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Lecture 4

AYB225 - Lecture 4 Notes

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LECTURE 4 – ACCOUNTING FOR ACTUAL AND NORMAL JOB COSTING, CONVERSION COSTS Additional Payroll Issues Withholdings  Items that are retained from employee’s wage or salary, and forwarded to a third party on the employee’s behalf.  They include items such as:  Income tax  Employee contributions to superannuation  Health insurance payments  This does not change the total payroll cost to the firm – it is $64,000 in total, whether paid to employees or the recipient of the withholding Payroll On-Costs  Factory on-costs are additional costs (over and above the wage/salary due to employees).  On-costs include: o 9% employer contributions to superannuation (superannuation guarantee) o payroll tax o provisions for leave o provisions for training etc.  on-costs do increase the total payroll cost to the firm.  On-costs that relate to selling and administration salaries will typically be added to sales salaries and admin salaries respectively.  On-costs that relate to manufacturing (factory) wages may be treated in one of two ways: (1) Treat on-costs on DL as DL, and on-costs on IL as IL (i.e. Overhead). The journal entry for lecture example 2 is: WIP DR 53,410 ($49,000 + $4,410) OH DR 16,350 ($15,000 + $1,350) WAGES CR 64,000 SUPERANNUATION PAYABLE CR 5,760 The rationale behind choosing this method is:  Because the $49,000 can be and is traced to the job (it is DL), then 9% of the $49,000 can also be traced to the job and called DL.  Because the $15,000 either cannot be traced, or the firm has decided it is not economical to trace directly, then it makes sense that the 9% of $15,000 will not be traced directly either, and will be called overhead. (2) All factory on-costs are treated as overhead. The journal entry is: WIP DR 49,000 (with DL only) OH DR 20,760 (with IL + all on-costs, i.e. $15,000 + $4,410 + $1,350) WAGES CR 64,000 SUPERANNUATION PAYABLE CR 5,760  The only difference between methods (1) and (2) is the treatment of the $4,410.  The rationale for choosing method (2) is simply that for some reason the firm has decided that it is uneconomical to charge the on-costs to the job.  Whether the firm chooses method 1 or method 2 is purely a subjective decision, based on management judgment. o Where managers want to have more confidence in the product cost, then they will be likely to trace as many costs as they can, and so would choose method 1.  For both method (1) and method (2), when on-costs are paid, debit the account payable, credit cash. 1 Overtime  Costs are treated as overhead  There are two choices as to what caused the overtime to occur: Overtime caused by the firm  Note that it is possible to trace the additional cost (i.e. the additional $250) to a particular job.  This means that the cost could be called a direct cost.  However, if the overtime was not the “job’s fault”, i.e. it was caused by the firm, then it is not equitable (not fair) to charge that job more than other jobs. The entry is: WIP DR 500 OH DR 250 (with the amount of the overtime premium) WAGES (OR WAGES PAYABLE) CR 750 Overtime caused by the job (ie a rush order)  If the job “caused” the overtime to be incurred, it is equitable to charge the job extra per labour hour. The entry is: WIP DR 750 (here the overtime premium is treated as direct labour) WAGES (OR WAGES PAYABLE) CR 750 Idle Time  Idle time is non-productive time. For some reason employees are not engaged in production activities but still must be paid. The entries for idle time are identical to those for the overtime premium.  If, for example, the idle time is caused by the firm (e.g. machinery breakdowns because the firm hasn’t maintained the machinery properly), the cost of idle time would be charged as overhead, i.e. OVERHEAD DR, WAGES OR WAGES PAYABLE CR  If, on the other hand, the demanding nature of a particular job caused machinery breakdown causing idle time, the entry would be WIP DR, WAGES OR WAGES PAYABLE CR with an amount equal to (no. of idle hours x no. of employees idle x labour rate per hour). Overhead  Calculating the budgeted OH rate uses the same formula regardless of the type of costing system used, and regardless of how many overhead rates the firm calculates. Budgeted overhead rate = Budgeted overhead (static budget) Budgeted activity level of the cost driver (static budget) Choices Relating to Overhead  Because overhead is an allocated cost, there will always be an element of subjectivity/arbitrariness about the amount that ends up as part of the product cost.  This is because the amount allocated depends on choices the firm makes, e.g. 1. How many overhead rates to use 2. Which cost driver/s to use 3. What activity level of the cost driver to use How many overhead rates  Firms may elect as many or as few overhead rates as it wishes. o A plant-wide rate. o Firms may choose different overhead rates for different departments – called departmental overhead rates. o Alternatively, firms may use a more refined system which uses multiple rates. o Multiple rates are typically associated with an activity based costing (ABC) system. 2 Which cost driver?  The cost driver is the measure that is used to share (allocate) overhead across production, i.e. the item that appears in
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