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3-2
Learning Objective 1
Distinguish between Distinguish between process costing and process costing and
job-order costing and job-order costing and identify companies that identify companies that would use each costing would use each costing
method.method.
3-3
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from other One unit of product is indistinguishable from other
units of product.units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables
assigning the same average cost per unit.assigning the same average cost per unit.
A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from other One unit of product is indistinguishable from other
units of product.units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables
assigning the same average cost per unit.assigning the same average cost per unit.
3-4
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.
Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.
3-5
Comparing Process and Job-Order Costing
Job-Order Process
Number of jobs worked Many Single Product
Cost accumulated byIndividual
Job Department
Average cost computed by Job Department
3-6
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
3-7
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
3-8
Learning Objective 2
Identify the documents Identify the documents used in a job-order used in a job-order
costing system.costing system.
3-9
Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge Charge direct direct
material material and direct and direct
labor costs labor costs to each job to each job as work is as work is performed.performed.
Charge Charge direct direct
material material and direct and direct
labor costs labor costs to each job to each job as work is as work is performed.performed.
Job-Order Costing – An Overview
Direct MaterialsDirect Materials
Direct LaborDirect Labor
3-10
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Direct Manufacturing Costs
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
3-11
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
The Job Cost Sheet
3-12
Measuring Direct Materials Cost
PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-05Job No. A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
Authorized Signature
Will E. Delite
3-13
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Measuring Direct Materials Cost
3-14
Measuring Direct Labor Costs
PearCo Employee Time Ticket
Time Ticket No. 36 Date 3/5/2005
Employee I. M. Skilled Station 42
Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143
Totals 8.00 11.00$ 88.00$ A-143
Supervisor C. M. W o r k m a n
3-15
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Product Cost
3-16
Learning Objective 3
Compute predetermined Compute predetermined overhead rates and overhead rates and
explainexplain why estimated why estimated overhead costs (rather overhead costs (rather than actual overhead than actual overhead costs) are used in the costs) are used in the
costing process.costing process.
3-17
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct are in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead hours, is used to assign manufacturing overhead
to individual jobs.to individual jobs.
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct are in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead hours, is used to assign manufacturing overhead
to individual jobs.to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
3-18
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the
period begins.
Manufacturing Overhead Application
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes
overhead.
Ideally, the allocation base is a cost driver that causes
overhead.
3-19
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
The Need for a POHR
$
3-20
Actual amount of the allocation based upon the actual level of
activity.
Actual amount of the allocation based upon the actual level of
activity.
Based on estimates, and determined before
the period begins.
Based on estimates, and determined before
the period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
3-21
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
Overhead Application Rate
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
3-22
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed 3-5-05
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total CostUnit Product Cost
3-23
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed 3-5-05
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Product Cost 118$
3-24
Interpreting the Average Unit Cost
The average 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 somewhat less than $118.
The average 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 somewhat less than $118.
3-25
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.b. $350.c. $380.d. $730.
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.b. $350.c. $380.d. $730.
3-26
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.b. $350.c. $380.d. $730.
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.b. $350.c. $380.d. $730.
3-27
Learning Objective 4
Understand the flow of Understand the flow of costs in a job-order costs in a job-order costing system and costing system and prepare appropriate prepare appropriate journal entries to journal entries to
record costs.record costs.
3-28Job-Order Costing
Document Flow Summary
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A production A production order initiates order initiates work on a job.work on a job.
A production A production order initiates order initiates work on a job.work on a job.
3-29Job-Order Costing
Document Flow Summary
Job Cost Sheets
Job Cost Sheets
MaterialsRequisitionMaterials
Requisition
Manufacturing Overhead Account
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedMaterials usedmay be eithermay be either
direct ordirect orindirect.indirect.
Materials usedMaterials usedmay be eithermay be either
direct ordirect orindirect.indirect.
3-30Job-Order Costing
Document Flow Summary
Job Cost Sheets
Job Cost Sheets
Employee Time TicketEmployee
Time Ticket
Manufacturing Overhead Account
Manufacturing Overhead Account
An employee’stime may be eitherdirect or indirect.
An employee’stime may be eitherdirect or indirect.
Direct Labor
Indirect Labor
3-31Job-Order Costing
Document Flow Summary
Manufacturing Overhead Account
Manufacturing Overhead Account
OtherActual OHCharges
OtherActual OHCharges
Job Cost Sheets
Job Cost Sheets
AppliedOverhead
MaterialsRequisitionMaterials
Requisition
EmployeeTime TicketEmployee
Time Ticket
IndirectMaterial
IndirectLabor
3-32
Learning Objectives 4 & 7
Understand the flow of costs Understand the flow of costs in a job-order costing system in a job-order costing system
and prepare appropriate and prepare appropriate journal entries to record costs. journal entries to record costs.
Use T-accounts to show the Use T-accounts to show the flow of costs in a job-order flow of costs in a job-order
costing system.costing system.
3-33
Job-Order Costing: The Flow of Costs
The transactions (in T-account and journal
entry form) that capture the flow of costs in a
job-order costing system are illustrated
on the following slides.
3-34
Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
The Purchase and Issue of Raw Materials
3-35
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Raw Materials XXXXX Accounts Payable XXXXX
Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
3-36
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX
Cost Flows – Material Usage
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to
Manufacturing Overhead and also decrease Raw Materials.
3-37
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
The Recording of Labor Costs
3-38
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX
The Recording of Labor Costs
The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.
3-39
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Recording Actual Manufacturing Overhead
OtherOverhead
3-40
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Manufacturing Overhead XXXXX Accounts Payable XXXXX Property Taxes Payable XXXXX Prepaid Insurance XXXXX Accumulated Depreciation XXXXX
Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the
Manufacturing Overhead account as they are incurred.
3-41
Learning Objective 5
Apply overhead cost to Apply overhead cost to Work in Process using Work in Process using
a predetermined a predetermined overhead rate.overhead rate.
3-42
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Applying Manufacturing Overhead
OtherOverhead
Overhead Applied
OverheadApplied to
Work inProcess
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
3-43
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXX Manufacturing Overhead XXXXX
Applying Manufacturing Overhead
Work in Process is increased when Manufacturing Overhead is applied to jobs.
3-44
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to individual jobs; rather they are expensed in the period incurred.
Examples:Examples:
1. 1. Salary expense of employeesSalary expense of employeeswho work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
Examples:Examples:
1. 1. Salary expense of employeesSalary expense of employeeswho work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
3-45
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Salaries Expense XXXXX Salaries Payable XXXXX
Advertising Expense XXXXX Accounts Payable XXXXX
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
3-46
Learning Objective 6
Prepare schedules of Prepare schedules of cost of goods cost of goods
manufactured and cost manufactured and cost of goods sold.of goods sold.
3-47
Finished GoodsWork in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Transferring Completed Units
3-48
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX Work in Process XXXXX
Transferring Completed Units
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.
3-49
Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost ofGoodsSold
Cost ofGoodsSold
Transferring Units Sold
3-50
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX Sales XXXXX
Cost of Goods Sold XXXXX Finished Goods XXXXX
Transferring Units Sold
When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce
Finished Goods.
3-51
Learning Objective 8
Compute underapplied Compute underapplied or overapplied or overapplied
overhead cost and overhead cost and prepare the journal prepare the journal entry to close the entry to close the
balance in balance in Manufacturing Manufacturing
Overhead to the Overhead to the appropriate accounts.appropriate accounts.
3-52
Problems of Overhead Application
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a
period is referred to as either underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during
the period.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during
the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead rate is rate is greater thangreater than the the
total amount of overhead total amount of overhead actually incurred during actually incurred during
the period.the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead rate is rate is greater thangreater than the the
total amount of overhead total amount of overhead actually incurred during actually incurred during
the period.the period.
3-53
PearCo’sPearCo’s actual overheadactual overhead for the year wasfor the year was $650,000$650,000 with a total ofwith a total of 170,000170,000 direct labor hours worked on direct labor hours worked on
jobs.jobs.How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs
during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.overhead rate of $4.00 per direct labor hour.
PearCo’sPearCo’s actual overheadactual overhead for the year wasfor the year was $650,000$650,000 with a total ofwith a total of 170,000170,000 direct labor hours worked on direct labor hours worked on
jobs.jobs.How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs
during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.overhead rate of $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-54
PearCo’s PearCo’s actual overheadactual overhead for the year wasfor the year was $650,000$650,000 with a total ofwith a total of 170,000170,000 direct labor hours worked on direct labor hours worked on
jobs.jobs.
How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.overhead rate of $4.00 per direct labor hour.
PearCo’s PearCo’s actual overheadactual overhead for the year wasfor the year was $650,000$650,000 with a total ofwith a total of 170,000170,000 direct labor hours worked on direct labor hours worked on
jobs.jobs.
How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.overhead rate of $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
3-55
Disposition of Under- or Overapplied Overhead
$30,000 may be$30,000 may beclosed directly toclosed directly to
cost of goods sold. cost of goods sold.
Cost of Goods Sold
Cost of Goods Sold
PearCo’s MethodPearCo’s Method
Work inProcessWork inProcess
FinishedGoods
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
$30,000$30,000may be allocatedmay be allocatedto these accounts.to these accounts.
OROROROR
3-56
Disposition of Under- or Overapplied Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000
$30,000 overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
Overhead appliedto jobs
$680,000
3-57
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
3-58
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
3-59Allocating Under- or Overapplied Overhead Between
Accounts
Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
3-60Allocating Under- or Overapplied Overhead Between
Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
We would complete the following allocation of $30,000 overapplied overhead:
3-61Allocating Under- or Overapplied Overhead Between
Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Manufacturing Overhead 30,000 Work in Process Inventory 3,000 Finished Goods Inventory 9,000 Cost of Goods Sold 18,000
3-62Overapplied and Underapplied Manufacturing Overhead -
Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’s Method
3-63
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead predetermined overhead rate called a plantwide overhead
rate.rate.
To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead predetermined overhead rate called a plantwide overhead
rate.rate.
Large companies Large companies often use multiple often use multiple predetermined predetermined overhead rates.overhead rates.
Large companies Large companies often use multiple often use multiple predetermined predetermined overhead rates.overhead rates.
May be more complex May be more complex but . . .but . . .May be more complex May be more complex but . . .but . . .
May be more accurate because May be more accurate because it reflects differences across it reflects differences across
departments.departments.
May be more accurate because May be more accurate because it reflects differences across it reflects differences across
departments.departments.
3-64
Job-Order Costing in Service Companies
Job-order costing is used in many different types Job-order costing is used in many different types of service companies.of service companies.
Job-order costing is used in many different types Job-order costing is used in many different types of service companies.of service companies.
3-65
The Use of Information Technology
Technology plays an important part in many job-order Technology plays an important part in many job-order cost systems. When combined with Electronic Data cost systems. When combined with Electronic Data Interchange (EDI) or a web-based programming Interchange (EDI) or a web-based programming
language called Extensible Markup Language (XML), bar language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies coding eliminates the inefficiencies and inaccuracies
associated with manual clerical processes.associated with manual clerical processes.
Technology plays an important part in many job-order Technology plays an important part in many job-order cost systems. When combined with Electronic Data cost systems. When combined with Electronic Data Interchange (EDI) or a web-based programming Interchange (EDI) or a web-based programming
language called Extensible Markup Language (XML), bar language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies coding eliminates the inefficiencies and inaccuracies
associated with manual clerical processes.associated with manual clerical processes.