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Lecture 5

Week 5 - Ch. 5

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Ryerson University
ACC 406
Alison Beavis

ACC406Week FiveJobOrder Industries produce a wide variety of services or products that are quite distinct from each other ex printing construction dental services extProcess Industry mass produce large quantities of similar products ex cement chemicals petroleumDirect materials and direct labour are easy to assign over head is not as easyInstead over head is applied to productionCosting TypesActual Costing actual costs of direct materials direct labour and overhead are used to determine unit costNormal Costing determine unit cost by adding actual direct materials actual direct labour and estimated over head costsMajority of firms use this methodNormal CostingEstimating Over HeadThree step process1Calculate the predetermined over head rate2Apply over head to production3Reconcile applied over head with actual over head OR allocate applied over head to work in progress WIP and finished goods ending inventoryHow to calculateEx At start of year ABC Co estimated overhead to be 360000 direct labour to be 720000 They use normal costing For the month of February direct labour cost was 560001 OH Rateestimated annual over headestimated annual activity level Overheaddirect labour costs 36000072000005 or 50 of direct labour costs250 of 5600005 x 56000280003 Ex Dave Inc had actual OH of 400000 but applied 390000 to productionThis is called an over head varianceIn this case since actualapplied this is underapplied over head vs overappliedOver head variance is assigned to the cost of goods soldUnderapplied would be added
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