ACCT 2302

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• ACCT 2302
• Fundamentals of Accounting II
• Spring 2011
• Lecture 4
• Professor Jeff Yu

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Review Manufacturing Cost Flows
Balance
Sheet Costs
Inventories
Income StatementExpenses
Raw Material Purchases
Direct Labor
ManufacturingOverhead
Goods Sold
How to show product cost flows using T-accounts?
3
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

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Job-order costing vs. Process costing
ProcessCosting
Job-orderCosting
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Job-order costing vs. Process costing
ProcessCosting
Job-orderCosting
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Job-order costing vs. Process costing
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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.

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Product Cost Flow in Job-order Costing
Costs are traced andapplied to individualjobs
in a job-ordercost system.
Direct Materials
Work-in-Process (JOB)
FinishedGoods
Direct Labor
Applied MOH
Cost of GoodsSold
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Job-order costing cost allocation
Directmaterials
Manufacturing Overhead
Traced directly to each job
THE JOB
Applied to eachjob using apredeterminedoverhead
rate
Traced directly to each job
Direct labor
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Predetermined Overhead Rate

• The predetermined overhead rate (POHR) used to
  apply overhead to jobs is determined at the
  beginning of the period.

The allocation base is typically a cost driver
that causes MOH, e.g. DL hours, or machine hours.
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The Need for a POHR

• Using a predetermined rate makes itpossible to
  estimate total job costs sooner.
• Actual manufacturing overhead costs for the
  period is not known until the end of the period.

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Applying Manufacturing Overhead
Overhead Applied
Actual Activity

POHR

Actual Activity Actual amount of the allocation
base, such as direct labor hours (DLH) or
machine hours (MH) incurred during the period
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Example POHR
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.
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Example applying MOH
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Job-Order Cost Accounting
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Interpreting the Average Unit Product Cost
The average product unit cost should not be
interpreted as the costs that would actually be
incurred if anadditional unit were
produced.Fixed overhead would not change if
another unitwere produced, so the incremental
cost of another unit may be less than 118.
(Recall Fixed cost per unit is decreasing as
activity level increases)
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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?

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Job-Order Costing T-accounts
Manufacturing Overhead
Work in Process
Beg. Bal.
Actual
Applied
Cost of Goods Manufactured
Direct Material
Applied Overhead
Indirect Material
Direct Labor
Indirect Labor
Applied Overhead
Other MOH
End. Bal.
If actual and applied MOH are not equal, a
year-end adjustment is required. Financial
statements need to be properly stated at year end.
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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.
• What is DFW Products POHR for the year?
• Determine the amount of MOH applied to jobs
  during the year.
• What are the journal entries needed to apply MOH
  to jobs?
• Is MOH for the year overapplied or underapplied?
  By how much?
• What if the actual total MOH is 530,000?

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Adjustment Method Close to Cost of Goods Sold
MOH
Cost of Goods Sold
Unadjusted Balance
Actual
Applied
AdjustedBalance
Q what journal entry will lead to a zero ending
balance for MOH T-account?
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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.
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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?

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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.

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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?
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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 50,000
Actual machine hours 70,000
Direct labor cost 80,000
Indirect materials 20,000
Other MOH 400,000
Indirect labor cost 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?
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Homework Problem 3

• 
  01/01/08 12/31/08
• Raw materials inventory
  8 7
• Work-in-progress inventory
  6 7.5
• Finished goods inventory 15 21.5
• Purchases of raw materials
  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
• Determine cost of goods manufactured for 2008
• Compute the amount of underapplied or overapplied
  MOH for 2008
• Determine cost of goods sold after the year-end
  adjustment entry.