Calculate Cost of Goods Sold and Ending Overhead
- Slides: 56
Calculate Cost of Goods Sold and Ending Overhead Balance Principles of Cost Analysis and Management © Dale R. Geiger 2011 1
Terminal Learning Objective • Task: Calculate Cost of Goods Sold and Ending Overhead Balance • Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors. • Standard: With at least 80% accuracy • • • Calculate cost of job given predetermined overhead rate Calculate over-/ under-applied overhead Explain causes of over-/under-applied overhead Prove ending balances in inventory accounts © Dale R. Geiger 2011 2
If Unit Cost is misstated, how might that affect these decisions? Do user fees cover Unit Cost? On which products and services should we expend our limited resources? Are we competitive in providing this service? Should we increase user fees? © Dale R. Geiger 2011 3
Job Order Costing • Provides a methodology for calculating the cost of a job • Assumes that each job is unique and has identifiable direct costs • Assumes that all jobs consume indirect resources in a similar manner © Dale R. Geiger 2011 4
Job Order Costing • Records Direct Materials and Labor for each individual job • Work in Process consists of all jobs still in process • Cost of job = Direct Materials + Direct Labor + Applied Overhead © Dale R. Geiger 2011 5
Job Order Costing • Applies Overhead on a predetermined rate • Traditional labor-based OH Rate = Estimated Overhead $ / Estimated Direct Labor $ • Assumes that indirect costs are closely correlated to Direct Labor • OH Application = Overhead Rate * Direct Labor $ © Dale R. Geiger 2011 6
Job Order Costing Lends itself readily to service applications: • • Legal services Repair and maintenance services Contract services Others? © Dale R. Geiger 2011 7
The Inventory Chain Overhead © Dale R. Geiger 2011 8
Job Order Cost Flow Finished Goods Raw Materials Purchased Goods Mfd Materials Used Goods Sold Work in Process Job A DL OH DM DM © Dale R. Geiger 2011 Job B 9
Check on Learning • What is the goal of Job Order costing? • What is the equation for the cost of a job? © Dale R. Geiger 2011 10
Job Tickets • Detailed information about each job is recorded on a Job Ticket: • Direct Materials • Direct Labor • Overhead Applied • Work in Process = Total of Job Tickets for unfinished jobs • Cost of Goods Manufactured = Total of Job Tickets for jobs completed during the period © Dale R. Geiger 2011 11
Job Tickets • Detailed information about each job is recorded on a Job Ticket: • Direct Materials • Direct Labor • Overhead Applied • Work in Process = Total of Job Tickets for unfinished jobs • Cost of Goods Manufactured = Total of Job Tickets for jobs completed during the period © Dale R. Geiger 2011 12
Job Tickets • Detailed information about each job is recorded on a Job Ticket: • Direct Materials • Direct Labor • Overhead Applied • Work in Process = Total of Job Tickets for unfinished jobs • Cost of Goods Manufactured = Total of Job Tickets for jobs completed during the period © Dale R. Geiger 2011 13
Job Order Cost Flow Total cost of direct materials used equals cost of materials for Job A plus cost of materials for Job B Finished Goods Raw Materials Purchased DMU 4000 Work in Process = 13, 000 Job A DL 2000 OH 1600 DL 3000 OH 2400 DM 1500 5100 DM 2500 7900 Goods Mfd Goods Sold Job B © Dale R. Geiger 2011 14
Job Order Cost Flow Total cost of Work in Process equals cost of materials, labor and overhead for Job A plus cost of materials, labor and overhead for Job B Finished Goods Raw Materials Purchased DMU 4000 Work in Process = 13, 000 Job A DL 2000 OH 1600 DL 3000 OH 2400 DM 1500 5100 DM 2500 7900 Goods Mfd Goods Sold Job B © Dale R. Geiger 2011 15
Job Order Cost Flow If Job B is completed and transferred to Finished Goods, Cost of Goods Manufactured equals cost of Job B. Work in Process consists of Job A, which is still unfinished. Finished Goods Raw Materials Purchased DMU 4000 Work in Process = 5100 Goods Mfd 7900 Job A DL 2000 OH 1600 DL 3000 OH 2400 DM 1500 5100 DM 2500 7900 Goods Sold Job B © Dale R. Geiger 2011 16
Check on Learning • Work in Process inventory is equal to? • Cost of Goods Manufactured is equal to? © Dale R. Geiger 2011 17
Demonstration Problem • The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Alpha Bravo Charlie Parts 5000 4200 3600 Labor 4500 6400 3200 Overhead ? ? ? Total ? ? ? • Overhead is applied at 50% of Direct Labor • Calculate the cost of each job © Dale R. Geiger 2011 18
Demonstration Problem • The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Alpha Bravo Charlie Parts 5000 4200 3600 Labor 4500 6400 3200 Overhead 2250 3200 1600 ? ? ? Total • Overhead is applied at 50% of Direct Labor • Calculate the cost of each job © Dale R. Geiger 2011 19
Demonstration Problem • The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Alpha Bravo Charlie Parts 5000 4200 3600 Labor 4500 6400 3200 Overhead 2250 3200 1600 11750 13800 8400 Total • Overhead is applied at 50% of Direct Labor • Calculate the cost of each job © Dale R. Geiger 2011 20
Demonstration Problem • Alpha and Bravo are completed and transferred out. Charlie remains in process Alpha Bravo Charlie Parts 5000 4200 3600 Labor 4500 6400 3200 Overhead 2250 3200 1600 11750 13800 8400 Total • Calculate Cost of Goods Manufactured and ending Work in Process inventory © Dale R. Geiger 2011 21
Check on Learning • How is overhead applied to each job? • What is the underlying assumption in using direct labor as a basis for overhead application? © Dale R. Geiger 2011 22
Perpetual Overhead Application • Uses a Predetermined Overhead Rate: Estimated Overhead $ Estimated Direct Labor $ • Overhead is applied or added to jobs • As direct labor is incurred by jobs • In proportion to Direct Labor © Dale R. Geiger 2011 23
Perpetual Overhead Example • The Contract Administration Department accounts for the cost of administering contracts using a job order cost system. • The Department Manager estimates that Overhead for the year will be $85, 500 and Direct Labor on contracts will be $95, 000. • Calculate the Predetermined Overhead Rate: Estimated Overhead: $85, 500 = 90% Estimated Direct Labor: $95, 000 © Dale R. Geiger 2011 24
Perpetual Overhead Example • The Contract Administration Department accounts for the cost of administering contracts using a job order cost system. • The Department Manager estimates that Overhead for the year will be $85, 500 and Direct Labor on contracts will be $95, 000. • Calculate the Predetermined Overhead Rate: Estimated Overhead: $85, 500 = 90% Estimated Direct Labor: $95, 000 © Dale R. Geiger 2011 25
Check on Learning • How is the predetermined overhead rate calculated? • Why is perpetual overhead application used in Job Order costing? © Dale R. Geiger 2011 26
Perpetual Overhead Example (cont’d) • The Training and Education contract requires $3, 000 of direct Contract Administration labor. • How much Overhead should be added to the cost of administering the contract? $3, 000 * 90% = $2, 700 • Direct Contract Administration Labor incurred on all other contracts during June totaled $6, 800 • How much Overhead was applied to other contracts? $6, 800 * 90% = $6, 120 © Dale R. Geiger 2011 27
Perpetual Overhead Example (cont’d) • The Training and Education contract requires $3, 000 of direct Contract Administration labor. • How much Overhead should be added to the cost of administering the contract? $3, 000 * 90% = $2, 700 • Direct Contract Administration Labor incurred on all other contracts during June totaled $6, 800 • How much Overhead was applied to other contracts? $6, 800 * 90% = $6, 120 © Dale R. Geiger 2011 28
Perpetual Overhead Example (cont’d) • The Training and Education contract requires $3, 000 of direct Contract Administration labor. • How much Overhead should be added to the cost of administering the contract? $3, 000 * 90% = $2, 700 • Direct Contract Administration Labor incurred on all other contracts during June totaled $6, 800 • How much Overhead was applied to other contracts? $6, 800 * 90% = $6, 120 © Dale R. Geiger 2011 29
Perpetual Overhead Example (cont’d) • Contract Administration overhead incurred in June: • Supplies $1, 000 • Supervision 6, 000 • Facilities 1, 500 • Total $8, 500 • Contract Administration overhead applied in June: • T&E Contract: $2, 700 • Other contracts: 6, 120 • Total $8, 820 Incurred OH $8, 500 < Applied OH $8, 200 Overhead is over-applied by $320 © Dale R. Geiger 2011 30
Check on Learning • How is actual overhead calculated? • How is applied overhead calculated? © Dale R. Geiger 2011 31
Over-applied vs. Under-applied • Perpetual overhead application is a function of estimates • OH rate = Estimated OH$/Estimate DL$ • If our estimates are perfect, actual overhead will equal applied overhead • Since perfection is rare, more likely the actual will differ from the estimate • If the relationship between actual overhead and actual labor is different than estimated, overhead may be over- or under-applied © Dale R. Geiger 2011 32
Over-applied vs. Under-applied • Think of the overhead account as a bank account • Actual overhead cost incurred is like a deposit • Overhead applied to jobs is like a withdrawal • If more overhead is applied jobs than incurred, the account is overdrawn, or over-applied (+) (-) OH incurred OH applied 8500 8820 -----320 © Dale R. Geiger 2011 33
Over-applied vs. Under-applied • If actual overhead incurred < overhead applied, overhead is over-applied • Too much overhead was applied to each contract. Reported cost of administering contracts is too high. • If actual overhead incurred > overhead applied, overhead is under-applied • Not enough overhead was applied to each contract. Reported cost of administering contracts is too low. © Dale R. Geiger 2011 34
Is this a Serious Problem? • If the over- or under-applied overhead amount is Material then the difference will affect decisions • What constitutes a material amount? • It depends. If the error is more than 5% of the total contract amount, it is probably significant • Is the error due to a significant error in estimating either Labor $ or Overhead $? • If so, the overhead rate should be adjusted © Dale R. Geiger 2011 35
Under- or Over-costing • How might under-costing Contract Administration affect decisions? • How might over-costing Contract Administration affect decisions? © Dale R. Geiger 2011 36
Under- or Over-costing • How might under-costing Contract Administration affect decisions? • If contract administration costs are significantly under-costed (think underpriced), the demand for contract administration resources will increase and they will be over-consumed. • How might over-costing Contract Administration affect decisions? © Dale R. Geiger 2011 37
Under- or Over-costing • How might under-costing Contract Administration affect decisions? • If contract administration costs are significantly undercosted (think underpriced), the demand for contract administration resources will increase and they will be over-consumed. • How might over-costing Contract Administration affect decisions? • If contract administration costs are significantly overcosted, it may make outsourcing appear attractive. © Dale R. Geiger 2011 38
Check on Learning • How can perpetual overhead application result in over- or under-applied overhead? • If actual overhead is greater than applied overhead, overhead will be -applied. © Dale R. Geiger 2011 39
Demonstration Problem – Part 2 • The Repair Depot has no jobs in process at the beginning of the period. During the period the following jobs are started: Alpha Bravo Charlie Parts 5000 4200 3600 Labor 4500 6400 3200 Overhead 2250 3200 1600 11750 13800 8400 Total • Alpha and Bravo are completed and transferred out. Charlie remains in process. © Dale R. Geiger 2011 40
Demonstration Problem – Part 2 • Additional Information • Beginning Raw Materials (Parts) • Ending Raw Materials (Parts) • Overhead Costs Incurred: • Shop utilities • Shop supplies • Indirect labor $1500 2500 $1700 3300 2100 • Administrative costs 2800 • All jobs are sold when completed. User fees equal Cost + 10% to cover administrative costs © Dale R. Geiger 2011 41
Demonstration Problem – Part 2 Use the inventory template to: • Calculate Raw Materials Purchases • Calculate Cost of Goods Sold • Prove the ending balances in the inventory accounts • Calculate Gross Profit and Operating Income © Dale R. Geiger 2011 42
Demonstration Problem – Part 2 WIP - Summary Raw Materials Beg. 1500 Purchases ? --------End. 2500 ? DMU Beg. -0 DL OH DMU --------End. Finished Goods Work in Process Alpha DL OH DM COGM Bravo. . . Beg. COGM ---------End. COGS Charlie. . . © Dale R. Geiger 2011 43
Demonstration Problem – Part 2 WIP - Summary Total of materials for the three jobs equals Direct Materials Used Raw Materials Beg. 1500 Purchases 13800 --------End. 2500 DL OH DM 12800 DMU Beg. -0 DL 14100 OH 7050 DMU 12800 --------End. Work in Process Alpha 4500 2250 5000 Bravo 6400 3200 4200 © Dale R. Geiger 2011 COGM Finished Goods Beg. COGM ---------End. COGS Charlie 3200 1600 3600 =14100 = 7050 =12800 44
Demonstration Problem – Part 2 WIP - Summary Ending is 1000 more than Beginning; Inputs must be 1000 more than Outputs Raw Materials Beg. 1500 Purchases 13800 --------End. 2500 DL OH DM 12800 DMU Beg. -0 DL 14100 OH 7050 DMU 12800 --------End. Work in Process Alpha 4500 2250 5000 Bravo 6400 3200 4200 © Dale R. Geiger 2011 COGM Finished Goods Beg. COGM ---------End. COGS Charlie 3200 1600 3600 =14100 = 7050 =12800 45
Demonstration Problem – Part 2 WIP - Summary Total of labor for the three jobs equals Direct Labor Raw Materials Beg. 1500 Purchases 13800 --------End. 2500 DL OH DM 12800 DMU Beg. -0 DL 14100 OH 7050 DMU 12800 --------End. Work in Process Alpha 4500 2250 5000 Bravo 6400 3200 4200 © Dale R. Geiger 2011 COGM Finished Goods Beg. COGM ---------End. COGS Charlie 3200 1600 3600 =14100 = 7050 =12800 46
Demonstration Problem – Part 2 WIP - Summary Total of Overhead applied to for the three jobs equals Overhead Applied Raw Materials Beg. 1500 Purchases 13800 --------End. 2500 DL OH DM 12800 DMU Beg. -0 DL 14100 OH 7050 DMU 12800 --------End. Work in Process Alpha 4500 2250 5000 Bravo 6400 3200 4200 © Dale R. Geiger 2011 COGM Finished Goods Beg. COGM ---------End. COGS Charlie 3200 1600 3600 =14100 = 7050 =12800 47
Demonstration Problem – Part 2 WIP - Summary Raw Materials Beg. 1500 Purchases 13800 --------End. 2500 DL OH DM 12800 DMU Beg. -0 DL 14100 OH 7050 DMU 12800 --------End. 25550 COGM Work in Process Alpha 4500 2250 5000 11750 Bravo 6400 3200 4200 13800 © Dale R. Geiger 2011 Alpha and Bravo are completed. COGM equals total of Alpha and Bravo Finished Goods Beg. COGM 25550 ---------End. 25550 COGS Charlie 3200 1600 3600 =14100 = 7050 =12800 48
Demonstration Problem – Part 2 WIP - Summary Raw Materials Beg. 1500 Purchases 13800 --------End. 2500 DL OH DM 12800 DMU Beg. -0 DL 14100 OH 7050 DMU 12800 --------End. 25550 COGM Work in Process Alpha 4500 2250 5000 11750 Bravo 6400 3200 4200 13800 © Dale R. Geiger 2011 All jobs are sold when completed. COGS equals total of Alpha and Bravo Finished Goods Beg. -0 COGM 25550 ---------End. -0 - 25550 COGS Charlie 3200 1600 3600 =14100 = 7050 =12800 49
Demonstration Problem – Part 2 WIP - Summary Raw Materials Beg. 1500 Purchases 13800 --------End. 2500 12800 DMU Beg. -0 DL 14100 OH 7050 DMU 12800 --------End. 8400 Alpha DL 4500 Ending in WIP is OH Balance 2250 equal to the cost of Charlie DM 5000 11750 25550 COGM Finished Goods Work in Process Bravo 6400 3200 4200 13800 © Dale R. Geiger 2011 Beg. -0 COGM 25550 ---------End. -0 - 25550 COGS Charlie 3200 1600 3600 ----8400 =14100 = 7050 =12800 50
Demonstration Problem – Part 2 • Is overhead over- or under-applied? Overhead Utilities Supplies Ind. labor 1700 3300 2100 --------End. 50 7050 Applied • Actual > Applied, so under-applied Statement of Activities Revenue: User Fees $28, 105 Less: COGS 25, 550 Gross Profit 2, 555 Less: Admin cost 2, 800 Net loss $ 355 © Dale R. Geiger 2011 51
Practical Exercise © Dale R. Geiger 2011 52
Job Order Costing Spreadsheet Enter estimated overhead and estimated direct labor to calculate pre-determined overhead rate Enter total direct labor for the period to automatically calculate overhead applied © Dale R. Geiger 2011 53
Job Order Costing Spreadsheet Itemize actual overhead incurred © Dale R. Geiger 2011 Over or under-applied overhead is calculated automatically 54
Screenshots Enter data for each job and the Inventory accounts will update automatically © Dale R. Geiger 2011 55
Practical Exercise © Dale R. Geiger 2011 56
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