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Systems Design:

Job-Order Costing
.

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Is labor expense a variable expense?

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DEVELOPING COSTING SYTEM


1. Planning & preparation for the study
2. System analysis & documentation
1. Organization chart & documents
2. Interviews
3. Input and outputs documents

3.
4.
5.
6.

Mapping out the production process


Developing bills of materials
Setting measurement systems
Coding (Units of organization, inputs, outputs,
cost objects, accounts)
7. Implementation Planning
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Types of Product Costing Systems


Process
Costing

Job-order
Costing

A company
company produces
produces many
many units
units of
of aa single
single
product.
product.

One

One unit
unit of
of product
product is
is indistinguishable
indistinguishable from
from
other
other units
units of
of product.
product.

The

The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
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Types of Product Costing Systems


Process
Costing

Job-order
Costing

A company
company produces
produces many
many units
units of
of aa single
single
product.
product.
Example companies:

Pnar
St
products
)
unit
of
product
is
from
1.One
One
unit
of(dairy
product
is indistinguishable
indistinguishable
from
other
product.
DYOof
(chemical)
other2.units
units
ofPaints
product.
Coca-Cola
bottling

identical
nature
of
unit
of
3.The
The
identical(mixing
nature and
of each
each
unit beverages)
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
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Types of Product Costing Systems


Process
Costing

Job-order
Costing

Many
Many different
different products
products are
are produced
produced each
each period.
period.
Products
Products are
are manufactured
manufactured to
to order.
order.

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

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Types of Product Costing Systems


Process
Costing

Job-order
Costing

Many
Many different
different products
products are
are produced
produced each
each period.
period.
Example companies:
are
to
Products
are manufactured
manufactured
to order.
order.
1.Products
Boeing (aircraft
manufacturing)

1. Boeing (aircraft manufacturing)

unique
nature
each
order
2.The
The
unique
nature
ofscale
eachconstruction)
order requires
requires tracing
tracing or
or
Mesa
Insaat
(largeof
costs
to
job,
maintaining
allocating
costs
to each
each
job, and
and
maintaining cost
cost
3.allocating
Walt Disney
Studios
(movie
production)
records for each job.
records
records for
for each
each job.
job.

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Comparing Process and Job-Order Costing

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Quick Check
Which
Which of
of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Eczacba
Eczacba for
for Selpak.
Selpak.
b.
b. Architects.
Architects.
c.
c. Tamek
Tamek for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
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Quick Check
Which
Which of
of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Eczacba
Eczacba for
for Selpak.
Selpak.
b.
b. Architects.
Architects.
c.
c. Tamek
Tamek for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
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Direct Manufacturing Costs

Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

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Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33

Charge
Charge
direct
direct
material
material and
and
direct
direct labor
labor
costs
costs to
to
each
each job
job as
as
work
work is
is
performed.
performed.
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Direct Manufacturing Costs

Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

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Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33

Manufacturing
Manufacturing
Overhead,
Overhead,
including
including
indirect
indirect
materials
materials and
and
indirect
indirect labor
labor,,
are
are allocated
allocated to
to
jobs
jobs rather
rather than
than
directly
directly traced
traced
to
to each
each job.
job.
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Job-Order Cost Accounting


PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount

Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount

Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

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Date Initiated 3-4-05


Date Completed
Units Completed

Units Shipped
Date Number Balance

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Materials Requisition Form

Will E. Delite

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Job-Order Cost Accounting

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Employee Time Ticket

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Job-Order Cost Accounting

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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.
POHR =

Estimated total manufacturing


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

Ideally,
Ideally, the
the allocation
allocation base
base
is
is aa cost
cost driver
driver that
that causes
causes
overhead.
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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Application of Manufacturing Overhead

Based
Based on
on estimates,
estimates, and
and
determined
determined before
before the
the
period
period begins.
begins.

Overhead applied = POHR Actual activity


Actual
Actual amount
amount of
of the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.

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Overhead Application Rate

POHR =

POHR =

Estimated total manufacturing


overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
$640,000
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For
For each
each direct
direct labor
labor hour
hour worked
worked on
on aa
particular
particular job,
job, $4.00
$4.00 of
of factory
factory overhead
overhead
will
will be
be applied
applied to
to that
that job.
job.
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Job-Order Cost Accounting

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Job-Order Cost Accounting

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Quick Check
Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and
and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. What
What would
would be
be
recorded
recorded as
as the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
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Quick Check
Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and
and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. What
What would
would be
be
recorded
recorded as
as the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
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Job-Order Costing
Document Flow Summary
Lets summarize
the document flow
in a job-order
costing system.

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Job-Order Costing
Document Flow Summary

A
A sales
sales order
order is
is the
the
basis
basis of
of issuing
issuing aa
production
production order.
order.

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A
A production
production
order
order initiates
initiates
work
work on
on aa job.
job.

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Job-Order Costing
Document Flow Summary
Materials
Materialsused
used
may
may be
beeither
either
direct
director
or
indirect.
indirect.

Direct
materials

Job
Job Cost
Cost
Sheets
Sheets

Materials
Materials
Requisition
Requisition
Indirect
materials

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Manufacturing
Manufacturing
Overhead
Overhead
Account
Account
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Job-Order Costing
Document Flow Summary
An
Anemployees
employees
time
timemay
maybe
beeither
either
direct
direct or
orindirect.
indirect.

Direct
Labor

Job
Job Cost
Cost
Sheets
Sheets

Employee
EmployeeTime
Time
Ticket
Ticket
Indirect
Labor

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Manufacturing
Manufacturing
Overhead
Overhead
Account
Account
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Job-Order Costing
Document Flow Summary

Employee
Employee
Time
TimeTicket
Ticket
Other
Other
Actual
Actual OH
OH
Charges
Charges
Materials
Materials
Requisition
Requisition
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Indirect
Labor

Manufacturing
Manufacturing Applied
Overhead
Overhead
Overhead
Account
Account

Job
Job Cost
Cost
Sheets
Sheets

Indirect
Material
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Job-Order System Cost Flows

Lets examine the


cost flows in a
job-order costing
system.

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Journal Entries
Purchase of materials on credit, $89,000
_________ / ____________
Materials Inventory 89,000
Accounts Payable
89,000
_________ / ____________

Requisition of direct ($81,000) and indirect materials


(OH) ($4,000) into production:
_________ / ____________
Work-in-Process
81,000
Manufacturing Overhead
4,000
Materials Inventory
85,000
_________ / ____________

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Journal Entries
Incurred direct ($39,000) and indirect (OH) labor
wages ($15,000), paid in cash
_________ / ____________

Work-in-Process
39,000
Manufacturing Overhead
15,000
Cash
54,000
_________ / ____________

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Journal Entries
Incurring or recording of various actual
indirect costs: Supervision & engineering salaries:
$44,000, paid in cash; plant utilities, repairs, &
insurance: $13,000; plant depreciation: $18,000
_________ / ____________
Manufacturing Overhead
75,000
Salaries Payable 44,000
Accounts Payable
3,000
Cash
44,000
Accumulated Depreciation
18,000
Prepaid Expenses
10,000
_________ / ____________

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Journal Entries

Allocation or application of indirect costs


(overhead) to the work-in-process account is
based on a predetermined overhead rate.

_________ / ____________
Work-in-Process
80,000
Manufacturing Overhead80,000
_________ / ____________

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Note: Actual overhead costs are never posted


directly into work-in-process.

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Journal Entries
Products are completed and transferred out of
production in preparation for being sold,
$188,800.
_________ / ____________
Finished Goods Inventory
188,800
Work-in-Process
188,800
_________ / ____________

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Journal Entries
Products are sold to customers on credit, $270,000
_________ / ____________
Accounts Receivable 270,000
Sales Revenue
270,000
_________ / ____________

The associated costs are transferred to an expense


(cost) account, $180,000.
_________ / ____________
Cost of Goods Sold 180,000
Finished Goods Inventory

180,000

_________ / ____________
Note: The difference between the sales and cost of goods sold
amounts represents the gross margin (profit) on this particular
transaction.

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Journal Entries
Marketing costs for February, $45,000, and
customer service costs for February,
$15,000, paid in cash,
_________ / ____________
Marketing Expenses
45,000
Selling Expenses
15,000
Cash Control
60,000
_________ / ____________
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Flow of Costs Illustrated

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Illustrated General Ledger in a Job Cost Environment

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Job-Order System Cost Flows


Raw Materials
Material Direct
Purchases Materials
Indirect
Materials

Work in Process
(Job Cost Sheet)
Direct
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials

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Job-Order System Cost Flows


Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
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Job-Order System Cost Flows


Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
Overhead
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Job-Order System Cost Flows


Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Materials Overhead
Indirect
Applied to
Labor
Work in
Other
Process
Overhead
McGrawHill/Irwin

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

IfIf actual
actual and
and applied
applied
manufacturing
manufacturing overhead
overhead
are
are not
not equal,
equal, aa year-end
year-end
adjustment
adjustment is
is required.
required.
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Nonmanufacturing Cost Flows


Nonmanufacturing costs are not assigned to
individual jobs, rather they are expensed in the
period incurred.
Examples:
Examples:
1.
1. Salary
Salary expense
expense of
of employees
employees
that
that work
work in
in aa marketing,
marketing, selling,
selling,
or
or administrative
administrative capacity.
capacity.
2.
2. Advertising
Advertising expenses
are expensed
expensed
expenses are
in
in the
the period
period incurred.
incurred.
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Job-Order System Cost Flows


Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

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Finished Goods
Cost of
Goods
Mfd.

Cost of
Goods
Mfd.

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Job-Order System Cost Flows


Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

Finished Goods
Cost of
Goods
Mfd.

Cost of
Goods
Mfd.

Cost of
Goods
Sold

Cost of Goods Sold


Cost of
Goods
Sold

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Defining Under- and Overapplied Overhead


The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is termed either underapplied or overapplied
overhead.
Underapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is less than the total
amount of overhead actually
incurred during the period.
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Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.
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Overhead Application Example


PearCos
PearCos actual
actual overhead
overhead for
for the
the year
year was
was
$650,000
$650,000 with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor
hours
hours worked
worked on
on jobs.
jobs.
How
How much
much total
total overhead
overhead was
was applied
applied to
to
PearCos
PearCos jobs
jobs during
during the
the year?
year? Use
Use
PearCos
PearCos predetermined
predetermined overhead
overhead rate
rate of
of
$4.00
$4.00 per
per direct
direct labor
labor hour.
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
PearCos actual
actual overhead
overhead for
for the
the year
year was
was
$650,000
$650,000 with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor
hours
hours worked
worked on
on jobs.
jobs.
PearCo has overapplied
How
much
total
overhead
was
applied
to
How
much
total
overhead
was
applied
to
overhead for the year
PearCos
jobs
during
the
year?
Use
PearCos
jobs
during
the
year?
Use
by $30,000. What will
PearCos
overhead
PearCos
predetermined
overhead rate
rate of
of
PearCo predetermined
do?
$4.00
$4.00 per
per direct
direct labor
labor hour.
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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Quick Check
Tiger,
Tiger,Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tigers
Tigersmanufacturing
manufacturing overhead
overhead is
is
a.
a.
b.
b.

$50,000
$50,000 overapplied.
overapplied.
$50,000
$50,000 underapplied.
underapplied.

c.
c.
d.
d.

$60,000
$60,000 overapplied.
overapplied.
$60,000
$60,000 underapplied.
underapplied.

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Quick Check
Tiger,
Tiger,Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
hours
Overhead
Inc. worked
worked 290,000
290,000 machine
machine
hours during
during the
the
OverheadApplied
Applied
$4.00
hour
period.
is
$4.00per
peroverhead
hour290,000
290,000
hours
period. Tigers
Tigersmanufacturing
manufacturing
overhead
ishours
== $1,160,000
$1,160,000

a.
a.
b.
b.

$50,000
$50,000 overapplied.
overapplied.
Underapplied
UnderappliedOverhead
Overhead
$1,210,000
--$1,160,000
$1,210,000
$1,160,000
$50,000
underapplied.
$50,000 underapplied.

c.
c.
d.
d.

$60,000
$60,000 overapplied.
overapplied.
$60,000
$60,000 underapplied.
underapplied.

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== $50,000
$50,000

Copyright2015,TheMcGrawHillCompanies,Inc.

Disposition of Under- or Overapplied Overhead


PearCos
PearCos Method
Method

$30,000
may be allocated
to these accounts.

$30,000 may be
closed directly to
cost of goods sold.

OR
Work
Work in
in
Process
Process

Finished
Finished
Goods
Goods

Cost
Cost of
of
Goods
Goods Sold
Sold
McGrawHill/Irwin

Cost
Cost of
of
Goods
Goods Sold
Sold
Copyright2015,TheMcGrawHillCompanies,Inc.

Disposition of Under- or Overapplied Overhead

PearCos Cost
of Goods Sold
Unadjusted
Balance

Actual Overhead
overhead applied
costs
to jobs
$30,000

Adjusted
Balance

McGrawHill/Irwin

PearCos
Mfg. Overhead

$650,000
$30,000

$680,000
$30,000
overapplied

Copyright2015,TheMcGrawHillCompanies,Inc.

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:

McGrawHill/Irwin

Copyright2015,TheMcGrawHillCompanies,Inc.

Allocating Under- or Overapplied


Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:

McGrawHill/Irwin

Copyright2015,TheMcGrawHillCompanies,Inc.

Overapplied and Underapplied Manufacturing


Overhead - Summary
PearCos
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED

Alternative 1
Close to Cost
of Goods Sold

Alternative 2

INCREASE
Cost of Goods Sold

INCREASE
Work in Process
Finished Goods
Cost of Goods Sold

DECREASE
Cost of Goods Sold

DECREASE
Work in Process
Finished Goods
Cost of Goods Sold

(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)

McGrawHill/Irwin

Allocation

Copyright2015,TheMcGrawHillCompanies,Inc.

Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCos
PearCos net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.

McGrawHill/Irwin

Copyright2015,TheMcGrawHillCompanies,Inc.

Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCos
PearCos net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.

McGrawHill/Irwin

Copyright2015,TheMcGrawHillCompanies,Inc.

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
often use multiple
predetermined
overhead rates.

McGrawHill/Irwin

May be more
complex but . . .
May be more
accurate because it
reflects differences
across departments.
Copyright2015,TheMcGrawHillCompanies,Inc.

Job-Order Costing in Service Companies


Job-order costing is used in many
difference types of service companies.

McGrawHill/Irwin

Copyright2015,TheMcGrawHillCompanies,Inc.

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 webbased programming language called
Extensible Markup Language (XML), bar
coding eliminates the inefficiencies and
inaccuracies associated with manual clerical
processes.

McGrawHill/Irwin

Copyright2015,TheMcGrawHillCompanies,Inc.

End of Chapter 3

McGrawHill/Irwin

Copyright2015,TheMcGrawHillCompanies,Inc.