COST ACCOUNTING AND Semivariable Costs Graph (Type B) JPIA-HA

CONTROL Techniques for Analyzing Semivariable

Accounting for Factory Overhead and Job Order Cost
Costing 1. Observation Method (Account
Classification Method)
Overview of the Handouts:
1. Accounting for Factory Overhead 2. High-Low Method
2. ABC Costing 3. Scattergraph Method
3. Job Order Costing 4. Method of Least Squares

I. ACCOUNTING FOR FACTORY Budgeting Factory Overhead Costs

OVERHEAD  Budgets are management’s operating
plans expressed in quantitative terms.
Overview  Costs are segregated into fixed and
1. Review on cost behavior patterns. variable components.
2. Budget factory overhead costs.
 Budgets can be prepared for different
3. Accumulate actual overhead costs.
4. Apply factory overhead estimates to levels of production (flexible budget).
production.  Valuable management tool for planning
5. Calculate and analyze differences and controlling costs.
between actual and applied factory  Entries are made in the general journal
overhead. for indirect materials and indirect labor
from the summary of materials issued
Cost Behavior Patterns and the labor cost summary.
 Variable costs are costs that vary in  Other factory overhead expenses are
proportion to volume changes. recorded in the general ledger from the
 Fixed costs remain constant.
invoices and schedules for fixed costs.
 Semivariable costs have characteristics
 A factory overhead subsidiary ledger
of both fixed and variable costs.
a) Type A – remain constant over a may be used if the number of factory
range of production, then change overhead accounts becomes too large.
abruptly.
b) Type B – vary continuously but Factors to be considered in the
not in direct proportion to volume computation of Factory Overhead Rate
changes. 1. Based to be used
 Physical Output
Variable Costs Graph  Direct Materials Cost
 Direct Labor Cost
Cost  Direct Labor Hours
 Machine Hours
2. Activity Level to Use
Volume
 Normal Capacity
 Expected Actual Capacity
3. Inclusion or exclusion of Fixed Factory
Fixed Costs Graph Overhead
 Absorption costing
 Direct Costing
4. Use of Single or Multiple Rates
 Plant-wide or Blanket Rate
 Departmentalized Rate
 Activity Based Costing (ABC)
Semivariable Costs Graph (Type A) System

Cost Accounting and Control –Factory Overhead and Job Order Costing
Distributing Service Department Expenses Applying Factory Overhead to Production JPIA-HA
 Service departments are an essential  Factory overhead costs may not be
part of the organization, but they do not known until the end of the accounting
work directly on the product. period.
 Production departments perform the  The cost of a job is needed soon after
actual manufacturing operations that completion, so a method to estimate
physically change the units being the amount of factory overhead
processed. applied must be established.
 The costs of the service departments  This enables companies to bill
must be apportioned to the production customers on a timelier basis and to
departments. prepare bids for new contracts more
 An analysis of the service department’s accurately.
relationship to other departments must
be done. Accounting for Actual and Applied Factory
Overhead
Plant-Wide Entry to apply estimated factory overhead to production
Factory Overhead Rate Formula: Work in Process XX
Factory Overhead Applied XX
At the end of the period, the applied factory overhead account
is closed to factory overhead.
Factory Overhead Applied XX
Factory Overhead Control XX

Departmentalize Factory Overhead Rate

Common Bases for Distributing Service Under- and Overapplied Factory Overhead
Department Costs  After the applied factory overhead
Service Basis for Distribution account is closed, the underapplied
Departments
(debit) or overapplied (credit) balance in
Building Floor space occupied by other the factory overhead account is moved
Maintenance departments
to work in process.
Inspection and Production volume
Under- and Overapplied Factory Overhead XX
Packing
Factory Overhead XX
Machine Shop Value of machinery and equipment Assuming the under or overapplied overhead is immaterial

Human Resources Number of workers in departments Cost of Goods Sold XX

served Under- and Overapplied Factory Overhead XX

Purchasing Number of purchase orders

Shipping Quantity and weight of items shipped

II. ABC COSTING (TRANSACTION
Stores Units of materials requisitioned COSTING)
Tool Room Total direct labor hours in departments  The premise in ABC Costing is that
served overhead costs that are caused by
activities are traced to individual product
Methods of Distributing Costs units on the basis of frequency of
1. Direct Distribution Method consumption of overhead resources by
a. Service department costs are each product.
allocated only to production
departments. Five Steps in ABC Costing
2. Sequential Distribution or Step Method 1. Assemble similar activities into activity
a. Distributes service department centers
costs regressively to other 2. Classify costs by activity center and by
service departments and then to type of expense
production departments. 3. Select the cost drivers
3. Algebraic Distribution Method 4. Calculate a cost function
a. Distributes costs by simultaneous 5. Assign cost to the cost objective
equations recognizing the
relationship of services rendered
by departments to each other.

Cost Accounting and Control –Factory Overhead and Job Order Costing
 III. JOB ORDER COSTING JPIA-HA
 The job order procedure keeps the costs
of various jobs or contracts separate
during their manufacture or construction.

Major Source Documents for Job Oder

Costing
1. Job Order Cost Sheet
a. These records accumulate
product costs of specific units or
small batches of units for both
product costing and control
purposes
b. The file of job-order sheet for
uncompleted jobs serves as a
perpetual book inventory and the
subsidiary ledger for Work in
Process Control
c. A separate cost sheet is prepared
for each job
2. Materials Stockcard
a. These records are perpetual
book inventory of costs and
quantities of materials on hand
b. The file of materials stock cards
for unused materials is the
subsidiary ledger for Materials
Control
c. A separate stockcard is prepared
for each type of material on hand
3. Finished Goods Stockcard
a. These records are the perpetual
book inventory of costs and
quantities of completed goods
held for sale
b. The file of finished goods stock
cards for unsold goods is the
subsidiary ledger of Finished
Goods Control
4. Factory Overhead Control Cost Record
a. These records accumulate
detailed manufacturing overhead
costs by department
b. The file of these records for the
accounting period is the
subsidiary ledger for Factory
Overhead Control
5. Materials Requisition, Time Ticket, and
Clock Card
a. As the source documents for
charging costs to jobs and
department
b. To aid in fixing responsibility for
control and usage of materials
and labor

Cost Accounting and Control –Factory Overhead and Job Order Costing