1. Product Costing Break Normal Costing ACTG 321 Agenda for Lecture 6

2. Cost Flows for a Manufacturing Firm Raw Mat.s Direct Labor Mfg O/H W.I.P. F/G Inv. COGS = Balance Sheet account = expense account = Income Statement Account

3. Overview of Job Costing for Manufacturing Companies Manufacturing Overhead Machine Hours Indirect Costs Direct Costs Direct Labor Direct Materials Indirect Cost Pool Cost Allocation Base the “Job” Direct Costs

4. Five Step Approach To Job Costing 1Identify the cost object. 2Identify the direct cost categories for the job. 3Identify the indirect cost pools associated with the job. 4Select the cost allocation base for each indirect cost pool. 5Calculate the rate per unit of the allocation base to allocate indirect costs.

5. Calculation Of Overhead Rates Over- = total costs in the cost pool head total quantity of the cost Rate allocation base

6. The Levi Strauss factory in Albuquerque makes jeans and Dockers. Each product line has its own production line on the factory floor. Budgeted and actual overhead costs for the entire factory for 2003 were $1,200,000 and $1,100,000, respectively. Budgeted production for each product line was 500,000 units for the year (one million units for the factory in total). Actual production of jeans was equal to budget. However, actual production of Dockers was curtailed to 400,000 units, due to increased competition in the casual slacks market.

7. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production.

8. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production. $1,100,000  (500,000 + 400,000) = $1.22 per unit

9. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 2003, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate using direct labor hours as the allocation base, and using actual costs and actual labor hours. Using the allocation rate above, how much overhead would be allocated to jeans in 2003?

10. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 2003, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate using direct labor hours as the allocation base, and using actual costs and actual labor hours. Using the allocation rate above, how much overhead would be allocated to jeans in 2003? $1,100,000  500,000 = $2.20 per direct labor hour

11. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 2003, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate using direct labor hours as the allocation base, and using actual costs and actual labor hours. Using the allocation rate above, how much overhead would be allocated to jeans in 2003? $1,100,000  500,000 = $2.20 per direct labor hour $2.20 per direct labor hour x 200,000 direct labor hours = $440,000; which is $0.88 per pair of jeans.

12. Product Costing Break Normal Costing ACTG 321 Agenda for Lecture 6

13. Normal Costing There is nothing Normal about Normal Costing

14. Actual versus Budgeted Amounts Actual or budgeted rates for overhead. Actual or budgeted prices/rates of direct inputs. Actual quantities of direct inputs, or standard quantities based on actual production. Actual quantity of overhead, or standard quantity based on actual production.

15. Why Use Budgeted Amounts? Actual costs may not be known on a timely basis. Actual costs may be subject to short-run fluctuations. When actual O/H rates are used, production volume for one product affects the reported costs of other products. A system using budgeted numbers may be more economical.

16. The Levi Strauss factory in Albuquerque makes jeans and Dockers. Each product line has its own production line on the factory floor. Budgeted and actual overhead costs for the entire factory for 1997 were $1,200,000 and $1,100,000, respectively. Budgeted production for each product line was 500,000 units for the year (one million units for the factory in total). Actual production of jeans was equal to budget. However, actual production of Dockers was curtailed to 400,000 units, due to increased competition in the casual slacks market.

17. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production.

18. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production. $1,200,000  (500,000 + 500,000) = $1.20 per unit $1,100,000  (500,000 + 400,000) = $1.22 per unit

19. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. Calculate the misapplied overhead: $1,200,000  (500,000 + 500,000) = $1.20 per unit

20. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using budgeted overhead dollars and production. Calculate the misapplied overhead: $1,200,000  (500,000 + 500,000) = $1.20 per unit $1.20 per unit x 900,000 units = $1,080,000 applied $1,080,000 applied - $1,100,000 actual = $20,000 underapplied.

21. Misapplied Overhead The use of budgeted overhead rates usually results in underallocated or overallocated overhead. Possible disposition of these variances include: 1) Restate to actual cost 2) Write off to COGS 3) Prorate between COGS & inventory 4) Treat as a period cost

22. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production. Calculate the misapplied overhead: $1,100,000  (500,000 + 400,000) = $1.22 per unit

23. Budgeted Overhead:$1.2 million Actual Overhead:$1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Calculate the overhead allocation rate per pair of pants, using actual overhead dollars and production. Calculate the misapplied overhead: $1,100,000  (500,000 + 400,000) = $1.22 per unit $1.22 per unit x 900,000 units = $1,100,000 applied $1,100,000 applied - $1,100,000 actual = $0 misapplied.

24. Misapplied Overhead Restatement using actual overhead rates is preferred conceptually, but is not necessarily the most conservative. Restatement can result in higher net income and ending inventory than write-off to COGS when variances are unfavorable. Is there justification for treating unfavorable variances as a period cost?

25. Budgeted O/H: $1.2 million Actual O/H: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that the budgeted overhead of $1,200,000 consisted of $800,000 budgeted for variable overhead and $400,000 for fixed overhead. Also assume that the factory has the capacity to produce 1.5 million pairs of pants, and that the fixed overhead rate is calculated using capacity in the denominator. Calculate the budgeted overhead rates for fixed overhead and for variable overhead.

26. Budgeted O/H: $1.2 million Actual O/H: $1.1 million Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that the budgeted overhead of $1,200,000 consisted of $800,000 budgeted for variable overhead and $400,000 for fixed overhead. Also assume that the factory has the capacity to produce 1.5 million pairs of pants, and that the fixed overhead rate is calculated using capacity in the denominator. Calculate the budgeted overhead rates for fixed overhead and for variable overhead. Variable O/H rate: $800K  1,000,000 = $.80 per unit Fixed O/H rate: $400,000  1,500,000 = $.27 per unit Total: $1.07 per unit

27. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 1997, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate (one rate for both fixed and variable overhead) using direct labor hours as the allocation base, and using actual costs and actual labor hours. Using the allocation rate above, how much overhead would be allocated to jeans in 1997?

28. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 1997, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate (one rate for both fixed and variable overhead) using direct labor hours as the allocation base, and using actual costs and actual labor hours. Using the allocation rate above, how much overhead would be allocated to jeans in 1997? $1,100,000  500,000 = $2.20 per direct labor hour

29. Budgeted O/H: $1.2 million; Actual O/H: $1.1 million. Budgeted production: 500K jeans, 500K Dockers. Actual production: 500K jeans, 400K Dockers. Assume that 500,000 direct labor hours were used in production in 1997, 200,000 for jeans, and 300,000 for Dockers. Calculate the overhead rate (one rate for both fixed and variable overhead) using direct labor hours as the allocation base, and using actual costs and actual labor hours. Using the allocation rate above, how much overhead would be allocated to jeans in 1997? $1,100,000  500,000 = $2.20 per direct labor hour $2.20 per direct labor hour x 200,000 direct labor hours = $440,000; which is $0.88 per pair of jeans.