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McGraw-Hill/Irwin

Job Order Cost Systems Job Order Cost Systems and Overhead Allocationsand Overhead Allocations

Chapter 17

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Planning andcontrol

functions

Providingproducts or services tocustomers

Assessing theefficiency andeffectivenessof operations

Determining unitmanufacturing

costs

Cost accounting systems provide information supporting decisions making the business successful

Cost Accounting SystemsCost Accounting Systems

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Discloseinventoriesand cost ofgoods sold

Track resourcesconsumed byproducts and

services

Manage activitiesthat consume

resources

Evaluate andreward

employeeperformance

Cost Accounting SystemsCost Accounting Systems

Cost accounting systems are the proceduresand techniques used by management

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Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.

Job Order CostingJob Order Costing

Typical job order cost applications:

Special-order printing Building construction

Also used in service industry Hospitals Law firms

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THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services Manufacturing

overhead (OH)

Applied to eachjob using a

predeterminedrate (POHR)

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Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct material and direct labor costs to each job as work is performed.

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Apply overhead to each job using a predetermined rate.

Job Order Cost Systems Job Order Cost Systems and the Creation of Goods and the Creation of Goods and Servicesand Services

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Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theactivity base for the coming period

POHR =

The predetermined overhead rate (POHR) used to apply overhead to

jobs is determined before the period begins.

Ideally, the activity base is a cost driver that causes overhead.

Overhead Application Overhead Application RatesRates

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Overhead applied = POHR × Actual activity

Actual amount of the cost driver such as units produced, direct labor hours, or machine hours

incurred during the period.

Based on estimates, and determined before

the period begins.

Overhead Application Overhead Application RatesRates

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A materials requisition

indicates the cost of direct

materialto charge to

jobsand the cost of

indirect material to charge to

overhead.

Flow of Costs in Job Flow of Costs in Job CostingCosting

Job Cost Sheets

Manufacturing Overhead Account

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Direct Material

Indirect Material

MaterialsRequisitioinMaterial

RequisitioinMaterialsRequisitioniMaterials

Requisition

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Employee time tickets indicate

the cost of direct laborto charge to

jobsand the cost of indirect

labor to charge to overhead.

Job Cost Sheets

Manufacturing Overhead Account

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Direct Labor

Indirect Labor

Employee Time TicketEmployee Time

TicketEmployee Time TicketEmployee Time

Ticket

Flow of Costs in Job Flow of Costs in Job CostingCosting

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EmployeeTime

Ticket

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

OverheadApplied

withPOHR

Manufacturing Overhead Account

Job Cost Sheets

Flow of Costs in Job Flow of Costs in Job CostingCosting

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If Manufacturing Effect of Closing toOverhead is . . . Cost of Goods Sold

UNDERAPPLIED INCREASE(Applied OH is less Cost of Goods Sold

than actual OH)

OVERAPPLIED DECREASE(Applied OH is greater Cost of Goods Sold

than actual OH)

Over- or Under applied Over- or Under applied OverheadOverhead

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Level of C

omplexity

Overhead Allocation

Plantwide Overhead Rate

DepartmentalOverhead Rates

Activity-Based Costing

Activity-Based Costing Activity-Based Costing (ABC)(ABC)

ACB

In the ABC method, we recognize that many activities within a

department drive overhead costs.

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The Benefits of ABCThe Benefits of ABCMore detailed measures of costs.Better understanding of activities.More accurate product costs for . . .

Pricing decisions.Product elimination decisions.Managing activities that cause costs.

Benefits should always be comparedto costs of implementation.

ACB

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Identifying Cost Drivers Identifying Cost Drivers Most cost drivers are related to either

volume or complexity of production.Examples: machine time, machine setups,

purchase orders, production orders.

Three factors are considered in choosing a cost driver: Causal relationship. Benefits received.Reasonableness.

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Overhead Actual Rate Activity

×

Activity-Based Costing Activity-Based Costing ProceduresProcedures

Identify activities that consume resources. Assign costs to a cost pool for each

activity. Identify cost drivers associated with each

activity. Compute overhead rate for each cost pool:

Assign costs to products:

Rate = Estimated overhead costs in activity cost pool

Estimated number of activity units

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End of Chapter 17End of Chapter 17