Download Chapter 5 part 1 transcript

Chapter 5 part 1 transcript
Slide 1
In this chapter, we will discuss job-order costing.
Slide 2
Companies can be divided into 2 major categories depending on whether their products or services are
unique. The two categories are job-order and process costing. Job-order means the company’s products
or services are unique. Process costing is when a company produces similar products or services.
Slide 3
Firms operating in job-order industries produce a wide variety of services or products that are distinct
from each other. Examples include printing, construction, medical services, and auto repair.
Slide 4
The key feature of job-order costing is that the cost of one job differs from that of another and must be
kept track of separately.
Slide 5
Firms in process industries mass-produce large quantities of similar products.
Slide 6
Process firms accumulate production costs by process or by department for a given period of time. Unit
costs are measured by taking process costs / output.
Slide 7
This illustrate the differences between job-order costing and process costing.
Slide 8
Unit costs are important because managers need accurate cost information on materials, labor, and
overhead when making decisions.
Slide 9
There are 2 ways that are commonly used to measure the costs associated with production. They are
actual costing and normal costing. In actual costing only actual costs (direct material, direct labor, and
overhead) are used to determine unit cost. Normal costing determines unit cost by adding actual direct
materials, actual direct labor, and estimated overhead. Virtually all firms use normal costing.
Slide 10
Unit costs are essential for valuing inventory, determining income, and making important decisions.
Slide 11
Service firms must identify the service unit being provided. Service firms do not produce physical
products therefore they do not need to include work-in-process and finished goods inventories.
Slide 12
In normal costing, overhead is estimated. To estimate overhead we follow three steps. First we
calculated predetermined overhead rate, then apply overhead to production throughout the year, then
we calculate the difference between total actual overhead incurred and the total overhead applied to
production.
Slide 13
The predetermined overhead rate is calculated by taking the estimated annual overhead / estimated
annual activity level.
Slide 14
Once the predetermined overhead rate is calculated, we calculate the applied overhead by taking the
predetermined overhead rate x actual activity level.
Slide 15
Once this is calculated we can calculate the total costs. To determine total costs we take actual direct
materials + actual direct labor + applied overhead.
Slide 16
In this example, I want you to calculate the predetermined overhead rate and the overhead applied to
production in February. Pause the lecture and try the example.
You should have calculated:
1. Predetermine OH rate = $360,000 / $720,000 = 0.50 or 50% of direct labor cost
2. Overhead applied = 0.50 x $56,000 = 28,000.
Slide 17
Remember that two types of overhead are recorded: Actual overhead: Costs are tracked throughout the
year in the overhead account. Applied overhead: Costs are computed throughout the year and added to
actual direct materials and actual direct labor to get total product cost.
The difference between actual overhead and applied overhead is called an overhead variance. If actual
overhead is $400,000 for the year but $390,000 was applied to production, we would say that the
variance is underapplied overhead. If actual overhead is $400,000 for the year but $410,000 was applied
to production, we would say that the variance is overapplied overhead. If overhead has been
underapplied, then product cost has been understated. If overhead has been overapplied, then product
cost has been overstated.
Slide 18
Typically, the entire overhead variance is assigned to Cost of Goods Sold. Underapplied overhead is
added to COGS and overapplied overhead is subrtracted from COGS.
Slide 19
This exhibit shows the concepts of overapplied and underapplied overhead.
Slide 20
In this example, you are required to calculate the overhead variance for the year and adjust the COGS.
Pause the lecture and try it out.
You should have calculated:
1. Recall the overhead applied that we previously calculated was $375,000. So we take the actual
overhead which is $375,400 – applied overhead which is $375,000 = $400 underapplied.
2. The unadjusted COGS is $632,000 so since we have an overhead variance of $400 underapplied
we add it to the COGS to get the adjusted COGS = $632,400.