Transcript Accounting Based Equity Valuation Model: One Period
ACCT 2302 Fundamentals of Accounting II
Spring 2011 Lecture 4
Professor Jeff Yu
Review: Manufacturing Cost Flows
Balance Sheet Costs Inventories Raw Material Purchases Direct Labor Income Statement Expenses Manufacturing Overhead Goods Sold How to show product cost flows using T-accounts?
Chapter 3: Job order costing
How accounting system reports costs ?
Absorption Costing
is the most common approach to product costing. It is required for both external financial reporting and tax reporting in this country. Recall: in absorption costing, all
manufacturing
costs are assigned to the product or service (
fully absorbed
), regardless of whether they are fixed or variable.
Two commonly used absorption costing systems: •
Job-order costing
•
Process costing
Job-order costing vs. Process costing
Process Costing Job-order Costing
A firm mass-produces many units of a single product. Continuous flow of virtually identical units over a long period.
Costs may not be directly traceable to each unit. Instead, costs are accumulated by department average cost for each unit.
to get the same
Examples: Coca-Cola, Exxon, General Mills, Kellogg
Job-order costing vs. Process costing
Process Costing Job-order Costing
A firm produces many different products each period. Products are built to order rather than mass produced.
The unique nature of each order requires tracing and allocating costs to each job and maintain cost records for each job.
Examples: Boeing, Walter Disney, Levi Strauss, Hallmark construction firms, hospitals, law firms, advertising agencies, accounting firms, repair shops
Job-order costing vs. Process costing Number of jobs worked Cost accumulated by Average cost computed by
Job-Order
Job Job
Process
Single Product Department Department
Quick Check
For each of the following companies, determine whether they are more likely to use job-order costing or process costing?
1. Scott Paper Company for Kleenex.
2. Architects.
3. Heinz for ketchup.
4. Caterer for a wedding reception.
Product Cost Flow in Job-order Costing
Direct Materials Costs are traced and applied to individual jobs in a job-order cost system.
Direct Labor Work-in-Process (JOB) Finished Goods
Applied MOH
Cost of Goods Sold
Job-order costing: cost allocation
Direct materials Direct labor Manufacturing Overhead THE JOB Applied to each job using a predetermined overhead rate
Predetermined Overhead Rate
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined at the beginning of the period.
POHR = Estimated total MOH cost for the coming period Estimated total units in the allocation base for the coming period The allocation base is typically a cost driver that causes MOH, e.g. DL hours, or machine hours.
The Need for a POHR
Using a predetermined rate makes it possible to estimate total job costs sooner.
$
Actual manufacturing overhead costs for the period is not known until the end of the period.
Applying Manufacturing Overhead
Overhead Applied = POHR * Actual Activity Actual Activity : Actual amount the allocation base, of such as direct labor hours (DLH) or machine hours (MH) incurred during the period
Example: POHR
Estimated total MOH for the coming period = $640,000 Estimated total DL hours for the coming period = 160,000
POHR = $640,000 160,000
POHR = $4.00 per DL hour For each direct labor hour worked on a particular job, $4.00 of MOH will be applied to that job.
Example: applying MOH
Job-Order Cost Accounting
Interpreting the Average Unit Product Cost
The average product unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced.
Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be less than $118. ( Recall: Fixed cost per unit is decreasing as activity level increases )
Example
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. POHR is determined annually on the basis of direct labor hours. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. Q: What would be recorded as the cost of job WR53?
Job-Order Costing: T-accounts
Manufacturing Overhead Actual Applied Indirect Material
Applied Overhead
Indirect Labor Other MOH Work in Process Beg. Bal.
Direct Material Direct Labor
Applied Overhead
End. Bal.
Cost of Goods Manufactured If actual and applied MOH are not equal, a year-end adjustment is required. Financial statements need to be properly stated at year end.
Example: Job-order costing
DFW Products computes its POHR annually on the basis of machine hours. At the beginning of the year, it estimated that its total MOH costs would be $600,000 and the total machine hours would be 30,000 hours. Its actual total MOH costs for the year was $470,000 and its actual total machine hours was 25,000 hours. 1) What is DFW Products’ POHR for the year?
2) Determine the amount of MOH applied to jobs during the year. 3) What are the journal entries needed to apply MOH to jobs?
4) Is MOH for the year overapplied or underapplied? By how much?
5) What if the actual total MOH is $530,000?
Adjustment Method: Close to Cost of Goods Sold Actual MOH Applied Cost of Goods Sold
Unadjusted Balance
Adjusted Balance
Q: what journal entry will lead to a
zero
ending balance for MOH T-account?
Summary: MOH Application in job-order costing At the
beginning
of the period , calculate:
POHR
= Estimated total MOH cost / Estimated total activity level
During
the period , calculate: Applied MOH = POHR * Actual activity level At the
end
of the period , calculate: Actual MOH Applied MOH to determine whether MOH was
underapplied
or
overapplied
and do an adjustment entry to close to
Cost of Goods Sold
.
Practice Problem
Janna Company applies MOH using a predetermined overhead rate of 60% of direct labor cost. During the year, 4,000 DL hours were incurred at $12 per hour. A year-end calculation of actual MOH costs show the following: Indirect material costs $1,000, indirect labor costs $16,000 and other MOH costs (including factory property tax, utilities and depreciation) amount to $12,000. Questions: (1) Is MOH overapplied or underapplied? (2) What are the journal entries to close the difference to CGS?
(3) If CGM is $100,000, the beginning FG inventory is $30,000 and the ending FG inventory is $25,000, what is the CGS after the year end adjustment entry? (4) What if actual total MOH is $28,000?
For Next Class
Review chapter 3, we will do more practice problems.
Attempt the assigned HW problems.
Read chapter 5, we will proceed to cover the basic concepts of cost behavior.
Homework Problem 1
Janna Company incurred $400, 000 actual MOH, and overapplied $20,000 on MOH account for the year. If POHR is $10 per direct labor hour, how many hours did the company work during the year?
Homework Problem 2
Harwood Co. uses job-order costing and applies MOH to jobs based on machine hours. On January 1, 2009, managers estimated that the company will incur $420,000 in MOH costs and work 60,000 machine hours. Managers have the following data on 12/31/2009: Actual direct-labor hours Actual machine hours Direct labor cost Indirect materials Other MOH Indirect labor cost 50,000 70,000 $80,000 $20,000 $400,000 $100,000 Q: (1) Is MOH under- or overapplied for the year? By how much?
(2) What are the journal entries to close to CGS at the year-end?
Homework Problem 3
01/01/08 12/31/08 Raw materials inventory $ 8 7 Work-in-progress inventory 6 7.5
Finished goods inventory Purchases of raw materials 15 21.5
32 Indirect material cost 24 Direct labor cost 40 Indirect labor cost 10 Sales commissions 15 Total machine hours used 10 Other manufacturing overhead cost 14 All above data are in thousands. POHR of $5 per machine-hour was used: 1) Determine cost of goods manufactured for 2008; 2) 3) Compute the amount of underapplied or overapplied MOH for 2008 Determine cost of goods sold after the year-end adjustment entry.