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Types of Product Costing Systems

2- 1. A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. Types of Product Costing Systems.

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Types of Product Costing Systems

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  1. 2-1 • A company produces many units of a single product. • One unit of product is indistinguishable from other units of product. • The identical nature of each unit of product enables assigning the same average cost per unit. Types of Product Costing Systems ProcessCosting Job-orderCosting

  2. 2-2 • Many different products are produced each period. • Products are manufactured to order. • The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Types of Product Costing Systems ProcessCosting Job-orderCosting

  3. 2-3 Comparing Process and Job-Order Costing

  4. 2-4 Job-Order Costing—An Overview Charge direct material and direct labor costs to each job as work is performed. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

  5. 2-5 Job-Order Costing—An Overview Manufacturing Overhead, including indirect materials and indirect labor, are allocated to jobs rather than directly traced to each job. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

  6. 2-6 Job Cost Sheet

  7. 2-7 Materials Requisition Form

  8. 2-8 Job Cost Sheet

  9. 2-9 Employee Time Ticket

  10. 2-10 Job Cost Sheet

  11. 2-11 Application of Manufacturing Overhead Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. • We use an allocation base because: • It is impossible or difficult to trace overhead costs to particular jobs. • Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary. • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

  12. 2-12 Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period Ideally, the allocation base is a cost driver that causes overhead. Application of Manufacturing Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

  13. 2-13 Application of Manufacturing Overhead Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner. Actual overhead for the period is notknown until sometime after the period has ended. Actual overhead costs can fluctuate seasonally, thus misleading decision makers. It simplifies record keeping. $

  14. 2-14 Overhead applied = POHR × Actual activity Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Actual amount of the allocation based upon the actual level of activity (this is called a normal costing system).

  15. 2-15 Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period $640,000 POHR = 160,000 direct labor hours (DLH) Application of Manufacturing Overhead POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.

  16. 2-16 Application of Manufacturing Overhead

  17. 2-17 Completing the Job Cost Sheet

  18. 2-18 Interpreting the Average Unit Cost The average 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 is something less than $118.

  19. 2-19 • Direct Materials • Direct Materials • Indirect Materials • Indirect Materials Summary of Cost Flows Raw Materials Work in Process(Job Cost Sheet) • Material Purchases Mfg. Overhead Actual Applied

  20. 2-20 Journal Entry – Material Purchases Raw material purchases are recorded in an inventory account.

  21. 2-21 Journal Entry – Material Usage Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and decrease Raw Materials.

  22. 2-22 • Direct Labor • IndirectLabor Summary of Cost Flows Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor Mfg. Overhead Actual Applied • Indirect Materials

  23. 2-23 Journal Entry – Labor Costs The cost of direct labor incurred increases Work in Process and thecost of indirect labor increases Manufacturing Overhead.

  24. 2-24 Summary of Cost Flows In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are debited to the Manufacturing Overhead account. Mfg. Overhead Actual Applied • Indirect Materials • IndirectLabor • OtherOverhead

  25. 2-25 Journal Entry – Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead accountas they are incurred.

  26. 2-26 Summary of Manufacturing Overhead Cost Flows Work in Process(Job Cost Sheet) Mfg. Overhead Actual Applied • Direct Materials • Indirect Materials • OverheadApplied to Work inProcess • Direct Labor • IndirectLabor • Overhead Applied • OtherOverhead If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

  27. 2-27 Journal Entry – Overhead Applied Work in Process is increasedwhen Manufacturing Overheadis applied to jobs.

  28. 2-28 Journal Entry – Accounting for Nonmanufacturing Costs Nonmanufacturing Cost Examples:1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

  29. 2-29 Summary of Goods Manufactured Cost Flows Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied

  30. 2-30 Journal Entry – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

  31. 2-31 • Cost ofGoodsSold • Cost ofGoodsSold Summary of Job-Order System Cost Flows Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied Cost of Goods Sold

  32. 2-32 Journal Entry – Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

  33. 2-33 Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. Underapplied overheadexists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less thanthe total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

  34. 2-34 Overhead Application Example PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

  35. 2-35 PearCo has overappliedoverhead for the yearby $30,000. What willPearCo do? Overhead Application Example PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

  36. 2-36 $30,000 $30,000 Disposition of Under- or Overapplied Overhead PearCo’sMfg. Overhead PearCo’s Costof Goods Sold Unadjusted Balance Actualoverhead costs $650,000 Overhead appliedto jobs $680,000 AdjustedBalance $30,000 overapplied

  37. 2-37 May be more complex but . . . May be more accurate because it reflects differences across departments. Multiple Predetermined Overhead Rates To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates.

  38. 2-38 Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies.

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