ACCOUNTING PRINCIPLES 2

LECTURE NOTES

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Direct Labour:
 Charges easily traced
Indirect Labour:
 Charges not easily traced
• Maintenance
• Supervision
• Cleanup
Time ticket:
 an hour-by hour summary
 employee’s activity
 for the day
• One computerized approach
• Creating time ticket
• Uses bar code
• Capture data
• Each employee and each job has a unique bar code

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The three bar codes used in each job:

 The first bar code:

• Job started

 The second bar code:

• Employee’s identity badge

 The third bar code:

• job
The information is automatically recorded

Sample Employee’s Time Ticket

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In absorption costing:
 Product cost –
• Manufacturing overheads
• Direct materials
• Direct labour

Manufacturing overhead needs to be recorded on job sheet

 Assigning manufacturing overhead
 Three complicated circumstances:
• Indirect cost
• Many different types of costs
• Large amount of fixed manufacturing overhead.

Allocation Base:
 Used to assign overhead cost to product
 A measure:
• Direct Labour-hours (DLH)
• Machine-hours (MH)
• Used to assign overhead costs to products and services

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Predetermined overhead rate:
 Manufacturing overhead is commonly assigned to product
 using a predetermined overhead rate
 Computed using the following formula

 Computed before period begins

 Using a four step process:
• Estimate the total amount of allocation base for the next period
• Estimate total fixed manufacturing overhead cost for next period and
• The variable manufacturing overhead cost per unit
• Use formula shown below to estimate the total manufacturing overhead cost

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 • Compute the predetermined overhead rate
Note that:
 estimate the amount of the allocation base
 Next – total manufacturing overhead cost
 Variable overhead cost which depend on the amount of the allocation base

Overhead Application:
 Assigning overhead cost to job
 Used predetermined overhead rate computed
 Used to apply overhead cost to job throughout the period
 Use the formula below to determine amount of overhead cost to apply to a particular
job

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Managers uses cost information:
 Planning
 Decision making:
• Job profitability report
• Develop sales plan
• Production plan
 Price decision:
For instance:

Managers establish:
 Mark-up to generate revenue
 Generate residual profit

Job-order cost system inaccurately assigned to cost jobs

 Focus on indirect manufacturing cost or
 Manufacturing overhead cost
 While joc accurately trace DM & DL costs
 They often fail to allocate MOH cost
 production process
 Couse by choice of allocation base

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Multiple Predetermined Overhead Rate:
 Use more than overhead rate
 Complex & Accurate
 Reflects differences across departments
• Labour-intensive
• Direct Labour-hours
• Machine-intensive
• Machine-hours

Dickson Company – Two production departments:

 Milling & Assembly
 Job-order costing system
Predetermined Overhead rates
 For milling department – Machine-hours
 Assembly department – direct labour-hours
 Cost plus pricing
 mark-up of 75%
 Selling prices

For instance, at the beginning of the year, the company made the following estimates:

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Compute the selling price:
Use the formula below:

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Solution:

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Activity-Based Approach:
 Overhead rate for each activity within the department
 More overhead rates than departmental approach
 Activity based costing
For instance:

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Job-order cost system:
 Use to compute unit product costs for internal management purpose
 Also used to create balance sheets and income statements for external parties

Using predetermined overhead rates:

 Apply overhead costs to jobs
 The amount of overhead applied to all jobs during a period
 Differ from the actual amount of overhead cost during the period
Underapplied overhead
has implications on preparation financial statement:
Overapplied overhead

Implications for instance:

 Cost of goods sold reported on income statement
 Adjusted to reflect under and over applied overhead
Underapplied
 adjustment increase cost of goods sold and decrease net operating income
Overapplied
 Adjustment

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A job cost sheet - Accumulates the total:
 Direct materials
 Direct labour
 Manufacturing overhead cost
 Assigned to job

Subsidiary Ledger:
 When all a company’s job costs sheet are viewed collectively

Company’s job costs sheet:

 Provides a set of financial records
 Specific job comprise the amount reported in:
• Work-In-progress
• Finished Goods on the balance sheet
• Cost of Goods Sold on the income statement

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Job-order costing:
 Also used in service organizations:
• Law firms
• Movie studios
• Hospitals
• Repair shops

In a Law Firm for instance Tongapore Law firm:

 Clients = jobs
 Cost of each job is accumulated day by day on a job cost sheet
 Client case is handled by the firm:
• Legal forms/ similar inputs (Direct materials)
• Time expended by Attorneys (Direct labour)
• Cost of secretaries, legal aids, rent, deprecation etc.( overhead)

In a Movie studio such as Columbia Pictures:

Each film= = job
Cost of direct materials (costumes, props, films etc.)
Cost of direct labour (actors, directors, extras etc.)
All these are charged to a job sheet
A share of the studio’s overhead costs :
Utilities, depreciation of equipment, wages of maintenance workers
Charged to each film
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 The End

Thank you
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