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Job-Order Costing

Chapter 8

2015 McGraw-Hill Education


Learning Objective 1

Distinguish between
process costing and job-
order costing, and identify
companies that would use
each costing method.

2015 McGraw-Hill Educa4on Garrison, Noreen, Brewer, Cheng & Yuen 2


Types of Product Costing Systems

Process Job-order
Costing Costing

v A company produces many units of a single


product.
v One unit of product is indistinguishable from
other units of product.
v The identical nature of each unit of product enables
assigning the same average cost per unit.

2015 McGraw-Hill Educa4on Garrison, Noreen, Brewer, Cheng & Yuen 3


Types of Product Costing Systems

Process Job-order
Costing Costing

v A company produces many units of a single


product.companies:
Example
v 1.One
Asiaunit
Pulpof&product
Paper (paper manufacturing)
is indistinguishable from
2.other units of(Instant
Kang-shi-fu product.Noodle Producer)
v 3.The
Coca-Cola
identical(mixing
nature and bottling
of each unit beverages)
of product enables
assigning the same average cost per unit.

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Types of Product Costing Systems

Process Job-order
Costing Costing

v Many different products are produced each period.


v Products are manufactured to order.
v The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.

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Types of Product Costing Systems

Process Job-order
Costing Costing

v Example
Many companies:
different products are produced each period.
v 1. Commercial Aircraft
Products are Corporation
manufactured of China
to order.
(aircraft manufacturer)
v The unique nature of each order requires tracing or
2. Tata Consultancy Services (Information Technology)
allocating costs to each job, and maintaining cost
3. Hong Kong
records forAircraft Engineering (aircraft maintenance)
each job.

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Comparing Process and Job-Order Costing
Job-Order Process
Number of jobs worked Many Single Product

Cost accumulated by Individual Department or


Job Process
Average cost computed by Job Department or
Process

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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.

2015 McGraw-Hill Educa4on Garrison, Noreen, Brewer, Cheng & Yuen 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.

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Learning Objective 2

Identify the documents


used in a job-order costing
system.

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Job-Order Costing An Overview

Direct Materials
Charge
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Manufacturing Job No. 3 each job as
Overhead work is
performed.

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Indirect Manufacturing Costs

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated
Manufacturing
to all jobs
Job No. 3
Overhead rather than
directly traced
to each job.
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The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped


Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

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Measuring Direct Materials Cost
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-09


Job No. A - 143
Department B3

Description Quantity Unit Cost Total Cost


2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Authorized
Signature Will E. Delite!

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Measuring Direct Materials Cost
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116

Cost Summary Units Shipped


Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

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Measuring Direct Labor Costs

PearCo Employee Time Ticket

Time Ticket No. 36 Date 3/5/2009


Employee I. M. Skilled Station 42

Starting Ending Hours Hourly


Time Time Completed Rate Amount Job No.
0800 1600 8.00 $ 11.00 $ 88.00 A-143

Totals 8.00 $ 11.00 $ 88.00 A-143

Supervisor C. M. Wo r km an

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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88

Cost Summary Units Shipped


Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead
Total Cost
Unit Product Cost

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Learning Objective 3
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.

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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.

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Manufacturing Overhead Application
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins.

Estimated total manufacturing


overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base


is a cost driver that causes
overhead.

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The Need for a POHR

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.

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Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated
using a three-step process.


Estimate the level of Estimate total amount Estimate total
production for the of the allocation base manufacturing
period. for the period. overhead costs.

POHR =
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Application of Manufacturing Overhead

Based on estimates, and


determined before the
period begins.

Overhead applied = POHR Actual activity

Actual amount of allocation is


based upon the actual level of
activity (normal costing system).

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Overhead Application Rate
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

$640,000
POHR =
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH


For each direct labor hour worked on a particular job,
$4.00 of factory overhead will be applied to that job.

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Learning Objective 4

Compute the total cost and


average cost per unit of a
job.

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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed 3-5-09
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped


Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost
Unit Product Cost

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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed 3-5-09
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped


Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Product Cost $ 118

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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 was produced.

Fixed overhead would not change if another unit


was produced, so the incremental cost of
another unit is something less than $118.

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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.

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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. POHR = $760,000/20,000 hours $38
b. $350.
Direct materials $200
c. $380.
Direct labor $15 x 10 hours $150
d. $730. Manufacturing overhead $38 x 10 hours $380
Total cost $730

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Learning Objective 5

Understand the flow of costs


in a job-order costing system
and prepare appropriate
journal entries to record
costs.

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Job-Order Costing
Document Flow Summary

A sales order is the A production


basis of issuing a order initiates
production order. work on a job.

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Job-Order Costing
Document Flow Summary

Materials
used may be Direct Job Cost
either direct or materials Sheets
indirect.
Materials
Requisition

Manufacturing
Indirect Overhead
materials Account

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Job-Order Costing
Document Flow Summary
An
employees
time may be either Direct Job Cost
Labor Sheets
direct or
indirect.
Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

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Job-Order Costing
Document Flow Summary

Materials Indirect
Requisition Material POHR
rate used
to apply
Other Manufacturing
overhead Job Cost
Actual OH Overhead
Sheets
Charges Account

Employee Indirect
Time Ticket Labor

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Learning Objectives 5 and 8
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.

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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.

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The Purchase and Issue of Raw Materials

Raw Materials Work in Process


Material lDirect
l (Job Cost Sheet)
Purchases Materials Direct
l
lIndirect Materials
Materials

Mfg. Overhead
Actual Applied
lIndirect
Materials

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Cost Flows Material Purchases
Raw material purchases are recorded in an
inventory account.
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX

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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.
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Raw Materials XXXXX

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The Recording of Labor Costs
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
lDirect Direct
l
Labor Materials
lIndirect lDirect
Labor Labor

Mfg. Overhead
Actual Applied
lIndirect

Materials
lIndirect

Labor
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The Recording of Labor Costs
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Salaries and Wages Payable XXXXX

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Recording Actual Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
lDirect Direct
l
Labor Materials
lIndirect lDirect
Labor Labor
Mfg. Overhead
Actual Applied
lIndirect

Materials
lIndirect

Labor
lOther

Overhead
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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.
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Manufacturing Overhead XXXXX
Accounts Payable XXXXX
Property Taxes Payable XXXXX
Prepaid Insurance XXXXX
Accumulated Depreciation XXXXX

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Learning Objective 6

Apply overhead cost to


Work in Process using a
predetermined overhead
rate.

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Applying Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
lDirect Direct
l
Labor Materials
lIndirect lDirect
Labor Labor
lOverhead
Mfg. Overhead
Applied
Actual Applied
lIndirect
If actual and applied
Materials lOverhead
manufacturing overhead
lIndirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
lOther
Process
Overhead
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Applying Manufacturing Overhead
Work in Process is increased when Manufacturing
Overhead is applied to jobs.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX

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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.

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Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Salaries Expense XXXXX
Salaries Payable XXXXX

Advertising Expense XXXXX


Accounts Payable XXXXX

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Learning Objective 7

Prepare schedules of cost


of goods manufactured
and cost of goods sold.

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Transferring Completed Units
Work in Process Finished Goods
(Job Cost Sheet )
Direct
l lCost of
Materials Cost of
l Goods
Goods Mfd.
lDirect
Mfd.
Labor
lOverhead
Applied

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Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods from
Work in Process.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process XXXXX

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Transferring Units Sold
Work in Process Finished Goods
(Job Cost Sheet)
Direct
l lCost of Cost of
l

Materials Cost of
l Goods Goods
Goods Mfd. Sold
lDirect
Mfd.
Labor
lOverhead
Applied Cost of Goods Sold
Cost of
l
Goods
Sold

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Transferring Units Sold
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record
the Cost of Goods Sold.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX

Cost of Goods Sold XXXXX


Finished Goods XXXXX

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Learning Objective 9
Compute underapplied or
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.

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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 Overapplied overhead


exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
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Overhead Application Example

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 Applied During the Period
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

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Overhead Application Example

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
PearCo hasyear? Use PearCos predetermined overhead
overapplied
overheadrateforofthe
$4.00
yearper direct labor hour.
by $30,000. What will
Overhead
PearCo Applied
do? During the Period
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

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Quick Check

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.

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Quick Check

Tiger, Inc. had actual manufacturing overhead


costs of $1,210,000 andOverhead
a predetermined
Applied overhead
rate of $4.00 per machine$4.00
hour.
perTiger, Inc. worked
hour 290,000 hours
290,000 machine hours during the period. Tigers
= $1,160,000
manufacturing overhead is
Underapplied Overhead
$1,210,000 - $1,160,000
a. $50,000 overapplied. = $50,000

b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.

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Disposition of Under- or Overapplied
Overhead
PearCos Method

$30,000 $30,000 may be


may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold

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Disposition of
Under- or Overapplied Overhead

PearCos Cost PearCos


of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied

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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:
Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

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Allocating Under- or Overapplied
Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:

Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

10% $30,000

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Allocating Under- or Overapplied
Overhead Between Accounts
Percent of Allocation of
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Manufacturing Overhead 30,000
Work in Process Inventory 3,000
Finished Goods Inventory 9,000
Cost of Goods Sold 18,000

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Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCos
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE


Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE


Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

More accurate but more complex to compute.

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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.

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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.

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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 May be more complex


often use multiple but . . .
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.

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Job-Order Costing in Service Companies

Job-order costing is used in many different


types of service companies.

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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.

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Activity-based Job-order Costing

Appendix 8A

2015 McGraw-Hill Education


Learning Objective 10
(Appendix 8A)
Apply Job-order Costing in
Activity-based Costing
Environment.

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Activity-based Job-order Costing:
Example at Dell

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Activity-based Job-order Costing:
Example at Paperart

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End of Chapter 8

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