ACCT 2020 1st Edition Lecture 6 Outline of Last Lecture I Rules Guidelines Exam Review II Margin of Safety III Cost structure and Profit Stability IV Structuring Sales Commissions V Compute Break even point sales mix Outline of Current Lecture I Job order Costing II Compute a Predetermined Overhead Rate III Materials cost IV Computing Job costs V Compute Under applied or Over applied Overhead Cost Current Lecture I Job order Costing Used when many different products are produced during a single period If you produce more than one product you need to allocate overhead onto different products If products are manufactured to order Requires the allocation of overhead Many companies need this type of allocation o Say you re a manufacturer of bicycles and a retailer wants to buy 150 bikes That s the job What is the total cost of this job 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 WE have direct material and direct labor which are easily allocated Manufacturing overhead which includes direct labor and materials but how do we allocate this Companies need to keep track of the cost of each job so they know how much they make money on the job should they continue are they making money is it beneficial o One example of this could be to fallout a job cost sheet in which the total is divided by the unit to get that per unit cost A materials requisition form that helps define a total cost of materials needed for this job employee time tickets are then directly traced to the job the final cost is manufacturing overhead that is tricky to be included in the cost of the product The part related to the production is always related to OVERHEAD II Compute a Predetermined Overhead Rate Whatever we think is driving overhead can be used as an allocation base The idea here is if we believe the overhead goes up with amount of hours worked than direct labor dollars will be the allocation base The predetermined overhead rate Estimated total manufacturing overhead Estimated total units of allocation base o This is all based on ESTIMATION There needs to be a predetermined overhead rate because if we waited till the actual then we would have to wait 12 months to recognize overhead This means we would lack the information to charge customers and pay employees properly o First find the allocation base and then estimate the manufacturing overhead and finally you are able to do the division ALWAYS REMEMBER EVERYTHING IS BASED ON ESTIMATES o Fixed estimated Overhead variable overhead x allocation base Allocation base Average cost per unit can be found by diving the totally job cost by the units produced Job has 200 direct materials 10 hours of labor at 15 hr estimated total overhead was 760 000 for the year with 20 000 direct labor hours What would the job cost be o 760 000 20 000 38 38 10 15 10 200 730 job cost III Materials cost Raw materials are any materials that go into the final product When raw materials are purchased you debut raw materials and credit cash or account payable Once you start using raw materials in production these materials are now a work in process which consists of units of production that are only partially complete and need further work to be sellable There is no expense involved just a transfer between inventory accounts Once completed they can be considered finished goods which are completed goods that are ready to be sold Cost of good manufactured includes the costs associated wit them goods that were finished during this period All of these changes are on the balance sheet not on the income statement until expenses are incurred IV Computing Job costs 3 types of manufacturing cost Direct Labor Direct Materials and Overhead o Example OH 18 hr DL 12 hr 200 TDM 120 TDL Direct labor cost is 120 12 10 direct labor hours Now we know we have 10 DLH so OH cost is 18x10 180 So 180 120 200 500 V Compute Under applied or Over applied Overhead Cost If you overhead are under applied then the overhead is less than your actual And vice versa for over applied overhead which is greater than the actual overhead costs o If actual overhead was 95 000 and applied overhead was 90 000 then the underapplied overhead is 5 000 Once you know if the Overhead is over or under applied you must record on the balance sheet If we do not record it then the cost of goods sold will be affected So we will need to change the cost of good sold