ACCT 2102 1nd Edition Lecture 4 Outline of Last Lecture II COGS for a Merchandising Company III COGS for a Manufacturing Company Outline of Current Lecture IV The Product Cost Systems V How to Handle Manufacturing Overhead A Before the Year Begins B During the Year C At the End of the Year Current Lecture The Product Cost Systems There are two types of product cost systems The job costing product system is the first This system has a customization environment This job involves products that a user can personalize Therefore the products normally differ in some way An example is a house builder This builder can customize each potential buyer s home with job costing The initial cost object is the job itself and the ultimate cost object is the price of one unit The next type is the process costing This type involves mass production and a lack of customization An example is a candy company Candy companies mass produce millions of identical pieces of candy The initial cost is the process as in the first step or first department to create the product The ultimate cost object is again the price of one unit How to Handle Manufacturing Overhead Before The Year Begins The first step in handling MOH Manufacturing Overhead is by setting a predetermined rate called the POHR This rate is used to allocate MOH to each job of the company In order to find the POHR you have to divide the budgeted allocation base by the budgeted MOH The budgeted MOH is given however the base is normally two options labor by hours or machine by hours The base depends on if the company is labor intensive LH or automated MH These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute During the Year To allocate the MOH throughout the year you multiply the POHR by the actual amount of the allocation based used by the cost object It is allocated whenever it can or is needed Once it the MOH is applied this affects the work in progress account with an increase At the End of the Year Once the year is over accountants have to compare the results of the pre thought MOH with the actual MOH If the applied MOH was greater than the actual MOH then we call this an over allocation If the applied was greater than the actual then we have an under allocation With an overallocated MOH work in process inventory will be too high therefore when closing the account we need to decrease the amount of cost of goods sold The opposite effect happens with underallocated MOH where an increase in COGS is needed during the closing period