6

Job-Order Costing
and Accounting for
Overhead
2007 Pearson Education Canada

Slide 6-1

Product Costing
Job Order

Process Costing

Allocate costs to products

that are readily identifiable

Average costs over large number

of nearly identical units

Common in construction,
print shops, unique goods

Common in chemical, textiles,

lumber, glass, food processing

Accumulate costs for

specific jobs

Accumulate costs
by departments

Produce for sale

Produce for inventory

2007 Pearson Education Canada

Slide 6-2

Job-Order Costing
Direct Material
Requisition
Sheet
Labour
Time
Ticket

Overhead
Application
Rate

2007 Pearson Education Canada

Job Cost Sheet

Job #963
12 units
Direct materials
Direct labour
Applied factory overhead
Total cost
Unit cost ($907.50 / 12 )

$460.00
267.50
180.00
$907.50
$75.625

Slide 6-3

Job-Costing Cost Flows

Apply material, labour and overhead costs to work in process
As goods as produced costs flow to finished goods inventory
When sold, costs shift to cost of goods sold
Direct
Material
Inventory

Work in
Process
Inventory

Finished
Goods
Inventory

Cost of
Goods Sold

Use

Buy
Material

Material

Production

Sales

Labour Costs
Overhead
Control Account
Overhead
Costs
2007 Pearson Education Canada

Over / under
applied overhead
(at year end)
Slide 6-4

Accounting for Factory Overhead

Overhead Application (Overhead Absorption)
Allocation of overhead costs to products
Budgeted Factory Overhead Rate
Calculated at the beginning of the year and used to apply overhead
to products throughout the year
Six Steps in Applying Overhead
1. Select a cost driver for overhead
2. Prepare a budget for yearly overhead costs and yearly volume of the
cost driver
3. Calculate the budgeted factory overhead rate as
Overhead rate = budgeted total overhead / budgeted cost driver
4. Obtain data on the actual cost driver
5. Apply overhead to products
6. At year end, account for difference between actual overhead costs
and applied overhead costs
2007 Pearson Education Canada

Slide 6-5

Over / Under Application of Overhead

Actual overhead
a mixed cost function with variable and fixed costs
Y = F + VX
Applied overhead
a variable cost function
Applied overhead = overhead rate x actual driver

Volume
$

Volume

$
Applied Overhead
Actual Overhead

Overapplied: Applied > Actual

Underapplied: Applied < Actual
Dispose of over/under applied
overhead at year end

Volume
2007 Pearson Education Canada

Slide 6-6

Fixed Manufacturing Overhead &

Absorption Costing

Firms use a overhead rate to smooth the application of overhead

to work in process and determine "full" product costs
Budgeted overhead
application rate
Actual
Fixed
Overhead

Budgeted total factory overhead

Budgeted total of cost driver
Applied Fixed
Overhead

Budgeted
Fixed
Overhead

Fixed Overhead Spending Variance

Rate x Actual Volume

Production-Volume Variance

Over / Under Applied Overhead

difference between actual and applied fixed overhead relates to:

spending more or less than expected
producing more or less than expected

2007 Pearson Education Canada

Slide 6-7

Budgeted and Applied Fixed Overhead

$

Volume
Budgeted Fixed Overhead

2007 Pearson Education Canada

Volume
Applied Fixed Overhead

Slide 6-8

Production Volume Variance in

Absorption Costing
Change in net income due to not producing the amount of
output expected when we determined the P.O.R. at the
beginning of the year
Production
=
Volume Variance
$

Actual - Expected
volume
volume

x Budgeted
overhead rate
Applied Overhead
Actual Overhead
Budgeted Overhead

Volume of activity
2007 Pearson Education Canada

Slide 6-9

Dells Value Chain and ABC System

R&D
Product
Design
Production
Marketing
Distribution
Customer
Service

2007 Pearson Education Canada

Indirect
costs are
allocated to
product
lines based
on ABC
cost drivers
Other
indirect costs
+ profit

Individual Job
Direct material

$xxx

Direct labour

xxx

Applied overhead

xxx

Total job cost

xxx

Markup

xxx

Job price

$xxx

Slide 6-10