Managerial Accountingfem.put.poznan.pl/poli-admin/didactics/8158374MA Lecture IV.pdf · Chapter 2 -...

© 2012 Flat World Knowledge

Managerial Accounting

© 2012 Flat World Knowledge 1


Chapter 2

How Is Job Costing Used to

Track Production Costs?

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Chapter 2 - Section 1

Distinguish between job costing and process costing.

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What is a job costing system and why is it used?

•A job costing system tracks revenues and costs for each unique job.

•Used to compare actual and budgeted revenues and costs.

•Used to assess profitability of each job.

•Used to track revenues and costs throughout production process.

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How is a process costing system different than a job

costing system?

•A process costing system tracks revenues and costs for companies producing

identical products in batches.

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What types of companies

use job costing and

process costing?

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Understand how direct materials and direct labor costs are assigned

to jobs.

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What are the product costs for a manufacturing company?

•Direct materials

•Direct labor

•Manufacturing overhead

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How do we account for the purchase of raw materials?

•Journal entry assuming Custom Furniture Company purchased $4,500 in raw

materials on May 2:

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How are raw materials requisitioned for production?

•Materials Requisition Form is used to track materials ordered for each job.

•The following form

is used at Custom

Furniture Company

to order materials

for job 50:

Materials Requisition

Form for Custom

Furniture Company

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How do we account for the transfer of raw materials to

production as direct materials?

•Journal entry assuming Custom Furniture Company transferred $370 in direct

materials out of raw materials inventory into production for job 50:

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What is a job cost sheet and how is it used?

•A job cost sheet tracks

manufacturing costs for

each job.

•Serves as the subsidiary

ledger for the WIP Inventory

account.

•Custom Furniture Company

job cost sheet for job 50

with direct materials:

12

*$370 comes from the total in Figure 2.2



How do we track direct labor hours used in production?

•Information is tracked

using a timesheet

for each employee.

•The following

timesheet is for

one employee at

Custom Furniture

Company:

13



How do we account for the use of direct labor in

production?

•Journal entry assuming Custom Furniture Company used $120 in direct labor

for job 50:

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What does the

updated job cost

sheet look like

for job 50?

Direct Labor Costs for

Custom Furniture Company’s Job 50

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*Direct labor information carried over from Figure 2.4



Understand how manufacturing overhead costs are assigned to jobs.

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What costs are included in manufacturing overhead?

•All costs related to production other than direct materials and direct labor.

•Examples:

– Factory rent

– Factory utilities

– Indirect labor (production supervisors)

– Indirect materials

– Factory equipment depreciation

– Factory maintenance

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How do we account for manufacturing overhead costs?

•Predetermined overhead rate is used to allocate manufacturing overhead to

jobs (this is called normal costing).

•Predetermined overhead rate typically uses direct labor hours, direct labor

costs, or machine hours as the allocation base.

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• Predetermined overhead rate is calculated as:

Estimated overhead costs / Estimated activity in allocation base

• Predetermined rate calculation for Custom Furniture Company:

= $4,140,000 estimated overhead costs / 38,000 estimated direct labor hours

= $30 per direct labor hour

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How is the predetermined overhead rate used to apply

manufacturing overhead costs to jobs?

•Journal entry assuming six direct labor hours were charged to job 50 using

the rate of $30 per direct labor hour:

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What does the

updated job

cost sheet look

like for job 50?

Overhead Applied for

Custom Furniture Company’s Job 50

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*$180 = $30 per direct labor hour × 6 direct labor hours.



What information flows through the Manufacturing

Overhead account?

•Actual overhead costs are recorded

as a debit to Manufacturing

Overhead.

•Overhead costs applied to jobs are

recorded as a credit to

Manufacturing Overhead.

•The Manufacturing Overhead

account is a clearing account.

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What do the terms overapplied and underapplied

overhead mean?

•Underapplied overhead: As shown in the manufacturing overhead account at

the end of the reporting period, actual overhead costs are higher than

overhead costs applied to jobs.

•Overapplied overhead: As shown in the manufacturing overhead account at

the end of the reporting period, actual overhead costs are lower than

overhead costs applied to jobs.

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How is the manufacturing overhead account closed at the

end of the period?

•Companies typically close the manufacturing overhead account to cost of

goods sold at the end of the period if the amount is not significant.

•If overhead is underapplied by $2,000, the journal entry to close the account

is:

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• If overhead is overapplied by $3,000, the journal entry to close the

account is:

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Apply job costing methods to service organizations.

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How does job costing

work in a service

company setting?

•Same as manufacturing except

service companies use fewer

materials and the account names

are slightly different.

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Use a job costing system to track costs and evaluate profitability for

each job.

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How is job costing

used to perform

job profitability

analysis at Custom

Furniture Company?

Job Cost Estimates Versus

Actual Results for Custom

Furniture Company

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a Product costs are from the job cost sheet, and the sales price is based on the original bid. b Based on 70 percent markup of estimated total production costs. For example, job 40’s sales price of $18,360 = $10,800 × 170 percent. c Equals gross profit divided by total production costs. Company target is 70 percent. d Rounded.

© 2012 Flat World Knowledge© 2012 Flat World Knowledge

Managerial Accounting

© 2012 Flat World Knowledge 30


Chapter 3

How Does an Organization Use Activity-Based

Costing to Allocate Overhead Costs?

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Understand why organizations allocate overhead costs to products.

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Why do managers insist on allocating overhead costs to

products?

•Job costs typically include direct materials, direct labor, and manufacturing

overhead.

•Indirect manufacturing costs (overhead) are not easily traced to products, so

these costs must be allocated to products.



What are the benefits of allocating overhead costs to

products?

•To provide information for decision making, such as establishing prices.

•To promote efficient use of resources.

•To comply with U.S. Generally Accepted Accounting Principles (GAAP) which

requires all manufacturing costs to be assigned to products for inventory

costing.

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Compare and contrast allocating overhead costs using a plantwide

rate, department rates, and activity-based costing.

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What are the three methods that can be used to allocate

overhead costs?

•Plantwide allocation.

•Department allocation.

•Activity-based allocation (called activity-based costing).

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How is the plantwide method used to allocate overhead

costs to products?

•One predetermined overhead rate is used for the entire company.

•Predetermined overhead rate calculation is (from chapter 2):

Estimated overhead costs / Estimated activity in allocation base

•Works well for companies with simple operations and a few similar products.

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• SailRite example of

plantwide predetermined

overhead rate:

Using One Plantwide Rate to Allocate SailRite Company’s Overhead

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How is the product cost per unit determined at SailRite

using the plantwide approach?

•Direct material and direct labor costs per unit are the same regardless of the

method used to allocate overhead. Both costs are given for this example.

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• Overhead cost per unit is calculated as direct labor hours per unit times

$32 overhead rate per direct labor hour.

*$1,280 = 40 direct labor hours per unit × $32 rate.

**$1,600 = 50 direct labor hours per unit × $32 rate.

40



How is the department method used to allocate overhead

costs to products?

•One predetermined overhead rate is used for each department.

•Predetermined overhead rate calculation for each department is:

Estimated department overhead costs / Estimated activity in allocation base

•Different allocation base can be used for each department.

•Works well for companies with simple operations within each department,

but with different activities across departments.

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• Notice in the SailRite example

below that each department

uses a different allocation base

(machine hours and direct labor

hours).

• The goal is to use the allocation

base that best drives overhead

costs for each department.

Using Department Rates to Allocate SailRite Company’s Overhead

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Understand how to use the five steps of activity-based costing to

determine product costs.

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How is the activity-based costing (ABC) used to allocate

overhead costs to products?

•ABC uses several cost pools, organized by activity, to allocate overhead costs.

•Examples of activities:

– Purchasing materials

– Setting up machines

– Assembling products

•Overhead costs are allocated to products based on each product’s use of the

activities.44



What are the five steps required to implement ABC?

•Step 1: Identify costly activities required to produce products.

– Goal is to understand all the activities required to make the company’s products.

– Must narrow down the activities to those that significantly impact overhead

costs.

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– SailRite identified the following activities:

• Purchasing materials

• Setting up machines

• Running machines

• Assembling products

• Inspecting finished products

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• Step 2: Assign overhead costs to activities identified in step 1.

– Requires identifying the overhead costs associated with each activity.

– SailRite identified the following costs:

*We should note that this is not the direct labor cost. Instead, this represents overhead costs

associated with assembling products, such as supplies and the factory space being used for assembly.

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• Step 3: Identify the cost driver for each activity.

– Cost driver is the action that causes (or drives) the costs associated with the

activity.

– Example: The cost of setting up machines is caused by the number of times

the machines must be set up. The more machine setups; the higher the cost.

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– SailRite established the following cost drivers for each activity:

• Purchasing materials: Number of purchase requisitions

• Setting up machines: Number of machine setups

• Running machines: Number of machine hours

• Assembling products: Number of direct labor hours

• Inspecting finished products: Number of inspection hours

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• Step 4: Calculate a predetermined overhead rate for each activity.

– Predetermined overhead calculation for each activity is:

Estimated activity overhead costs / Estimated activity in allocation base

– SailRite established the following predetermined overhead rates:

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• Step 5: Allocate overhead costs to products.

– Multiply the predetermined overhead rate for each activity by the level of cost

driver activity used by each product.

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– SailRite allocated overhead costs for each activity as follows (cost driver

activity levels were

given). Notice that

the per unit

overhead cost is

calculated at the

bottom.

*Overhead allocated equals the predetermined overhead rate times the cost driver activity.

**Overhead cost per unit for the Basic model equals $5,020,000 (overhead allocated) ÷5,000 units produced, and for the Deluxe model, it equals $2,980,000 ÷ 1,000 units

produced.

52



How is the product cost determined using ABC?

•The product cost calculation at SailRite is shown below.

•Notice that direct material and direct labor costs do not change when using

ABC.

SailRite Company

Product Costs Using

Activity-Based

Costing

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How do the product

costs per unit differ

when comparing ABC

with the plantwide

approach?

54



What are the advantages of using ABC?

•More accurate cost information leads to better decisions.

•Increased knowledge of production activities leads to process improvements

and reduced costs.

55



What are the disadvantages of using ABC?

•ABC systems can be costly to implement.

•Unitizing fixed costs can be misleading.

•The benefits may not outweigh the costs.

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How are overhead costs recorded when using ABC?

•We presented the flow of costs for a job costing system in chapter 2

assuming a plantwide approach was used.

•The cost flows are the same for an ABC system except several rates are used

to calculate overhead applied rather than just one plantwide rate.

•Once the overhead amount is calculated using several rates, the entry is the

same as the entry presented in chapter 2:

Dr. WIP inventory

Cr. Manufacturing overhead

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Recap of Three

Allocation

Methods

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