3-1
Types of Costing Systems Used to
Determine Product Costs
Chapter 3
Process
Costing
Job-order
Costing
Chapter 4
™ Many different products are produced each period.
Systems Design:
Job-Order Costing
™ Products are manufactured to order.
™ Cost are traced or allocated to jobs.
™ Cost records must be maintained for each distinct
product or job.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
z Typical job order cost applications:
™ Special-order printing
™ Building construction
z Also used in the service industry
™ Hospitals
™ Law firms
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order Costing
Quick Check 9
Which of the following companies would be
likely to use job-order costing rather than
process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Sequence of Events in a JobOrder Costing System
Manufacturing
overhead (OH)
Direct
material
Applied to each
job using a
predetermined
rate
Tra
ced
dire
to e
ctly
ach
job
Receive
orders from
customers
Begin
production
The Job
Direct
labor
McGraw-Hill/Irwin
ctly
dire
ced
ob
a
j
r
T
ach
to e
Schedule
jobs
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Order
materials
© The McGraw-Hill Companies, Inc., 2003
3-2
Sequence of Events in a JobOrder Costing System
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing
Overhead
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order Cost Accounting
Sequence of Events in a JobOrder Costing System
Direct Materials
Apply
overhead to
each job
using a
predetermined rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing
Overhead
Job No. 3
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
The primary
document for
tracking the costs
associated with a
given job is the
job cost sheet.
Let’s investigate
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order Cost Accounting
Department B3
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
McGraw-Hill/Irwin
Units Shipped
Number Balance
© The McGraw-Hill Companies, Inc., 2003
Materials Requisition Form
PearCo Materials Requisition Form
Date Initiated 3-4-01
Date Completed
Units Completed
A materials requisition
is used to
Direct Laborform Manufacturing
Overhead
Ticket Hours Amount Hours
authorize the Rate
use Amount
of
materials on a job.
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Date
McGraw-Hill/Irwin
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated 3-4-01
Date Completed
Units Completed
Requisition No. X7 - 6890
Job No. A - 143
Department B3
Description
2 x 4, 12 feet
1 x 6, 12 feet
Quantity
12
20
Date
$
3-4-01
Unit Cost
3.00
4.00
Total Cost
36.00
80.00
$
116.00
$
Units Shipped
Date Number Balance
Let’s
see one
Authorized
Signature
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Will E. Delite
© The McGraw-Hill Companies, Inc., 2003
3-3
Materials Requisition Form
Job-Order Cost Accounting
PearCo Job Cost Sheet
PearCo Materials Requisition Form
Requisition No. X7 - 6890
Job No. A - 143
Department B3
Description
2 x 4, 12 feet
1 x 6, 12 feet
Quantity
12
20
Date
Job Number A - 143
3-4-01
Cost of material is
charged to job A-143.
$
Unit Cost
3.00
4.00
Total Cost
36.00
80.00
$
116.00
$
Will E. Delite
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Type, quantity, and
total cost of material
charged to job A-143.
Authorized
Signature
Job-Order Cost Accounting
Department B3
Item Wooden cargo crate
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
$
116
Workers
use
Manufacturing
Overhead
Hours time
Rate tickets
Amount to
record the time
spent on each
job.
Units Shipped
Date
Units Shipped
Number Balance
© The McGraw-Hill Companies, Inc., 2003
Employee Time Ticket
Time Ticket No.
Employee
Starting
Time
0800
36
I. M. Skilled
Ending
Time
1600
Date
3/5/01
Station
42
Hours
Hourly
Completed
Rate
8.00
$
11.00
Amount
$
88.00
Job No.
A-143
Totals
8.00
$
11.00
$
88.00
A-143
Let’s see one
Supervisor
McGraw-Hill/Irwin
Job-Order Cost Accounting
C. M. Workman
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order Cost Accounting
PearCo Job Cost Sheet
Department B3
Item Wooden cargo crate
Date
Number Balance
© The McGraw-Hill Companies, Inc., 2003
Job Number A - 143
116
PearCo Employee Time Ticket
Date Initiated 3-4-01
Date Completed
Units Completed
Direct Materials
Direct Labor
Req. No. Amount Ticket Hours Amount
X7-6890 $ 116
$
McGraw-Hill/Irwin
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated 3-4-01
Date Completed
Units Completed
Department B3
Item Wooden cargo crate
PearCo Job Cost Sheet
Date Initiated 3-4-01
Date Completed
Units Completed
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-01
Date Completed 3-5-01
Units Completed
2
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
8
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Cost Summary
Units Shipped
Direct
Materials
$ 116 to
Datejobs
Number
Balance
Apply
manufacturing overhead
using
a
Direct Labor
$
88
predetermined overhead
rate
of $4 per direct
Manufacturing Overhead
$
32
labor hour$ (DLH).
Total Cost
236
Let’s do it
Unit Cost
$ 118
McGraw-Hill/Irwin
$
$
116
88
Date
Units Shipped
Number Balance
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3-4
Job-Order Cost Accounting
Application of Manufacturing
Overhead
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated 3-4-01
Date Completed 3-5-01
Units Completed
2
Department B3
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
8
$
4 $
32
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
$
$
$
$
$
116
88
32
236
118
POHR =
Units Shipped
Date Number Balance
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base
is a cost driver that causes
overhead.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
The predetermined overhead rate (POHR)
used to apply overhead to jobs is determined
before the period begins.
Application of Manufacturing
Overhead
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Application of Manufacturing
Overhead
PearCo Job Cost Sheet
Based on estimates, and
determined before the
period begins.
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-01
Date Completed 3-5-01
Units Completed
2
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
8
$
4 $
32
Overhead applied = POHR × Actual activity
Actual amount of the allocation
base such as units produced,
direct labor hours, or machine
hours incurred during the
period.
Overhead applied = POHR × Actual activity
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
The Need for a Predetermined
Manufacturing Overhead Rate
Using a predetermined rate makes it
possible to estimate total job costs sooner.
$
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Overhead Application Example
PearCo applies overhead based on direct labor
hours. Total estimated overhead for the year
is $640,000. Total estimated labor cost is
$1,400,000 and total estimated labor hours are
160,000.
What is PearCo’s predetermined overhead rate
per hour?
Actual overhead for the period is not
known until the end of the period.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3-5
Overhead Application Example
POHR =
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
$640,000
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For each direct labor hour worked on a
job, $4.00 of factory overhead will be
applied to the job.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overhead Application Example
Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32
Department B3
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-7456 $ 240
23
26
$ 286
Cost Summary
Units Shipped
Direct Materials
$ 240 Date Number Balance
Direct Labor What amount of$ overhead
286
will
Manufacturing Overhead
PearCo apply to Job X-32?
Total Cost
Unit Product Cost
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32
Department B3
Item Wooden cargo crate
Date Initiated 3-9-01
Date Completed 3-11-01
Units Completed
6
PearCo Job Cost Sheet
Date Initiated 3-9-01
Date Completed 3-11-01
Units Completed
6
Job Number X - 32
Department B3
Item Wooden cargo crate
Date Initiated 3-9-01
Date Completed 3-11-01
Units Completed
6
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-7456 $ 240
23
26
$ 286
26
$
4 $ 104
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-7456 $ 240
23
26
$ 286
26
$
4 $ 104
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGraw-Hill/Irwin
$
$
$
240
286
104
Date
Units Shipped
Number Balance
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Quick Check 9
If the number of wooden crates in the order on
the previous page is increased or decreased by
one unit, what would you expect to happen to
the total spending of PearCo?
a. Total spending would probably change
by less than $105.
b. Total
spending
would probably
change
Total
spending
would change
by $105 only
if all
about
$105.
of thebycosts
were
variable with respect to the
c. Total
spending
would
probably
change
number
of units
produced.
Direct
materials
is
by more
than of
$105.
variable,
but much
the overhead and perhaps
even direct labor may be fixed.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
$
$
$
$
$
240
286
104
630
105
Date
Units Shipped
Number Balance
© The McGraw-Hill Companies, Inc., 2003
Quick Check 9
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labor hours at $15
per hour. Estimated total overhead for the year
was $760,000 and estimated direct labor hours
were 20,000. What would be recorded as the
cost of job WR53?
Pred.
$38
a. $200.
Pred. ovhd.
ovhd. rate
rate $760,000/20,000hours
$760,000/20,000hours
$38
b. $350.
Direct
$200
Direct materials
materials
$200
Direct
$15
Direct labor
labor
$15 xx 10
10hours
hours $150
$150
c. $380.
Manufacturing
Manufacturingoverhead
overhead $38
$38 xx 10
10hours
hours $380
$380
Total
cost
$730
d. $730.
Total cost
$730
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3-6
Quick Check 9
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labor hours at
$15 per hour. Estimated total overhead for
the year was $760,000 and estimated direct
labor hours were 19,000. What would be
recorded as the cost of job WR53?
a. $200.
Pred.
$40
Pred.ovhd.
ovhd.rate
rate $760,000/19,000hours
$760,000/19,000hours
$40
b. $350.
Direct
$200
Directmaterials
materials
$200
Direct
$15
c. $750.
Directlabor
labor
$15 xx 10
10hours
hours $150
$150
Manufacturing
Manufacturingoverhead
overhead $40
$40 xx 10
10hours
hours $400
$400
d. $730.
Total
$750
Totalcost
cost
$750
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 9
If overhead contains fixed costs, what will
happen to the predetermined overhead rate
if lower unit sales volume is expected?
a. The predetermined overhead rate will
likely increase.
b. The predetermined overhead rate would
be unaffected.
c. The predetermined overhead rate will
likely decrease.
Quick Check 9
If overhead contains fixed costs, what will
happen to product costs computed by the
accounting system if lower unit sales
volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Job-Order Costing
Document Flow Summary
Let’s summarize
the document flow
in a job-order
costing system.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Quick Check 9
If selling prices increase, what will happen to
unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order Costing
Document Flow Summary
Materials used
may be either
direct or
indirect.
Direct
materials
Job Cost
Sheets
Materials
Requisition
Indirect
materials
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Manufacturing
Overhead
Account
© The McGraw-Hill Companies, Inc., 2003
3-7
Job-Order Costing
Document Flow Summary
An employee’s
time may be either
direct or indirect.
Direct
Labor
Job Cost
Sheets
McGraw-Hill/Irwin
Employee
Time Ticket
Other
Actual OH
Charges
Employee Time
Ticket
Indirect
Labor
Job-Order Costing
Document Flow Summary
Manufacturing
Overhead
Account
© The McGraw-Hill Companies, Inc., 2003
Indirect
Labor
Manufacturing
Applied
Overhead
Overhead
Account
Materials
Requisition
Indirect
Material
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order System Cost Flows
Job-Order System Cost Flows
Raw Materials
Let’s examine the
cost flows in a
job-order costing
system..
Job Cost
Sheets
Material
zDirect
Purchases Materials
zIndirect
Materials
z
Work in Process
(Job Cost Sheet)
zDirect
Materials
Mfg. Overhead
Actual Applied
zIndirect
Materials
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Job-Order System Cost Flows
Next let’s add
labor costs and
applied
manufacturing
overhead.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order System Cost Flows
Salaries and
Wages Payable
Direct
Labor
zIndirect
Labor
z
Mfg. Overhead
Actual Applied
Indirect zOverhead
Materials Applied to
Work in
zIndirect
Process
Labor
z
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Work in Process
(Job Cost Sheet)
zDirect
Materials
zDirect
Labor
zOverhead
Applied
If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
© The McGraw-Hill Companies, Inc., 2003
3-8
Job-Order System Cost Flows
Now let’s
complete the
goods and sell
them. Still with
me?
Job-Order System Cost Flows
Work in Process
(Job Cost Sheet)
zDirect
Materials
zDirect
Labor
zOverhead
Applied
Finished Goods
Cost of
Goods
Mfd.
z
Cost of
Goods
Mfd.
z
Cost of
Goods
Sold
z
Cost of Goods Sold
Cost of
Goods
Sold
z
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Job-Order System Cost Flows
Let’s return to PearCo
and see what we will
do if actual and
applied overhead are
not equal.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overhead Application
Example
PearCo’s actual overhead for the year was
$650,000 for a total of 170,000 direct labor
hours.
PearCo has overapplied
How much total overhead was applied to PearCo’s
overhead for the year
jobs during the year? Use PearCo’s
by $30,000. What will
predetermined overhead rate of $4.00 per direct
PearCo do?
labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overapplied and Underapplied
Manufacturing Overhead
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overapplied and Underapplied
Manufacturing Overhead
PearCo’s Method
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
McGraw-Hill/Irwin
$30,000
Cost of
Goods Sold
© The McGraw-Hill Companies, Inc., 2003
Adjusted
Balance
McGraw-Hill/Irwin
PearCo’s
Mfg. Overhead
Actual Overhead
overhead Applied
costs
to jobs
Unadjusted
Balance
Finished
Goods
Cost of
Goods Sold
PearCo’s Cost
of Goods Sold
$650,000
$30,000
$680,000
$30,000
overapplied
© The McGraw-Hill Companies, Inc., 2003
3-9
Quick Check 9
Quick Check 9
What effect will the overapplied overhead
have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
What effect will the overapplied overhead
have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Overapplied and Underapplied
Manufacturing Overhead - Summary
PearCo’s
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
McGraw-Hill/Irwin
Allocation
© The McGraw-Hill Companies, Inc., 2003
Job-Order Costing – Typical
Accounting Entries
Let’s look at
summary journal
entries for a joborder costing
system.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Quick Check 9
Tiger, Inc. had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of
$4.00 per machine hour. Tiger, Inc. worked 290,000
machine hours during the period. Tiger’s
Overhead Applied
manufacturing overhead is
$4.00 per hour × 290,000 hours
a. $50,000 overapplied. = $1,160,000
Underapplied Overhead
b. $50,000 underapplied.
$1,210,000 - $1,160,000
c. $60,000 overapplied. = $50,000
d. $60,000 underapplied.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.
GENERAL JOURNAL
Date
Description
Raw Materials
Accounts Payable
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Page
Post.
Ref.
Debit
3
Credit
XXXXX
XXXXX
© The McGraw-Hill Companies, Inc., 2003
3-10
Cost Flows – Material Usage
Cost Flows – Labor
Direct materials issued to a job increase Work in
Process and decrease Raw Materials. Indirect
materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.
GENERAL JOURNAL
Date
Description
Page
Post.
Ref.
Work in Process
Manufacturing Overhead
Raw Materials
Debit
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.
Date
XXXXX
XXXXX
Cost Flows – Actual Overhead
GENERAL JOURNAL
Description
Page
Post.
Ref.
Manufacturing Overhead
Accounts Payable
Property Taxes Payable
Prepaid Insurance
Accumulated Depreciation
Debit
Date
Description
Debit
Salaries Expense
Salaries and Wages Payable
XXXXX
Advertising Expense
Accounts Payable
XXXXX
McGraw-Hill/Irwin
Description
Page
Post.
Ref.
Debit
3
Credit
XXXXX
XXXXX
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Cost Flows – Cost of Goods
Manufactured
Nonmanufacturing costs (period expenses)
are charged to expense as they are incurred.
Date
XXXXX
Work in Process
Manufacturing Overhead
Cost Flows – Period Expenses
Page
XXXXX
XXXXX
GENERAL JOURNAL
3
Credit
XXXXX
XXXXX
XXXXX
XXXXX
Post.
Ref.
3
Credit
Work in Process is increased when
Manufacturing Overhead is applied to jobs.
XXXXX
GENERAL JOURNAL
Debit
Cost Flows – Overhead Applied
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Page
Post.
Ref.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
In addition to indirect materials and indirect labor,
other manufacturing overhead costs are charged
to the Manufacturing Overhead account as they
are incurred.
Date
Description
Work in Process
Manufacturing Overhead
Salaries and Wages Payable
XXXXX
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
GENERAL JOURNAL
3
Credit
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished
Goods from Work in Process.
GENERAL JOURNAL
3
Credit
XXXXX
Date
Description
Finished Goods
Work in Process
Page
Post.
Ref.
Debit
3
Credit
XXXXX
XXXXX
XXXXX
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3-11
End of Chapter 3
Cost Flows – Sales
When finished goods are sold, two entries
are required: (1) to record the sale; & (2) to
record COGS and reduce Finished Goods.
GENERAL JOURNAL
Date
Description
Page
Post.
Ref.
Debit
Accounts Receivable
Sales
XXXXX
Cost of Goods Sold
Finished Goods
XXXXX
McGraw-Hill/Irwin
3
Credit
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Quick Check 9
Appendix 3a
The Predetermined
Overhead Rate &
Capacity
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
Quick Check 9
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
© The McGraw-Hill Companies, Inc., 2003
Quick Check 9
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3-12
Quick Check 9
Quick Check 9
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
© The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Quick Check 9
© The McGraw-Hill Companies, Inc., 2003
Basing the rate on expected
volume
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Expected volume
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
McGraw-Hill/Irwin
40,000
$40.00
$24.00
$100,000
40,000
$2.50
$500,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Basing the rate on capacity
When estimated activity is used in the denominator
in the predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a.The predetermined overhead rate goes up when
activity goes down.
b.The predetermined overhead rate stays the same;
it is not affected by changes in activity.
c.The predetermined overhead rate goes down
when activity goes down.
McGraw-Hill/Irwin
When capacity is used in the denominator in the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up when
activity goes down.
b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,060,000
540,000
500,000
$
40,000
© The McGraw-Hill Companies, Inc., 2003
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
McGraw-Hill/Irwin
40,000
$40.00
$24.00
$100,000
50,000
$2.00
$500,000
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,040,000
560,000
20,000
500,000
$
40,000
© The McGraw-Hill Companies, Inc., 2003