© 2002 Pearson Education Canada Inc. Slide 6-1

Job-CostingSystems

6

© 2002 Pearson Education Canada Inc. Slide 6-2

Product Costing

Job Order

Allocate costs to productsthat are readily identifiable

Common in construction,print shops, unique goods

Accumulate costs forspecific jobs

Produce for sale

Process Costing

Average costs over large number of nearly identical units

Common in chemical, textiles, lumber, glass, food processing

Accumulate costs by departments

Produce for inventory

© 2002 Pearson Education Canada Inc. Slide 6-3

Job-Order Costing

Job Cost Sheet

Job #963 12 units

Direct materials $460.00

Direct labour 267.50

Applied factory overhead 180.00

Total cost $907.50

Unit cost ($907.50 / 12 ) $75.625OverheadApplication

Rate

LabourTime

Ticket

Direct MaterialRequisition

Sheet

© 2002 Pearson Education Canada Inc. Slide 6-4

Job-Costing Cost Flows• Apply material, labour and overhead costs to work in process • As goods as produced costs flow to finished goods inventory • When sold, costs shift to cost of goods sold

DirectMaterial

Inventory

BuyMaterial

Work inProcess

Inventory

FinishedGoods

Inventory

Cost ofGoods Sold

Use

Material

Labour Costs

OverheadCosts

Production Sales

OverheadControl Account Over / under

applied overhead

(at year end)

© 2002 Pearson Education Canada Inc. Slide 6-5

Accounting for Factory Overhead Overhead Application (Overhead Absorption) • Allocation of overhead costs to products

Budgeted Factory Overhead Rate• Calculated at the beginning of the year and used to apply overhead

to products throughout the year

Six Steps in Applying Overhead

1. Select a cost driver for overhead2. Prepare a budget for yearly overhead costs and yearly volume of the

cost driver3. Calculate the budgeted factory overhead rate as

Overhead rate = budgeted total overhead / budgeted cost driver4. Obtain data on the actual cost driver5. Apply overhead to products 6. At year end, account for difference between actual overhead costs

and applied overhead costs

© 2002 Pearson Education Canada Inc. Slide 6-6

Over / Under Application of Overhead

Actual overhead• a mixed cost function with variable and fixed costs• Y = F + VX

Applied overhead• a variable cost function• Applied overhead = overhead rate x actual driver

• Overapplied: Applied > Actual • Underapplied: Applied < Actual • Dispose of over/under applied

overhead at year end

$

Volume

Applied Overhead

Actual Overhead

Volume

Volume

$

$

© 2002 Pearson Education Canada Inc. Slide 6-7

Fixed Manufacturing Overhead & Absorption Costing

• Firms use a overhead rate to smooth the application of overhead to work in process and determine "full" product costs

Budgeted overhead = Budgeted total factory overheadapplication rate Budgeted total of cost driver

• difference between actual and applied fixed overhead relates to:• spending more or less than expected• producing more or less than expected

ActualFixed

Overhead

BudgetedFixed

Overhead

Applied FixedOverhead

Rate x Actual Volume

Fixed Overhead Spending Variance Production-Volume Variance

Over / Under Applied Overhead

© 2002 Pearson Education Canada Inc. Slide 6-8

Budgeted and Applied Fixed Overhead

$

Volume

Budgeted Fixed Overhead

$

Volume

Applied Fixed Overhead

© 2002 Pearson Education Canada Inc. Slide 6-9

Production Volume Variance in Absorption Costing

• Change in net income due to not producing the amount of output expected when we determined the P.O.R. at the beginning of the year

Production = Actual - Expected x BudgetedVolume Variance volume volume overhead rate

$

Volume of activity

Applied Overhead

Actual Overhead

Budgeted Overhead

© 2002 Pearson Education Canada Inc. Slide 6-10

Dell’s Value Chain and ABC System

R & D

ProductDesign

Production

Marketing

Distribution

CustomerService

Indirect costs are

allocated to product

lines based on ABC

cost drivers

Individual Job

Direct material $xxx

Direct labour xxx

Applied overhead xxx

Total job cost xxx

Markup xxx

Job price $xxx

Otherindirect costs

+ profit

© 2002 Pearson Education Canada Inc. Slide 6-11

Example:

• September production resulted in the following activity in a key account of Colebury Costing Company (in thousands)

September 1 balance 12$ DM used 50$ DL charged to jobs 25$ Factory overhead applied to jobs 55$

Work in Progress Inventory

• Job Order 13N and 37Q, with total costs of $70 and $54 thousand, respectively were completed in September.

1. Journalize the completed production in September

2. Compute the balance in WIP inventory, Sept 30 after recording the completed production

3. Journalize the credit sale of Job 13N for $101,000

© 2002 Pearson Education Canada Inc. Slide 6-12

Suggested Problems

• Questions all even (page 264)• Problems 6, 8, 10, 14, 20 (page 266)

Assignment• Problems 13, 15, 17 (page 269 )