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Lecture 2

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York University
ACTG 2020
Ben Kelly

January 11, 2014 LECTURE 2 REVIEW COST CONCEPTS Cost behavior: Variable v. fixed costs – helps you more accurately calculate future (labor, for example) costs- helps us determine the break-even point (how many units need to be sold to recover fixed costs) Traceable to a cost object: Direct v. indirect costs (directly contributing- material costs; indirect costs- lighting; first need to define the cost object- THEN can classify cost; want to figure out what is an overhead expense; performance evaluation) Cost concept for decision- making: differential costs, opportunity costs, sunk costs Product costs v. period costs: DM, DL, MOH v. selling and admin. Expenses; cost of goods sold v. cost of goods manufactured PROBLEM 2-22 CHAPTER 3: SYSTEMS DESIGN: JOB- ORDER COSTING • What will we learn from this chapter? The use of Job order costing to assign overhead cost; Calculate unit product cost Product Costing GM B/S and I/S Direct Costs Summary: Cost Of Goods Manufactured And Cost Of Goods Sold Schedule of Cost of Goods Manufactured: Total current period manufacturing costs + Add: Beginning Work in Process - Less: Ending Work in Process = Cost of Goods Manufactured Total current period manufacturing costs= Direct Material Used: Beginning January 11, 2014 +Add : Purchased -Less : Ending =Total direct material used Direct labour Manufacturing overheads (MOH) Variable OH applied Fixed OH applied Schedule of Cost of Goods Sold: Beginning Finished goods + Add: Cost of Goods Manufactured = Cost of Goods Available for Sale - Less: Ending Finished Goods =Cost of Goods Sold -/+ Over/Under-applied Fixed Overhead Costs = Cost of Goods Sold The Job Cost Sheet The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a given job. A job number uniquely identifies each job. Direct material, direct labour, and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account. We will look at a job cost sheet used by a hypothetical company called PearCo. The company has a job that calls for the construction of wooden cargo crates. You can see the separate sections for direct materials, direct labour, and manufacturing overhead. In addition, we have a section to summarize total costs of the job. Job-Order Cost Accounting The Accounting Department records the labour costs from each time ticket onto the job cost sheet. On the job cost sheet, we can see that time ticket number 36 posted 8 hours to job A – 143. The total amount of direct labour cost is $88. This amount is also posted to the summary section of the job cost sheet. Q2: How much MOH is applied to each car? MOH allocation by job order costing system Allocation of Indirect Manufacturing Costs January 11, 2014 Types of Product-Costing Systems Process Costing- Job-Order Costing: - Used for production of large, unique, high- cost items - Built to order rather than mass produced - Many costs can be directly traced to each job Two types: - Job-shop operations: Product manufactured in very low volumes or one time at a time - Batch- production operations: Multiple products in batches of relatively small quantity Typical job-order cost applications - Special- order printing (e.g. Hallmark) - Building construction (e.g. Bombardier) Also used in the service industry – assign overhead cost to each patient - Hospitals - Law firms Job- Order Costing System: Allocation of Indirect Manufacturing Costs to Each Job - Manufacturing overhead, including indirect materials and indirect labour, are allocated to jobs rather than directly traced to each job - An allocation base, such as direct labour hours, direct labour dollars, or machine hours, is used to assign manufacturing overhead to individual jobs Determining Overhead Application Rate (POHR) Estimatedtotalmanufacturingoverheadcost forthecoming period POHR= Estimated totalunits∈theallocationbasefor thecoming period How does a firm choose the allocation base? POHR= $640,000 =$4.00per MH 160,000machinehours(MH) For each machine hour worked on a car, $4.00 of factory overhead will be applied to that job ** Ideally, the allocation base is a cost driver that cases overhead Apply manufacturing overhead to each job? POHR: Based on estimates, and determine before the period begins Actual activity: amount of the allocation based on upon the actual level of activity Overhead applied to Job 1 = POHR * Actual activity needed for Job 1 Job- Order Accounting Recall that an employee worked a total of 8 hours on Job A-143. Our predetermined overhead rate is $4 per direct labour-hour, so we will apply $32 (8 hours times $4 per direct labour-hour) of overhead to this job. The computation is shown in the manufacturing overhead section of the job cost sheet and in the summary section. January 11, 2014 Since this particular job included 2 units of production, the average cost per unit is $118. We calculated the average cost by dividing the total cost of $236 by the 2 crates produced. The average unit cost should not be interpreted as the costs that would actually be incurred if another unit was produced. The fixed overhead would not change
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