Tutorial 2

What have we learnt in Lesson 3

Costs accumulation methodology - costs accumulated by Jobs - costs accumulated by Processes Differences between the two costing methods Differences between normal & actual costing

How Mfg OH costs are allocated/applied to product, POHR, basis and treatment of the variances

Tutorial 2 Review
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Production processes using Job costing/ process costing / hybrid costing Flow of Costs in Job Order Costing Comparing Job order and Process costing POHR Costs allocation basis Why use an allocation base

Job costing/Process costing/Hybrid examples

Type of Production Process Description of Process Low volume Little standardisation Unique products, customized Low volume Multiple products Example of Manufacturer unique motorcycles Orange County Choppers bakery Sunshine

Job Shop

Batch

Assembly Line

Higher volume A few major products

High volume Many standardised components Customised combination of components High volume Highly standardised commodity products

automobile production line Ford, Toyota

Mass Customization

sporting shoes line MiAdidas

Continuous Flow

oil refinery Exxon

Note:
Generally, Job Order costing or Job Costing is prevalent in low volume processes & high cost items. Often the Jobs are bespoke, whilst Process costing is commonly seen for high volume production, small, identical and low cost items. Though batch production is of low volume but there may be situations customer may request for high volume & in such situations a batch production can comprise of a Hybrid of Job-Order and Process costing.

Other users of Job Order costing

Most consulting, engineering, services providers use Job Costing; Project, missions, non-profit or chartable organisations, program/event organisers are also incline to use Job costing

Job-Order Costing Document Flow Summary

Materials used may be either direct or indirect.
Direct materials Job Cost Sheets

Materials Requisition Indirect materials Manufacturing Overhead Account

Refer Lecture notes on T account costs flow

Job-Order Costing Document Flow Summary

An employees time may be either direct or indirect.
Direct Labor Job Cost Sheets

Employee Time Ticket Indirect Labor Manufacturing Overhead Account

Refer Lecture notes on T account costs flow

Job-Order Costing Document Flow Summary

Materials Requisition Indirect Material POHR rate used to apply overhead

Other Actual OH Charges

Manufacturing Overhead Account

Job Cost Sheets

Employee Time Ticket

Indirect Labor
Refer Lecture notes on T account costs flow

Bill completed jobs to customers

Costs Flow through T accounts

Refer Lecture notes on Job Order costs flow T accounts & Journal entries (lecture notes slide 3-28 to 3- 40)

Comparing Job Order & Process Costing

Job-Order Number of jobs worked Cost accumulated by Recording costs by Many Individual Job Process Single Product Dept./Process

Job Sheet, record Dept./Process

** Both make use of the WIP Account, one track by jobs

(summarised in the Job Sheet Reports) the other track by processes or departments ( summarised in the Production Report).

Predetermined Overhead Rate (POHR)

POHR = Budgeted Mfg OH costs Budgeted Activity Base ( amount of cost driver) e.g. of activity base generally used under the traditional costing are DLH or DL$ or MHr

So MOH applied = POHR X Actual Activity As such any over- or under-applied OH is the OH variance 2 alternative treatments of this variance (refer lecture notes slide 3-48)
Note: POHR is based on estimates and is determined before the period begins.

Job-Order Costing - The Need for a POHR

Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period.

Cost Allocation Basis - Cost Drivers

Traditional plant-wide single rate uses any of the 3 allocation basis: DLH, MHr, & DL$

First two basis are predominantly used in traditional plant-wide allocation style.

Why use an Allocation Base?

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It is impossible to trace all OH costs to particular job Mfg OH consists of many different items ranging from grease/lubricants used in machines to production managers salary Many types of Mfg OH costs are fixed even though output fluctuates during the period Actual OH is not known until the end of the period

Actual MOH vs Applied MOH

When Actual overhead incurred exceeds the MOH applied to the finished goods, the difference is under-applied Conversely if MOH applied is more than the actual OH incurred then we have over-applied MOH The balance remaining in the MOH A/c is either over- or under-applied MOH This over- or under-applied MOH is charged to the COGS at the end of the accounting period.

Overapplied and Underapplied Manufacturing Overhead - Summary

Alternative 1 If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold

Alternative 2 Close to Cost of Goods Sold INCREASE Cost of Goods Sold

DECREASE Cost of Goods Sold

Two-Stage Cost Allocation

Stage One: Cost assigned to departments Department Cost pools
Indirect Labor Indirect Materials Other Overhead

Department 1

Department 2

Department 3

Departmental Overhead Rates

Stage One: Cost assigned to departments Department Cost pools
Indirect Labour Indirect Materials Other Overhead

Department 1

Department 2 Machine Hours

Department 3 Direct Labour Cost $

Direct Stage Two: Labour Costs applied Hours to products

Products
Departmental Allocation Bases

Common difficulties students encounter in product costing terms used interchangeably:

Budgeted = Estimated/Planned Applied = Allocated/Absorbed Actual = Incurred

Tutorial 3 Assignment

Group K15, & K17

Team 1 = Qn 1, Problem 9-15 -Process costing Team 2 = Qn 5, Supple Qn on ABC , Team 3 = Qn 3, Case 9-19 -Process costing Team 4 = Qn 4, Problem 7-19 ABC All teams Qn 6, Qn 2 on Problem 9-16 -Process costing
Teams 1 to 4 same as above Team 5 = Qn 5, Supple qn on ABC All teams = supple qn 2 MCQs

Group K 16