consumed.
How might over-costing Contract Administration affect decisions? If contract administration costs are significantly over-costed, it may make outsourcing appear attractive. We will discuss this more in the next lesson, and also on Day 8.
If contract administration costs are significantly over-costed, it may make outsourcing appear attractive.

27. LSA #3 Check on Learning
Q1. How is actual overhead calculated? Q2. How is applied overhead calculated? Q3. How can perpetual overhead application result in over- or under-applied overhead?
A1. Actual overhead is the sum of all indirect costs incurred.
A2. Applied overhead is the predetermined OH application rate times the actual DL incurred
Show Slide #27: LSA #3 Check on Learning
Facilitator’s Note: Ask the following Questions:
Q1. How is actual overhead calculated?
A1. Actual overhead is the sum of all indirect costs incurred.
Q2. How is applied overhead calculated?
A2. Applied overhead is the predetermined OH application rate times the actual DL incurred
Q3. How can perpetual overhead application result in over- or under-applied overhead?
A3. The application rate is based on estimates. If the actual overhead incurred differs from the estimate, it can result in over- or under-applied overhead.
A3. The application rate is based on estimates. If the actual overhead incurred differs from the estimate, it can result in over- or under-applied overhead.

28. LSA 1-3 Summary
In this lesson, we discussed Job order costing, a system used for assigning manufacturing costs to an individual product or batches of products. Also, we were given a formula that would calculate the cost of job given a predetermined overhead rate. Lastly, we discussed and explained some of the causes of over-/under-applied overhead.
Show Slide #28: LSA 1-3 Summary
Facilitator’s Note: In this lesson, we discussed Job order costing, a system used for assigning manufacturing costs to an individual product or batches of products. Also, we were given a formula that would calculate the cost of job given a predetermined overhead rate. Lastly, we discussed and explained some of the causes of over-/under-applied overhead.

29. Demonstration Problem (Part 2)
The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started:
Alpha and Bravo are completed and transferred out. Charlie remains in process.
Alpha
Bravo
Charlie
Parts
5000
4200
3600
Labor
4500
6400
3200
Overhead
2250
1600
Total
11750
13800
8400
Show Slide #29: Prove ending balances in inventory accounts
4. Learning Step Activity 4: Prove ending balances in inventory accounts
Method of Instruction: DSL-Discussion (small or large group discussion)
Facilitator to Student Ratio: 2:25
Time of Instruction: 20 Minutes
Media: PowerPoint, Printed Reference Material
Facilitator’s Note: The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started:
Alpha and Bravo are completed and transferred out. Charlie remains in process.

30. Demonstration Problem (Part 2 – Cont.)
Additional Information:
Beginning Raw Materials (Parts): $1500
Ending Raw Materials (Parts):
Overhead Costs Incurred:
Shop utilities : $1700
Shop supplies:
Indirect labor:
Administrative costs:
All jobs are sold when completed. User fees equal Cost + 10% to cover administrative costs
Show Slide #30: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Additional Information:
Beginning Raw Materials (Parts): $1500
Ending Raw Materials (Parts):
Overhead Costs Incurred:
Shop utilities: $1700
Shop supplies:
Indirect labor:
Administrative costs:
All jobs are sold when completed. User fees equal Cost + 10% to cover administrative costs
Facilitator’s Note: Beginning and ending Raw Materials are key variables in the inventory template. The overhead costs are the actual overhead incurred. This will be used to calculate over- or under-applied overhead. The administrative costs will be used on the Statement of Activities All jobs are sold when completed. This gives us a clue to the beginning and ending balances of Finished Goods inventory. If all jobs are sold when completed, what is the beginning and ending balance? It must be zero. All of the jobs completed last period were sold last period. All of the jobs completed this period will be sold this period.
Finally, the information about user fees will be used in the Statement of Activities.

31. Demonstration Problem (Part 2 – Cont.)
Use the inventory template to:
Calculate Raw Materials Purchases
Calculate Cost of Goods Sold
Prove the ending balances in the inventory accounts
Calculate Gross Profit and Operating Income
Show Slide #31: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Use the inventory template to:
Calculate Raw Materials Purchases
Calculate Cost of Goods Sold
Prove the ending balances in the inventory accounts
Calculate Gross Profit and Operating Income

32. Demonstration Problem (Part 2 – Cont.)
Raw Materials
Alpha
Finished Goods
Charlie
Beg
Purchases
End
DMU DL OH DM
=14100
= 7050
=12800
Beg.
COGM
End.
COGS 
Work in Process
Bravo
6400
3200
4200
WIP - Summary
Beg DL OH
DMU 12800
Total of materials for the three jobs equals Direct Materials Used
WIP - Summary
Beg DL OH
DMU
End.
COGM
Finished Goods
Raw Materials
Beg
Purchases ?
End
Beg.
COGM
End.
COGS 
? DMU
Work in Process
Show Slide #32: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Total of materials for the three jobs equals Direct Materials Used
Direct Materials Used = Alpha Bravo Charlie 3600 = 12800
Alpha
Bravo
Charlie DL OH DM . .

33. Demonstration Problem (Part 2 – Cont.)
WIP - Summary
Ending is 1000 more than Beginning; Inputs must be 1000 more than Outputs
Beg DL OH
DMU 12800
End.
COGM
Finished Goods
Raw Materials
Beg
Purchases
End
Beg.
COGM
End.
COGS 
DMU
Work in Process
Show Slide #33: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Thought process: since the ending balance is 1000 more than the beginning, the inputs must be 1000 more than the outputs.
Using the input-output equation:
Raw Materials Purchases = Beg ? – DMU = End 2500
Beg ? – DMU = End 2500
? = – 1500
? = 13800
Alpha
Bravo
Charlie DL OH DM
6400
3200
4200
=14100
= 7050
=12800

34. Demonstration Problem (Part 2 – Cont.)
WIP - Summary
Total of labor for the three jobs equals Direct Labor
Beg DL OH
DMU 12800
End.
COGM
Finished Goods
Raw Materials
Beg
Purchases
End
Beg.
COGM
End.
COGS 
DMU
Work in Process
Show Slide #34: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Total of labor for the three jobs equals Direct Labor
Direct Labor = Alpha Bravo Charlie 3200 = 14100
Alpha
Bravo
Charlie DL OH DM
6400
3200
4200
=14100
= 7050
=12800

35. Demonstration Problem (Part 2 – Cont.)
WIP - Summary
Total of Overhead applied to for the three jobs equals Overhead Applied
Beg DL OH
DMU 12800
End.
COGM
Finished Goods
Raw Materials
Beg
Purchases
End
Beg.
COGM
End.
COGS 
DMU
Work in Process
Show Slide #35: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Total of Overhead applied to for the three jobs equals Overhead Applied
Overhead Applied (50% of DL) = Alpha Brave Charlie 1600 = 7050
Alpha
Bravo
Charlie DL OH DM
6400
3200
4200
=14100
= 7050
=12800

36. Demonstration Problem (Part 2 – Cont.)
WIP - Summary
Alpha and Bravo are completed. COGM equals total of Alpha and Bravo
Beg DL OH
DMU 12800
End.
COGM
Finished Goods
Raw Materials
Beg
Purchases
End
Beg.
COGM 25550
End.
COGS 
DMU
Work in Process
Show Slide #36: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Alpha and Bravo are completed. COGM equals total of Alpha and Bravo
Alpha Bravo = COGM 25550
Alpha
Bravo
Charlie DL OH DM
11750
6400
3200
4200
13800
=14100
= 7050
=12800

37. Demonstration Problem (Part 2 – Cont.)
WIP - Summary
All jobs are sold when completed. COGS equals total of Alpha and Bravo
Beg DL OH
DMU 12800
End.
COGM
Finished Goods
Raw Materials
Beg
Purchases
End
Beg
COGM 25550
End
COGS 
DMU
Work in Process
Show Slide #37: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Since all jobs are sold when completed, COGS = total of Alpha and Bravo.
Beginning and ending inventory of Finished Goods are zero.
Alpha
Bravo
Charlie DL OH DM
11750
6400
3200
4200
13800
=14100
= 7050
=12800

38. Demonstration Problem (Part 2 – Cont.)
WIP - Summary
Beg DL OH
DMU 12800
End
COGM
Finished Goods
Raw Materials
Beg
Purchases
End
Beg
COGM 25550
End
COGS 
DMU
Work in Process
Show Slide #38: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Ending Balance in WIP is equal to the cost of Charlie But we can also prove that using the input output equation.
Beginning 0 (given) + inputs DL OH DMU – Outputs COGM = End 8400
Alpha
Bravo
Charlie DL OH DM
11750
6400
3200
4200
13800
=14100
= 7050
=12800
8400
Ending Balance in WIP is equal to the cost of Charlie

39. Demonstration Problem (Part 2 – Cont.)
Is overhead over- or under-applied?
Actual > Applied, so under-applied
Statement of Activities Revenue: User Fees $28,105 Less: COGS 25,550 Gross Profit 2,555 Less: Admin cost 2,800 Net loss $ 245
Overhead
Utilities
Supplies
Ind. labor
7050 Applied
End
Show Slide #39: Prove ending balances in inventory accounts (Cont.)
Facilitator’s Note: Is overhead over- or under-applied? Actual > Applied, so under-applied
Statement of Activities
Revenue:
User Fees: $28,105
Less: COGS 25,550
Gross Profit: 2,555
Less: Admin cost 2,800
Net loss: $
User fees are equal to Cost of Goods Sold * 1.1 = * 1.1 = (to account for the 10% markup to cover admin costs)
Gross Profit = Revenues or User Fees less COGS
Gross Profit less Admin Costs (given) = a net loss of 245.
The Net loss is slightly above 1% of user fees. This may be acceptable if there is a small profit made in another period during the year to offset the loss.

40. LSA #4 Check on Learning and Summary
The Check on learning and Summary for LSA #4 will be conducted after the Practical Exercise (PE).
Show Slide #40: LSA #4: Prove ending balances in inventory accounts
Facilitator's Note: The Check on learning and Summary for LSA #4 will be conducted after the Practical Exercise (PE).

41. Lesson Summary What are your questions?
Calculate Cost of Goods Sold, Gross Profit, and Operating Income is a lesson designed for the learners to apply the methodology for calculating the cost of a job. During this lesson, we covered the following Learning Step Activities:
1. Overview of Job Order Costing
2. Calculate cost of job given predetermined overhead rate
3. Calculate and Explain causes of over-/ under-applied overhead
4. Prove ending balances in inventory accounts
What are your questions?
Show Slide #41: TLO Summary
Facilitator’s Note: Calculate Cost of Goods Sold, Gross Profit, and Operating Income is a lesson designed for the learners to apply the methodology for calculating the cost of a job. During this lesson, we covered the following Learning Step Activities:
1. Overview of Job Order Costing
2. Calculate cost of job given predetermined overhead rate
3. Calculate and Explain causes of over-/ under-applied overhead
4. Prove ending balances in inventory accounts
What are your questions?

42. Practical Exercise Show Slide #42: Deploy the Practical Exercise (PE)
Facilitator’s Note: Conduct the Run-phase Method of Instructions. This is your opportunity to demonstrate how to calculate cost of goods, gross profit and operating income. Your Commander is relying on you to complete this task before he/she can make informed resourcing and operational decisions. You will have 10 minutes to complete the practical exercise (PE). Do your best to complete the PE in the allotted time. We will conduct an review of the PE as a group.

43. TLO Summary
Action: Calculate Cost of Goods Sold, Gross Profit and Operating Income
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for International learners):
Overview of Job Order Costing
Calculate cost of job given predetermined overhead rate
Calculate and Explain causes of over-/ under-applied overhead
Prove ending balances in inventory accounts
Show Slide #43: TLO Summary
Facilitator’s Note: Restate the TLO
Action: Calculate Cost of Goods Sold, Gross Profit and Operating Income
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: with at least 80% accuracy (70% for International learners)
Overview of Job Order Costing
Calculate cost of job given predetermined overhead rate
Calculate and Explain causes of over-/ under-applied overhead
Prove ending balances in inventory accounts
“Or”
Facilitator's at this time, have one learner from each group to explain the most important take away to them from this lesson. Facilitate a discussion on each answer.