acct 2302 fundamentals of accounting ii spring 2011 lecture 4 professor jeff yu
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ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 4
Professor Jeff Yu
Review: Manufacturing Cost Flows
Raw Material Purchases
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
ManufacturingOverhead
Goods Sold
How to show product cost flows using T-accounts?
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
Job-order costing vs. Process costing
ProcessCosting
Job-order
Costing A firm mass-produces many units of a single product.
Continuous flow of virtually identical units over a long period.
Costs may not be directly traceable to each unit.
Instead, costs are accumulated by department to get the same average cost for each unit.
Examples: Coca-Cola, Exxon, General Mills, Kellogg
Job-order costing vs. Process costing
ProcessCosting
Job-order
Costing A firm produces many different products each period.
Products are built to order rather than mass produced.
The unique nature of each order requires tracing and allocating costs to each job and maintain cost records for each job.
Examples: Boeing, Walter Disney, Levi Strauss, Hallmark
construction firms, hospitals, law firms, advertising agencies, accounting firms, repair shops
Job-Order Process
Number of jobs worked Many Single Product
Cost accumulated byIndividual
Job Department
Average cost computed by Job Department
Job-order costing vs. Process costing
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.
Product Cost Flow in Job-order Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
Applied MOH
Applied MOH
Costs are traced andapplied to individualjobs in a job-order
cost system.
Costs are traced andapplied to individualjobs in a job-order
cost system.Direct MaterialsDirect
Materials
Work-in-Process (JOB)
THE JOB
Directmaterials
Direct labor
Traced directly to each job
Traced directly
to each job
Manufacturing Overhead
Job-order costing: cost allocation
Applied to eachjob using a
predeterminedoverhead rate
Estimated total MOH cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined at the beginning of the period.
Predetermined Overhead Rate
The allocation base is typically a cost driver that causes MOH,
e.g. DL hours, or machine hours.
The allocation base is typically a cost driver that causes MOH,
e.g. DL hours, or machine hours.
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.
The Need for a POHR
$
Actual Activity: Actual amount of the allocation base,
such as direct labor hours (DLH) or machine hours (MH) incurred
during the period
OverheadApplied
POHR * ActualActivity
=
Applying Manufacturing Overhead
For each direct labor hour worked on a particular job,
$4.00 of MOH will be applied to that job.
Example: POHR
POHR = $4.00 per DL hour
$640,000
160,000POHR =
Estimated total MOH for the coming period = $640,000
Estimated total DL hours for the coming period = 160,000
Example: applying MOH
Job-Order Cost Accounting
Interpreting the Average Unit Product Cost
The average product unit cost should not be interpretedas the costs that would actually be incurred if an
additional 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)
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?
Manufacturing Overhead Work in Process
Indirect Material
Direct MaterialApplied
Overhead
If actual and applied MOH are not equal, a year-end adjustment is required. Financial statements need to
be properly stated at year end.
Indirect LaborDirect Labor
Applied OverheadOther MOH
Actual Applied
Job-Order Costing: T-accounts
Cost of Goods
Manufactured
Beg. Bal.
End. Bal.
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.
1)What is DFW Products’ POHR for the year?
2)Determine the amount of MOH applied to jobs during the year.
3)What are the journal entries needed to apply MOH to jobs?
4)Is MOH for the year overapplied or underapplied? By how much?
5)What if the actual total MOH is $530,000?
Example: Job-order costing
Adjustment Method: Close to Cost of Goods Sold
MOH
Actual
Cost of Goods Sold
Unadjusted Balance
AdjustedBalance
Applied
Q: what journal entry will lead to a zero ending balance for MOH T-account?
Summary: MOH Application in job-order costing
POHR = Estimated total MOH cost / Estimated total activity level
Applied MOH = POHR * Actual activity level
Actual MOH - Applied MOH
At the beginning of the period, calculate:
During the period, calculate:
At the end of the period, calculate:
to determine whether MOH was underapplied or overapplied and do an adjustment entry to close to Cost of Goods Sold.
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?
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.
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?
Homework Problem 1
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:
Homework Problem 2
Actual direct-labor hours 50,000Actual machine hours 70,000Direct labor cost $80,000 Indirect materials $20,000Other MOH $400,000Indirect 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?
01/01/08 12/31/08Raw materials inventory $ 8 7Work-in-progress inventory 6 7.5Finished goods inventory 15 21.5Purchases of raw materials 32Indirect material cost 24Direct labor cost 40Indirect labor cost 10Sales commissions 15Total machine hours used 10Other manufacturing overhead cost 14
All above data are in thousands. POHR of $5 per machine-hour was used:1) Determine cost of goods manufactured for 2008;2) Compute the amount of underapplied or overapplied MOH for 20083) Determine cost of goods sold after the year-end adjustment entry.
Homework Problem 3
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