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Job Order Cost Systems

and Overhead Allocations


Chapter 17

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights


Cost Accounting Systems
Determining unit Planning and
manufacturing control
costs functions

Cost accounting systems provide information


supporting decisions making the business successful

Assessing the Providing


efficiency and products or
effectiveness services to
of operations customers
17-2
Cost Accounting Systems
Evaluate and Disclose
reward inventories
employee and cost of
performance goods sold

Cost accounting systems are the procedures


and techniques used by management

Track resources
Manage activities
consumed by
that consume
products and
resources
services
17-3
Job Order Costing
 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.

 Typical job order cost


applications:
 Special-order printing
 Building construction
 Also used in service industry
 Hospitals
 Law firms
17-4
Job Order Cost Systems
and the Creation of Goods
and Services Manufacturing
overhead (OH)
Applied to each
Direct Tr job using a
ace
materials d di predetermined
to e rect
ach ly rate (POHR)
jo b

THE JOB
c t l y
d i re
c e d b
Tr a j o
Direct e ach
to
labor
17-5
Job Order Cost Systems
and the Creation of Goods
and ServicesCharge direct material and
direct labor costs to each
job as work is performed.
Direct
DirectMaterials
Materials
Job
Job No.
No. 11

Direct
DirectLabor
Labor Job
Job No.
No. 22

Manufacturing
Manufacturing Job
Job No.
No. 33
Overhead
Overhead
Apply overhead to each job
using a predetermined rate.
17-6
Overhead Application
Rates
The predetermined overhead rate
(POHR) used to apply overhead to
jobs is determined before the period
begins.
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
activity base for the coming period

Ideally, the activity base is a cost


driver that causes overhead.

17-7
Overhead Application
Rates

Based on estimates,
and determined before
the period begins.

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.

17-8
Flow of Costs in Job
Costing
Direct Job Cost
A materials Material Job Cost
Job Cost
Sheets
Job Cost
requisition Sheets
Sheets
indicates the Sheets
cost of direct Materials
Material
Requisitioin
material Materials
Requisitioin
to charge to Materials
Requisitioni
jobs Requisition
and the cost of Manufacturing
indirect material Overhead
to charge to Indirect Account
overhead. Material

17-9
Flow of Costs in Job
Costing
Direct Job Cost
Employee time Labor Job Cost
Job Cost
Sheets
tickets indicate Job Cost
Sheets
Sheets
the cost of Sheets
direct labor Employee Time
Employee Time
Ticket
to charge to Employee Time
Ticket
Employee Time
jobs Ticket
and the cost Ticket
of indirect Manufacturing
labor to charge Overhead
to overhead. Indirect Account
Labor

17-10
Flow of Costs in Job
Costing
Employee Indirect
Time Labor
Ticket

Overhead
Other Manufacturing
Applied Job Cost
Actual OH Overhead
with Sheets
Charges Account
POHR

Materials Indirect
Requisition Material

17-11
Over- or Under applied
Overhead

If Manufacturing Effect of Closing to


Overhead 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)

17-12
Activity-Based Costing
(ABC) Activity-Based Costing

Departmental
Overhead Rates i ty
l ex
p
o m
C f
Plantwide l o
v e
Overhead Rate Le
Overhead Allocation

A In the ABC method, we recognize


that many activities within a
B C department drive overhead costs.
17-13
The Benefits of ABC
 More 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 compared


to costs of implementation.
A
B C 17-14
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.

17-15
Activity-Based Costing
Procedures
 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:
Estimated overhead costs in activity cost pool
Rate =
Estimated number of activity units
 Assign costs to products:
Overhead Actual
×
Rate Activity

17-16
End of Chapter 17

17-17

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