Description
Managerial Accounting Cost ConceptsPlease have one discussion post for each chapter and one reply post (a total of 3 posts for two chapters covered each week). Choose a question or a subject from the ‘Glossary’ or ‘Questions’ sections at the end of each chapter. Then, elaborate on that matter within one paragraph that will be two posts. Second, choose one of your classmates’ posts and respond to that post by adding a further explanation within one paragraph. its super easy. I added the slides for chapter 1 and 2Chapter 01 Narrated PowerPointsLinks to an external site.
Unformatted Attachment Preview
Chapter 1
Managerial Accounting and Cost
Concepts
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
April L. Mohr, MAcc, CPA
© 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of
McGraw-Hill Education.
1-1
Needs of Management
• Financial accounting is concerned with reporting
financial information to external parties, such as
stockholders, creditors, and regulators.
• Managerial accounting is concerned with providing
information to managers within an organization so that
they can formulate plans, control operations, and make
decisions.
© 2019 McGraw-Hill Education.
1-2
Purposes of Cost Classification
Assigning costs to cost objects.
2. Accounting for costs in manufacturing companies.
3. Preparing financial statements.
4. Predicting cost behavior in response to changes in
activity.
5. Making decisions.
1.
© 2019 McGraw-Hill Education.
1-3
Learning Objective 1
Understand cost
classifications used for
assigning costs to cost
objects: direct costs
and indirect costs.
© 2019 McGraw-Hill Education.
1-4
Assigning Costs to Cost Objects
Direct costs
• Costs that can be easily and conveniently traced to a unit of
product or other cost object.
• Examples: direct materials and direct labor.
Indirect costs
• Costs that cannot be easily and conveniently traced to a unit
of product or other cost object.
• Example: manufacturing overhead.
Common costs
• Indirect costs incurred to support a number of cost objects.
These costs cannot be traced to any individual cost object.
© 2019 McGraw-Hill Education.
1-5
Learning Objective 2
Identify and give
examples of each
of the three basic
manufacturing
cost categories.
© 2019 McGraw-Hill Education.
1-6
Classifications of Manufacturing
Costs
• Direct materials.
• Direct labor.
• Manufacturing overhead.
© 2019 McGraw-Hill Education.
1-7
Direct Materials
• Direct materials are raw materials that become an
integral part of the product and that can be
conveniently traced directly to it.
• Example: A radio installed in an automobile.
© 2019 McGraw-Hill Education.
1-8
Direct Labor
• Direct labor consists of labor costs that can be easily
traced to individual units of product.
• Example: Wages paid to automobile assembly workers.
© 2019 McGraw-Hill Education.
1-9
Manufacturing Overhead
Manufacturing overhead includes all manufacturing
costs except direct material and direct labor. These costs
cannot be readily traced to finished products.
• Includes indirect materials that cannot be easily or
conveniently traced to specific units of product.
• Includes indirect labor that cannot be easily or conveniently
traced to specific units of product.
© 2019 McGraw-Hill Education.
1-10
Manufacturing Overhead –
Examples
Examples of manufacturing overhead:
• Depreciation of manufacturing equipment.
• Utility costs.
• Property taxes.
• Insurance premiums incurred to operate a manufacturing
facility.
Only those indirect costs associated with operating the
factory are included in manufacturing overhead.
© 2019 McGraw-Hill Education.
1-11
Prime Costs and Conversion Costs
Manufacturing costs are often classified as
follows:
Prime cost
• Direct materials.
• Direct labor.
Conversion cost
• Direct labor.
• Manufacturing overhead.
© 2019 McGraw-Hill Education.
1-12
Nonmanufacturing Costs
Selling costs
• The costs incurred to secure customer orders and get the
finished product to the customer. Selling costs can be either
direct or indirect costs.
Administrative costs
• The costs associated with the general management of an
organization rather than with manufacturing or selling.
Administrative costs can be either direct or indirect costs.
© 2019 McGraw-Hill Education.
1-13
Learning Objective 3
Understand cost
classifications used to
prepare financial
statements: product
costs and period costs.
© 2019 McGraw-Hill Education.
1-14
Product Costs
• Product costs include all the costs involved in acquiring
or making a product.
• Product costs “attach” to a unit of product as it is
purchased or manufactured and they stay attached to
each unit of product as long as it remains in inventory
awaiting sale.
© 2019 McGraw-Hill Education.
1-15
Manufacturing Product Costs
For manufacturing companies, product costs include:
• Raw materials include any materials that go into the
final product.
• Work in process consists of units of product that are
only partially complete and will require further work
before they are ready for sale to the customer.
• Finished goods consist of completed units of product
that have not yet been sold to customers.
© 2019 McGraw-Hill Education.
1-16
Transfer of Product Costs
• When direct materials are used in production, their costs
are transferred from Raw Materials to Work in Process.
• Direct labor and manufacturing overhead costs are added
to Work in Process to convert direct materials into finished
goods.
• Once units of product are completed, their costs are
transferred from Work in Process to Finished Goods.
• When a manufacturer sells its finished goods to customers,
the costs are transferred from Finished Goods to Cost of
Goods Sold.
© 2019 McGraw-Hill Education.
1-17
Cost Classifications for Preparing
Financial Statements
1
Product costs include direct materials, direct labor, and
manufacturing overhead.
© 2019 McGraw-Hill Education.
1-18
Cost Classifications for Preparing
Financial Statements
2
Period costs include all selling costs and administrative
costs.
© 2019 McGraw-Hill Education.
1-19
Concept Check 1
Which of the following costs would be considered a period
rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
E. Sales commissions.
© 2019 McGraw-Hill Education.
1-20
Concept Check 1a
Which of the following costs would be considered a period
rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
E. Sales commissions.
Answer: B, E.
© 2019 McGraw-Hill Education.
1-21
Learning Objective 4
Understand cost
classifications used to
predict cost behavior:
variable costs, fixed
costs, and mixed costs.
© 2019 McGraw-Hill Education.
1-22
Cost Classifications for Predicting
Cost Behavior
Cost behavior refers to how a cost will react to changes in
the level of activity.
The most common classifications are:
• Variable costs.
• Fixed costs.
• Mixed costs.
© 2019 McGraw-Hill Education.
1-23
Variable Cost
• A variable cost varies, in total, in direct proportion to
changes in the level of activity.
• A variable cost per unit is constant.
© 2019 McGraw-Hill Education.
1-24
An Activity Base (Cost Driver)
An activity base is a measure of what causes the
incurrence of a variable cost.
• Units produced.
• Machine hours.
• Miles driven.
• Labor hours.
© 2019 McGraw-Hill Education.
1-25
Fixed Cost
• A fixed cost is a cost that remains constant, in total,
regardless of changes in the level of the activity.
• If expressed on a per unit basis, the average fixed cost
per unit varies inversely with changes in activity.
© 2019 McGraw-Hill Education.
1-26
Types of Fixed Costs
Committed
• Long term, cannot be significantly reduced in the short
term.
Discretionary
• May be altered in the short term by current managerial
decisions.
© 2019 McGraw-Hill Education.
1-27
The Linearity Assumption and the
Relevant Range
• The relevant range of activity pertains to fixed cost as
well as variable costs. For example, assume office space
is available at a rental rate of $30,000 per year in
increments of 1,000 square feet.
• Fixed costs would increase in a step fashion at a rate of
$30,000 for each additional 1,000 square feet.
© 2019 McGraw-Hill Education.
1-28
Relevant Range: Graphic
The relevant range of activity for a fixed cost is the range
of activity over which the graph of the cost is flat.
© 2019 McGraw-Hill Education.
1-29
Comparison of Cost Classifications for
Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost
In Total
Per Unit
Variable cost
Total variable cost increases and
Variable cost per unit
decreases in proportion to changes remains constant.
in the activity level.
Fixed cost
Total fixed cost is not affected by
changes in the activity level within
the relevant range.
© 2019 McGraw-Hill Education.
Fixed cost per unit
decreases as the activity
level rises and increases
as the activity level falls.
1-30
Concept Check 2
Which of the following costs would be variable with respect to
the number of ice cream cones sold at a Baskin & Robbins?
(There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
© 2019 McGraw-Hill Education.
1-31
Concept Check 2a
Which of the following costs would be variable with respect to
the number of ice cream cones sold at a Baskin & Robbins?
(There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Answer: C, D.
© 2019 McGraw-Hill Education.
1-32
Mixed Costs
1
A mixed cost contains both variable and fixed elements.
Consider the example of utility cost.
© 2019 McGraw-Hill Education.
1-33
Mixed Costs
2
The total mixed cost line can be expressed as an
equation: Y = a + bX
Where:
Y = The total mixed cost
a = The total fixed cost (the vertical intercept of
the line)
b = The variable cost per unit of activity (the
slope of the line)
X = The level of activity
© 2019 McGraw-Hill Education.
1-34
Mixed Costs – An Example
If your fixed monthly utility charge is $40, your variable
cost is $0.03 per kilowatt hour, and your monthly activity
level is 2,000 kilowatt hours, what is the amount of your
utility bill?
Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100
© 2019 McGraw-Hill Education.
1-35
Learning Objective 5
Understand cost
classifications used in
making decisions:
differential costs, sunk
costs, and opportunity
costs.
© 2019 McGraw-Hill Education.
1-36
Cost Classifications for
Decision Making
• Decisions involve choosing between alternatives. The
goal of making decisions is to identify those costs that
are either relevant or irrelevant to the decision.
• It is important to understand the terms differential cost
and revenue, sunk cost, and opportunity cost.
© 2019 McGraw-Hill Education.
1-37
Differential Costs
• Differential cost (or incremental cost) is the difference
in cost between any two alternatives.
• A difference in revenue between two alternatives is
called differential revenue.
• Both are always relevant to decisions.
• Differential costs can be either fixed or variable.
© 2019 McGraw-Hill Education.
1-38
Sunk Costs
• Sunk costs have already been incurred and cannot be
changed by any decision made now or in the future.
• These costs should be ignored when making decisions.
© 2019 McGraw-Hill Education.
1-39
Opportunity Cost
• Opportunity cost is the potential benefit that is given
up when one alternative is selected over another.
• These costs are not usually found in accounting records
but must be explicitly considered in every decision.
• For students: What is the opportunity cost you incur by
attending class?
© 2019 McGraw-Hill Education.
1-40
Concept Check 3
Suppose you are trying to decide whether to drive or take the
train to Portland to attend a concert. You have ample cash to
do either, but you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this decision? In other
words, should the cost of the train ticket affect the decision of
whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
© 2019 McGraw-Hill Education.
1-41
Concept Check 3a
Suppose you are trying to decide whether to drive or take the
train to Portland to attend a concert. You have ample cash to
do either, but you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this decision? In other
words, should the cost of the train ticket affect the decision of
whether you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Answer: A.
© 2019 McGraw-Hill Education.
1-42
Concept Check 4
Suppose you are trying to decide whether to drive or take the
train to Portland to attend a concert. You have ample cash to
do either, but you don’t want to waste money needlessly. Is
the annual cost of licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
© 2019 McGraw-Hill Education.
1-43
Concept Check 4a
Suppose you are trying to decide whether to drive or take the
train to Portland to attend a concert. You have ample cash to
do either, but you don’t want to waste money needlessly. Is
the annual cost of licensing your car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Answer: B.
© 2019 McGraw-Hill Education.
1-44
Concept Check 5
Suppose that your car could be sold now for $5,000. Is this a
sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
© 2019 McGraw-Hill Education.
1-45
Concept Check 5a
Suppose that your car could be sold now for $5,000. Is this a
sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Answer: B.
© 2019 McGraw-Hill Education.
1-46
Learning Objective 6
Prepare income
statements for a
merchandising company
using the traditional and
contribution formats.
© 2019 McGraw-Hill Education.
1-47
The Traditional and Contribution
Formats
Traditional format → Used primarily for external reporting
Contribution format → Used primarily by management
© 2019 McGraw-Hill Education.
1-48
Uses of the Contribution Format
The contribution format income statement is used as an
internal planning and decision-making tool. We will use this
approach for:
1. Cost-volume-profit analysis (Chapter 6).
2. Segmented reporting of profit data (Chapter 7).
3. Budgeting (Chapter 8).
4. Special decisions such as pricing and make-or-buy analysis
(Chapter 11).
© 2019 McGraw-Hill Education.
1-49
End of Chapter 1
© 2019 McGraw-Hill Education.
1-50
Chapter 2
Job-Order Costing:
Calculating Unit Product Costs
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
April L. Mohr, MAcc, CPA
© 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of
McGraw-Hill Education.
2-1
Job-Order Costing: An Overview
1
Job-order costing systems are used when:
1. Many different products are produced each period.
2. Products are manufactured to order. Many service
industries use job-order costing.
3. The unique nature of each order requires tracing and
allocating costs to each job, and maintaining cost
records for each job.
© 2019 McGraw-Hill Education.
2-2
Job-Order Costing: An Overview
2
Examples of companies that would use job-order costing
include:
1. Boeing (aircraft manufacturing).
2. Bechtel International (large scale construction).
3. Walt Disney Studios (movie production).
© 2019 McGraw-Hill Education.
2-3
Job-Order Costing – Cost Flow 1
Direct costs
• Direct materials.
• Job No. 1.
• Job No. 2.
• Job No. 3.
• Direct labor.
• Job No. 1.
• Job No. 2.
• Job No. 3.
Charge direct material and direct labor costs to each job
as work is performed.
© 2019 McGraw-Hill Education.
2-4
Job-Order Costing – Cost Flow 2
Direct costs
• Direct materials.
• Direct labor.
Indirect costs
• Manufacturing overhead.
• Job No. 1.
• Job No. 2.
• Job No. 3.
Manufacturing overhead, including indirect materials and
indirect labor, are allocated to all jobs rather than directly
traced to each job.
© 2019 McGraw-Hill Education.
2-5
The Job Cost Sheet
© 2019 McGraw-Hill Education.
2-6
Measuring Direct Materials Cost
1
Access the long description slide.
© 2019 McGraw-Hill Education.
2-7
Measuring Direct Materials Cost
© 2019 McGraw-Hill Education.
2
2-8
Measuring Direct Labor Costs
© 2019 McGraw-Hill Education.
2-9
Job-Order Cost Accounting
Access the long description slide.
© 2019 McGraw-Hill Education.
2-10
Learning Objective 1
Compute a
predetermined
overhead rate.
© 2019 McGraw-Hill Education.
2-11
Why Use an Allocation Base?
An allocation base, such as direct labor-hours, direct labordollars, or machine-hours, is used to assign manufacturing
overhead to individual jobs.
We use an allocation base because:
a. It is impossible or difficult to trace overhead costs to
particular jobs.
b. Manufacturing overhead consists of many different items
ranging from the grease used in machines to the
production manager’s salary.
c. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
© 2019 McGraw-Hill Education.
2-12
Manufacturing Overhead
Application
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
allocation base for the coming period
Ideally, the allocation base is a cost driver that causes
overhead.
© 2019 McGraw-Hill Education.
2-13
Recording Labor Cost: Journal Entry
Predetermined overhead rates that rely upon estimated
data are often used because:
1. Actual overhead for the period is not known until the
end of the period, thus inhibiting the ability to
estimate job costs during the period.
2. Actual overhead costs can fluctuate seasonally, thus
misleading decision makers.
© 2019 McGraw-Hill Education.
2-14
Computing Predetermined
Overhead Rates
1
The predetermined overhead rate is computed before the
period begins using a four-step process.
1. Estimate the total amount of the allocation base (the
denominator) that will be required for next period’s
estimated level of production.
2. Estimate the total fixed manufacturing overhead cost
for the coming period and the variable manufacturing
overhead cost per unit of the allocation base.
© 2019 McGraw-Hill Education.
2-15
Computing Predetermined
Overhead Rates
2
3.
Use the following equation to estimate the total amount of
manufacturing overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost per
unit of the allocation base
X = The estimated total amount of the allocation base
4.
Compute the predetermined overhead rate.
© 2019 McGraw-Hill Education.
2-16
Learning Objective 2
Apply overhead
cost to jobs using a
predetermined
overhead rate.
© 2019 McGraw-Hill Education.
2-17
Overhead Application Rate
1
PearCo estimates that it will require 160,000 direct laborhours to meet the coming period’s estimated production
level. In addition, the company estimates total fixed
manufacturing overhead at $200,000, and variable
manufacturing overhead costs of $2.75 per direct laborhour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000
direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000
© 2019 McGraw-Hill Education.
2-18
Overhead Application Rate
2
$640,000 estimated total manufacturing overhead
POHR =
160,000 estimated direct labor-hours (DLH)
POHR = $4.00 per direct labor-hour
© 2019 McGraw-Hill Education.
2-19
Recording Manufacturing Overhead
Access the long description slide.
© 2019 McGraw-Hill Education.
2-20
Learning Objective 3
Compute the total
cost and the unit
product cost of a
job using a
plantwide
predetermined
overhead rate.
© 2019 McGraw-Hill Education.
2-21
Calculating Total Cost of Job
© 2019 McGraw-Hill Education.
2-22
Calculating Unit Product Cost
© 2019 McGraw-Hill Education.
2-23
Concept Check 1
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.
© 2019 McGraw-Hill Education.
2-24
Concept Check 1a
1
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.
Answer: D.
© 2019 McGraw-Hill Education.
2-25
Concept Check 1a
2
Access the long description slide.
© 2019 McGraw-Hill Education.
2-26
Job-Order Costing – A Managerial
Perspective – Part 1
Inaccurately assigning manufacturing costs to jobs
adversely influences planning and decisions made by
managers.
1. Job-order costing systems can accurately trace direct
materials and direct labor costs to jobs.
2. Job-order costing systems often fail to accurately
allocate the manufacturing overhead costs used
during the production process to their respective jobs.
© 2019 McGraw-Hill Education.
2-27
Job-Order Costing – A Managerial
Perspective – Part 2
1
Choosing an Allocation Base
Job-order costing systems often use allocation bases that
do not reflect how jobs actually use overhead resources.
The allocation base in the predetermined overhead rate
must drive the overhead cost to improve job cost
accuracy. A cost driver is a factor that causes overhead
costs.
© 2019 McGraw-Hill Education.
2-28
Job-Order Costing – A Managerial
Perspective – Part 2
2
Many companies use a single predetermined plantwide
overhead rate to allocate all manufacturing overhead
costs to jobs based on their usage of direct labor-hours.
1. It is often overly-simplistic and incorrect to assume
that direct labor-hours is a company’s only
manufacturing overhead cost driver.
2. If more than one overhead cost driver can be
identified, job cost accuracy is improved by using
multiple predetermined overhead rates.
© 2019 McGraw-Hill Education.
2-29
Learning Objective 4
Compute the total
cost and the unit
product cost of a
job using multiple
predetermined
overhead rates.
© 2019 McGraw-Hill Education.
2-30
Information to Calculate Multiple
Predetermined Overhead Rates
1
Dickson Company has two production departments, Milling
and Assembly. The company uses a job-order costing system
and computes a predetermined overhead rate in each
production department. The predetermined overhead rate in
the Milling Department is based on machine-hours and in the
Assembly Department it is based on direct labor-hours. The
company uses cost-plus pricing (and a markup percentage of
75% of total manufacturing cost) to establish selling prices for
all of its jobs. At the beginning of the year, the company made
the following estimates:
© 2019 McGraw-Hill Education.
2-31
Information to Calculate Multiple
Predetermined Overhead Rates
2
Access the long description slide.
© 2019 McGraw-Hill Education.
2-32
Step 1 – Calculate the
Predetermined Overhead Cost for
Each Department
During the current month the company started and completed
Job 407. It wants to use its predetermined departmental
overhead cost and rate for the Milling and Assembly
Departments.
• Milling Department = $390,000 + ($2.00 per MH × 60,000
MHs) = $510,000.
• Assembly Department = $500,000 + ($3.75 per DLH ×
80,000 DLHs) = $800,000.
© 2019 McGraw-Hill Education.
2-33
Step 2 – Calculate the
Predetermined Overhead Rate for
Each Department
Use the amounts determined on the previous slide to
calculate the predetermined overhead rate (POHR) of
each department.
• Milling Department = $510,000 ÷ 60,000 MHs =
$8.50 per MH.
• Assembly Department = $800,000 ÷ 80,000 DLHs =
$10.00 per DLH.
© 2019 McGraw-Hill Education.
2-34
Step 3 – Calculate the Amount of Overhead
Applied from Both Departments to a Job
Use the P O R calculated on the previous slide to determine the
overhead applied from both departments to Job 407:
Milling Department = 90 MHs × $8.50 per MH = $765
Assembly Department = 20 DLHs × $10 per DLH = $200
Access the long description slide.
© 2019 McGraw-Hill Education.
2-35
Step 4 – Calculate the Total Job
Cost for Job 407
We can use the information given to calculate the
amount of the total cost of Job 407. Here is the
calculation:
Access the long description slide.
© 2019 McGraw-Hill Education.
2-36
Step 5 – Calculate the Selling Price
for Job 407
1
Here is the selling price of Job 407 assuming a 75%
markup:
© 2019 McGraw-Hill Education.
2-37
Step 5 – Calculate the Selling Price
for Job 407
2
• It is important to emphasize that using a departmental
approach to overhead application results in a different
selling price for Job 407 than would have been derived
using a plantwide overhead rate based on either direct
labor-hours or machine-hours.
• The appeal of using predetermined departmental
overhead rates is that they presumably provide a more
accurate accounting of the costs caused by jobs, which
in turn, should enhance management planning and
decision making.
© 2019 McGraw-Hill Education.
2-38
Multiple Predetermined Overhead
Rates—An Activity-Based
Approach
• When a company creates overhead rates based on the
activities that it performs, it is employing an approach
called activity-based costing.
• Activity-based costing is an alternative approach to
developing multiple predetermined overhead rates.
Managers use activity-based costing systems to more
accurately measure the demands that jobs, products,
customers, and other cost objects make on overhead
resources.
© 2019 McGraw-Hill Education.
2-39
Job-Order Costing for Financial
Statements to External Parties
The amount of overhead applied to all jobs during a
period will differ from the actual amount of overhead
costs incurred during the period.
1. When a company applies less overhead to production
than it actually incurs, it creates what is known as
underapplied overhead.
2. When it applies more overhead to production than it
actually incurs, it results in overapplied overhead.
© 2019 McGraw-Hill Education.
2-40
Financial Adjustment for
Overhead Applied
The cost of goods sold reported on a company’s income
statement must be adjusted to reflect underapplied or
overapplied overhead.
1. The adjustment for underapplied overhead increases
cost of goods sold and decreases net operating
income.
2. The adjustment for overapplied overhead decreases
cost of goods sold and increases net operating
income.
© 2019 McGraw-Hill Education.
2-41
Job Cost Sheets: A Subsidiary
Ledger
All of a company’s job cost sheets collectively form a
subsidiary ledger.
© 2019 McGraw-Hill Education.
2-42
Job Cost Sheets: Balance Sheet
Reporting
1
The job costs sheets provide an underlying set of
financial records that explain what specific jobs comprise
the amounts reported in Work-in-Process and Finished
Goods on the balance sheet.
© 2019 McGraw-Hill Education.
2-43
Job Cost Sheets: Balance Sheet
Reporting
2
© 2019 McGraw-Hill Education.
2-44
Job Cost Sheets: Income
Statement Reporting
1
The job costs sheets provide an underlying set of financial
records that explain what specific jobs comprise the
amounts reported in Cost of Goods Sold on the income
statement.
© 2019 McGraw-Hill Education.
2-45
Job Cost Sheets: Income
Statement Reporting
2
© 2019 McGraw-Hill Education.
2-46
Job-Order Costing in Service
Companies
• Although our attention has focused upon
manufacturing applications, it bears re-emphasizing
that job-order costing is also used in service industries.
• Job-order costing is used in many different types of
service companies such as law firms, accounting firms,
and medical treatment.
© 2019 McGraw-Hill Education.
2-47
Measuring Direct Materials Cost
Long Description
1
Requisition Number: X7-6890
Date: 3-4-17
Job Number: A-143
Department B3
Description, quantity, unit cost, and total cost of
materials is shown with the total cost equaling $116.
Authorized signature appears at the bottom of the
form.
Return to slide containing original image.
© 2019 McGraw-Hill Education.
2-48
Concept Check 1a Long
Description
2
POHR is $760,000 divided by 20,000 hours for $38
Direct materials are $200
Direct labor is $15 times 10 hours for $150
Manufacturing overhead is $38 times 10 hours for
$380
Total cost is $730
Return to slide containing original image.
© 2019 McGraw-Hill Education.
2-49
Information to Calculate Multiple Predetermined
Overhead Rates Long Description
2
Milling Department data:
Machine-hours, 60,000
Direct labor-hours, 8,000
Total fixed manufacturing overhead cost, $390,000
Variable manufacturing overhead per machine-hour, $2.00
Variable manufacturing overhead per direct labor-hour, not applicable
Assembly Department data:
Machine-hours, 3,000
Direct labor-hours, 80,000
Total fixed manufacturing overhead cost, $500,000
Variable manufacturing overhead per machine-hour, not applicable
Variable manufacturing overhead per direct labor-hour, $3.75
Return to slide containing original image.
© 2019 McGraw-Hill Education.
2-50
Step 3 – Calculate the Amount of Overhead
Applied from Both Departments to a Job
Milling Department data:
Machine-hours, 90
Direct labor-hours, 5
Direct materials, $800
Direct labor cost, $70
Assembly Department data:
Machine-hours, 4
Direct labor-hours, 20
Direct materials, $370
Direct labor cost, $280
Return to slide containing original image.
© 2019 McGraw-Hill Education.
2-51
Step 4 – Calculate the Total Job
Cost for Job 407
Direct materials are $800 for Milling and $370
Assembly, for a total of $1,170. Direct labor is $70
Milling, $280 Assembly, total of $350.
Manufacturing overhead applied is $765 Milling,
$200 Assembly, for total of $965. Adding these totals
gives us total cost of Job 407 of $2,485.
Return to slide containing original image.
© 2019 McGraw-Hill Education.
2-52
End of Chapter 2
© 2019 McGraw-Hill Education.
2-53
Purchase answer to see full
attachment
