C05 Instr PPT Mowen4Ce

POWERPOINT PRESENTATION TO
ACCOMPANY
CORNERSTONES
OF MANAGERIAL
ACCOUNTING
FOURTH CANADIAN EDITION
BY
MOWEN/HANSEN/HEITGER/McCONOMY/WITT
Presentation Revised by
Robert G. Ducharme
University of Waterloo
5-1 Copyright © 2022 Cengage Canada

Chapter 5
Job-Order Costing

Learning Objectives
After studying this chapter, you should be able to:
1. Describe the difference between job-order costing and process
costing, and identify the types of firms that would use each
method.
2. Compute the predetermined overhead rate and use the rate to
assign overhead to units or services produced.
3. Identify and set up the source documents used in job-order
costing.
4. Describe the cost flows associated with job-order costing.
5. (Appendix 5A) Prepare the journal entries associated with job-
order costing.
6. (Appendix 5B) Allocate support department costs to producing
departments.
CPA Competencies
CPA Competencies included in this chapter:
3.1.1 Evaluates management information requirements

3.1.2 Documents and assesses business processes,
systems and data requirements and recommends
improvements to meet information needs
3.1.4 Identifies ethical and privacy issues related to
information technology
3.2.1 Develops or evaluates data and information inputs
for operational plans, budgets, and forecasts

CPA Competencies
CPA Competencies included in this chapter:
3.3.1 Evaluates cost classifications and costing methods

for management of ongoing operations
3.3.2 Evaluates and applies cost management
techniques appropriate for specific costing
decisions
3.5.1 Performs sensitivity analysis
3.6.1 Evaluates performance using accepted
frameworks

Importance of Unit Costs to Firms
For manufacturing firms, unit costs are essential for
• valuing inventory
• determining income
• making important decisions
For service firms, unit costs are used to determine
• profitability
• feasibility of introducing new services

Job-Order vs. Process Costing
• Firms operating in job-

Job- order industries produce a
Order wide variety of services or
Costing products that are quite
distinct from each other.
• Firms producing identical

Process products or services can
Costing use a process-costing
accounting system.

Job-Order vs. Process Costing
Job-Order Costing Process Costing

Wide variety of distinct Homogeneous products
products
Costs accumulated Costs accumulated by
by job process or department
Unit cost computed by Unit cost computed by
dividing total job costs dividing process costs for
by units produced for the period by the units
that job produced in the period

Process Production and Costing
• Firms in process industries mass-produce large

quantities of similar or homogeneous products.
• This approach to cost accumulation is known as a
process-costing system.
• Examples of process manufacturers include
• food canning and manufacturing
• cement
• petroleum
• pharmaceutical and chemical manufacturing

Process Production and Costing
• Process firms accumulate production costs by

process or by department for a given period of
time.
• Unit costs are measured using the following
equation:
Unit costs = Process costs ÷ Output

Production Costs in Job-Order Costing
Direct materials Direct labour
Job #1 Job #2 Job #3
Direct materials and direct labour are fairly

easy to trace to individual jobs.

Normal Costing and
Overhead Application
• Unit costs are important because managers need
accurate cost information on materials, labour, and
overhead when making decisions.
• For example, when a construction company bills a
client at set points throughout the construction, it
is important that unit cost be generated in a timely
manner.
• Job-order costing using a normal cost system will
give the company the unit cost information it
needs.

Actual Costing
• Two methods are commonly used to measure the

costs associated with production: actual costing
and normal costing.
• In an actual cost system, only actual costs of direct
materials, direct labour, and overhead are used to
determine unit cost.
• However, there are several issues involved in using
actual costing.

Actual Costing
• Defining overhead costs: Overhead items do
not have the direct relationship with units
produced that direct materials and direct labour
do.
• Uneven overhead costs: Many overhead costs
are not incurred uniformly throughout the year.
• Waiting until the end of the year to total the actual
overhead costs is typically unrealistic.
• Uneven production: Distortions can occur when
averages are used with uneven production.
• Strict actual cost systems are rarely used because
accurate day-to-day unit cost information is needed
on a timely basis.

Normal Costing
• Normal costing solves the problems associated with
actual costing.
• A normal cost system determines unit cost by
adding actual direct materials, actual direct labour,
and estimated overhead.
• Overhead can be estimated by approximating the
year’s actual overhead at the beginning of the year
and then using a predetermined rate throughout
the year to obtain the needed unit cost
information.
• Virtually all firms use normal costing.

Job-Order: Cost Accumulation System
Actual Normal Standard

Actual direct Actual direct Standard direct
material material material
Actual direct Actual direct Standard direct
labour labour labour
Actual overhead Overhead Overhead
applied using applied using
predetermined predetermined
overhead rate overhead rate

Normal Costing and
Estimating Overhead
In normal costing, overhead must be estimated and
applied to output.
Three-step process:
1. Calculate the predetermined overhead rate.
2. Apply overhead to production.
3. Reconcile applied overhead with actual overhead and
allocate difference to COGS, WIP, and finished goods
ending inventories.

Step 1: Calculating the
Predetermined Overhead Rate
• The predetermined overhead rate is calculated at
the beginning of the year by dividing the total
estimated annual overhead by the total estimated
level of associated activity or cost driver:
Overhead rate = Estimated annual overhead ÷
Estimated annual activity level
• Notice that the predetermined overhead rate
includes estimated amounts in both the numerator
and the denominator.

Step 1: Calculating the
Predetermined Overhead Rate
• This estimation is necessary because the
predetermined overhead rate is calculated in
advance, usually at the beginning of the year.
• Estimated overhead is the firm’s best estimate of the
amount of overhead (utilities, indirect labour,
depreciation, etc.) to be incurred in the coming year.
• The number of machine hours could be a good choice
of activity level for overhead of a company that has
automated production.
• Estimates may be based on last year’s figures
adjusted for anticipated changes in the coming year.
Step 2: Applying Overhead to
Production throughout the Year
• Once the overhead rate has been computed, the
company can begin to apply overhead to
production.
• Applied overhead is found by multiplying the
predetermined overhead rate by the actual use of
the associated activity for the period:
Applied overhead = Predetermined overhead rate
× Actual activity level

Step 2: Applying Overhead to
Production throughout the Year
• Once this is calculated, the total cost of product for
the period is the actual direct materials and direct
labour, plus the applied overhead:
Total costs = Actual direct materials +

Actual direct labour + Applied overhead

CORNERSTONE 5.1
Calculating and Applying Predetermined Overhead Rate

Information:
At the beginning of the year, Argus Company estimated
the following costs:
• Overhead cost = $360,000
• Direct labour cost = $720,000
Argus uses normal costing and applies overhead on the
basis of direct labour cost. For the month of February,
direct labour cost was $56,000.

CORNERSTONE 5.1

Required:
1. Calculate the predetermined overhead rate for
the year.
2. Calculate the overhead applied to production in
February.

CORNERSTONE 5.1 • SOLUTION

Formula: Best estimate of manufacturing-related
costs, such as factory-related costs,
indirect materials, and indirect labour
Overhead Estimated annual overhead

=
rate Estimated annual activity level
Both overhead and activity level are estimated

because overhead rate must be calculated at
the beginning of the year.

1. Predetermined overhead rate:
Overhead rate = Overhead

Direct labour cost
Overhead rate = $360,000

$720,000
Overhead rate = 50% of direct labour cost


2. Overhead applied to production in February:
Applied overhead = Predetermined × Actual

overhead rate activity level
Overhead applied = 50% × $56,000
to February (Overhead) (Direct labour
production cost)
Overhead applied = $28,000
to February
production

Step 3: Reconciling Actual Overhead
with Applied Overhead
• Remember that two types of overhead are
recorded:
• Actual overhead: Costs are tracked throughout
the year in the overhead account.
• Applied overhead: Costs are computed
throughout the year and added to actual direct
materials and actual direct labour to get total
product cost.

• At the end of the year, however, it is time to
reconcile any difference between actual and
applied overhead and to correct the cost of goods
sold account to reflect actual overhead spending.
• Applied overhead will rarely equal actual overhead.
• The difference between actual overhead and
applied overhead is called an overhead variance.

Step 3: Reconciling Applied Overhead
with Actual Overhead
Example: Proto Company had actual overhead of
$400,000 for the year but had applied $390,000 to
production.
Actual Overhead Applied Overhead

$400,000 $390,000
Actual ≠ Applied
• This is called an overhead variance.

Step 3: Reconciling Applied Overhead
with Actual Overhead
Actual Overhead Applied Overhead
$400,000
− $390,000
Underapplied
Actual OverheadOverhead = $10,000
> Applied Overhead =
Underapplied Overhead, Add to COGS
Actual Overhead < Applied Overhead =
Overapplied Overhead, Subtract from COGS

• If the overhead variance is material (large), another
approach is taken. That approach is to allocate the
variance among the ending balances of Work in
Process, Finished Goods, and Cost of Goods Sold.

Actual Overhead and
Applied Overhead
§ This exhibit illustrates the concepts of over- and

underapplied overhead.

CORNERSTONE 5.2
Reconciling Actual Overhead with Applied Overhead

Information:
• At the beginning of the year, Argus Company
estimated the following:
• Overhead cost = $360,000
• Direct labour cost = $720,000
• Overhead rate = 50% of direct labour cost
• By the end of the year, actual data are
• overhead cost = $375,400
• direct labour cost =750,000

CORNERSTONE 5.2

Information:
• Argus uses normal costing and applies overhead
on the basis of direct labour cost.
• At the end of the year, cost of goods sold (before
adjusting for any overhead variance) is $632,000.
Required:
1. Calculate the overhead variance for the year.
2. Dispose of the overhead variance by adjusting
cost of goods sold.


1. Calculate and apply predetermined overhead rate:
Actual overhead = $375,400

Applied overhead:
Overhead rate × Actual labour cost $375,000
(0.50 × $750,000)
Overhead variance (underapplied ) = $400
2.
Unadjusted COGS $632,000
Add: Underapplied variance 400
Adjusted COGS $632,400
Plantwide and Departmental Overhead
Plantwide • Single overhead rate calculated

using all estimated overhead
Overhead for a factory and dividing by
Rate estimated activity for entire plant
• Estimated overhead for a

Departmental department divided by estimated
Overhead activity level for that same
Rate department

CORNERSTONE 5.3
Calculating Plantwide Overhead Rate and Applying Overhead to
Production
Information:
• At the beginning of the year, Sorrel Company
estimated the following:
Machining Assembly Total

Overhead $240,000 $360,000 $600,000
Direct labour 135,000 240,000 375,000
hours
Machine hours 200,000 — 200,000

CORNERSTONE 5.3
Production
Information, continued:
• Sorrel has decided to use a plantwide overhead rate
based on direct labour hours. Actual data for the
month of June are as follows:

Overhead $22,500 $30,750 $53,250
Direct labour hours 11,000 20,000 31,000
Machine hours 17,000 — 17,000

CORNERSTONE 5.3
Production
Required:
1. Calculate the predetermined plantwide overhead
rate.
2. Calculate the overhead applied to production for
the month of June.
3. Calculate the overhead variance for the month of
June.

Production
1. Plantwide overhead rate:
Plantwide overhead rate = Total overhead
Direct labour hours
Plantwide overhead rate = $600,000

(Total estimated overhead)
375,000
Plantwide overhead rate = $1.60 per direct labour hour

Production
2. Applying overhead to production:
Formula:
Applied overhead = Plantwide × Actual activity
overhead rate level
Actual direct labour hours for June:

Machining 11,000 + Assembly 20,000 hours
Applied overhead = $1.60 × 31,000 direct

labour hours
Applied overhead = $49,600
Production
3. Overapplied or underapplied overhead?
Actual overhead – Applied overhead

$53,250 – $49,600
$3,650
Underapplied
(Not enough overhead was applied to production.)

CORNERSTONE 5.4
Calculating Predetermined Departmental Overhead Rate and
Applying Overhead
Information:
• At the beginning of the year, Sorrel Company
estimated
Overhead cost $240,000 $360,000 $600,000
Direct labour 135,000 240,000 375,000
hours
Machine hours 200,000 — 200,000

CORNERSTONE 5.4
Applying Overhead
• Sorrel uses departmental overhead rates. Actual
data for the month of June are as follows:

Overhead $22,500 $30,750 $53,250
Direct labour 11,000 20,000 31,000
hours
Machine hours 17,000 — 17,000

CORNERSTONE 5.4
Applying Overhead
Sorrel uses departmental overhead rates.
• Machining department: Overhead is applied on the
basis of machine hours.
• Assembly department: Overhead is applied on the
basis of direct labour hours.

CORNERSTONE 5.4
Applying Overhead
Required:
1. Calculate the predetermined overhead rates for the
machining and assembly departments.
2. Calculate the overhead applied to production in
each department for the month of June.
3. By how much has each department’s overhead
been overapplied? Underapplied?

Applying Overhead
1. Overhead rates:
Machining OH rate = Estimated overhead
Estimated machine hours
Machining department’s overhead is applied on the basis

of machine hours.
Machining OH rate = $240,000

200,000
Machining OH rate = $1.20 per machine hour

Applying Overhead
1. Overhead rates:
Assembly OH rate = Estimated overhead
Estimated direct labour
hours
Assembly OH rate = $360,000

240,000
Assembly OH rate = $1.50 per direct labour hour

Applying Overhead
Machining Department
Overhead applied = Overhead × Actual machine
in June rate hours
Overhead applied = $1.20 × 17,000
in June
in June

Applying Overhead
Assembly Department
Overhead applied = Overhead × Actual direct
in June rate labour hours
Overhead applied = $1.50 × 20,000
in June
in June

Applying Overhead
3. Underapplied or overapplied overhead?
Machining Dept. Assembly Dept.
Actual overhead $22,500 $30,750
Applied overhead $20,400 $30,000
Underapplied $2,100 $750
overhead
Actual overhead exceeded applied overhead in both
departments.

Unit Costs in the Job-Order
System
• The unit cost of a job is the total cost of the job
(materials used on the job, labour worked on the
job, and applied overhead) divided by the number
of units in the job:
Unit cost = Total cost ÷ Number of units
• Although the concept is simple, the practical reality

of the computation can be somewhat more
complex because of the recordkeeping involved.

Keeping Track of Job Costs with Source
Documents
• Job-order cost sheet
• Materials requisition form
• Job time tickets

Job-Order Cost Sheet
• Accounting for job-order production begins by

preparing the source documents that are used to keep
track of the costs of jobs. The job-order cost sheet
is prepared for every job.

Job-Order Cost Sheet
• The job-order cost sheet is subsidiary to the work-

in-process account and is the primary document for
accumulating all costs related to a particular job.
• As more and more jobs are produced, a company
will usually find it convenient to number them.
• Work in Process consists of all incomplete work.
• In a job-order system, this will be all of the
unfinished jobs.
• The balance in Work in Process at the end of the
month will be the total of all the job-order cost
sheets for the incomplete jobs.

Materials Requisition Form
• The cost of direct materials is assigned to a job by

the use of a source document known as a materials
requisition form.

Materials Requisition Form
• Notice that the form asks for the type, quantity, and
unit price of the direct materials issued and, most
importantly, the number of the job.
• Using this form, the cost accounting department can
enter the cost of direct materials onto the correct job-
order cost sheet.
• If the accounting system is automated, this posting may
entail directly entering the data into a computer, using
the materials requisition forms as source documents.
• No attempt is made to trace the cost of other materials,
such as supplies, lubricants, and the like, to a particular
job.
• Indirect materials are assigned to jobs through the
predetermined overhead rate.

Time Ticket
• The means by which direct labour costs are

assigned to individual jobs is the source document
known as a time ticket.

Time Ticket
• Each day, the employee fills out a time ticket that
identifies his or her name, wage rate, and the hours
worked on each job.
• Time tickets are collected and transferred to the cost
accounting department where the information is
used to post the cost of direct labour to individual
jobs.
• Again, in an automated system, posting involves
entering the data into the computer.
• Time tickets are used only for direct labourers.
• All completed job-order cost sheets of a firm can
serve as a subsidiary ledger for the finished goods
inventory.
• Then, the work-in-process account consists of all of
the job order cost sheets for the unfinished jobs.
Source Documents for Other Activities:
Sources for Account Balances
Work in • Total of all job-order cost

Process sheets for unfinished jobs
Finished • Total of all job-order cost

Goods sheets for finished but
unsold jobs
Cost of • Total of all job-order cost

Goods Sold sheets for sold jobs

Accounting for Materials
and Direct Labour
Raw Materials Work in Process

Purchases Direct Direct
materials
materials
used in
production Direct
labour
Raw material beginning balance + Purchases

Accounting for Actual Overhead and
Applied Overhead Costs
• Actual overhead costs never enter the Work in
Process account. Actual overhead costs are
recorded as debits in the Manufacturing Overhead
control account.
• Applied overhead from all jobs is entered in the
Work in Process account.
• At the end of the period, actual overhead is
reconciled with applied overhead, and the variance
is closed to the Cost of Goods Sold account.

Accounting for Finished Goods
• Costs of completed jobs are transferred from Work
in Process to Finished Goods.
Work in Process Finished Goods

Direct Completed Completed
materials jobs jobs
Direct
labour
Applied
Overhead

Accounting for Cost of Goods Sold
• Once a job is sold, it is added to Cost of Goods Sold
and reported on the income statement.
Finished Goods Cost of Goods Sold

Completed Sold jobs Sold jobs
jobs
To ensure accuracy in computing these costs, a cost of goods

manufactured statement is prepared.
Accounting for Cost of Goods Sold
• When jobs are sold
• finished goods inventory is decreased
• cost of goods sold is increased
• The selling price is recognized by
• increasing (crediting) sales revenue
• increasing (debiting) accounts receivable (or cash)

CORNERSTONE 5.5
Preparing Brief Job-Order Cost Sheets

Information:
• At the beginning of June, Galway Company had
two jobs in process:
Job 78 Job 79
Direct materials $1,000 $ 800
Direct labour 600 1,000
Applied overhead 750 1,250
Balance, June 1 $2,350 $3,050

CORNERSTONE 5.5

• During June, two more jobs were started.
• The following direct materials and direct labour
costs were added to the four jobs during the
month of June:
Job 78 Job 79 Job 80 Job 81
Direct materials $500 $1,110 $ 900 $100
Direct labour 400 1,400 2,000 320

CORNERSTONE 5.5

Required:
1. Calculate the overhead rate based on direct
labour cost.
2. Prepare a job-order cost sheet for the four jobs.
• Show the balance as of June 1 as well as direct materials
and direct labour added in June.
• Apply overhead to the four jobs for the month of June,
and show the ending balances.
3. Calculate the ending balances of Work in Process
and Finished Goods as at June 30.
4. Calculate the Cost of Goods Sold for June.


1. Calculating overhead rate:
• We were not given estimated overhead or estimated
direct labour cost. So, we will have to work
backward to find the rate.
Applied overhead = Predetermined × Actual activity

overhead rate level
• We can compute the rate using the information
from Job 78.


1. Calculating overhead rate:
Applied overhead = Predetermined × Actual activity
overhead rate level
$750 = Predetermined × $600
overhead rate
$750/$600 = Predetermined
overhead rate
1.25 or 125 percent of direct labour cost


2. Job-order cost sheets:
Begin. bal., June 1 $2,350 $3,050 $ 0 $ 0
Direct materials 500 1,110 900 100
Direct labour 400 1,400 2,000 320
Applied overhead 500 1,750 2,500 400
Direct labour × Overhead rate = $400 × $1.25

Direct labour × Overhead rate = $1,400 × $1.25
Direct labour × Overhead rate = $2,000 × $1.25
Direct labour × Overhead rate = $320 × $1.25


2. Job-order cost sheets:
Begin. bal., June 1 $2,350 $3,050 $ 0 $ 0
Direct materials 500 1,110 900 100
Direct labour 400 1,400 2,000 320
Applied overhead 500 1,750 2,500 400
Total, June 30 $3,750 $7,310 $5,400 $820


3. and 4. Computing ending balances:
• By the end of June, Jobs 78, 79, and 80 have been
transferred out of Work in Process.
• Therefore, the ending balance in Work in Process
consists only of Job 81.
Work in Process
• Only Job 81 was still in process at June 30.
• Work in process = $820


• 3. and 4. Computing ending balances:
Finished goods, June 1 $ 0
Job 78 3,750
Job 80 5,400
Finished goods, June 30 $9,150
• One job, Job 79, was sold during June.
• Cost of Goods Sold:
• June 30 balance = $7,310

Accounting for
Nonmanufacturing Costs
• Manufacturing costs are not the only costs incurred
by a firm. Nonmanufacturing, or period, costs are
also incurred.
• These include selling and general administrative
costs, which are never assigned to the product;
they are not part of the manufacturing cost flows.
• Period costs are shown on the income statement.

Job-Order Costing
for Service Firms
• A job-order costing system may be used for service
firms as well.
• Architects, accountants, lawyers, tutors, physicians,
and advertising agencies provide services to
individual clients, students, or patients.
• In such cases, the client, student, or patient can be
viewed as a job for which costs are accumulated
and reported.

Job-Order Costing
for Service Firms
• Any materials or supplies used in rendering services
are normally insignificant.
• For that reason, materials and supply costs are
included in the overhead cost.
• Direct labour and overhead costs of rendering
services to a client are accumulated in a Work in
Process account.

Appendix 5A: Journal Entries
For Job-Order Costing
Purchased raw materials costing $2,500 on account

Requisitioned materials costing $1,500 for use in

production

Recognized direct labour costing $1,530

Applied overhead to production at the rate of $4 per

direct labour hour. A total of 85 direct labour hours
were worked.

Incurred actual overhead costs of $415

Completed the backpack job and transferred it to

Finished Goods

Sold the backpack job at cost plus 50%

Closed underapplied overhead to Cost of Goods Sold

Appendix 5A: Posting of Journal Entries
to the Accounts

Appendix 5B: Producing and Supporting
Departments
• Nearly every company or factory has producing
departments and support departments.
• Producing departments are directly responsible for
creating the products or services sold to customers.
• Example: A public accounting firm might have
producing departments devoted to auditing, tax,
and management advisory services.
• In a factory, producing departments are those
that work directly on the products being
manufactured, such as the grinding and
assembly departments.

Appendix 5B: Producing and Supporting
Departments
• Support departments provide essential services for
producing departments, but they do not actually
make the product or service being sold.
• Examples include the maintenance, grounds,
engineering, housekeeping, personnel, and
photocopying departments.

5B: Steps for Determining Product Costs:
Predetermined Departmental Overhead Rates
• Once the direct overhead costs of each department

are determined, the next step is to assign the
support department costs to producing
departments using causal factors (drivers).

Appendix 5B: Assigning Costs of
Multiple Support Departments
• The three methods of assigning costs of multiple
support departments to producing departments
are
• the direct method
• the sequential method
• the reciprocal method
• Companies must determine the extent of support
department interaction and weigh the individual
costs and benefits of each method.

Appendix 5B: Direct Method
• The direct method assigns support department costs
only to the producing departments.
• It is the simplest and most straightforward way to
assign costs.

CORNERSTONE 5.6
Assigning Support Department Costs by Using the Direct Method
Information:
Departmental data:
Support Producing
Departments Departments
Power Maint. Grinding Assembly
Direct overhead $250,000 $160,000 $100,000 $ 60,000
costs*
Expected activity:
Kilowatt-hours — 200,000 600,000 200,000
Maintenance 1,000 — 4,500 4,500
hours

CORNERSTONE 5.6
Required:
Using the direct method, assign the support
department costs to the producing departments.

• Calculating usage or allocation ratios:

Grinding Assembly
Power: 600,000/(600,000 + 0.75 —
200,000)
200,000/(600,000 + — 0.25
200,000)
Maint.: 4,500/(4,500 + 4,500) 0.50
4,500/(4,500 + 4,500) — 0.50


Support Departments Producing
Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Powera (250,000) — 187,500 62,500
Maintenanceb — (160,000) 80,000 80,000
Total $ 0 $ 0 $367,500 $202,500

Appendix 5B: Sequential Method
• The sequential (or step) method of allocation
recognizes that interactions among support
departments occur.
• The sequential method does not fully account for
support department interaction.
• Cost allocations are performed in a step-down
fashion, following a predetermined ranking
procedure.
• The sequence is defined by ranking the support
departments in order of the amount of service
rendered.
• The sequential method does not fully account for
all support department interaction.
CORNERSTONE 5.7
Assigning Support Department Costs by Using the Sequential Method
Information:
Departmental data:
Support Producing
Departments Departments
Direct overhead $250,000 $160,000 $100,000 $ 60,000
costs*
Expected activity:
Kilowatt-hours — 200,000 600,000 200,000
Maintenance 1,000 — 4,500 4,500
hours
CORNERSTONE 5.7
Required:
Using the sequential method, assign the support
department costs to the producing departments.


Maint. Grinding Assem.
Power: 200,000/(200,000 + 0.20 — —

600,000 + 200,000)
600,000/(200,000 + — 0.60 —
600,000 + 200,000)
200,000/(200,000 + — — 0.20
600,000 + 200,000)
Maint.: 4,500/(4,500 + 4,500) — 0.50 —
4,500/(4,500 + 4,500) — — 0.50
Support Departments Producing

Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Powera (250,000) 50,000 150,000 50,000
Maintenanceb — (210,000) 105,000 105,000
Total $ 0 $ 0 $355,000 $215,000

Appendix 5B: Reciprocal Method
• The reciprocal method of allocation recognizes all
interactions among support departments.
• Total cost reflects interactions among all of the
support departments.
• This method uses a system of simultaneous linear
equations.
• The reciprocal method is not widely used due to its
complexity and limited value in providing more
precise cost allocations.

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POWERPOINT PRESENTATION TO

5-1 Copyright © 2022 Cengage Canada

5-2 Copyright © 2022 Cengage Canada

3.1.1 Evaluates management information requirements

5-4 Copyright © 2022 Cengage Canada

3.3.1 Evaluates cost classifications and costing methods

5-5 Copyright © 2022 Cengage Canada

5-6 Copyright © 2022 Cengage Canada

• Firms operating in job-

• Firms producing identical

5-7 Copyright © 2022 Cengage Canada

Job-Order Costing Process Costing

5-8 Copyright © 2022 Cengage Canada

• Firms in process industries mass-produce large

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• Process firms accumulate production costs by

Unit costs = Process costs ÷ Output

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Direct materials Direct labour

Job #1 Job #2 Job #3

Direct materials and direct labour are fairly

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• Two methods are commonly used to measure the

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Actual Normal Standard

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Total costs = Actual direct materials +

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Calculating and Applying Predetermined Overhead Rate

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Calculating and Applying Predetermined Overhead Rate

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Calculating and Applying Predetermined Overhead Rate

Overhead Estimated annual overhead

Both overhead and activity level are estimated

Calculating and Applying Predetermined Overhead Rate

Overhead rate = Overhead

Overhead rate = $360,000

Overhead rate = 50% of direct labour cost

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Calculating and Applying Predetermined Overhead Rate

Applied overhead = Predetermined × Actual

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Actual Overhead Applied Overhead

• This is called an overhead variance.

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§ This exhibit illustrates the concepts of over- and

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Reconciling Actual Overhead with Applied Overhead

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Reconciling Actual Overhead with Applied Overhead

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Reconciling Actual Overhead with Applied Overhead

Actual overhead = $375,400