CostAcc Procurement No.

of orders or cost of
Departmentalization – requires the use of Receiving Cost of materials, number of
different overhead rates for applying
units, number of orders.
manufacturing overhead.
Storeroom Cost of materials, number of
Two kinds of Departments requisition filled, number of
Producing Departments – are those units handled
departments that are directly engaged in the Factory Office Number of employees, labor
manufacturing activities. hours, labor costs
Service Departments – are those Personnel Number of employees, labor
departments that assist indirectly by hours, labor costs
rendering services. Building Floor space occupied
Procedures of Departmentalization Power plant Kilowatt Hours of power
1. Calculate departmental predetermined
overhead application rates.
2. Apply the predetermined overhead rates
Three Methods of Distributing or Reallocating
to production on a departmental basis.
3. Record actual manufacturing overhead
costs by departments in the Departmental
Direct Method – the costs of each service
Overhead Analysis sheet.
department are allocated only to the
producing departments. It is the most often
Direct Departmental Overhead Costs – are
used in practice because it is simple to apply.
those that can be easily traced to specific
(See page 238 for the computations)
departments. Examples:
Repairs and Maintenance
Step Method – allocates service department
Indirect Labor
cost to all service departments as well as
Indirect Materials
producing departments. This method ignores
Depreciation of Equipment
the fact that the reciprocal services are used
between some service departments. (See
Indirect Departmental Cost – allocating can
page 239 for the computations.)
be done through a survey of facilities and
Comprehensive Illustrations (See page 242
for the computations)
Indirect Departmental Distribution
Costs Bases 1. Select the service department serving the
Factory Rent Square Footage most other service departments. If they are
Depreciation - Factory Square Footage equal, select the department with the
Building highest costs.
Fire insurance on building Square Footage 2. Allocate the cost of the service
Repairs and maintenance Square Footage departments selected in step 1 to the
Telephone No. of producing departments and other service
employees or departments based on a relative
No. of telephone appointment level of the apportionment
Light Kilowatt hour base.
Freight-In Materials used 3. Allocate the costs of each remaining
service department selected in the same
Service Departmental Cost – reallocated to manner as described in step 1.
the producing departments since these cost 4. Costs of service departments are never
cannot be directly identified to the products allocated to departments whose costs have
manufactured. already been collected.

Service Allocation Bases Reciprocal Method – a way to adjust for the
reciprocal services provided among the

Some arbitrary allocations continue. 2. Applied Manufacturing Overhead – 2. costs. Journal Entry: Finished Goods Inventory Identify the activities that cause the Work In Process overhead costs to be incurred. Drivers per Act. Allocate manufacturing overhead costs for each activity centers to products using the Recording the Cost Completed activity-based overhead rates. Identify the major activities that pertain to It is impractical to used ABC System when the manufacture of specific products and the prime cost (Direct Materials plus Direct allocate manufacturing overhead costs to Labor) is already 90%. categories rather than departments and the 3. allocated using only one cost pool. whereas consume resources.) Advantages of ABC Journal Entry: 1. activity centers. ABC leads to better management overhead charged to Dept. 2. Product lines are greatly in volume and Activity Based Costing (ABC) – measures a manufacturing is complex. (See page 240-241 for the computations. activities make and sell. X decisions. The unit cost is determined. Manufacturing Overhead – Dept. . produce and sell show large profits. To record the applied manufacturing 3. X Factors in Implementing ABC Systems Traditional Costing System – cost assigned to 1. show small profits. (See page 273 Recorded in the Job Cost Sheet (Document – 276 for the computations) 13) Activity centers or activity pools – a list of Procedure: individual activities may be quiet lengthy so 1. ABC leads to enhanced control overhead Dept. Significant amount of indirect costs are products or services are estimated. 2. charged to Dept. The manufacturing process or the number Unit Costs under ABC of products has changed significantly. totaled and entered in the summary section. Product line are numerous and require relationship to overhead costs. Completing the Cost Cycle 3.service departments. finished product and compute the activity based overhead rate. number of drivers depends on the company and the products its produces. All columns of the job cost sheet are activities are group. Most accurate method products that a company is less suited to so far. ABC can be expensive to use. variety of different factory activities and their 3. ABC leads more costs pool used to allocate Work in Process overhead costs. X Disadvantages of ABC Manufacturing Overhead Control 1. The reason different degrees of support services. To record the actual manufacturing overhead 2. The error is minimized. The total cost of the job completed is Cost drivers – are usually organized by computed. Procedure: 1. Products that a company Is well suited to Products consume activities . Identify the costs drivers that accurately ABC in Service and Merchandising – similar to measure each activity’s contribution to the the ABC approach in manufacturing. Service department Activity Based = Estimated Overhead costs and service department reciprocal per Activity service relationships are described by an Overhead Rate Expected Use of Cost of algebraic equation. behind the system of coat allocation: 4. 5. To record the costs of completed job.

Materials Payroll Cash/Accounts Receivable Applied Mfg. labor and overhead. bring these goods up to standard. Scrap – is the residue of manufacturing process. spoiled goods from Work in Process. Journal Entry: Journal entry: Spoilage Attributable to a Specific Job (Due to Customers Specifications) page 308 At the Time of its Sale – Scrap is low or immaterial Spoiled Goods inventory Cash/Accounts receivable Work in Process Inventory Scrap Revenue To removed estimated disposal value of To record sale of scrap. When the scrap is sold Journal Entry Cash/Accounts Receivable Before considering rework costs Scrap Inventory Work in Process Inventory To record sale of scrap. Accounting for the Production Losses in a Job 2. Work In Process Inventory To removed estimated sales value of spoiled Recognizing Scrap at the Time of Its goods and charged loss to Manufacturing Production Overhead Control Scrap Attributable to a Specific Inventory (See Page 310 for the computations) Scrap Inventory Work In Process Inventory 3. Scrap Attributable to a Specific Job Cash or Accounts Receivable Cash/Accounts receivable Spoiled Goods Inventory Work In Process Inventory To record sales of spoiled goods at net To record sale of scrap. disposal value.additional cost required to To record scrap returned to storeroom. Cost of Goods Sold Work in Process Inventory Finished Goods Inventory Materials To record cost of goods sold. To record reuse of scrap. . Spoilage Common to All Jobs (Due to Internal Scrap Common to All Jobs Failure) Cash/Accounts receivable Spoiled Goods inventory Manufacturing Overhead Control Manufacturing Overhead Control To record sale of scrap. To record scrap returned to storeroom. Defective Goods – units of production that To record scrap returned to storeroom.Cash/Accounts receivable Materials Sales Manufacturing Overhead Control To record sales. fail to meet production standards but that can be brought up to standard by adding Scrap Common to All Jobs more materials. Scrap Inventory Manufacturing Overhead Control Rework costs. Spoiled Goods – goods that have been Order damaged through imperfect machining or processing. 1. Overhead Work in Process inventory To record cost Scrap Inventory To record sale of scrap at less than its Rework Cost charged to a Specific Job recorded sale.

Manufacturing Overhead Control Materials Payroll . Overhead job. the costs of the rework are charged to manufacturing overhead and spread through overhead allocation. the rework costs are charged in the To record cost of reworked defective units to usual manner to the rework job. If the rework is normal and specific Applied Mfg. Manufacturing Overhead Rework Cost charged to All Jobs (See page 313 for the computations) If it is not attributable to a specific job.