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.