Chapter 3: Systems Design: Job-Order Costing Flashcards
The purpose of costing systems is to:
Accumulate and record the incurrence of costs and to assign the costs to the cost object
Examples of cost objects
Products, customers, divisions, and market territories
Every cost system must accomplish two things:
1) It should tell you which costs are traceable to the cost object, including how much has been incurred (These are direct costs)
2) For those costs that cannot be traced directly to a product or activity - such as the costs of using physical facilities, utility and power costs, shop supplies costs - the costing system or approach must tell you how to allocate those costs to the product or activity whose cost you are trying to compute (These are indirect costs)
Production
Refer to the production of tangible goods as well as the provision of services
Two types of production systems are common:
1) Job shops
2) Flow shops
The two types of costing systems that correspond to the job shop and the flow shop are the:
1) Job-ordering costing system
2) Process costing system
1) Job-ordering costing system
1) Job ordering costing system
A costing system used in situations where many different products, jobs, or services are produced each period.
2) Process costing system
A costing system used in those manufacturing situations where a single, homogeneous product (such as cement or flour) is produced for long periods.
Job shops typically make a large variety of products in small quantities known as __________
Batches (each order or batch is known as a job)
Flow shops produce a much smaller variety of products in large volumes,
using a standardized and fixed sequence of operations
Which shop kind produce to order?
Job shops produce to order (meaning they can do custom, one of a kind orders
Example: Small metal fabrication companies
MacGregor golf clubs
Bombardier
Which shop kind produce to stock?
Flow shops (and the products made by these systems are sold from inventory)
Examples: Any soft drink bottler, television and appliance makers, cement manufactures, flour mills, oil refiners
Concept of a batch is not meaningful, rather take the costs of production over a period and divide it by the volume of production to compute costs
What is the difference between an appliance maker and an oil refiner?
Oil refining is a continuous process, meaning the output is one continuous stream
You cannot distinguish between the first and last liter
Appliance production is a ______ process
Discrete, meaning it is possible to distinguish from the first unit from its last (discrete prcoess)
When management wishes to determine the profitability of a certain product, it must include both _____ and ____ costs when computing product costs
Variable and fixed
Absorption costing (full costing)
A costing method that includes all manufacturing costs—direct materials, direct labour, and both variable and fixed overhead—as part of the cost of a finished unit of product.
Variable costing
A costing method that includes only variable manufacturing costs—direct materials, direct labour, and variable overhead—as part of the finished unit of product. NO FIXED COSTS
The absorption costing approach is common to many businesses for 2 reasons:
1) External financial reporting and tax reporting requirements dictate the use of this approach
2) Many companies have found this approach useful for managerial accounting purposes
Actual costing system
A costing system in which actual overhead costs are applied to jobs by multiplying the actual overhead rate by the actual amount of the allocation base incurred by the job.
If managers allocate actual overhead costs to jobs they are said to use this method
Normal costing system
A costing system in which overhead costs are applied to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.
Guess what the rate is to know ahead of time
Materials requisition form
A detailed source document that specifies:
1) the type and quantity of materials that are to be drawn from the storeroom,
2) and identifies the job to which the costs of materials are to be charged.
Bill of materials
A document that shows the type and quantity of each major item of materials required to make a product
Determined initially from blueprints and engineering specifications and may undergo revisions as the work s carried out
Job cost sheet
A form prepared for each job that records the materials, labour, and overhead costs charged to the job.
Asides from charging costs to jobs, this form also serves a key part for the accounting records
Time sheet
A detailed source document used to record an employee’s activities during a day along with the time consumed for those activities.
Basically how they punch in and out
Three reasons why determining the amount of overhead to a specific job may be a difficult task
1) Overhead is an indirect cost, meaning that it is either impossible or difficult to trace to a particular product or job
2) Overhead consists of many different items, such as supplies (nails, screws, glue), maintenance, utilities, and the annual salary of the department manager
3) Even though output may fluctuate due to seasonal or other factors, overhead costs tend to remain relatively constant due to the presence of fixed costs
Allocation base
A measure of activity, such as direct labour-hours or machine-hours, that is used to assign costs to cost objects.
A universal measurement that can be used
Examples: Direct labor hours and machine hours
Predetermined overhead rate definition
A rate used to charge overhead cost to jobs in production; the rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period.
Predetermined overhead rate =
equation
Estimated total manufacturing overhead cost / Estimated total activity volume of the allocation base (actual activity)
Overhead application
The process of charging manufacturing overhead cost to job cost sheets and to the work-in-process account.
After you have calculated your predetermined rate you apply it and that is the name for this process
Overhead applied to a particular job =
(equation) - this is the vague version that does not have a specific base being measured
Predetermined overhead rate x Quantity of the allocation base consumed by the job
Overhead applied to a particular job =
equation) (THIS IS FOR WHEN THE BASE IS DIRECT LABOR HOURS (DLH
Predetermined overhead rate per DLH x Actual DLHs charged to the job
Examples: Estimating $18 an hour for a job that took 30 hours = 540
Cost Driver
A factor—such as machine-hours, beds occupied, computer time, or flight-hours—that causes overhead costs.
If the base does not drive overhead costs then the result will be inaccurate overhead rates and distorted product costs
The purchase and issue of Materials (accounts)
ex: XYZ company has $7000 in raw materials and decides to purchase $60,000 more of finger nails
Raw Materials 60,000
Accounts Payable 60,000
Issues of Direct and Indirect Materials (accounts)
Example: In April, $52,000 in raw materials were requisitioned from the storeroom for use in production
Work in Process 50,000
Manufacturing Overhead 2,000
Raw Materials 52000
Issue of direct materials only (accounts)
Work in process xxxx
Raw Materials xxxx
Labour costs (accounts)
Note: Labour charged to manufacturing overhead represent the indirect labour costs of the period, such as supervision, janitorial work, and maintenance
Work in process 60,000
Manufacturing overhead 15,000
Salaries and wages payable 75,000
Manufacturing overhead costs (accounts)
Remember that all costs of operating the factory, asides from direct materials and direct labour, are considered manufacturing overhead costs
This example specifically looks at $21,000 coming from utilities, $16,00 for rent on factory equipment, and $3,000 for miscellaneous factory costs which equal $40,000
Manufacturing Overhead 40,000
Accounts Payable 40,000
Manufacturing overhead costs for property taxes (accounts)
This assumes that Custom treasures recognizes $13,000 in accrued property taxes and $7,000 in prepaid insurance
Manufacturing Overhead 20,000
Property taxes payable 13,000
Prepaid insurance 7,000
Manufacturing overhead costs for depreciation (accounts)
This assumes the company recognized $18,000 in depreciation on factory equipment (amortization)
Manufacturing Overhead 18,000
Accumulated Depreciation 18,000
Manufacturing overhead to work in process (accounts)
Given 15,000 machine-hours were consumer, with a predetermined overhead rate of $6 (90,000)
Work in process 90,000
Manufacturing Overhead 90,000
Subtle but important points:
Actual overhead costs are not charged to jobs; actual overhead costs do not appear on the job cost sheet, nor do they appearing the work-in-process account. Only the applied overhead cost, based on the predetermined overhead rate, appears on the job cost sheets and i the work-in-process account
Cost of goods manufactured (COGM) (accounts)
Finished goods 158,000
Work in Process 158,000
Costs of goods sold (COGS) (accounts)
$158 per unit x 750 units sold = $118,500
Accounts receivable 225,000
Sales 225,000
Costs of goods sold 118,500
Finished goods 118,500
Underapplied overhead
A debit balance in the manufacturing overhead account that arises when the amount of overhead cost actually incurred is greater than the amount of overhead cost applied to work in process during a period.
You guessed too low of an amount before the real results became apparent
Overapplied overhead
A credit balance in the manufacturing overhead account that arises when the amount of overhead cost applied to work in process is greater than the amount of overhead cost actually incurred during a period.
You guessed too high of an amount before the real results became apparent
The difference between the applied and the actual amounts can have several causes:
The cause of under and overappliec overhead
1) The estimated and actual prices of the individual overhead items are different
2) The estimated and actual amounts of the allocation base are different
3) The allocation based used to apply overhead may not be representative of the various factors that potentially drive the different overhead cost items
4) The rate computed and used effectively treats overhead as a variable cost, whereas many individual overhead items may be fixed in nature
Two common methods exist for dealing with over or under applied overhead balance
1) Prorate the under or overapplied overhead to cost of goods sold and the two inventory accounts (finished goods and work in process) based on the amounts in these accounts at the end of year
2) A simpler method that only uses COGS and Manufacturing Overhead to close
Entry to close the underapplied account using method 1 (aka prorate the account to close the underapplied overhead)
AFFECTS BOTH BALANCE SHEET AND INCOME STATEMENT
Cost of goods sold 2,469
Finished goods inventory 1,031
work-in-process inventory 1,500
Manufacturing overhead 5,000
Entry to close the underapplied account using method 2 (simpler method) Close the underapplied overhead to cost of goods sold
ONLY AFFECTS INCOME STATMENT
Simpler method
Cost of goods sold 5,000
Manufacturing Overhead 5,000
Plantwide overhead rate
A single predetermined overhead rate used throughout a plant.
Multiple predetermined overhead rate
More accurate
A costing system in which there are multiple overhead cost pools with different predetermined rates for each cost pool, rather than a single predetermined overhead rate for the entire company. Frequently, each production department is treated as a separate overhead cost pool.
Marketing and selling costs should be treated as what?
Treated as period expenses and charged directly to the income statement
Nonmanufacturing costs should not go into where?
The manufacturing overhead account
Accounting salaries (accounts) Nonmanufacturing costs
Salaries expense 30,000
Salaries and wages payable 30,000
Depreciation on office equipment (accounts)
Nonmanufacturing costs
Depreciation Expense 7,000
accumulated Depreciation 7,000
Advertising and Selling and Administrative expenses (accounts)
Nonmanufacturing costs
Advertising Expense 42,000
Other selling and administrative expense 80,000
Accounts Payable 50,000
What statement will you find manufacture overhead
What type of account is manufacture overhead
Phantom Account Phantom statement (exam answer)
job definition
Each order batch is known as a job
Can bein service companies too, such as a movie by Columbia pictures is known as a job.
Regardless of the method of adjustment chosen, product cost are never
adjusted in a normal costing system in the reconciliation process
Why is predetermined overhead better than actual overhead?
1) Companies like to quote people ahead of time for the charges
2) Manager want to know the accounting valuation of completed jobs before the end of the accounting period
3) If actual costs are computed the may fluctuate on seasons and managers see no reason for these fluctuations and find them misleading
The cost of a completed job consists of
1) The actual materials cost of the job
2) the actual labour of the job
3) The overhead cost applied to the job
When products are transferred from work in process to finished goods, it results in a debit to finished goods and a credit to work in process
True - Manufacturing overhead account is credited when manufacturing overhead is applied to work in process
The predetermined overhead rate is calculated using the following formula:
estimated total manufacturing overhead cost divided by estimated total units
Suppose a total of $30,000 of overhead is applied to jobs. What account will be debited?
Work in Process $30,000
Last year, a company reported estimated overhead, $100,000; actual overhead, $90,000; and applied overhead, $92,000. The company’s overhead cost for the year would be:
overapplied, $2,000
To calculate costs of goods sold on bullshit exam question
Opening finished goods + COGM (add direct materials + Direct labour + Applied overhead + beginning work in process - ending work in process) - Ending finished goods = COGS
Non-manufacturing costs are shown in the income statement below the gross margin line.
True
