ACC 406 Chapter 5 - Lecture notes 5 PDF

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Accounting lecture note for Lior Yitzhaky....

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CHAPTER 5: JOB-ORDER COSTING Importance of Unit Costs to Firms - For manufacturing firms, unit costs are essential for - Valuing inventory - Determining income - Making important decisions - For service firms, unit costs are used to determine - Probability - Feasibility of introducing new services Job-Order vs. Process Costing

Production Costs in Job-Order Costing

Job-Order: Cost Accumulation System

Normal Costing and Estimating Overhead - In normal costing, overhead must be estimated and applied to output. - Three step-process: 1. Calculate the predetermined overhead rate. 2. Apply overhead to production. 3. Reconcile applied overhead with actual overhead and allocate difference to COGS, WIP, and finished goods ending inventories. Calculating and Applying Predetermined Overhead Rate Information: - At the beginning of the year, Argus Company estimated the following costs: - Overhead cost = $360,000 - Direct labour cost = $720,000 - Argus uses normal costing and applies overhead on the basis of direct labour cost. For the month of February, direct labour cost was $56,000. Required: 1. Calculate the predetermined overhead rate for the year. 2. Calculate the overhead applied to production in February. Formula: - Best estimate of manufacturing-related costs, such as factory-related costs, indirect materials, and indirect labour

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Both overhead and activity level are estimated because overhead rate must be calculated at the beginning of the year. 1. Predetermined overhead rate:

2. Overhead applied to production in February:

Reconciling Applied Overhead with Actual Overhead - Example: Proto Company had actual overhead of $400,000 for the year but had applied $390,000 to production

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This is called an overhead variance.

Information: - At the beginning of the year, Argus Company estimated the following: - Overhead cost = $360,000 - Direct labour cost = $720,000 - Overhead rate = 50% of direct labour cost - By the end of the year, actual data are: - Overhead cost = $375,400 - Direct labour cost = $750,000 - Argus uses normal costing and applies overhead on the basis of direct labour cost. - At the end of the year, the cost of goods sold (before adjusting for any overhead variance) is $632,000. Required: 1. Calculate the overhead variance for the year. 2. Dispose of the overhead variance by adjusting cost of goods sold.

Plantwide and Departmental Overhead

Information: - At the beginning of the year, Sorrel Company estimated the following:

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Sorrel has decided to use a plantwide overhead rate based on direct labour hours. Actual data for the month of June are as follows:

Required: 1. Calculate the predetermined plantwide overhead rate. 2. Calculate the overhead applied to production for the month of June. 3. Calculate the overhead variance for the month of June. Calculation: 1. Plantwide Overhead Rate:

2. Applying Overhead to Production:

3. Overapplied or Underapplied Overhead?

Information: - At the beginning of the year, Sorrel Company estimated:

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Sorrel uses departmental overhead rates. Actual data for the month of June are as follows:

Sorrel uses departmental overhead rates. - Machining department: Overhead is applied on the basis of machine hours. - Assembly department: Overhead is applied on the basis of direct labour hours. Calculating Predetermined Departmental Overhead Rate and Applying Overhead: 1. Calculate the predetermined overhead rates for the machining and assembly departments. 2. Calculate the overhead applied to production in each department for the month of June. 3. By how much has each department’s overhead been overapplied? Underapplied?

1. Overhead Rates:

2. Applying Overhead to Production:

3. Underapplied or Overapplied Overhead?

Unit Costs in the Job-Order System -

Unit cost is a sum of  irect Labour + Overhead - Direct Material + D Source Documents Used in Job-Order Costing - Job-Order Cost Sheet - Materials Requisition Form - Job Time Tickets Source Documents as Sources for Account Balance

Accounting for Materials and Direct Labour

Accounting for Actual Overhead Costs

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Actual overhead costs never enter the Work-in-Process account. Actual overhead costs are recorded as debits in the Manufacturing Overhead control account. At the end of the period, actual overhead is reconciled with applied overhead, and the variance is closed to the Cost of Goods Sold account. Accounting for Finished Goods - Costs of completed jobs are transferred from Work-in-Process to Finished Goods.

Accounting for Actual Overhead Costs - Once a job is sold, it is added to costs of goods sold and reported on the income statement.

Accounting for Cost of Goods Sold - When jobs are sold: - Finished goods inventory is decreased - Cost of goods sold is increased - The selling price is recognized by - Increasing (crediting) sales revenue - Increasing (debiting) accounts receivable (or cash) Preparing Brief Job-Order Cost Sheets Information: - At the beginning of June, Galway Company had two jobs in process:

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During June, two more jobs were started. The following direct materials and direct labour costs were added to the four jobs during the month of June:

Required: 1. Calculate the overhead rate based on direct labour cost. 2. Prepare a job-order cost sheet for the four jobs. - Show the balance as of June 1 as well as direct materials and direct labour added in June. - Apply overhead to the four jobs for the month of June, and show the ending balances. 3. Calculate the ending balances of Work-in-Process and Finished Goods as at June 30. 4. Calculate the Cost of Goods Sold for June. 1. Calculate Overhead Rate: - We were not given estimated overhead or estimated direct labour cost. So we will have to work backward to find the rate.

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We can compute the rate using the information from Job 78.

2. Job-Order Cost Sheets:

3. And 4. Computing Ending Balances: - By the end of June, Jobs 78, 79, and 80 have been transferred out of Work-in-Process. - Therefore, the ending balance in Work-in-Process consists only of Job 81. - Work-in-Process: - Only Job 81 was still in process at June 30. - Work-in-Process = $820

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Only job, Job 79, was sold during June. Cost of Goods Sold: - June 30 Balance = $7,310 Accounting for Nonmanufacturing Costs - Manufacturing costs are not the only costs incurred by a firm. - Selling and general administration are period costs. - Period costs are shown on the income statement. Job-Order Costing for Service Firms - A job-order costing system may be used for service firms as well.

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Architects, accountants, lawyers, tutors, physicians, and advertising agencies provide services to individual clients, students, or patients. In such cases, the client, student, or patient can be viewed as a job for which costs are

accumulated and reported. - Any materials or supplies used in rendering services are normally significant. - For that reason, materials and supply costs are included in the overhead cost. - Direct labour and overhead costs of rendering services to a client are accumulated in Work-in-Process account. Methods of Support Department Cost Allocation - There are three methods of assigning costs of multiple support departments: - Direct method - Sequential method - Reciprocal method Direct Method - The direct method assigns support department costs only to the producing departments. - It is the simplest and most straightforward way to assign costs. Assigning Support Department Costs by Using the Direct Method Information: Departmental data:

Required: - Using the direct method, assign the support department costs to the producing departments. - Calculate Usage or Allocation Ratios:

Sequential Method - The sequential method recognizes that interactions among support departments occur. - Cost allocation are performed in a step-down fashion, following a predetermined ranking procedure. - The sequence is defined by ranking the support departments in order of the amount of service rendered. - The sequential method does not fully account for all support departmental interaction. Information: Departmental data:

Required: - Using the sequential method, assign the support department costs to the producing departments. - Calculate Usage or Allocation Ratios:

Reciprocal Method - The reciprocal method recognizes all interactions among support departments. - Total cost reflects interaction among all of the support departments. - This method uses a system of simultaneous linear equations. - The reciprocal method is not widely used due to its complexity and limited value in providing more precise cost allocations. Information: - Baxter Company has two departments: human resources (HR) and custodial services (CS). It also has two producing departments: domestic sales and export sales. - The cost of the human resources department are allocated on the basis of the number of employees in each of the other departments. The costs of custodial services are allocated on the basis of floor area allocation. Baxter Company used the reciprocal method to allocate support department costs.

Required: 1. Develop a simultaneous equations system of total costs for the support departments. Solve for the total reciprocal costs of each support department (round reciprocated costs to the nearest dollar using four digits in the allocation ratios). 2. Using the reciprocal method, allocate the costs of human resources and custodial services to the producing departments (round to the nearest dollar). 3. What if the allocation ratios were rounded into six rather than four digits? How would that affect any rounding error in the allocation of costs? 1. Simultaneous Equations System:

2. Allocation ratios:

3. Allocation ratio precision: - Rounding the allocation ratios to six significant digits would produce a more precise allocation of costs and would reduce the rounding error. We can see that there is a $7 rounding error in human resources in Requirement 2. This is due to the rounding of the allocation ratios....