PowerPoint Presentation
Manufacturing CompaniesThere are 3 major categories of
manufacturing costs:Direct Materials
Raw material, parts, and components that can be observed being
used to make a specific product.Direct Labor
The cost of paying employees who convert direct materials into
finished product.OverheadsIndirect materialIndirect laborOther
overheadPrime Costs include:Direct Materials
Direct Labor
Manufacturing OverheadManufacturing CompaniesConversion Costs
include:Direct Materials
Direct Labor
Manufacturing OverheadManufacturing CompaniesProcessCostingJob
OrderCosting Used for production of large, unique, high-cost items.
Built to order (MTO) rather than mass produced (MTS). Many costs
can be directly traced to each job. Typical job order cost
applications: Special-order printing Building construction
Also used in service industry Hospitals Law
firmsProcessCostingJob OrderCosting
A manufacturer of luxury yachts
An automobile service centre (e.g. Honda workshop)
A professional services firm (e.g. Accountancy firms like
E&Y)
A landscape garden contractor, house builder etc.Job-Order
Costing:Examples Used for production of small, identical, low-cost
items. Mass produced in automated continuous production process.
Costs cannot be directly traced to each unit of
product.ProcessCostingJob OrderCosting Typical process cost
applications: Petrochemical refinery Paint manufacturer Paper
millProcessCostingJob OrderCostingThe primary document for tracking
the costs associated with a given job is the job cost sheet.
Lets investigateJob-Order CostingJob-Order CostingIn Job-Order
Costing systems the primary document is called a job-cost
sheet.
It is used to capture costs of producing that product.
Using the home builder example, a job-cost sheet would be
prepared for each home. And the costs it captures are the usual
suspects, materials, labor and overheads!10The Job Cost Sheet
The Job Cost Sheet
Accumulate direct labor costs by means of a work record, such as
a time card, for each employee.The Job Cost Sheet
Apply manufacturing overhead to jobs using a predetermined
overhead rate (OAR) based on direct labor hours The Job Cost
Sheet
Lets summarize the cost flows we have been discussing in a job
order costing system. Job order costingDirect LaborDirect
MaterialsFinishedJobFactoryOverheadsCost Flow for Job Cost
ComponentsDirect allocationDirect allocationAbsorbedDirect Material
CostThe document used to request the release of materials to
production is called a materials requisition.
This requisition indicates the type, quantity and cost of
material as well as the job number to which it will be
assigned.
17Direct Labor CostThe document which is used to trace direct
labor cost to production is called a time card.
The time card indicates how much time was spent on which
job.
Note that when several employees all work on the same job, the
time card data will be aggregated and then applied to each
job.18Manufacturing OverheadsUnlike Direct Materials and Direct
Labor which are directly traceable to the job, manufacturing
overhead is added to each job in a slightly more complex
manner.
Manufacturing Overhead is applied to specific jobs as opposed to
being traced.
And it is applied on some common allocation basis.19Assigning
Costs to Jobs: A SummaryHow are costs attached to jobs?
Direct Material: Material Requisition Forms.
Direct Labor: Labor Time cards.
Overheads: Overhead Absorption Rate.20Predetermined Overhead
RatesMost companies develop overhead absorption rates based
on:Estimates of total overhead costs ($) and Estimated level of the
activity basis as follows:
OAR = Budgeted overheads ($)Budgeted activity basis21Activity
BasisThe relevant bases used for the allocation of overhead
are:
Units of output: if just one product or a line of very similar
products is produced
Direct labor hours: if production is very labor intensive and
the number of workers drives activity of overheads
Machine hours: if production is highly automated
Cost percentage rates: fit very seldomWhy Budgeted OARs ?OAR
must be predetermined in order to calculate jobs near to their
production time
A job to be produced on 1st Feb 2013 should not be calculated in
March 2013, when historical overhead costs are known for
February.
It should not be calculated in January 2014 next year, when
overheads for the whole year are known.Recording overheadsRecording
Manufacturing Overhead is a two-step process.
First, overheads are applied to production based on the
Predetermined Overhead Rate (OAR).
Second, actual costs are recorded in the Overhead control
account24Over-absorption or Under-absorptionAs a result, unless
estimates are perfect, there will be either an over-absorption or
under-absorption of overheads.
If actual costs are more than applied overheads , we have under
- applied overhead.
If applied overhead is more than actual overhead, the result is
over - applied overhead.25Over-absorption or Under-absorptionThere
are three simple steps to compute any under/ over absorption at the
end of an accounting period as follows:
Calculate overheads absorption rate using:
Calculate Absorbed overheads using:
Finally, calculate under/ over absorption using:
OAR = Budgeted overheads ($)Budgeted activity basisAbsorbed
Overheads = OAR x Actual ActivityActual Production fixed
overheadsxAbsorbed Production fixed overheadsxunder/ over
absorptionx
Accounting for Over-absorbed or Under-absorbed OverheadsSo what
happens to this under-applied or over-applied amount at the end of
the year?
Any under-absorbed overheads are deducted from gross profit in
the income statement.
Any over-absorbed overheads are added back to gross profit in
the income statement.27Sales(units x SP)xFull cost of SalesOpening
Inventory(units x FC)xProduction Cost (units x FC)xClosing
Inventory(units x FC)(x)(x)GROSS PROFITX(under) / over
absorptionxPeriod costsAdmin fixed overheads(x)Admin variable
overheads(x)Selling fixed overheads(x)Selling variable
overheads(x)NET PROFITXAbsorption Costing StatementMarginal Costing
StatementSales(units x SP)xMarginal cost of salesOpening Inventory
(units x MC)xProduction Cost(units x MC)xClosing Inventory(units x
MC)(x)(x)Variable overheadsSelling variable overheads(x)Admin
variable overheads(x)CONTRIBUTIONXFixed overheadsProduction fixed
overheads(actual)(x)Admin fixed overheads(actual)(x)Selling fixed
overheads(actual)(x)NET PROFITXNet profit under absorption
costingxadd: Opening inventory difference(units x OAR)xless:
Closing inventory difference(units x OAR)(x)Net profit under
marginal costingxProfit Reconciliation StatementSheet1RoseCo Job
Cost SheetJob Number A - 143Date Initiated 24 Sep 2013Date
CompletedDepartment AssemblyUnits CompletedItem Wooden cargo
crateDirect MaterialsDirect LaborManufacturing OverheadReq.
No.AmountTicketHoursAmountHoursRateAmountCost SummaryUnits
ShippedDirect MaterialsDateNumberBalanceDirect LaborManufacturing
OverheadTotal CostUnit Cost
&APage &P
Sheet2
&APage &P
Sheet3
&APage &P
Sheet4
&APage &P
Sheet5
&APage &P
Sheet6
&APage &P
Sheet7
&APage &P
Sheet8
&APage &P
Sheet9
&APage &P
Sheet10
&APage &P
Sheet11
&APage &P
Sheet12
&APage &P
Sheet13
&APage &P
Sheet14
&APage &P
Sheet15
&APage &P
Sheet16
&APage &P
Sheet1RoseCo Job Cost SheetJob Number A - 143Date Initiated
3-4-X9Date CompletedDepartment B3Units CompletedItem Wooden cargo
crateDirect MaterialsDirect LaborManufacturing OverheadReq.
No.AmountCardHoursAmountHoursRateAmountX7-6890$116368$88Cost
SummaryUnits ShippedDirect Materials$116DateNumberBalanceDirect
Labor$88Manufacturing OverheadTotal CostUnit Cost
&APage &P
Sheet2
&APage &P
Sheet3
&APage &P
Sheet4
&APage &P
Sheet5
&APage &P
Sheet6
&APage &P
Sheet7
&APage &P
Sheet8
&APage &P
Sheet9
&APage &P
Sheet10
&APage &P
Sheet11
&APage &P
Sheet12
&APage &P
Sheet13
&APage &P
Sheet14
&APage &P
Sheet15
&APage &P
Sheet16
&APage &P
Sheet: Sheet1Sheet: Sheet2Sheet: Sheet3Sheet: Sheet4Sheet:
Sheet5Sheet: Sheet6Sheet: Sheet7Sheet: Sheet8Sheet: Sheet9Sheet:
Sheet10Sheet: Sheet11Sheet: Sheet12Sheet: Sheet13Sheet:
Sheet14Sheet: Sheet15Sheet: Sheet16RoseCo Job Cost SheetJob Number
A - 143Date Initiated 3-4-X9Date Completed 3-5-X9Department B3Units
Completed2.0Item Wooden cargo crateDirect MaterialsDirect
LaborManufacturing OverheadReq.
No.AmountTicketHoursAmountHoursRateAmountX7-6890Cost SummaryUnits
ShippedDirect Materials116.0DateNumberBalanceDirect
Labor88.0Manufacturing Overhead32.0Total Cost236.0Unit
Cost118.0
