Libby, Libby and Short

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Product and Service Costing Overhead
Application and Job-Order System
Prepared by Douglas Cloud Pepperdine University
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Objectives
1. Differentiate the cost accounting systems of
service and manufacturing firms and of unique and
standardized products. 2. Discuss the
interrelationship of cost accumulation, cost
measurement, and cost assignment. 3. Compute a
predetermined overhead rate, and use the rate to
assign overhead to production.
After studying this chapter, you should be able
to
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Objectives
4. Explain the difference between job-order and
process costing, and identify the source
documents used in job-order costing. 5. Describe
the cost flows associated with job-order costing,
and prepare the journal entries. 6. Explain why
multiple overhead rates may be preferred to a
single, plantwide rate.
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Continuum of Services and Manufactured Products
Pure Service
Manufactured Product
Bungee jumping Beauty Salon
Restaurant Automobiles

Software Cereals
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Features of Service Firms and Their Interface
with the Cost Management System
Impact on Cost Management System
Feature
Relationship to Business
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Features of Service Firms and Their Interface
with the Cost Management System
Impact on Cost Management System
Feature
Relationship to Business
Other customers are involved in production.
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Features of Service Firms and Their Interface
with the Cost Management System
Impact on Cost Management System
Feature
Relationship to Business
Productivity measurement is ongoing. TQM is
critical.
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Features of Service Firms and Their Interface
with the Cost Management System
Impact on Cost Management System
Feature
Relationship to Business
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Relationship of Cost Accumulation, Cost
Measurement, and Cost Assignment
Cost Measurement
Cost Assignment
Cost Accumulation
Record Costs Classify Costs
Assign to Cost Objects
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Cost Accumulation

• Cost accumulation refers to the recognition and
  recording of costs.
• The cost accountant needs to develop source
  documents, which keep track of costs as they
  occur. A source document describes a
  transaction. Data from these source documents
  can then be recorded in a database.
  Well-designed source documents can supply
  information in a flexible way.

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Cost Measurement
Cost measurement refers to classifying the cost.

• There are two commonly used ways to measure the
  costs associated with production actual costing
  and normal costing.
• An actual cost system uses actual costs for
  direct materials, direct labor, and overhead to
  determine unit cost.
• Normal costing systems measure overhead costs on
  a predetermined basis and use actual costs for
  direct materials and direct labor.

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Example Prime Costs
Rubber stops are made for cellos. The cost of
rubber is 0.30 per ounce and two ounces are
required per stop. The price of labor is 8 per
hour and it takes .10 hour to make a stop. Thus,
one stop should cost 1.40 calculated as follows

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Example Using Actual Overhead
April June
August
Actual overhead 20,000 40,000 40,000 Actual
units produced 40,000 40,000 160,000 Per-unit
overhead 0.50 1.00 0.25
Actual overhead/ Actual production
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Overhead Application
A Normal Costing View

• A predetermined overhead rate is calculated using
  the following formula

Continuing with the cello example
0.40
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Overhead Application

• 1. Units produced
• 2. Direct labor hours
• 3. Direct labor dollars
• 4. Machine hours
• 5. Direct materials

Estimated Overhead Activity Driver
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Data on Engine Housing
Cost of operating lathe 80,000 Total units
produced 20,000 Total machine hours used 12,500
Simple Complicated
Number of housings 10,000 10,000 Time on
lathe 0.25 MHr 1 MHr Operating cost
assigned using unit produced 4.00 4.00 Operat
ing cost assigned using machine
hours 1.60 6.40
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Choosing the Activity Level

• Expected activity level is simply the production
  level the firm expects to attain for the coming
  year.
• Normal activity level is the average activity
  usage that a firm experiences in the long term
  (normal volume is computed over more than one
  year).
• Theoretical activity level is the absolute
  maximum production activity of a manufacturing
  firm.
• Practical activity level is the maximum output
  that can be realized if everything operates
  efficiently.

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Basic Concept of Overhead Application

• In attempting to understand the concept of
  applied overhead, there are two points that
  should be emphasized.
• 1. Applied overhead is the basis for computing
  per-unit overhead cost.
• 2. Applied overhead is rarely equal to a periods
  actual overhead.

Applied overhead Overhead rate x Applied
production activity
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Basic Concept of Overhead Application
Measures of Activity Level
Number of Units
Consumer Demand-Oriented Measures of Activity
Level
Time
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Basic Concept of Overhead Application
Measures of Activity Level
Number of Units
Time
Productive Capability Measures of Activity Level
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Suncalc, Inc. Example
Suncalc, Inc. produces two unique, solar-powered
products a pocket calculator and a currency
translator. The following estimated and actual
data for 2004
Budgeted overhead 360,000 Normal activity
(DLH) 120,000 Activity (DLH) 100,000 Actual
overhead 320,000
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Suncalc, Inc. Example
The firm bases it predetermined overhead rate on
normal activity measured in direct labor hours
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Suncalc, Inc. Example
Using the overhead rate, applied overhead for
2004 is
Applied overhead Overhead rate x Actual
activity usage
3 per DLH x 100,000 DLH 300,000
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Suncalc, Inc. Example
Forty percent of the actual direct labor hours
worked were used to produce 80,000 units of the
pocket calculator and the remaining 60 percent
was used to produced 90,000 units of the currency
translator.
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Underapplied and Overapplied Overhead

• The difference between actual overhead and
  applied overhead is called overhead variance. If
  actual overhead is greater than applied overhead,
  then the variance is called underapplied
  overhead. If applied overhead is greater than
  actual overhead, the the variance is called
  overapplied overhead.

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Disposition of Overhead Variances

• The overhead variance is disposed of in one of
  two ways.
• 1. All overhead variance is allocated to cost of
  goods sold.
• 2. The overhead variance is allocated among work
  in process, finished goods, and cost of goods
  sold.

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Disposition of Overhead Variances
Suncalcs accounts had the following applied
overhead balances for the end of 2004
Work-in-Process Inventory, 60,000 Finished
Goods Inventory, 90,000 Cost of Goods Sold,
150,000. Suncale had 20,000 of underapplied
overhead. The amount is allocated as follows
Work-in-Process Inventory 60,000/300,000 x
20,000 4,000 Finished Goods Inventory
90,000/300,000 x 20,000 6,000 Cost of
Goods Sold 150,000/300,000 x 20,000
10,000
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A Job-Order Cost Sheet
Job Number 16 Date Ordered April
2, 2004 Date Completed April 24, 2004 Date
Shipped April 25, 2004
For Benson Company Item Description
Valves Quantity Completed 100
Direct Materials Direct Labor
Overhead
Ticket Number
Requisition Number
Amount
Hours Rate Amount Hours Rate Amount
12 300 68 8 6 48 8 10 80 18
450 72 10 7 70 10 10 100 750 118 1
80
Direct materials 750 Direct labor 118 Overhead 18
0
Total cost 1,048 Unit cost 10.48
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Material Requisition Form
Date Department Job Number
Material Requisition Number 678
April 8, 2004
Grinding
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Description Quantity
Cost/Unit Total Cost
Casing 100
3 300
Jim Lawson
Authorized Signature
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Job Time Ticket
45 Ann Wilson April 12, 2004

Job Time Ticket Number 68
Employee Number Name
Date
Start Time Stop Time Total Time Hourly Rate
Amount Job Number
800 1000 2 6 12 16 1000 1100 1 6 6 17 11
00 1200 1 6 6 16 100 600 5 6 30 16

Jim Lawson
Authorized Signature
Department Supervisor
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Accounting for Overhead
Actual overhead costs are never assigned directly
to jobs. Overhead is applied using a
predetermined overhead rate.
900,000
90,000 DLH
10 per direct labor hour
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All Signs Company
1 Materials Inventory 2 500 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
1. Direct materials costing 2,500 were
purchased on account.
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All Signs Company
2 Work in Process 1 500 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
2. Direct materials costing 1,500 were
requisitioned for use in production.
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All Signs Company
Job 101 Materials
Job 102 Materials
Req. No.
Amount
Req. No.
Amount
1 300 2 200 3 500 1,000
4 250 5 250 3 500
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All Signs Company
3 Work-in-Process Inventory 850 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
3. Direct labor costing 850 was recognized.
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All Signs Company
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All Signs Company
4 Work-in-Process Inventory 340 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
4. Overhead was applied to production at the rate
of 4 per direct labor hour. A total of 85
direct labor hours were worked.
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All Signs Company
5 Overhead Control 415 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
Lease Payable 200 00 Utilities Payable 50
00 Accumulated Depr.--Equipment 100 00 Wages
Payable 65 00
5. Actual overhead costs of 415 were incurred
lease, 200 utilities, 50 depreciation, 100
accrued wages, 65.
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All Signs Company
6 Finished Goods Inventory 1 840 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
6. Job 101, with a total cost of 1,840, are
completed and transferred to finished goods.
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Job Number 101 Date Ordered Jan. 1,
2004 Date Completed Jan. 2, 2004 Date Shipped
Jan. 15, 2004
All Signs Company
For Housing Development Item Description
Street Signs Quantity Completed 20
Materials Direct
Labor Overhead
Ticket Number
Requisition Number
Amount
Hours Rate Amount Hours Rate Amount
1 300 1 15 10 150 15 4 60 2 200 2 20 10
200 20 4 80 3 500 3 25 10 250 25 4 100 1,0
00 600 240
Direct materials 1,000 Direct labor 600 Overhead
240
Total cost 1,840 Unit cost 92
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All Signs Company
a. Cost of Goods Sold 1 840 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
b. Accounts Receivable 2 760 00
7. Sold Job 101 for 2,760.
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All Signs Company
8 Cost of Goods Sold 75 00
The receiving report and the invoice are used to
record the receipt of the merchandise and to
control the payment.
8. Underapplied overhead was closed to cost of
goods sold.
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All Signs Company Schedule of Cost of Goods
Manufactured For the Month Ended January 31, 2004
Direct materials Beginning direct materials
inventory 0 Purchases of direct
materials 2,500 Total direct materials
available for use 2,500 Ending direct
materials 1,000 Total direct materials
used 1,500 Direct labor 850 Manufacturing
Overhead Lease 200 Utilities 50 Depreciati
on 100 Indirect labor 65 415
Continued
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415 Less Underapplied overhead
75 Overhead applied 340 Current
manufacturing costs 2,690 Add Beginning work
in process 0 Total manufacturing
cost 2,690 Less Ending work in
process -1,050 Cost of goods manufactured 1,840

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All Signs Company Statement of Cost of Goods
Sold For the Month Ended January 31, 2004
Beginning finished goods inventory 0 Cost
of goods manufactured 1,840 Cost of goods
available for sale 1,840 Less Ending finished
goods inventory 0 Normal cost of goods
sold 1,840 Add Underapplied overhead
75 Adjusted cost of goods sold 1,915
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All Signs Company Income Statement For the Month
Ended January 31, 2004
Sales 2,760 Less Cost of goods sold
1,915 Gross margin 845 Less selling and
administrative expenses Selling
expenses 200 Administrative expenses 550
750 Operating income 95
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SINGLE VERSUS MULTIPLE OVERHEAD RATES
Department A Department B Total
Overhead costs 60,000 180,000 240,000 Direct
labor hours 15,000 5,000 20,000 Machine
hours 5,000 15,00 20,000
Department A is labor-intensive and Department B
is machine-intensive.
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SINGLE VERSUS MULTIPLE OVERHEAD RATES
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SINGLE VERSUS MULTIPLE OVERHEAD RATES
Department A Department B
Overhead cost 60,000 180,000 Cost driver 15,000
DLH 15,000 MHr Department overhead
rate 4/DLH 12/MHr Overhead applied to Job
23 2,000 --- Overhead applied to Job
24 --- 6,000
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End of
Chapter
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