ACCT 2020 1nd Edition Exam 2 Study Guide Chapters 4 6 Chapter 4 Job Order Costing Absorption Job order Costing o Absorption costing is used when many different products are produced during a single period If a company produces more than one product they will need to allocate overhead onto different products 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 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 They need to know is the product beneficial o DM DL VARI MANUFACTURING OVERHEAD FIXED MFCT OH o Examples 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 Compute a Predetermined Overhead Rate o 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 say the amount of hours worked then direct labor hours will be the allocation base 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 o The predetermined overhead rate Estimated total manufacturing overhead Estimated total units of allocation base o Total Job Cost Fixed estimated Overhead variable overhead x allocation base Allocation base 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 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 is the job cost o 760 000 20 000 38 38 10 15 10 200 730 job cost Example of Multiple Predetermined Overhead Rates o Milling Fixed OH 390 000 variable 2 machine hour x 60 000 mhr 120 000 Total Estimated OH 390 000 120 000 510 000 POHR 510 000 8 50 mhr 60 000 mhr o Assembly Fixed OH 500 000 variable 3 75 Direct labor x 80 000 DL 300 000 Total Estimated OH 500 000 300 000 800 000 POHR 800 000 10 DL 80 000 DL o Now apply to Job 407 DM for milling assembly are 800 370 Total DM 1170 DL for milling assembly are 45 160 Total DM 205 OH for milling assembly are 90 x 8 50 20 x 10 Total OH 865 TOTAL JOB COST OF 2 340 Understanding Raw Materials in T Charts o When raw materials are purchased you debut raw materials and credit cash or account payable o 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 o Once completed they can be considered finished goods which are completed goods that are ready to be sold o 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 WIP 30 000 30 000 20 000 x 72 000 200 000 COGS 158 000 72 000 Finished Goods 158 000 158 000 1000units 158 unit 250 units x 158 39 500 0 158 000 x 39 500 x 158 000 39 500 COGS 118 500 SO we take the unadjusted COGS 118 500 add the under applied OH 5 000 so your cost of goods sold is 118 500 5 000 COGS 123 500 Compute Under applied or Over applied Overhead Cost o Final Step of Absorption costing is to adjust for under or over applied overhead cost If the applied overhead is less than your actual then your overhead is considered under applied then and this amount must be added to cost of goods sold If applied overhead is greater than the actual overhead costs it is considered over applied and the amount is subtracted from cost of goods sold If actual overhead was 95 000 and applied overhead was 90 000 then the under applied overhead is 5 000 This amount would be added to cost of goods sold on the balance sheet Uxmaiz Corporation had only one job in process during May Had no finished goods inventory on May 1 the job was started in April and finished in May 1 First get a cost per Unit Begin BAL 5 000 applied DM 8 000 applied DL 2 000 applied overhead 4 000 so total job cost is 19 000 100 units completed So 19 000 100 average unit product cost is 190 units 2 Second multiply that by a cost of unit sold 190 per unit and 40 units sold 190 x 40 units 7600 unadjusted COGS 3 Third adjust for over or under applied overhead 1 The overhead applied by 400 so what is the adjusted COGS 7600 400 7300 Chapter 6 Activity Based Costing Identifying the factors which cause the costs of an organizations major activities A Activities cause cost this could be ordering assembling servicing customers etc the idea here is that if the organization existed but never did anything than it should have zero costs B Producing products creates demand for these activities if a manufacturing company never did any manufacturing than they don t need to do anything else If they never produced than they would never need the raw materials etc C Costs are assigned to a product cost object on the basis of that product cost object s consumption of activities Because the production is causing the cost than we are going to assign those costs to those products Why ABC Costing o This method is a supplemental tool because the traditional costing system is needed for GAAP when filling financial reports but it provides managers with information for strategic decisions In a traditional costing system only manufacturing costs are assigned in ABC all are divided o Compare and Contrast ABC has many more cost pools than traditional accounting ABC has it own unique measure of activity The allocation base can be anything In a traditional costing system we are unable to see the true reasons for net loss or income So the ABC system can have benefits of identifying and increasing sales The traditional costs system over costs the better profiting product and reports a lower product margin Traditional system uses only one rate to allocate over all products while ABC only assign manufacturing overhead costs related to that product Traditional costing allocated all manufacturing overhead costs using a volume related allocation based ABC costing also uses non volume related allocation bases Traditional costing system ignores selling and administrative expenses when allocating