1. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Three Systems Design: Job-Order Costing

2. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-2 Learning Objective 1 Distinguish between process costing and job- order costing and identify companies that would use each costing method.

3. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-3 Types of Product Costing Systems Process Costing Job-order Costing A company produces many units of a single product. A company produces many units of a single product. One unit of product is indistinguishable from other units of product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. The identical nature of each unit of product enables assigning the same average cost per unit. A company produces many units of a single product. A company produces many units of a single product. One unit of product is indistinguishable from other units of product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. The identical nature of each unit of product enables assigning the same average cost per unit.

4. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-4 Types of Product Costing Systems Process Costing Job-order Costing A company produces many units of a single product. A company produces many units of a single product. One unit of product is indistinguishable from other units of product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. The identical nature of each unit of product enables assigning the same average cost per unit. A company produces many units of a single product. A company produces many units of a single product. One unit of product is indistinguishable from other units of product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. The identical nature of each unit of product enables assigning the same average cost per unit. Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages) Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)

5. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-5 Types of Product Costing Systems Process Costing Job-order Costing Many different products are produced each period. Many different products are produced each period. Products are manufactured to order. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Many different products are produced each period. Many different products are produced each period. Products are manufactured to order. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

6. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-6 Types of Product Costing Systems Process Costing Job-order Costing Many different products are produced each period. Many different products are produced each period. Products are manufactured to order. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Many different products are produced each period. Many different products are produced each period. Products are manufactured to order. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production) Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

7. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-7 Comparing Process and Job-Order Costing

8. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-8 Quick Check Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels. Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

9. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-9 Quick Check Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels. Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

10. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-10 Learning Objective 2 Identify the documents used in a job-order costing system.

11. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-11 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. Job-Order Costing – An Overview Direct Materials Direct Labor

12. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-12 Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. Direct Manufacturing Costs Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

13. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-13 PearCo Job Cost Sheet Job Number A - 143Date Initiated 3-4-05 Date Completed Department B3Units Completed Item Wooden cargo crate Direct MaterialsDirect LaborManufacturing Overhead Req. No.AmountTicketHoursAmountHoursRateAmount Cost SummaryUnits Shipped Direct MaterialsDateNumberBalance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost The Job Cost Sheet

14. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-14 Measuring Direct Materials Cost Will E. Delite

15. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-15 Measuring Direct Materials Cost

16. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-16 Measuring Direct Labor Costs

17. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-17 Job-Order Cost Accounting

18. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-18 Learning Objective 3 Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.

19. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-19 Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor 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 production managers salary. 3.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

20. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-20 The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Manufacturing Overhead Application 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.

21. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-21 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 $

22. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-22 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

23. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-23 For each direct labor 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 $640,000 160,000 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 =

24. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-24 Job-Order Cost Accounting

25. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-25 Job-Order Cost Accounting

26. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-26 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.

27. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-27 Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor 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 labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.

28. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-28 Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor 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 labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.

29. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-29 Learning Objective 4 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs.

30. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-30 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.

31. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-31 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.

32. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-32 Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account An employees time may be either direct or indirect. Direct Labor Indirect Labor

33. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-33 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 Labor

34. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-34 Learning Objectives 4 & 7 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs. Use T-accounts to show the flow of costs in a job-order costing system.

35. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-35 Job-Order Costing: The Flow of Costs The transactions (in T- account and journal entry form) that capture the flow of costs in a job- order costing system are illustrated on the following slides.

36. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-36 Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) ActualApplied Direct Materials Indirect Materials The Purchase and Issue of Raw Materials

37. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-37 Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

38. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-38 Cost Flows – Material Usage Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.

39. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-39 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor The Recording of Labor Costs

40. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-40 The Recording of Labor Costs The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

41. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-41 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Recording Actual Manufacturing Overhead Other Overhead

42. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-42 Recording Actual Manufacturing Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

43. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-43 Learning Objective 5 Apply overhead cost to Work in Process using a predetermined overhead rate.

44. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-44 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Applying Manufacturing Overhead Other Overhead Overhead Applied Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

45. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-45 Applying Manufacturing Overhead Work in Process is increased when Manufacturing Overhead is applied to jobs.

46. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-46 Accounting for Nonmanufacturing Cost Nonmanufacturing costs are not assigned to individual jobs; rather they are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

47. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-47 Accounting for Nonmanufacturing Cost Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

48. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-48 Learning Objective 6 Prepare schedules of cost of goods manufactured and cost of goods sold.

49. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-49 Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Transferring Completed Units

50. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-50 Transferring Completed Units As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

51. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-51 Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Sold Transferring Units Sold

52. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-52 Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

53. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-53 Learning Objective 8 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

54. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-54 Problems of Overhead Application The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead. Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

55. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-55 PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour. PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

56. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-56 PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour. PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo has overapplied overhead for the year by $30,000. What will PearCo do?

57. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-57 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. Tigers manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. 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. Tigers manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Quick Check

58. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-58 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. Tigers manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. 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. Tigers manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Quick Check Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000 Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

59. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-59 Disposition of Under- or Overapplied Overhead $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold PearCos Method Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. OROR

60. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-60 Disposition of Under- or Overapplied Overhead PearCos Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCos Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 Overhead applied to jobs $680,000

61. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-61 Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:

62. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-62 Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead:

63. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-63 Allocating Under- or Overapplied Overhead Between Accounts

64. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-64 Overapplied and Underapplied Manufacturing Overhead - Summary PearCos Method

65. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-65 Quick Check What effect will the overapplied overhead have on PearCos net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. What effect will the overapplied overhead have on PearCos net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

66. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-66 Quick Check What effect will the overapplied overhead have on PearCos net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. What effect will the overapplied overhead have on PearCos net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

67. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-67 Multiple Predetermined Overhead Rates To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates. May be more complex but... May be more accurate because it reflects differences across departments.

68. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-68 Job-Order Costing in Service Companies Job-order costing is used in many different types of service companies.

69. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-69 The Use of Information Technology Technology plays an important part in many job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web- based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.

70. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Appendix 3A The Predetermined Overhead Rate & Capacity

71. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-71 Learning Objective 9 (Appendix 3A) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

72. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-72 Predetermined Overhead Rate and Capacity Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: 1.Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. 2.Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use. Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: 1.Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. 2.Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.

73. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-73 Capacity-Based Overhead Rates Criticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation. Lets look at the difference!

74. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-74 An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?

75. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-75 An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate? Traditional Method = $2.50 per unit $100,000 40,000 = Capacity Method = $2.00 per unit $100,000 50,000 =

76. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-76 Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

77. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-77 Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

78. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-78 Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

79. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-79 Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity? a. $2.00 per case. b. $2.50 per case. c. $4.00 per case.

80. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-80 Quick Check When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down. When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.

81. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-81 Quick Check When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down. When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a. The predetermined overhead rate goes up when activity goes down. b. The predetermined overhead rate stays the same; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.

82. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-82 Quick Check When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down. When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.

83. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-83 Quick Check When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down. When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases? a.The predetermined overhead rate goes up when activity goes down. b.The predetermined overhead rate stays the same; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.

84. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-84 Income Statement Preparation

85. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-85 Income Statement Preparation

86. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 3-86 End of Chapter 3