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Lecture 4

ACC 406 Lecture 4: Lecture 4

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ACC 406
Anthony Chan

02/07/2017 Chapter 5: Job order costing system Homework: P5-29, P5-30  Costing system o A set of accounting procedures by using accounts to accumulate cost in and distribute cost out  Product costing system o A costing system in which the product itself is the cost object  Job order costing system o A major example of product costing system Absorption costing Variable costing  Fixed overhead is included/applied  when company excludes fixed to/absorbed by product units overhead cost from product costs,  i.e. cost of goods manufactured = and expensed in the accounting Direct material + Direct labour + Total period overhead  cost of good manufactured = DM +DL  the total overhead means both total + Variable OH only variable overhead and total fixed overhead Absorption costing  Need overhead rate= overhead cost / activity volume  Two major versions: Actual Absorption costing Normal absorption costing Actual Overhead Rate= Predetermined (Normal) Overhead Rate= overhead cost / activity volume Expected Overhead cost/ expected activity  Eg. Actual overhead cost is $1,000 volume  Actual activity volume is 100 units  Predetermined means it is estimated   actual overhead rate= $10 per unit and not actual  Eg. Estimate that the expected  most people feel this method is better because it is more objective, overhead cost is $1,200 reliable, based on real information  Company also estimated to make 80  used by financial accounting units for the year  The predetermined overhead rate is = $15 per unit  This method is better for decision making usefulness because it is more timely and relevant  Used by management accounting  The better accounting method would be the normal absorption method because actual information is not timely 1  Companies need to make decisions all the time, they can’t wait for actual number  they make estimates at the beginning of the year (Predetermined Overhead Rate) and continuously throughout the year  Overhead Applied to Job 1 = Predetermined Overhead Rate x Actual Volume of Job1 2 methods to close overhead account at the end of the year: E.g. The overhead variance =$30,000 1. The immediate write off method o The overhead variance is closed to cost of goods sold only i) Under application situation Cost of goods sold $30,000 Overhead $30,000 ii) Over application situation Overhead $30,000 Cost of goods sold $30,000 2. Proration Method o Three accounts are used to close overhead variance o The accounts are: work in process inventory, finished goods inventory and cost of goods sold accounts I) Under application situation o You did not apply enough so you have to increase expense which is why cost of goods sold is so high o Two other accounts are used as well to share the burden Pre-Closing Balance Distribution ratio work in process inventory $100,0000 100,000/1MIL= 10% finished goods inventory $400,000 400,000/1MIL=40% cost of goods sold $500,000 500,000/1MIL=50% Total $1,000,000 Debit work in process $3,000 (10%) Debit finished goods inventory $12,000 (40%) Debit cost of goods sold $15,000 (50%) Credit Overhead $30,000 (to balance) II) Over application situation o You have applied to
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