CHAPTERTHREE

J
OBORDERCOSTI
NGSYSTEM
I
ntr
oduc
tion
Ac cur at epr oduc tc ostingi svi t
alf orbus i
nes ss uc ces s.Itisus edf orpl anning,pr oductc osti
ng,c ost
cont rol ,anddec isionmaki ng.Wit hawel ls et uppr oduc tc ostings ys tem,t hepr iceofpr oductsc anbe
pr ecisel ydet ermi ned.Thepr oduc tc os ti
ngs ystem c ant her eforebeus edbymanuf acturerstos el ect
pr oduc tsf ormaxi mum pr ofi
tability.Thef ol lowingpoi ntsneedt ober emember edi nconnec ti
onwi t
h
cos tings ys tems :
1.Thec ostbenef i
tappr oach: Thecos tsofac ompl exc ostings ystem,i nc ludingt hec os t
sof
educ at i
ngmanager sandot herper sonnelt ous ei t,c anbehi gh.Manager ss houl dins t
allamor e
compl exs ystem onl yift heybel ievet hati tsaddi tionalbenef i
ts-s uc hasmaki ngbet terinformed
dec isions-wi llout weight headdi tionalc os ts.
2. Cos ti
ngs ys temss houl dbet ai l
or edt otheunder lyingoper at i
ons ;theoper ati
onss houldnot
bet ailor edt of itt hec os ti
ngs ys tems .Anys ignificantc hangei noper ationsi sl i
kelyt ojusti
f ya
corres pondi ngc hangei nt hec os tings ys tem.Des igningt hebes ts ystem begi nswithas tudyof
howoper ati
onsar ec onduc tedandt hendet ermi ni ngf rom t hats t udywhati nf ormationt ogat her
andr epor t.
3. Cos ti
ngs ystemsaccumul at ecos tst of aci l
itat edeci s i
ons .Bec ausei t'
snotal wayspos sible
tof or es ees pec i
ficdec isionst hatmi ghtbenec es sary, costings ys t
emsar edes i
gnedt ofulfil
lsever al
gener alneedsofmanager s.Manager sus epr oduc t-costingi nfor mat iont omakedec isi
onsand
strat egy, andf orpl anni ngandc ont rol, cos tmanagement ,andi nvent oryval uati
on.
4. Cos ti
ngs ys temsar eonlyones our ceofi nfor mat ionf ormanager s.Whenmaki ngdec isi
ons ,
manager sc ombi ne i nfor mat i
on on c os tswi th ot hernon- costi nformat i
on,s uch asper sonal
obs er vat ionofoper ations ,andnof inanc ialper formanc emeas ures ,suc hass et upt i
mes ,abs ent ee
rates , andnumberofc us tomerc ompl aints .
Cos
tSys
temBas
ics
Cos
tsys
tem i
sac
oll
ect
ivet
ermf
ort
hepol
ici
es,pr
ocedur
es,andf
unc
tionalhar
dwar
ethata
companyus est opr ovi det heval ueoft heuni tc os t
sofi tspr oduc tsors ervices.Thec os ts ystem
i
nc ludes,butmaynotbel imi t
ed t o,t hef ollowi ng c omponent s:c ostobj ects;c os tpool s;c os t
accumul at i
onmet hod( e.g.,jobc os t
ingorpr oc essc os ti
ng) ;c ostmeas urementmet hod( e.g.,actual ,
nor mal,ors tandardc os ti
ng) ;over headal loc ationpr oc edur e(costdr i
ver s,choic eofc apac i
t ymeas ur e,
andover headr ates )f ors er vicedepar tment s,jointpr oc essc osts,andot herover headc osts;c os t
reportingf or mat( e.g.,abs or ptionorvar iabl ec osting) ;har dwar edes ign( e.g.,cent r
almai nframeor
sitewor ks t
at i
ons);ac ces sibili
ty( managerorf i
nanc ialanal ystonl yorf ullac ces si
bil
ity) ;andr epor ti
ng
frequenc y.
 Or ganizationsc hoos eamongc ostings ystemsbyc ons i
der i
ngt wot hings .Firs t,howdet ailed
ands peci
al i
z edmus tc os tsofeac hpr oduc tbe?Sec ond,mus tper i
odicc ostsbeac cumul at ed
from t hebegi nningoft hel ifeofapr oduc tunt ilitiss old?Ans wer i
ngt heseques t i
onshel ps
manager st oc hoos efromdi f
ferentt ypesofc os tings ystems .
 Ac ostobj ec ti sanyent ityorac tivityf orwhi chc ostsar eac cumul atedf ormanagement
pur poses( e.g.,f i
nanc i
alr eporting,dec i
si
on- maki ng,orper for manc eeval uat ion) .Exampl es
includephys i
c alpr oduc ts ,servicepr oduc ts( suc hast hepr oc ess i
ngofani ns uranc ec laim) ,
cus tomers ,pr oduc tl i
nes ,andor gani zationaluni ts
.I nanyanal ysisofac os ts ys t
em,i ti s
impor tantt oc ons iderwhet hert hec ostobj ectsar eappr opriatef orthedec ision( s)athand.
 I fthemanageri sint eres tedi nc ust omerpr of i
tabi li
ty,thent heappr opr i
atec ostobj ectsar e
individualc us tomer s.Ifthedec isioni nvolvespr oduc tmi x,thenpr oduc tsar et heappr opri
at e
cos tobjects .Ifthedec isioni nvolvesout s
our c i
ngas ervicef unc t
ion,t hent heor gani zati
onal
uni tthatist hes er vicedepar tmenti nques tioni st heappr opriatec ostobj ect.
1
  Cos tpoolsar emeani ngf ulgr oupsi nt owhi chc os tsar eaggr egated.Themos tcommonc os t
pooli sanor gani z
at ionaluni t,s uc hasapr oduc tionors er vicedepar tment .Costpool sar e
i
nt ermediateac cumul ationsofc os tst hathel pclar if
yt hepr ocessofas signingandal locating
costst oc ostobj ec t
s .Cos tPool sc anbepr oduc tiondepar tments ,servicedepar t
ment s
,or
organizationalac tivities.Thec ost soft her es ourc estheyc ons umear ec ol
lectedineac hc os t
pool.Somear edi r
ec tlyt raced;ot her s(s uc hass er vicedepar tmentc ostsinamanuf acturing
plant)maybeal locat ed.
 Cos tObj ects( as iti s discus sed i n CH- 2)c an be pr oduc ts
,c ustomer s,services,or
organizationaluni ts. Ideally,weas signc os tst oeac hcostobj ectinpr oporti
ont otheval ueof
ther esourcest heyc ons ume. Cos t sar et r ans ferredf r
om c os tpoolst oc ostobjectsusingc os t
drivers.
 Cos tDr i
versi deal lyr eflec tthei ndi rec tr es ourc esc ons umedi nt hepr oduc t
ionofac os t
object.Traditionalc os tdr i
versi nc ludemat erialcos ts,laborhour s,andmac hinehour s.
Theseassumet hatpr oduc tionofc os tobjec t scons umesover headc os tss uchass et-ups,maint enanc e,
engineeri
ng, qualitycont rol,et c.,i
npr opor t i
ont opr oduc tionvol ume.
Acti
vity-
bas edc ostdriver s,suc hast henumberofs et-upsorengi neer ingc hangeor der s
,assumet hat
producti
onofc ostobj ectsc ons umesover headr es our cesi npr opor tiont ot heamountofapar ti
cular
acti
vityr
equi red.
Cos
tAc
cumul
ati
onMet
hod
Thec ostaccumul at
ionmet hodtypi
cal
lydependsont hecharacteri
stic
softheproduc t
ionprocessof
theor gani
zati
on.Theac cumulati
onmet hoddescr
ibestheproceduresbywhi chcostsarerecor
dedas
inc
urred, t
rackedwi thcostobj
ectsthr
oughtheproductionprocess,andexpensedwhenpr oductsare
sol
d.I tispossibl
et othinkofcostaccumulati
onmet hodsasl yi
ngal ongas pec
trum:Thenextf ew
paragraphsprovideabr i
efdescr
ipti
onofthesecostsys
tems.
Pr
oces
sCos
ting
Process Costing is appropriat
ef or product
ion envi
ronment st hat involve high volumes of
homogeneouspr oducts
.Cos t
sac cumulatedbydepar t
mentandar eas si
gnedt ouni t
sofproduc t
sby
di
vidingthet otalcost
si ncur
redbyt heequival
entunitsofpr oducti
on.Theequi valentuni
tc oncept
accountsforthec ost
sofbegi nningandendi ngwork-i
n-processinventory.Exampl esofset
tingsthat
mightusepr ocesscosti
ngincludec hemicalproc
essi
ng,oilr
efining,
andpaperpr oducti
on.
J
obOr
der(
orJ
ob)Cos
ting
Whati
sJob-
OrderCos
ting?
Job-orderc ostingi susedwhendi f
ferentt ypesofpr oduc ts,jobs ,orbat chesar epr oduc ed,typically
overar at hers hor tperiodoft imet ot hec ustomer 'sspec i
fications .Asar esul t,eac hjobt endst obe
dif
ferent .Injob- ordercos ti
ng,eac hdi stinc tbat chofpr oduc ti
oni sc alledaj oborj obor der.Thec ost-
accountingpr oc edur esaredes ignedt oas signc ostst oeac hj ob.Thent hec os tsas si
gnedt oeac hjob
areaver agedovert heunitsofpr oduc tioni nt hejobt oobt ainanaver agec ostperuni t.
Exampl esofi ndus tr
iesinwhi chj ob- orderc ostingi sus edi nc ludepr i
nti
ngpr esses,c onstruction,
automobi l
er epai rs,offi
ceandhous ehol df urniture, off
icemac hines , etc.Inaj ob- orderc os ti
ngs ystem,
dir
ec tmat er i
alsc ostsanddi rectl aborc os tsar eus ual l
y" traced"di rectlytoj obs .Over headi sappl i
ed
tojobsus i
ngapr edet er
mi nedr ate. Actualover headc ostsar enot" trac ed"toj obs .Remembert hatjob
costscons istofac tualdirectmat er i
alsc os ts,actualdi rectlaborc osts ,butappl iedover headc osts.
Becaus er epor tingofbus inessac tivityoc c ursper iodicallybutc ompl et i
onofj obsgener all
ydoesnot
occuratt heendofar epor ti
ngper iod,j obc ostrepor t
ingmus tr ef l
ec ttheval ueofj obsati nterim
pointsbef oret heyar ec ompleted.Ther ear et woi nvent oryac c
ount sinwhi chc os tsofj obsar e
accumul ated. Theyar eWor k-i
nPr oc ess( WI P)invent or
yandFi nis hed- goodsi nvent ory( FGI ).
Wor k-i
n- Proc essi nventoryac cumul atesal lc ostsofr esour cesus edonj obst hathavenotbeen
compl eted. Eac hj obhasi tsowns ubs i
diaryac count ,wher ecos tss pec i
fictothej obar erec orded.

2
Finis
hed- goodsinvent oryi sanac countwher ecost
sofallc ompletedj obsar erec or
ded.Thes ec ost
s
aret r
ansf er
redf rom WI Pinvent orywhenaj obiscompleted.Thec os t
sr emai ninFGIunt ilt
hej obis
sold.Onces old,thec ostsofajobar etransfer
redtoanexpens eaccountc alledcostofgoodss old.
Compani esus i
ng j ob costing usuall
yhavemanyj obsbei ng wor ked on att hes amet ime.An
accountings yst
emmus tallowt heorganiz
at i
ontokeeptrackofalljobss epar at
elyandmus tmai ntai
n
recordsofal lj
obsi nprogr ess,c
ompl eted,andsold.
Itmus talsor
ec ordac tivi
tyforWI Pinventory,FGI,
andc ostofgoodss old.Thesethr eearegenerall
edgeraccountsarei mpor tantinajobc osti
ngs ystem

Thedi sti
ncti
onbet weent hejobc ostandt hepr oc essc ostmet hodsc entersl argelyonhowpr oduct
costingisac complished.J obc ostingappl i
esc oststos pecifi
cj obs,whi chmayc ons is
tofei thera
singlephysicalunitoraf ewl i
keuni tsi
nadi st
inc tbatchorj obl ot .I
nc ontrast, proces scosti
ngdeal s
wi t
hgr eatmas sesofl i
keuni tsandbr oadaver agesofuni tcosts .Thebas icdi stinctionbet weenj ob
orderc osti
ngandpr ocessc ostingi st hebr eadt hoft hedenomi nator:inj obor derc osti
ng,t he
denomi natorissmall;however , i
npr oces scosti
ng, thedenomi nat orislarge.
Jobc osti
ngandpr ocesscos ti
ngar eextremesal ongac ontinuum ofpot entialc os t
ings ystems.Eac h
companydes i
gnsi tsown ac count ings ystem t ofiti tsunder lyi
ngpr oduc tion ac ti
viti
es.Some
compani esus ehybridc ostings ystems ,whi char ebl endsofi deasofbot hj obc ostingandpr ocess
costing.

J
ob-
cost
ing Pr
ocess
- c
ost
ing
Sys
tem s
ystem

Dist
inctunit
sof Massesofi
dentic
al
aproductorservi
ce orsi
mi l
arunit
sof
aproduc
tors er
vice
Exampl
esofJ
obCos
tingandPr
oces
sCos
tingintheSer vi
ce,merc
handi
si
ng,andManuf
act
uri
ng
Sect
or

Ser
vic
eSec
tor Mer
chandi
singSec
tor Manuf
act
uri
ng
Sec
tor
-
Audi
ti
ngengagement
s -sendi
ng s
pecial
-or
deri
temsby mail-
Air
craf
tass
embly
order
J
ob -Consulting-f
irm -Speci
al promoti
on of new stor
e -
HouseConst
ruc
tion
engagement s product
s
Cos
ting -Advertising-
agency
campai gns
Us
ed -Lawc ases
-Auto-repairshops

Proc
ess -
Bank- c
heckcleari
ng
Cost
ing -
Pos t
aldel
iver
y -
Grai
ndealer -
Oilr
efini
ng
Used (
standardi
tems ) -
Lumberdealer -
Beveragepr
oduc
tion

Inthischapt er,wefoc usonjobc ost

ings yst
ems .ChapterFourdiscussespr ocess-cost
ingsyst
ems .
Thedi scussi
onbel owas s
umest hatapaper -basedmanuals ys
temisus edforr ecordi
ngc os
ts.Costand
otherdat aar er ec
or dedonmat eri
alsrequisi
tionfor
ms ,timet i
cket
s ,andj obc ostsheets
.Ofc ourse,
manyc ompani esnowent ercostandot herdat adi
rect
lyint ocomputerdat abasesandhavedi spensed
witht hesepaperdoc uments.Nevertheless,thedataresidinginthec omput ert ypi
call
yconsistsofa
"vi
rtual"vers i
onoft hemanuals yst
em.Si nceamanuals ystem i
seasyf ors t
udent stounderstand,we
continuet orelyoni twhendes cribi
ngaj ob-ordercos
tings yst
em.
1.J obCos tSheet .
Inaj obor derc ost
ings ystem,wemai ntai
naj obcosts heetforeachj ob.Thec os ts
heetsarel i
kethe
3
account sr ec eivabl es ubs idiaryl edger .Whi let heac count sr ecei vabl es ubs i
di aryl edgerpr ovidesa
detai ledl istingofi ndi vidualc ust omerac count s,thej obc os ts heet ss how adet ai ledl istingoft he
cost sas signedt oi ndividualj obsi nt hewor kinpr oces sandf i
nishedgoodsi nvent ories .Eac hj obs heet
breakst hec os tsdown i nt er msofdi rec tmat erials,di rectl abor ,andmanuf ac turingover head
assignedt oi ndi vidualj obs .Thej obc os ts heetwi llhaves omec odeordes c ri
pt i
vedat at oi dent ifythe
part icularjobandwi llcont ains pac est oc ol l
ec tc os t
sofmat er i
als, labor ,andover head.
2.Ac c ount ingf ormat erialsCos t s.
Whenaj obi ss tarted,mat erialst hatwi llber equi redt oc ompl et et hej obar ewi thdr awnf rom t he
storer oom.Thedoc umentt hataut hor i
z est hes ewi t
hdr awal sand t hats pec if
iest het ypesand
amount sofmat erialswi t
hdr awni sc alledt hemat erial srequi si
tionf orm.
Nor mal l
yt he pr oduc tion depar tments uper visorc ompl et est he mat er i
alsr equi sit
ion f or m and
pres ent sitt ot hes torer oom s uper vi sor .Themat eri
al sr equi sit
ionf ormi spr epar edatl eas tint hree
copi es.Onec opygoest othec os tac c ount i
ngdepar tment .I nthi sdepar tmentt hisc opyi sus edasa
bas isfort rans ferringt hec ostoft her equi sitionedmat erialf romt he“ RawMat er ialI nvent ory”ac count
tot he“ Wor ki nPr oces sInvent ory”ac count ,andf orent er ingt hec os toft hemat erialont hej ob- c
ost
sheetf ort hepr oduc tionj obi npr oc es s.Themat er i
al srequi sit
ionf or mi dent i
fiest hej obt owhi c
ht he
mat er ialsar et obec har ged.Car emus tbet akenwhenc hargingmat er ialst odi stingui shbet ween
direc tandi ndi rec tmat erials.
Forpr oduc tsandpr oduc tc omponent st hatar epr oduc edr out i
nel y, ther equi redmat erialsar eknown
i
nadvanc e. Fort hes epr oduc tsandc omponent s,mat er i
alr equi sitionsar ebas edona“ billofmat erial
”
thatl istsal loft hemat erialsneeded. Inc ompl exmanuf ac tur i
ngoper at i
ons , i
nwhi chpr oduc tiont akes
plac ei ns ever als tages ,mat er ialr equi rement spl anni ng( MRP)maybeus ed.MRPi sanoper ati
ons-
managementt oolt hatas sistsmanager si ns c hedul ingpr oduc ti
oni neac hs tageoft hemanuf ac t
uring
proc es s.Suc hc arefulpl anni ngi ns ur est hat ,ateac hs tagei nt hepr oduc t
ionpr oc es s
,t her equired
subas sembl ies,c omponent s,orpar tial l
ypr oces sedmat erialswi llber eadyf ort henex ts tage.MRP
system,whi c har egener allyc omput er ized,i ncludef i
lest hatl is tal loft hec omponentpar tsand
mat er ialsini nvent or yandal loft hepar tsandmat er i
al sneededi neac hs tageoft hepr oduc t
ion
proc es s.

Thec os tofamanuf acturedpr oduc tc ons i

stsoft hec ombi nedc os t
soft her awmat erial
spr oc essed,
thedi rec tlaborofempl oyeeswhopr oces sedt her awmat eri
al sandt hef ac t
or yover headgener ated
byt hemanuf ac tur ingpr oc es s.Si nc emat erialsmayc ompr iset hel arges tsingl eelementofc os t
,the
cont rolofmat erial sc ostisani mpor tantf actorinmanuf acturi
ng.
Mat er ialsc ont rolPr ocedur es
Thel ogi cals tep- by- stepdevel opmentofmat eri
alsc ontrolpr oc eduresc anbei l
lustratedbyus i
nga
simpl ifiedver s ionofwhati sor dinar ilyac ompl exmanuf act uringac t i
vity.Al thought hef ollowing
pr es ent ations ugges tsthatonl yonej obi sbei ngpr ocessedandt hateac hs tepi nt hepr ocessi
ngoft he
for msdes cri
bedi si solated, t
hef ac tist hats everaljobsmaybei npr oduc ti
ons imultaneous l
y, andt he
flowofpaper wor kwoul dbec ont inuous .
Cont r oldur ingPur chas i
ng
Onr ec eiptofac us tomer ’
sor der , thes al esmanagerc ommuni cat estot hepr oduc tionmanageral lthe
neededdet ails ,s uc hass pec ificat ions,uni tsor dered,requi r
eddel i
verydat e,andpr ices.From t hese
dat a,t hepr oduc tionmanagerr epor tsapr oduc ti
onor derwhi chaut horizest hepr oducti
onoft he
requi redpr oduc ts .
Bil lofmat er i
al s:
Thepr oduc tionor deri sgi vent os uper visorinc hargeofpr oduc tion,who,bas edonknowl edgeoft he
pr oduc t,pr epar esas chedul eoft hemat erialsrequi r
edt oc ompl et
et heor der.Thef ormf ort his
pur pos ei scal ledbi llofmat erials.
Ac opyoft hebi llofmat er ialsiss entt obes toreroom keeper .Thisper sonc hec ksthequant i
tiesoft he
var iousmat erial sr equi redwi t ht hos eonhandandonor dert odet erminewhet herornott her eare
4
enoughmat eri
alsavai l
abl et ocompl etet heor der .Ifther earenotenoughmat erials,thepur chas ing
agentmus tbenot if
iedoft hequant ityr equir ed;i fther eisanadequat eamountofmat er i
alsonhand
fort heor der ,i
tmus tbedet erminedwhet hert hewi thdrawaloft her equi redquant itywi llreduc et he
stockonhandt oal ow l evel.Ifs uc hi st hec as e,t hepur chasingagentmus tbeadvi sedont he
replac ementneeded. Thebi l
lofmat er i
al spr oc edur esar epr eli
mi nar ytot heac tuals tar t
ingoft hej ob
ordert hrought hef ac tory.Theyar edes ignedt oens uret hatonc et heor ders tartsi ntopr oduc tion,it
willnotbehel dupf orl ackofr awmat erials.
Purc has eRequi sit
ion.
Thef orm us edbyt hes torer oom keepert onot i
f yt hepur chasingagentoft headdi tionalmat er i
als
neededi sknownasapur chaser equi s i
t i
on.Thi sr equi siti
oni sani mpor tantpar toft hemat er i
als
cont rolpr oc essbec aus ei ti stheagent ’
saut hor ityt obuy.Ac arefullydes ignedf or ms houl dbeus ed.
Purc has er equisit
ionss houl d originat e wi tht he s toreroom keeperors ome ot herdes i
gnat ed
individualgi vens i
mi laraut hor it
yandr es pons ibility.
Purc has er equi si
ti
onss houl dbenumber eds er iallyt ohel pdet ectt helos sormi sus eofanyoft hes e
forms .Theymaybepr epar edi ndupl icat eori nt ri
plicate.Ifpr epar edi ndupl i
cat e,t hes torer oom
keeperr etai nsonec opyi ss enttot hepur chas ingagent .Ifthes toreroom keeperhasphys icalc har ge
ofthemat er ial
sbutanot herper s
oni nt heac count i
ngdepar t
menti sinc har geoft hes ubsidiar yst ores
ledgeri nwhi c
har ec or di skeptont hemat er ialsonhand,t her equisitions houl dbepr epar edi n
tri
plic ate.Thef i
rstcopygoest othepur chas i
ngagent ;thes econdc opygoest ot heper soni nc har geof
thes ubs idiar ystoresl edger ;andt het hirdc opyi sr etainedbyt hes toreroomkeeper .

Pur chas eor der

Thepur chas er equi sit
iongi vest hepur c
has ingagentaut hor i
t yt oor dert hemat erialsdes cribedi nt he
requi sition. Fr omaf ileofquot ationsandpr ices, thevendormaybes elec tedf romwhomt hemat er i
als
canbeobt ainedatt hel owes tc ostandwi t ht hel eas tdel ay.I ft hef il
edoesnotc ont aint his
informat ion,t hepur chas ingagentmayc ommuni cat ewi ths ever alpr os pec tivevendor sandr eques t
quot at i
onsont hemat erial sneeded.
Apur chas eor deri st henc ompl etedandaddr es sedt ot hec hos envendor ,des cribingt hemat er i
als
want eds tat ingpr i
c eandt er ms ,andf ixingt hedat eandmet hodofdel iver y.Thi spur c has eor der
shoul dbenumber eds eriallyandpr epar edi nquadr upl i
cate.Thef i
rstgoest ot hevendor ,t hes econd
copyi sr et ai nedbyt hepur c has i
ngagent ,thet hi rdc opygoest ot heac c ount i
ngdepar tmentwher eit
isr efer redt ot hes toresl edgerc ler k,andt hef our thc opygoest ot her ecei vingc l
er k.Thes tores
ledgerc ler kmakesamemoent ryont heappr opr iat el edgers heetoft hequant i
t yonor der.
Vendor ’
sI nvoi c e
Thevendor ’
si nvoi ces houl dber ec eivedbef or et hemat erialsar ri
veatt hef ac tor y.Ass oonasi tis
received,i tgoest ot he pur chas ing agent ,who c ompar esi twi tht he pur chas e or der,not ing
par ti
c ular lyt hatt hedes cript i
onoft hei temsi st hes ame, thatt hepr iceandt het er msagr ee, andt hat
themet hodofs hipmentandt hedat eofdel i
ver yc onf ormt ot hei ns tr
uc ti
onsont hepur chas eor der .
Whens at isfiedt hatt hei nvoi cei sc or r
ec t,thepur c hasingagenti ndic atesappr ovaldi rec tl
yont he
invoic e.
Rec eivi ngRepor t
Itwass ugges tedt hatt hef ourt hc opyoft hepur c has eor dergoest ot her ec eivingc ler kt ogi ve
advanc enot iceoft hear rivaloft hemat erialsor der ed.Thi si sdonet of ac i
litat epl anningwor kand
allottings pac et oi ncomi ngmat er i
al s.Ther ec eivingc l
er kisi nc har geoft her ec eivingdepar tment
wher eal li nc omi ngmat er i
al sar er ec ei
ved,opened,c ount edorwei ghed,andt es tedf orc onformi ty
wit ht heor der .Ifthemat er ialsr ec eivedar eoft oot echnic alanat ur et obet est edbyt her eceiving
clerk,t hei ns pec ti
onmaybeunder takenbyanengi neerf r
om t hepr oduc tionmanager ’
sof f
iceort he
mat er ialsmaybes entt ot hepl antl abor atoryf ort es ting.
Ast her ec eivingc lerkc ount sandi dent ifi
edt hemat erials,ar ecei vi
ngr epor ts houl dbepr epar ed
simi l
ari nf ormt otheoner epr oduc edbel ow.Eac hr epor tisnumber eds er i
allyands howsf rom whom
5
themat er ialswer er ec ei ved, whent heywer er ecei ved, whatt hes hipmentc ont ained, andt henumber
oft hepur c has eor dert hati dent ifiest hes hipment .Ther epor ts houl dbepr epar edi nquadr upl i
cat e.
Thef i
r stands ec ondc opi esgot ot hepur chas ingagent ,t het hi rdc opygoeswi tht hemat er i
alsor
suppl iest ot hes tor eroom keepert oens ur et hatal loft hemat er ialst hatc omet ot her ec eiving
depar tmentar eputi nt ot hes tor er oom;andt hef our thc opyi sr et ainedbyt her ec eivingc ler k.
Thepur c has ingagent ’
sf irs tcopyoft her ec eivi ngr epor ti sc ompar edwi ththevendor ’sinvoi ceandt he
pur chas eor dert odet er mi net hatt hemat er ialsrec eivedar eexac tlyl iket hos eor der edandbi l
led.I f
theyar ef oundt obet hes ame,t hepur chas i
ngagentt henat tac hest her ec eivingr epor tt ot heot her
for msal r eadyi nt hef ileands endst heent i
ref i
let ot heac count ingdepar t mentwher eavouc heri s
pr epar edandr ec ordedi nt hevouc herr egi ster.Tot hes ec ondc opyoft her ec eivingr epor t,t he
pur chas ingagentaddst heuni tpr icesoft hear ticl
esr ec eivedandext endst hef i
gur et os howt het ot al
cos t .Thi sc opyt hengoest ot heac count ingdepar tmentf orpos ti
ngt ot heappr opriat emat er i
al s
ac count si nt hes toresl edger .Thepur pos eoft hisdoubl er out i
ngt ot heac count ingdepar tmentof
copi esoft hes amef or mi st omaxi mi zei nt ernalc ont rolpr oc edur es.Oneac count i
ngc l
er kent erst he
pur chas ei nt otali nthevouc herr egi s ter;as ec ondc lerkent erst hepur chasei ndet ai lint hes ubs idiar y
stor esl edger .
Debi t-Cr edi tMemor andum -oc c as ionally, as hipmentofmat erial sdoesnotmat cht heor derandt he
invoi c
e.Whent hiss ituat ionoc cur s,c ompar ingt her ec eivingr epor twi ththepur chas eor derandt he
invoi c
ewi lldi scloset hevar i
anc et ot hepur chas ingagent . What evert hec aus eoft hedi f
fer enc e,itwi ll
leadt oc or res pondenc ewi tht hevendor ,andc opiesoft hel et ter ss houl dbeapar toft hef ilesoff orms
rel at i
ngt ot het rans ac t i
on.I fal ar gerquant i
tyhasbeenr ec eivedt hanhasbeenor der edandt he
exc essi st obekeptf orf utur eus e,ac redi tmemor andum i spr epar ednot ifyingt hevendoroft he
amountoft hei nc reas ei nt hei nvoi c e.
If,ont heot herhand,t hes hipmenti ss hor t,oneoft het woc our sesofac tionmaybet aken.I ft he
mat er i
al sr ec ei
vedc anbeus ed,t heymayber etainedandadebi tmemor andum pr epar ednot ifying
thevendoroft heamountoft hes hor tage. Ift hemat erialsr ecei vedc annotbeus ed, ar et ur ns hippi ng
or deri spr epar edandt hemat erial sr et urned.

Ther et ur ns hippingor deri sus ual lymadeouti nt r

iplicate.Thef irstc opygoest ot hevendor ,t he
secondc opygoest ot her ec eivingors hippingc l
erk,andt het hirdc opyi sf iledwi t hot herf orms
relati
ngt ot het rans act i
on.Debi torc redi tmemor andumss houldbepr eparedi ndupl icate.Thef i
rst
copygoest othevendorandt hes ec ondc opyi sf i
ledwi t
hdoc ument sr elatingwi tht het rans acti
on.
Notunt ilal lvarianc esordi s agr eement shavebeenr esol vedwi llt het rans actionbec ompl ete.When
theyar er esolved, thepur c has i
ngagents endst hefil
et ot heac count ingdepar tment .
Cont rolDur ings torageandI ss uanc es
Thepr oc eedingdi scus sionappl iest othec ontrolofmat erialsdur ingt hepr oces sofpr oc urement .The
routinet hathasbeens ugges tedandt hef ormsdes cri
bedhavet rac edt heor der i
ngandt hear rivalof
themat erialsandt hei rt r
ans fert ot hes toreroom.Thenextpr obl em t obec ons i
deredi sthes tor age
andi ssuanc eofmat erialsands uppl ies
.
Mat erialsi nvent oriesus ual lyr epr esentac ons i
derablei nves tmentofmoney;t herefor e,cares houl d
bet akent odevi seanadequat ec ontrols ystem t opr otectt hes eas sets.Thepr oblem i show t his
controlc anbes tbeac hieved.Thei mpor tanceofknowi ngt hequant i
tiesofmat erialsonhandatany
ti
mehasal readybeenemphas ized;iti sequal l
yi mpor tantt hatt hec ostofmat erialsonhandbe
known.
Mat erialsRequi sition
Nomat er i
als houl dbei ssuedf rom t hes toreroom exc eptonwr it
t enaut hor i
zations ot hatt herei sl ess
chanc eoft heft,c ar eles s
nes s,ormi suse.Thef or
m us edt opr ovidet hisc ont rolisknownast he
mat erialr equisi
tionors tor esr equi si
tionandi sprepar edbyt heper s onorper sonsi nt hef ac tory
author izedt owit hdr awmat er i
al sf r
om t hes t
or eroom.Thei ndividual swhoar eaut horizedt oper form
thi
sf unc ti
onmaydi fferf r
omc ompanyt oc ompany, buts uchaut hor itymus tbegi vent os omeone. The
6
mos ts at isf
ac tor yar rangementwoul dbet ohavet hepr oduc ti
onmanagerpr epar eal loft hemat erial
s
requi sitions ,butt hisi snotus ual lyfeas ible.Anot herar rangementi st or equi ret hatt hes uper vis orof
thedepar tments ignal lmat er i
al srequi sitions .Whenapr oper lys ignedr equi si
tioni spr es ent edt ot he
stor eroom keeper ,t her equi sitionedmat erialsar er eleas ed.Theempl oyeet owhom mat erialsar e
issueds houl dber equi redt os ignt her equi s i
tion.
Themat erialr equi s iti
on,whi chi snumber eds erially,isus uallypr epar edi nquadr upl icate.Thef irs
t
ands ec ondc opygoest ot heac c ount i
ngdepar t
ment .Onec opy ,afterpr icing, provi dest hei nf ormat ion
neededi npos tingt hec os tofr equi s
itionedmat erialst otheappr opr i
at eac c ount si nt hej obc os tand
factor yover headl edger s .Di rec tmat er ialsar ec hargedt ot hepr operj obsandi ndi rec tmat erialsar e
char gedt ot hef ac tor yover headac count s.Theot herc opypr ovidest hei nf ormat ionneededi npos t
ing
thequant itiesandc os tsofi ssuedmat erialst ot hec r
edi toft hepr opermat er i
alsac count si nt he
stor esl edger .Thi sc opyal sos er vesasas ourc eoft hei nformat ionneededi npr epar ingas ummar yof
thet ot aldi r ectandi ndi r ec tmat erialsi s s
ueddur ingt hemont h.Thet hirdc opyi sgi vent ot he
stor eroom keeperands ervesast heaut hor i
tyf ori ssuingt hemat er ialsr equi si
tioned. Thef ourt hc opy
isret ainedbyt hepr oduc tionmanagerors uper vis orwhopr epar edi t .
Ident ificat i
onc ont inuest obet hemos ti mpor tantf ac t
ori nt hec ont rolofmat erials.Fr om t het i
me
mat er ial sar ei s suedf orus ei nt hef actor yunt iltheyar er emovedasf inishedpr oduc ts ,theyar e
ident ifiedbynumberasappl yingt oapar t
icularj ob.Fort hi sreas on, oneoft hemos ti mpor tanti tems
ofinf or mat iont hats houl dappearont hemat er i
al srequi siti
oni saj oborpr oduc t ionor dernumber .
3.Ac count ingf orLaborCos ts .
Laborc os t
sar er ec or dedonadoc umentc alledat i
met icketorat imes heet .Eac hempl oyee
rec or dst heamountoft imeheors hes pendsoneac hj obandeac ht as konat i
met i
c ket .Thet i
me
ticketi st hes our c edoc umentus edi nt hec os tac count i
ngdepar tmentast hebas isf oraddi ng
direc t -
laborc os tt o“ Wor ki nPr oces sI nvent or y”andt ot hej ob- cos ts heet sf ort hevar iousj obsi n
proc ess.I ns omef ac tor iesac omput erizedt i
me- clocks ystem maybeus ed.Empl oyeesent ert he
timet heybegi nands topwor koneac hj obi nt ot het imec lock.Thet imec locki sc onnec tedt oa
comput er ,whi c hr ec or dst het imes pentonvar i
ousj obsandt rans mi tst hei nf ormat iont ot he
ac count ingdepar tment . Thet imes pentonapar ticularjobi sc ons idereddi rec tlaborandi tsc ostis
"trac ed"t ot hatj ob.Thec os toft imes pentonot hert as ks,nott raceabl et oanypar ticularj ob,is
us ual lyc ons ider edpar tofmanuf ac tur i
ngover head.

Al
loc
ati
onofFac
tor
yOver
head
WhyAl
loc
ati
on?
Asdiscussedi nt hepreviousc hapter,manuf acturi
ngover headincludesal lofthosec ostsincur r
edi n
themanuf ac t
uringpr oces swhi char enotdi rectl
y" t
raced"t oapar ticularcostobj ect.Inpr acti
c e,
manufacturingover headus ual l
yc onsistsofallmanuf acturi
ngc ostsothert handirectmat erialsand
dir
ectlabor.Compar edt odirec tmat eri
al sanddirectlabor,manufac t
uringover headc ostsarenotas
easytoas si
gnt opar t
icularj ob.Bes i
des ,formos toverheadc ostsactualc ostisknownaf teral ong
peri
odoft i
me, s
ay, aft
erayear ,amont h,etc.So,si
ncemanuf ac
turingover headc ost
sar ealsoc ostsof
ajob,weas sign( all
ocate)manuf act
uringover headtoj obsbasedonapr edeter
mi nedover headr at e,
whichisestimat edatt hebegi nningoft heyear.Otherwise,wewoul dhavet owai tuntilt
heendoft he
yeartocalculatet hecostofj obs .
Sel
ect
ionofAl
loc
ati
onBas
e
Inor dertoal locat
eover headc os
ts,s
omet ypeofal locati
onbas ec ommont oal lproduct
sbei ng
produc edmus tbei denti
fied.Themostwi delyus edal locati
onbas esaredi rectlabor-
hours,dir
ect
laborc ost
s ,andmac hine-hours.(
Thesebaseshavebeens ever
elyc ri
ti
cizedinr ecentyearssince
allegedlythereislit
tlerelati
onshi
pbetweenmac hine-
hour sordirectlabor-hoursandoverhead.).A
predeterminedover headrateiscomputedbydi vidingthees timatedtotaloverheadf ort
heupc oming
per i
odbyt hees t
imatedtotalamountoftheallocationbas e.
7
Ideallyover headc os ts houl dbes trict l
ypr opor tionalt ot heal loc ationbas e;i not herwor ds ,f or
exampl ea10% c hangei nt heal loc at ionbas es houl dc aus ea10% c hangei nt heover headc os t.Onl y
thenwi llt heal locat edover headc os tsbeus ef uli ndec ision- maki ngandi nper for manc eeval uat ion.
However ,muc hoft heover headt ypi cal lyc ons istsofc os tst hatar enotpr opor t i
onalt oanyal loc at i
on
baset hatc oul dbedevi sedf orpr oduc tsandhenc eanys chemef oral loc at i
ngs uc hc os tswi l
li nevi tabl y
leadt oc os tst hatar ebi as edandunr el i
abl ef ordec i
s ion- maki ngandper formanc eeval uat ion.I n
practice,t heover ri
di ngc onc er ni st os el ec ts omebas esf oral l
oc at ingal lover headc ostsandhar dly
any(s cant )at tent i
oni spai dt oques t
ionsofc aus ality.
Thepr edet er mi nedc os t-driverr at emayber efer redt oasapr edet er mi nedover headr at eorabur den
rate.Devel opi ngpr edet ermi nedc os t-dr iverr at esr equi r esal otofes timat ion, des cribedbel ow.
Fores timat ingc ost- dr i
verr at es , allac tivitiesmus tbedef i
nedandc at egor i
z ed.
Thent heover headc os t sofal loft hec ategor iesmus tbees timat ed.Thes ec os tes timat esar eus ual ly
basedonpas texper ienc e, cur rentc ondi tions , andexpec tedc hanges .
Next, cos t-dr iverbas esmus tbec hos enandt hequant ityoft hebas emus tbees timat ed. Somet imesa
cost-dr iverbas ei sobvi ousf ors omeover headc os ts. Atot hert imes , aval idc os t -driverbas ec annotbe
identified. Caus eandef fec tr el ations hi pbet weent hedr iverandt hec os tmus tbei nves tigated.
Final
l y,t hepr edet er mi nedc os t- dr i
verr at ec anbec alc ul atedbydi vidingt hees t imat edc os tofa
resour cebyt hees timat edquant it yoft hec hos enc os t-dr i
verbas e. Thes er at esar et henus edt oappl y
costst oj obsbas edont heac t ualamountofus eoft hec os tdr iver.
Atanyr at e,t heac tualamountoft heal loc at ionbas ei nc ur redbyaj obi sr ec or dedont hej obc ost
sheet .Theac tualamountoft heal loc ationbas ei st henmul ti
pliedbyt hepr edet er mi nedover head
ratetodet er mi net heamountofover headt hati sappl iedt ot hej ob.
Thef ollowi ngbas esc anbeus edt oc omput et hef ac tor yover headappl icationr at e:
1.Phys icalout putperuni tofpr oduc tionbas e
2.Di r ec tmat er ialsc ostbas e
3.Di r ec tl abor( DL)c ostbas e
4.Di r ec tl aborhour sbas e
5.Mac hi nehour sbas e
Thebas esus eddi ffernotonl yf romc ompanyt oc ompanybutal sof romonedepar tmentorc ostc ent er
toanot herwi thint hes amec ompany.
1.Phys icalout putperuni tofpr oduc tionbas e
Thi smet hodappl iesf ac tor yover headequal lyt oeac huni tpr oduc edandi sappr opriatewhena
c ompanyordepar tmentmanuf ac t
ur esonl yonet ype/ kindofpr oduc t.Thi smet hodi sver y
s impl es inc edat aont heuni tspr oduc edar er eadi lyavai l abl ef orappl yingf ac toryover head.
Thef act or yover headr at ei sc omput edasf ol lows :
Fac t oryover headr ateperuni tofpr oduc ti
on=Es t i
mat edfac t or yover headc os ts
Es timat eduni t
sofpr oduc tion
2.Di rec tmat er ial sc os t:
Iff ac tor yover headc ons istsmai nlyoft hel aborandequi pmentc os tsneededf ormat er i
al
handl i
ng, adi rec tr elat ions hi pi ses t
abl i
s hedandt hi sbas ei sus ed. Apr obl emar iseswhenmor e
thanonepr oduc ti smade,bec aus eeac hpr oduc tr equiresi tsownquant itiesandt ypesof
mat er ials ,t her efor eac c ur ac ywoul ddi ctat eas epar atec omput at i
on off ac toryover head
appl icat ionr at esf oreac hpr oduc t.Thi s ,however ,vi olat esthegoalofs impl icit y.
 Thef ac toryover headr atei sc omput edasf ollows :
FOHr at easaper cent ageofdi rec tmat er ialc os t=Es timat edf ac tor yover headc os t X100%
Es timat eddi r
ec tmat er ialc os t
s
 Thi smet hodhasl i
mi tedus ebec aus ei nmos tc as esnol ogi c alr elat i
ons hipexi sts
bet ween di r ec tmat er ialc os tofa pr oduc tand f ac tor y over head us ed i ni ts
produc tion.
3.Di rec tl aborc os tbas e:
8
 Thisi st hemos twi delyus edbas ebec aus edi rec tl aborc os tsar egener all
yc los elyr el
at edt o
factoryover headc ostsandpayr olldat aar er eadilyavai l
able. I
tt her efor emeet st he obj ec t i
ves
ofhavingadi rectr elati
ons hipt of act or yover headcos t,beings i
mpl et ocomput eandappl yand
requiri
ngl ittle, ifany,addi t
ionalcos ttocomput e. Thef ormul ai sasf ol l
ows :
FOHr at easaper centageofdi rec tc os t=Es timat edf actoryover headc os t X100%
Es timat eddi rectlaborc os t
 Thi smet hodwoul dnotbeappr opr iate:
a)I ft her eisadi rectr elat i
ons hi pbet weenf act ori
esover headc os tanddi rectlaborc ost
butwager atesvar ygr eat l
ywi t
hi ndepar tment s.
b)I ff ac toryover headc os tsar ec ompos edl argelyofdepr ec iation andequi pment
relat edc os t
s.
4.Directlaborhour s
:
Thismet hodi sappr opriatewhent her ei sadi rectr el at i
onshipbet weenf actor yover headc osts
anddi r ec tl aborhour sandwhent her ei ss i
gni ficantdi spar i
tyi nhour lywager ates.Ti me
keepingr ec or dsmus tbeac c umul atedt opr ovi det hedat anec es saryf orappl yingt hi
sr ate.
Ther atec omput edasf ollows :
Fac t oryover headr at eperdi rectl aborhour s=Es timat edf ac tor yover headc os
t
Es ti
mat eddi rec tlaborhour s
Thi smet hodl ikedir ectl aborc ostmet hodwoul dbei nappr opr iatei ff actoryover head
cos twer ec ompos edofc ostsunr elat edt ol aborac tivity.
5.Themac hi nehour s :
Thismet hodus est het imer equi redf ormac hinest oper forms imi laroper ationsasabas ein
comput ingt hef actoryover headappl icat ionr ate.Thi smet hodi sappr opr iat ei nor ganiz ations
ordepar tment st hatar elar gelyaut omat eds ot hatt hemaj or it
yoff actor yover headc osts
cons i
stofdepar tmentandot herequi pmentr el
atedc os t
s.
 Thef or mulai sasf ollows :
Fac tor yover headr at epermac hi nehour s=Es ti
mat edf ac toryover headc ost
Estimat edmac hinehour s
I
ngener al
,Fac toryover headappl i
cat ionr at eperuni t\dol lars=Es timat edf ac tor yover headc os
t s
Es timat edbas eatdenomi nat orac t
ivity
Notet
hati nanyc as e, t
henumer atorr emai nsc ons t ant;onl yt hedenomi nat ororbas eac tivityvar ies.
Gener
alAppr
oac
htoJ
obCos
ting
Therearesevenstepstoass
igningcos
tst
oanindi
vidualj
ob.Thisseven-
stepprocedur
eappl
ies
equall
ytoassi
gni
ngc os
tst
oaj obint
hemanuf
act
uri
ng,merchandi
si
ng,andservi
cesect
ors
.

Step1:I dent ifythej obt hati sthec hos enc os tObj ec t.

Step2:I dent ifytheDi rectc os tsoft heJ ob.Di r
ectmat erialanddi rectl abor :
Directmat erialsc ostsar ec alculatedbymul tiplyingt hequant i
tyofeac hmat erialus edf ora
particularjobbyi tsuni tc os t(thedi r
ect -costr ate)andaddi ngt ogethert hec ostsofal lthemat erials
.
Similar l
y,di rectmanuf ac tur i
ngl aborc os tsar ec alculatedbymul ti
plyi ngt hehour swor kedbyeac h
empl oyeeonapar ticularj obbyhi sorherwager at eandaddi ngt hesec os tstoget her .
Step3:Sel ectthec ost -
Al loc ati
onBas est oUs ef orAl loc atingI ndirec tCos t
st ot heJ ob.I ndirect
manuf acturingc ost sarenec essaryc ostst odoaj obt hatc annotbet r ac edt oas pec if
icj ob.I twoul d
bei mpos si
bl etoc ompl et eaj obwi thouti nc ur ri
ngi ndirec tc ostss uchass uper vision, manuf acturing
engineer i
ng, util
iti
es ,andr epai rs.Bec aus et hes ec os tsc annotbet rac edt oas pecificjob, theymus t
beal locatedt oalljobsbutnoti nabl anketway, di f
ferentj obsr equiredi fferentquant it
iesofi ndirect
resour ces.Theobj ec ti
vei st oallocatet hec ostsofi ndi r
ec tresourc esi nas ys t
emat icwayt otheir
rel
at edj obs .Compani esof tenus emul tiplec os t
-al l
oc ationbas est oal loc atei ndirec tcost s
.
Step4:I dent if
yt heI ndirec tCos tsAs soc i
at edwi thEac hCos t-AllocationBas e:i.
e. FOH.
9
Step5:Comput et heRat eperUni tofEac hc ost-All
ocat i
onBas eUs edt oAl locateIndir
ectc os
tst o
theJ ob.Foreac hc ostpool ,t hei ndi rec t-cos trateisc alculatedbydi vidingt otaloverheadc ost
si n
thepool( determi nedi ns tep4above)byt het otalquant i
tyoft hec os t-alloc at i
onbase(det ermined
i
ns tep3above) .
Step6:c omput et heIndirec tc ostsAl loc atedt ot heJ ob.Thei ndirec tc ostsofaj obarec omput ed
bymul t
iplyi
ngt heac t
ualquant i
tyofeachdi ff
erental l
oc ati
onbas e( oneal locati
onbas ef oreac h
costpool)as s
ociat edwi tht hej obbyt hei ndir ectcostrateofeachal locationbas e.
Step7:Comput et heTot alCos toft heJ obbyAddi ngal ldirectandI ndi rectc ostsAssi
gnedt ot he
Job.
Exampl es1
1.Thef oll
owi ngbudget eddat ai sgi venf orXYZText il
eFac toryfort heyear2001.
 Es timat edfac tor yover headf ort heyear………………………………$450, 000
 Es timat ednumberofs hi rtst obepr oducedi nt heyear …………………200, 000
 Es timat eddir ectmat er ialc os tfort heyear ……………………………. $300, 000
 Es timat eddir ectl aborc os t……………………………………………. $900, 000
 Es timat eddir ectl aborhour s …………. ………………………………300, 000hr s
 Es timat edmac hi nehour s……………………………………………… 90, 000hr s
Instructi
on:Comput et hepr edet er mi nedf actoryover headr atebas edont hefoll
owingbas es.
A.Phys ic alout putmet hod
B.Di rectmat erialsc os tbas e
C.Di rectl aborc os tbas e
D.Di rectl aborhour sbas e
E.mac hinehour sbas e
Exampl e-2
Assumeal li
nformat ioninexampl e1aboveandt hefollowingaddi tionali nf ormat i
on:
 Ac tualdat af orj ob201i sgi vei sgi venbelow
o Ac tualshir tsc ompl etedf orj ob201………………2, 000s hirt s
o Ac tualdirec tmat er ialc os tus ed………………. .
.$30,000
o Ac tualdirec tc osti nc urred……………………. ..
$20, 000
o Ac tualdirec tl aborhour sus ed…………………. 400hour s
o Ac tualmac hinehour s…………………………. 240hour s
Inst
ruc t
ion:Rec ordt heappl i
edf actor yover headanddet er minet het ot alc os tofjob201undereac h
ofthef i
vebas es.
A.Phys ic alout putmet hod
B.Di rectmat erialsc os tbas e
C.Di rectl aborc os tbas e
D.Di rectl aborhour sbas e
E.Mac hinehour sbas e
TheManuf
act
uri
ngOver
headCont
rolAc
count
Ac t
ualoverheadc ost
sar erecordedbydebi t i
ng“ Manufac turi
ngOver headCont r
ol”account.Overhead
costsappli
edt oj obsinWor ki nProc essus ingpr edeterminedr atesar er ecordedont hec r
editsideof
theManuf acturingOver headAppl iedac countwi t
hadebi tt o‘
Wor ki nPr ocess’account.
TimePer i
odUs edToComput eI ndirect-CostRat es
Indir
ectcostr atess houldbec alc
ul atedforal ongper iodoft ime( us uallyforayear )andnotf or
shortperi
ods( suc hasaweek, amont h,etc).Thisissobec auseoft hef ollowi ngreasons:
1.Thenumer atorreas on(i
ndi rec
t -
c ostpool ).Thes hortertheper iod,t hegr eatertheinfl
uenceof
seasonalpatternsont heamountofc osts.Forexampl e,ifindir
ec t-c ostr ateswer ecalcul
atedeac h
mont h,c
os t
sofheat i
ng( i
ncludedi nt henumer ator)woul dbec hargedonl ytopr oducti
ondur i
ngt he
wintermont hs.Butanannualper iodi ncorporatest heeffectofallf ours easonsintoas i
ngle,annual
10
i
ndi rect-
costrate.
Level soft otali ndirectc ostsar e al
so affected by nons easonaler raticc osts. Exampl esof
nons easonalerraticcostsincludecostsincur
redi napartic
ularmont ht hatbenef i
toper ati
onsdur ing
futuremont hs ,costsofr epairsandmai ntenanc eofequipment ,andc ostsofvac ati
onandhol iday
pay. Pooli
ngal lindir
ec tcoststogetheroverthec ourseofaf ullyearandc alc
ulatingas i
ngleannual
i
ndi rect-
costr atehel pst os mooths omeoft heer rat
icbumpsi nc ostsas sociatedwi ths pecific
periods.
2.Thedenomi natorr eason( quanti
tyoftheal locat
ionbas e).Anot herreas onf orlongerper iodsi s
theneedt os preadmont hlyf i
xedindir
ectc ostsoverfluctuat i
ngl evelsofmont hlyout put.Some
i
ndi rectcostsmaybevar i
ableeac hmont hwi t
hr especttot hec ostal l
oc at
ionbas e(forexampl e,
suppl i
es).Wher easot herindirectcostsaref i
xedeac hmont h(forexampl e,pr operty,taxes,and
rent).
Nor
malCos
ting
Thedi f
fic ultyofc alc ulatingac tuali ndi rec tc os tr atesonaweekl yormont hlybas ismeansmanager s
cannotc alc ulat et heac tualc os tsofj obsast heyar ec ompl eted.However ,manager swantac los e
appr oximat i
onoft hemanuf ac turingc os tsofvar i
ousj obsr egul arlydur ingt heyear ,notj us tatt he
endoft heyear .Manager swantmanuf ac tur ingc os t
s( andot herc osts ,inf act)f orongoi ngus es ,
includingpr icingj obs ,managi ngc os tsandpr epar ingi nt er imf i
nanc i
als tat ement s .Bec auseoft hes e
benef i
tsofi mmedi at eac c esst oj obc os ts,f ew c ompani eswai tunt i
lt heac tualmanuf actur ing
over headi sf inal lyknown( atyearend)bef or eal locat ingover headc os tst oc omput ej obc os ts.
Instead,apr edet er mi nedorbudget edi ndi rec t- cos tr at ei sc alculatedf oreac hc os tpoolatt he
begi nningofaf isc alyear ,andover headc os t sar eal loc at edt ojobsaswor kpr ogr esses .Fort he
numer at oranddenomi nat orr eas onsal r eadydes cribed, thebudget edi ndi rec t-cos tratei scomput ed
foreac hc os tpoolbydi vidi ngt hebudget edannuali ndi rec tc os tbyt hebudget edannualquant ityof
thec os tal loc at i
onbas e. Us ingbudget edi ndi r ec t-cos trat esgi vesr iset onor malc osting.
Nor malc os tingi sac os tingmet hodt hatt r ac esdi rec tc os tst oac os tobj ec tbyus i
ngt heac tual
direc t-
c os tr at est i
mest heac tualquant ityoft hedi rec tc os tinput s,andal loc atesi ndirectc os t
s
bas edont hebudget edi ndi rec t-cos tr at est imest heac tualquant ityoft hec os talloc ati
onbas e( s).
Bot hac tualc os ti
ngandnor malc ost i
ngt r ac edi r ectc os tst oj obsi nt hes ameway.Theac tual
quant i
tiesandac t ualr at esofdi r ectmat er ial sanddi rec tmanuf ac turingl aborus edonaj obar e
knownf rom t hes our cedoc ument sast hewor ki sdone.Theonl ydi f
fer enc ebet weenac tualc os ting
andnor malc os tingi st hatac tualc os t
ingus esac t uali ndi rec t-costr at es,wher easnor malc os ting
usesbudget edi ndi rec t-cos tr atest oc ostj obs .
Exampl e- 3( takenf romyourt extbook, page123, exer cis e4- 18)
Ander soc ons truc tionas s embl esr esident ialhous es .Itus esaj obc ostings ys tem wi tht wodi rec tc ost
categor ies( direc tmat erial sanddi rec tl abor )andonei ndi rectc ostpool( as sembl ys uppor t).Adi rect
labourhour si st heal locat ionbas ef oras sembl ys uppor tc os ts.InDec ember2003,Ander sonbudget s
2004as s embl ys uppor tc os tst obe$8, 000, 000and2004di r ectl aborhour st obe160, 000.
Att heendof2004, Ander soni sc ompar ingt hec os tofs ever aljobst hatwer es tartedandc ompl et edi n
2004.
LagunaModel Mi ssionModel
Cons t ruc tionper iod Feb–J une2004 May–Oc t2004
Di rec tmat er ials $106, 450 $127, 604
Di rec tlabor $36, 276 $41, 410
Di rec tlaborhour s 900 1,010
Direc tmat erialanddi rec tl aborar epai df oronac ont rac tbas is.Thec os tsofeac har eknownwhen
direc tmat er i
al sar eus edordi rec tlaborhour sar ewor ked.The2004ac tualas sembl y–s uppor tc osts
wer e$6, 888, 000, andac tualdi rectl aborhour swer e164, 000.

Requi
red:
11
 i
)Compute t
he( a)budgetedand( b)actuali
ndirec
tc os
trat
es.Whydot heydiff
er?
i
i) Whatisthejobc ostoftheLagunaModelandt heMissi
onModelus ing:
(
a)Normalc
os t
ingand( b)Actualcosti
ng
i
ii
) Whymi ghtAnder sonconstr
uc t
ionprefernormalcost
ingoverac
tualc os
ting?

Exampl e- 4
ZigbaFur nitur ei saf ur nitur emanuf ac turingf irmt hatus esjobor derc osting.Thec ompany ’
sinvent
ory
bal anc esonJ anuar y1, thebegi nningofi t
sf iscalyearwer easf ol lows :
Rawmat erial s...
..
...
...
..
...
.
....
..
....
...
..
...
..
...
..
...Br40, 000
Wor kinpr oc es s..
...
..
...
..
..
...
...
...
....
..
..
...
..
..
... 30, 000
Fini s hedgoods. ..
...
...
..
...
.
....
..
....
...
..
...
..
...
..
... 60, 000
Thec ompanyappl iesover headc os tt oj obsont hebas i
sofmac hine- hour swor ked.Fort hecurr
ent
year ,thec ompanyes timat edt hati twoul dwor k150, 000mac hine- hour sandi nc uramanuf ac
tur
ing
over headc ostofBr900, 000. Thef ollowi ngt rans actionswer er ec ordedf ort heyear :
a.Rawmat erial swer epur chas edonac c ount ,Br820, 000.
b.Rawmat erial swer er equi sit
ionedf orus ei npr oduc t ion, Br760, 000( Br720, 000di r
ect
mat er ialandBr40, 000i ndirec tmat er i
al).
c.Thef ol lowi ngc os tswer eincur redf orempl oyees er vices ;direc tlaborBr150, 000:indirect
laborBr220, 000;s alesc ommi ssion, Br180, 000;admi ni str
atives alaries,Br400, 000.
d.Sal est ravelc os tswer ei nc urred, Br34, 000.
e.Ut ili
t yc os t
swer ei ncur redi nt hef actory, Br86, 000.
f.Adver t isingc os tsi nc urred;Br360, 000.
g.Depr ec iationf ort heyear ,Br700, 000( 80% r el
at est of actoryoper ationsand20% t osell
ing
andadmi nis trat iveac tiviti
es )
h.Ins ur anc eexpi r eddur ingt heyear , Br20, 000( 70% r el atest of ac t
or yoper at i
onsandt he
remai ni ng30% r elat est os ellingandadmi nist
r ati
veac tivi
ties)
i.
Manuf ac tur ingover headwasappl iedt opr oduc t i
on. Duet ogr eat erthanexpec teddemandf or
itspr oduc ts,thec ompanywor ked160, 000mac hinehour sdur i
ngt heyear .
j.
Goodsc os ti
ngBr1, 800, 000t omanuf ac t
ur e,acc ordingt otheirj obc os tsheet s,wer ecompl eted
dur i
ngt heyear .
k.Goodswer es oldonac countt oc us tomer sdur i
ngt heyearatat otals ell
ingpr iceofBr
3,000, 000. Thegoodsc ostBr1, 740, 000t omanuf ac t ureac cor dingt ot heirjobc ostsheets.
I
nst
ruc
tion:
Prepar ejournalentriestor ec
ordt hepr ecedingtransac ti
ons.
Budget edI ndirectCostsandEnd- Of-PeriodAdjus tment s
Sincet hepr edeterminedover headr atei sbasedent irelyones t
imateddata,ther
ewillalmos talways
beadi ff
erenc ebet weent heac t
ualamountofover headc osti
ncurredandt heamountofover head
costt hatisappl i
edt ot heWor kI nProc essaccount .Thisdi f
fer
encei st
ermedunderappl iedorover
appliedover headandc anbedet erminedbyt hec ompar i
ngt hesetwoac count
s.Anunderappl i
ed
balanc eocc urswhenmor eoverheadc ostisactuall
yi nc ur
redthanisappliedtotheWor ki nPr oc
ess
account .Anoverappl iedbal anceres ultsfrom appl yingmor eoverheadtoWor kinPr ocesst hanis
actuallyincur r
ed.Inanot herwor d,whent hetotalFOHAppl i
edexceedstheFOHCont rolac countthe
diff
erenc eisoverappl iedandwhent het otalFOHAppl i
edislowerthantheFOHCont rolac countthe
diff
erenc eisunderappl ied.
Caus
eofunder
-andoverappl
iedover
head
Whenapr edet
erminedover headr ateisus ed,i
tisi mplic
itl
yassumedt hatt heoverheadc ostis
vari
abl
ewith(i
.e.
,proporti
onalto)theallocati
onbas e.Forexample,ifthepr edet
erminedover head
rat
eisBr80perdir
ectlabor-hour,
itisi
mpl i
citl
yassumedt hattheactualoverheadcostswilli
ncrease
byBr80foreachadditionaldir
ectlabor-
hourt hatisincurr
ed.If
,however ,someoft heover headis

12
fi
xedwit
hr espec
ttotheall
ocationbase,
thiswillnothappenandtherewil
lbeadi screpancybetween
theact
ualt ot
alamountoft heoverheadandt heover headthatisappli
edusingt heBr80r ate.I
n
addi
ti
on,theac t
ualtot
alover headcandifferfrom theesti
matedt ot
aloverheadbec aus
eofpoor
cont
rol
soveroverheadspendingorbecauseofinabil
it
ytoaccurat
elyfor
ecastoverheadc ost
s.
Di
spos
iti
onofunder
-andoverappl
iedOver
head
Ther ear et hr eeappr oac hest odeal ingwi thanunder -oroverappl iedover headbal anc ei nt he
acc ount s.
(1)t headj us tedal locat ion- rateappr oac h, (2)t hepr orationappr oac h,and( 3)t hewr ite-of ftoc os tof
goodss ol dappr oac h.
1.Adj us tedAl locat ion- Rat eAppr oac h
Theadj us tedal l
oc at i
on- rateappr oac hr es tatesal lover headent riesi nt hegener all edgerand
subs idiar yl edger sus ingac tualc os trat esr at hert hanbudget edc ostr ates .Fi rst,theac tualindi rec t-
cos tr atei sc omput edatt heendoft heyear .Then,t hei ndi rec tc os tsal loc atedt oever yj obdur ing
theyearar er ec omput edus i
ngt heac tuali ndi rect- cos tr ate( rat hert hant hebudget edi ndi r
ec t-cos t
rate) .Fi nal ly,end- ofyearc los ingent riesar emade.Ther es ulti st hatatyear -end,ever yjob- cos t
rec ordandf inishedgoodsr ec or d-aswel last heendi ngWor k- inPr oc es sCont rol,Fini shedGoods
Cont rol , andCos tofGoodsSol dac count s-ac curat elyr epr es ent sac t
uali ndi rec tcos tsi ncurred.The
wides pr eadadopt ionofc omput eriz edac count ings ys temshasgr eat lyreduc edt hec os tofus ingt he
adjus tedal loc ation- rat eappr oac h.
Theadj us tedal loc ation- r ateappr oac hyi eldst hebenef i
tsofbot ht het imel ines sandc onveni enc eof
nor malc os tingdur i
ngt heyearandt heac cur acyofac tualc os ti
ngatt heendoft heyear .Eac h
individualj ob- costr ec or dandt heend- of -yearac countbal anc esf ori nvent oriesandc ostofgoods
soldar eadj us tedt oac t ualc os ts.Af ter- the- factanal ys isofac tualpr ofitabi lityofi ndividualj obs
provi desmanager swi thac c urat eandus ef uli nsight sf orf ut ur edec i
sionsaboutj obpr icing,whi ch
jobst oemphas ize, andwayst omanagec os t s.
2.Pr or at ionAppr oac h
Pror at i
ons pr eadsunderal loc atedover headoroveral loc atedover headamongendi ngwor ki n
proc es s,f ini shed goods and c os tofgoods s old. Mat erial si nvent or ies ar e notal locat ed
manuf ac tur ingover headc os ts,s ot heyar enoti ncludedi nt hi spr oration.
Or gani zat ionss houl dpr orat eunderal loc at edoroveral loc atedamount sont hebas isoft het ot al
amountofmanuf ac turingover headal loc at ed( bef or epr or at ion)i nt heendi ngbal anc esofWor k-in-
Proc es sCont rol,Finis hedGoodsCont rol,andCos tofGoodsSol d.However , inc as esuc hi nformat ion
isnotavai l
abl e,theendi ngbal anc es( bef or epr oration)ofWI P, FGsandCGSac c ount sc anbeus edf or
dispos i
tionofoverorunderappl iedover head.
3.Wr ite- Of ft oCos tofGoodss ol dAppr oac h
Int hisc as e, t het ot alunderal loc at edover headoroveral l
oc at edover headi si ncludedi nt hec ur rent
year 'sCos tofGoodsSol d. Thes impl es tappr oac hist oc los eoutt heunder -oroverappl iedover head
toCos tofGoodsSol d
Choi
ceamongAppr
oac
hes
Whi choft hes et hreeappr oachesi st hebes tonet ous e? I nmar ketingthisdec i
si
on,manager s
shouldbegui dedbyhowt her esult
ingi nformat i
onwi llbeus ed.Ifmanager sintendt odevelopthe
mos tac cur ater ec ord ofi ndividualj ob c ostsforpr ofi
tabil
ityanal ys i
spurpos es
,t headj us
ted
alloc
ation-r ateappr oachi spr ef
er r
ed.I ft hepur posei sconfinedt or eporti
ngt hemos tac cur
ate
inventoryandc ostofgoodss oldf iguresi nt hef inancials tat
ement s,prorati
onbas edont he
manuf actur i
ngover head-allocatedc omponenti nt heendi ngbalanc ess houldbeus edbec auseit
adjuststhebal anc est owhatt heywoul dhavebeenunderac t
ualc osting.Not ethatt heprorati
on
approachdoesnotadj ustindi vi
dualjobc os trecords.
Thewr ite-of ftoCos tofGoodsSol disthes impl es
tappr oachf ordealingwi thunderallocatedorover
alloc
atedover head.I ftheamountofunderal l
oc at
edoroveral locatedover headsi ssmall--in
13
compar isont ototaloper atingi ncomeors omeot hermeas ureofmat er i
ality--thewr ite- offtoCos t
ofGoodsSol d appr oac h yi el
dsa good appr oximation to mor e ac curate,butmor ec ompl ex,
approac hes. Moder nc ompani esareal sobec omi ngi ncr
eas inglyc ons ci
ousofi nvent or yc ontrol.
Thus,quant i
ti
esofi nvent or iesarelowert hant heywer ei near li
eryear s,andCos tofGoodsSol d
tendst o be higheri nr elat i
on tot he dol l
aramountofwor k-i
n- proces sand f ini
s hed goods
inventories.Also,thei nvent orybalancesofj ob-costi
ngc ompani esareus uallysmal lbec aus egoods
areoftenmadei nr es pons et oc ust
omeror der s.Consequent ly,asi struei nourRobi nsonexampl e,
wr i
ti
ngof funderal loc atedoroveral l
ocatedover headins t
eadofpr oratingi ti
sunl ikel yt oc ause
signi
fi
c antdi st
or t
ionsi nf inanc i
alstatement s.Foral ltheser easons,t hec ost-benef itt estwoul d
favort hes impl estappr oac h- -wr i
te-offtoCos tofGoodsSol d- -bec aus et hemor ec ompl ex
attempt satac curacyr epres entedbyt heot hert woappr oachesdonotappeart opr ovides uffi
c i
ent
additi
onalus efulinfor mat ion.
TheEf
fec
tofunder
-andoverappl
iedOver
headonNetI
ncome
Ifoverheadisunderappl i
ed,lessover headhasbeenappl i
edtoinventor
yt hanhasac t
uall
ybeen
i
nc urr
ed.Enoughoverheadmus tbeappl i
edr etroacti
velytoCostofGoodsSold( andper hapsending
i
nvent or
ies)toeli
minatet hisdiscrepancy.Sinc eCos tofGoodsSoldi sincreas ed,underapplied
overheadreducesneti
ncome.
Ifoverheadisoverapplied,mor eover headhasbeenappl i
edtoinventor
yt hanhasac t
uall
ybeen
i
nc urr
ed.Enoughoverheadmus tber emovedr etr
oactivel
yfrom CostofGoodsSol d(andper haps
endinginventor
ies
)toeli
mi natethisdiscrepancy.SinceCostofGoodsSoldisdecr eased,overappl
ied
overheadincr
easesneti
nc ome.
TheFl
owofCos
tsi
nJobOr
derCos
ting
Thebas icflow ofc ostsi naj ob-or ders ys tem begi nsbyr ecor di
ngt hec ostsofmat erial
,labor,and
manuf acturingover head.Di r ectmat er i
alanddi rec tl aborc os t
sar edebi tedt ot heWor kinPr oc
es s
account .Anyi ndi rec tmat erialori ndirec tl aborc os t
sar edebi tedt otheManuf act
ur i
ngOver head
Cont r
olac count ,al ongwi thanyot herac t ualmanuf acturingover headc os t
si ncurreddur i
ngt he
period.Manuf actur ingover headi sappl iedt oWor kI nPr oc essus i
ngt hepr edeterminedr ate.The
offsettingc reditent ryist ot heManuf act uringOver headc ont rolaccount .Thec ostoffinis
heduni t
si s
creditedt oWor kI nPr oc essanddebi tedt ot heFi nishedGoodsi nvent oryac count .Whenuni tsaresold,
theircos tsar ecredi tedt oFi nishedGoodsanddebi tedt oCos tofGoodSol d.
Exampl e5
ACor por ationus esaj ob- orderc osts yst em.Thef actor yover headr atees t
imat edfort heyear2001
was$8perDLhr s. Thei nvent oryac count shadt hef ollowi ngbal ancesonDec ember1:
Mater i
als………………………………$7, 000
Wor k- i
n-pr oc ess(job210) ………………………. .6,500
FinishedGoods( job209) ………………. 7,000
Dur ingDec ember , t
hef ol l
owi ngevent soc c urred:
a) Mat erialpur c hasedonac count$18, 000
b) Direc tmat er i
al sandf ac torys uppl ieswer eissuedasf ollows:
 J ob211………………………$4, 500
 J ob212……………………… 5, 300
 J ob213………………………6, 200
 Suppl ies( indirec tmat er i
al s)
…. 1,800
c) TheDec emberdi rec tlaborc os tswer e:
Job210…………………150hr sat$6/ hr ……………………. .$900
Job211…………………400hr sat$6/ hr ……………………. .2,400
Job212………………. .
.350hr sat$6/ hr ……………………. .
.2,100
Job213…………………100hr sat$6/ hr……………………. .
.600

14
 Total 1, 000hr s $6000
d) Fac toryindirectlaborf orDec emberwas$2, 400.
e) Ot herover headc ostsincurreddur i
ngDec ember :
Uti
liti
es( paidinc ash)…………………. $2,500
Factorydepr ec i
ation………………. .
……1, 000
Repairsandmai nt enance( Paidincas h)
…500
Total……………………. .
$4,000
f)J ob210, 211, and212wer ec ompl et
edandt r
ansferredtofi
nis
hedgoodsinventor
y.
g) Job209and210wer es ol
donac countf or120% ofcostassumesperpet
ualinvent
orysys
tem.
I
nstruc t
ion:-
1.Journal i
zet heabovet rans acti
ons.
2.Deter mineendi ngbal anc eofalli
nvent oryaccounts.
3.Deter minet heunderoroverappl iedoverhead.
Exampl e6
Consi
dert hef oll
owi ngendi ngbal ancesofs omeac countsinBCompany.
FactoryOver headCont r
ol FactoryOverheadAppl i
ed CostofGoodSold

326,
000 324,
000 900,
000

Fi
nis
hedGoods Wor
kinpr
oces
s

70,
000 30,
000

Theamount soff actor yover headappliedincludedi ndiff

erentaccountsareasfol
lows:
Account Fac t
oryover headc os
t
Cos tofgoodss old…………………………$275, 400
Finishedgoods ……………………………. . 32,400
Wor ki nproc es s…………………………… 16, 200
Instr
uc t
ion:
1.Comput eoverorunderappl ied.
2.Showt hedi spos i
tionandt henec essaryjournalentriestoaccountforunderoroverappl
ied
OHus ing:
a) .
Prorat i
onAppr oach
b) .Write-Of ftoCos tofGoodss oldAppr oach
Exampl e-7
ABCFur nitur eCompanyhast wodepar tmentsandt hefoll
owingdat arel
atetothecompanyf ort
he
year2008.
InventoryJ anuary1, 2008
 Di rec tmat erial-----
-- -
------
---
------
-------
---130,000
 Wor ki nproc es s----
--------
----
------
----
-----100,000
 Fi nishedgoods -----
--------
----
------
----
------80,000
Manuf actur i
ngover headc ostsbudget edfortheyeari nbothdepar tmentsi
sgivenbelow:

Overheadit
em Depart
ment
-A Depart
ment
-B
I
ndirectl
abor 500,
000 820,
000
Suppli
es 90,
000 80,
000
15
 Uti
lities 220,
000 150,
000
Repai rs 280,
000 220,
000
Super vision 260,
000 430,
000
Factor yrent 190,
000 150,
000
Depr eciation-
Factor
y 320,
000 210,
000
Ins
ur anc eandothers 120,
000 140,
000
Total 1,
980,000 2,
200,000
Mac hinehour s 180,
000
Dir
ec tl aborcost 4,
400,000
Not
e:Thec ompanyappl iesoverheadusi
ngmac
hinehoursindepar
tment
-Aanddi
rec
tlaborc
ost
i
ndepartment -
B.
Summaryofac
tualevent
sfort
heyeari
sgi
venbel
owf
orbot
hdepar
tment
sandf
ort
hec
ompanyas
fol
lows
:
No I
tems Depar
tment
-A Depar
tment
-B Tot
al
.
A Dir
ectmat er
ialpurchased 3,
800,
000
B Dir
ectmat er
ialrequis
iti
oned 2,
200,
000 1,
500,
000 3,
700,
000
C Dir
ectlaborcostincurr
ed 1,
800,
000 5,
600,
000 7,
400,
000
D FOHincurred 2,
200,
000 2,
200,
000 4,
400,
000
E FOHAppl i
ed 1,
760,
000 X X
F Costofgoodsmanuf actured 15,
640,
00
0
G Sal
es 26,
000,
00
0
H Cos
tofgoodss
old 15,
600,
00
0
Requi
red
A. computethebudgetedoverheadrat
esf orbot
hdepartments
B. Computetheamountofmac hi
nehoursac t
ual
lyworkedindepar
tment
-A
C. Computethefactor
yoverheadappli
edindepar t
ment-B
D. Recor
dtransact
ionsAthroughH
E. I
soverheadunderappli
edoroverappliedandbyhowmuc h?
Exampl
e-8
Alphalimitedc ompanypr oduc esof f
iceequi pment sinr esponset oi tscustomer ’sorders.The
companyus esj obc ostings ystem t hathast wodi r
ec tcos
tc ategori
es( DM andDL)andonei ndirect
costc
ategor y( OH) .Over headi sallocatedbas edonmanuf ac turi
nglaborc osts.
Budgeteddat af oragi venper i
odi sgi venbelow:
 Directl aborc os t
- --
---------
---- -
----
----2,
100,000
 Manuf act uri
ngover head- --
- --
- -
----
--1,260,
000
Addit
ionalinf ormat ion
 Att heendoft hatyear ,twoj obsXandYwer ei ncomplete.Tot aldi
rectl aboranddi rect
mat erialf orjobXi s$55, 000and$110, 000respect
ivelyandf orj obY$195, 000and$210, 000
respec tively.
 Mac hinet imef orjobsXandYar e1,435and3, 235hour srespectively.
 Totalmanuf actur i
ngover headi ncurr
edf ortheperiodis$1,000,000anddi rectlaborcosttotal
$2,000, 000( 100,000di rectlaborhour s
)

16
  Ther ewer enobegi nni nginvent oriesandi nadditi
ont otheendi ngwor kinproc es
sinvent
ory,
finishedgoodshasanendi ngbalanc eof$780, 000outofwhi c
h$200, 000isdirectl
aborcost
.
 Tot als al esfort heper iodis$11, 200, 000andgoodsar es oldat140% oft hei
rc os
t and
oper at ingexpens ef ort heper i
odi s$2, 200,000
Requi red
A.Whati st hebalanceofW/ P,F/GandCGSatt heendoft heper i
odbefor eadjus
t ment?
B.Comput ethec ostofgoodsmanuf actured
C.I sover headunderoroverappl iedandbyhowmuc h?
D.Pr orat et heunderoroverappl iedover headamongW/ P,F/ GandCGSbas edon
I. Thei rendingbal anc ebefor epr oratioon
II
. TheFOHi neac hitembef or eadj us t
ment
It
em Endi ng Fract
ion Allocated FOH- i
n Fr ac t
ion Al located
s balanc e OH ending OH
W/ P 720, 000 720/9,500 15, 157.89 150, 000 150/ 1,20 25,000
0
F/G 780, 000 780/9,500 16, 421.05 120, 000 120/ 1,20 20,000
0
CGS 8000, 000 8, 000/ 9,50 168, 421. 06 930, 000 930/ 1,20 155,000
0 0
Total 9, 500, 000 1,
200,00
0

E.Pr epar eapartiali

ncomes tatementf ort
heper i
od(us eIinE)
Exampl e-9
XYZCompanyhast wodepar t
ment sinoneofi tspl
ants:Mac hini
ngandas s
embly.Itsj
obcos t
ing
syst
em hast wodirectc ostcategor i
es( DM andDL)andt womanuf act
uringoverheadcat
egor i
es
(Machi
ni ngdepar tmentOHal locatedus ingmac hi
nehour sandAs semblydepart
mentover heads
all
ocatedus i
ngdirectlaborcost).Thef ol
lowingisabudgetfortheyear2009:
It
ems Mac hiningdepart
ment As sembl ydepart
ment
Manuf acturi
ng $1,800,000 $3,
600,000
over head
Direc tlaborcost 1,400,000 2,
000,000
Mac hi nehours 50,000hr s 200,000hrs
Direc tlaborhours 100,000hr s 200,000hrs
Requi
red
A.Dur
ingt
hemont
hofFebr
uar
y,t
hej
obc
ostr
ecor
dofJ
ob-
494c
ont
ainedt
hef
oll
owi
ng

I
tems Machini
ngdepar
tment Assemblydepar
tment
Dir
ectmat er
ialused $45,
000 $70,000
Dir
ectlaborcost 14,
000 15,
000
Dir
ectlaborhours 1,
000hrs 1,
500hr s
Machinehours 2,
000hrs 1,
000hr s
I
. Comput
ethet
otalover
headc
ostf
orj
ob-
494
I
I.Computethet
otalcos
tofthejob
B.Att heendoftheyearthetotalact
ualmanuf
acturi
ngover
headcos
twas$2,100,
000inthe
Machi
ningdepart
mentand$3, 700,
000intheAs s
emblydepar
tment.Ass
umet hat55,
000
ac
tualmachi
nehourswer eusedinthemachi
ningdepar
tmentandthatdi
rec
tlaborcos
tof

17
 $2,
200,
000wasi
ncur
redi
ntheAs
sembl
ydepar
tment
:Isover
headunderoroverappl
iedand
byhowmuch?
Example-
10
ZLawf i
rm usesjobordercosti
ngwithtwodirec
tc os
tc ategori
es(prof
essi
onalpart
nerlaborand
prof
essi
onalassoci
atelabor)andtwoindir
ectc os
tc ategori
es(generalsupportandsecretar
ial
suppor
t).
Budgeteddataforthecompanyduri
ngapar t
icularmonthisasf
oll
ows:
Dir
ectc
ostc
ategor
ies
I
tems Profes
sionalpar
tner Profes
sionalas
soc
iat
e
labor labor
No. ofprof
es s
ional
s 5 20
Hour sofbi
llableti
meperprof
essi
onal 1,600 1,600
pery ear
Totalcompens ati
on(aver
ageper $200,
000 $80,
000
professi
onal

I
ndi
rec
tcos
tcat
egor
ies

It
ems Generalsupport Secretar
ialsupport
Totalcost $1,800,
000 $400,000
All
oc at
ionbas
e Profess
ionalas
soci
ate Prof
es si
onalpartnerl
abor
labor
Requir
ed
A.Computet
hebudgeteddi
rectc
ostrat
esf orpr
ofessi
onalpartnersandas
soci
atepartners
B.Computet
hebudgetedi
ndir
ectcos
tratesforprof
essionalpart
nersandass
ociat
epar t
ners
C.Thehasbeenoff
eredtogiveprofes
sionalservi
cest oCompanyXandYt hatrequir
esthe
fol
lowi
ngres
our
ces:

Items X-Company X- Company

Pr ofes sionalpar tnerl abor 60hr s 30hr s
Pr ofes sional as s
oc iate 40hr s 120hr s
labor
Comput et hebudget edt ot alc ostofgivings ervic
est obot hcompanies
Exampl e- 11
Ac orpor ationus esaj obor derc osti
ngs ystem.Thef oll
owingitemsrel
atet
heworkinproc
ess
accountoft hec ompanyf ort hemont hofMar c
h.
Wor kinpr oces sMar ch1- ----------
-----
------
-----$12,000
Dir
ec tmat erial-------- -----------
- -
----
-------
-----
- --
40,000
Dir
ec tlabor -
-- -
- -
---- ------ -
-- -
------
----
--------
------30,000
FOHappl ied- ------
- --- ---
- -------
-----
-----
- -
------
-- -
27,000
Costofgoodsmanuf ac tur ed- -
------
----
--------
----100,000
Thec orpor ationappl iedover headus i
ngdi rectlaborc ost.j
ob-232,
theonl
yjobi
npr
oces
sattheend
ofMar ch, hasbeenc har gedwi t hFOHof$2, 250.
Required:Comput e AR=27, 000/ 30,000=0.9
A.Thec os toft hej obs tillinprocess
B.Thedi rec tmat er i
alc os tchargedtoj ob-232

Ac
count
ingForSpoi
lage,
Re-
Wor
kandSc
rap
Gener
all
y,manuf
act
uri
ngoper
ati
onsc
annotes
capet
heoc
cur
renc
eofc
ert
ainl
oss
esorout
put
18
reduc
t i
onduet os
c r
ap,spoil
age,ordefect
ivework.Al
thoughs ometimesthes
ear ethecostofdoing
gooduni ts
,managementandt heentirepers
onnelofanor ganiz
ationshoul
dc ooperat
et oreduce
suchlossestoaminimum. Aslongastheyoccur,
however,theymus tberepor
tedandc ontr
oll
ed.
Def
ini
ti
onoft
ermi
nol
ogi
es
ScrapMat erials:ar erawmat erial
slef toverf rom thepr oduc ti
onpr oc esst hatc annotbeputbac k
int
ot hepr oduc tionforthes amepur pose.However ,theymaybeus efulf ordi f
ferentpur poseor
produc tionpr oc es s
.
Was t eMat erials:arepar t
sofr aw mat erialsleftoveraf terpr oducti
ont hathasnof urt
herus eor
resaleval ue. Somet i
mesc ostmaybei nc urredtodi spos
ewas temat erials.
Spoi ledUni ts:ar eunitsthatdonotmeetpr oducti
ons tandar dsandar eei thers oldf ortheirsal
vage
valueordi s carded.Spoi l
eduni t
shavei mper fecti
onst hatc annotbeec onomi callyc orr
ec t
ed.They
maybes oldasi t emsofinferiorqual i
tyor“ seconds”.
Defec t
ive( rewor k)units
:ar euni tst hatdonotmeetpr oduc t
ions tandar dsandmus tbef urther
proc essedi nor dert obesalabl easgooduni ts.Suchunitshavei mperfec ti
onsc ons ideredc orr
ectable
becaus et hemar ketvalueoft hec orrecteduni tswi l
lbegr eat erthant het otalc ostincurredfort he
units.
Not e:s crapi st heby- produc toft hepr oduc ti
onoft hepr imarypr oduc twher eass poil
edand
defec ti
vegoodsar enotby-produc tsbuti mper fec
tionsoft hepr i
mar ypr oduc t.
TypesofSpoi
lage
Thekeyobject
ivesi
naccount
ingf
orspoi
lagear
edetermini
ngthemagnit
udeoft
hec
ost
sofs
poi
lage
anddis
tingui
shingbet
weenthecost
sofnormalandabnormals
poi
lage.
Nor
malSpoi
lage
NormalSpoi l
agei sspoil
agethatisani nherentres ultoft heparti
cularpr oduc t
ionprocessandar is
es
evenunderef fi
cientoperati
ngcondi ti
ons.Foragi venpr oducti
onproc es s,managementmus tdec i
de
therateofs poilageitiswil
li
ngt oacc eptasnormal .
Cos tsofnor mals poilagearetypical
lytr
eat edas
componentoft hec ostsofgooduni tmanuf acturedbec ausegooduni tscannotbemadewi t
houtt he
simultaneousappear anceofspoileduni ts
.Nor mals poilageratess houldbec omput edusingt otal
unitscompl etedast hebase,nottotalac t
ualunitss tartedi nproduction. Becausetotaluni
tsstarted
alsoincludeanyabnor malspoil
agei nadditiontonor mals poil
age.Mor eover,thenormalspoilagei s
theamountofexpec tedspoi
lageas sociat
edorr elatedt ot hegooduni tspr oduced.
Abnor
malSpoi
lage
AbnormalSpoilageisspoi
laget hatshouldnotar iseunderef
fi
cientoper
atingcondit
ions
.Itisnotan
i
nherentresultofthepart
icularproducti
onproc ess.Abnormalspoi
lagei
sregardedasavoidableand
cont
roll
able.Lineoperat
orsandot herplantpers onnelcangeneral
lydecr
easeabnormals poi
lageby
mini
mizingmac hi
nebreakdowns ,acci
dentsandt heli
ke.Abnormalspoi
lagecostsarewritt
enoffas
l
ossesoftheac count
ingperiodinwhi chdetec
tionoft hespoi
ledunitsoc
curs.
J
obCos
tingandSpoi
lage
Thec oncept
sofnor maland abnor mals poi
lagealsoapplytoj ob-costi
ng sys
tems.Abnormal
spoi
lageisus uall
yregardedasc ontroll
ablebyt hemanager.Cost
sofabnor malspoil
agearenot
consi
deredasi nvent
orablecostsandar ewritt
enoffascos
tsoftheperiodinwhichdetecti
onoccur
s.
NormalSpoilagec ost
sinjob-costi
ngs yst
emsj ustasinproc
esscos t
ings ys
temsar ei
nventorabl
e
cost
s,alt
houghmanagement saretolerati
ngonl ysmal
lamountsofspoilageasnormal.
Spoil
ageisanimportantconsiderat
ioninanyproducti
onandcostrel
atedtoplanni
ngandc ont
rol
deci
sion.Si
nceinmos tcasess poi
lageisunavoidabl
e,managementmus tdeterminethemos t
eff
ici
entproduc
tionprocessthatwillkeepspoi
lagetoaminimum possi
ble.Whenassigni
ngcost
s,
19
j
ob-cost
ingsyst
emsgener
allydi
sti
ngui
shbetweennor mals
poilageat
tri
butabl
etoaspeci
ficj
oband
normalspoi
lagecommontoallj
obs.General
ly,asi
tismentionedaboveinthi
schapt
er,spoi
lagei
s
cl
assi
fi
edintotwo:nor
malandabnormal.
1.Normals poi lage:
Isspoi laget hatr esultsdes piteef fi
cientpr oduc ti
onmet hod.Thec ostsofnor mals poilageare
consider edt obeunavoi dabl ec ostofpr oduc i
nggooduni tsandar et heref
oret reatedasa
produc tc ost .Nor mals poilagec ostsar eac count edforintwoways :
 Appl iedt oas pec i
ficjob
 Appl iedt oal ljobs
Nor mals poi lagesar er ecor dedi nanas setac countli
ke“ SpoiledGoodsInventory”account .
2.Abnor mals poi lage:
I
ss poi lagei nexc essofwhati sc ons i
der ednor malf orapar tic
ularproductionpr ocess.The
tot alc ostofabnor mals poilages houl dbec hargedt oanexpens eac c
ountl i
ke“ Los sfr
om
Abnor malSpoi lage”ac c ount .
Exampl e- 1
Assumet hati nABCCompany10, 000uni t
swer eputi ntopr oducti
onf orjob09.Thet ot alcostof
productionwas$300, 000. Nor mals poil
agef ort hejobises ti
mat edtobe50uni ts.Atthec ompl et
ion
ofproduc ti
ononl y9, 910uni tswer egood.Al ls poil
eduni tsarees ti
matedt ohaveas alvageval ueof
$5eac h.
Required:
1.Presentt her equi redj ournalent ryas sumi ngnor mals poil
agei s-
A.Appl iedt oas pec i
ficjob
B.Appl iedt oal ljobs
2.Comput et heuni tc ostoft her emai ningf i
nis hedgooduni ts.
Soluti
on
Torecor dnor mals poi l
age:
a)Tos pec ificj ob
Spoi ledGoodsI nvent or y…………250
WI P- job09……. ……………………. 250
b)Toal lj obs :
Spoi ledGoodsI nvent or y…………250
FOH-Cont rol……………………. 1, 250
WI P-j ob09……. .
………………. 1,500
Torecor dabnor mals poilage:
Spoi ledgoodsi nvent or y..
.………. 200
Los sf r
omAbnor malSpoi lage……1, 000
WI P-job09…. ...
..
..
...
...
..
...
...
..
.
..
...
..
..
. 1,200
Exampl e- 2
InaMac hineShop5aircr
aftpart
soutofajoblotof50airc
raf
tspart
sarespoi
led.Costsass
igned
pri
ortoi nspect
ionpoi
ntare$2,000perpart
.Thec ur
rentdis
posalpri
ceofthes poi
ledpar t
sis
esti
matedt obe$600perpart.Whenthes
poil
ageisdetec
ted,t
hespoil
edgoodsareinventor
iedat
$600perpar t
.
Nor
malSpoi
lageat
tri
but
abl
etoas
pec
ifi
cjob:
Mat
eri
alsCont
rol(
5*$600) 30001
Wor
k-i
nPr
oces
sCont
rol(
spec
ifi
cjob)(
5*$600) 3000

20
Notet hattheWor k-i
nPr ocessControl(
specif
icjob)hasal readybeendebi ted$10,000forthe
spoil
edparts(5s poiledparts*$2,000perpart)
.Theef fectofthe$3, 000entryisthatthenetcos
tof
thenormals poi
lage, $7,000($10,
000-$3,
000)becomesanaddi tionalcostofthe45( 50-
5)goodunit
s
produced.Thetot alcostofthe45gooduni tsi
s$97, 000.$90,000( 45unit
s*$2,000perunit)i
ncur
red
toproducethegooduni tsplusthe$7,
000netc ostofnor malspoilage.
Nor
malSpoi
lagec
ommont
oal
ljobs
Mat
eri
alsControl(s
poiledgoodsatdisposalval
ue5*$600) 3000
MOHControl(normalspoil
age$10,000-$3,000) 7000
Wor k-i
nPr oces
sCont r
ol(s
pecifi
cjob5*$2,000) 10000
Abnor
malSpoi
lage:
Mater
ialsCont
rol(
spoiledgoodsatcurr
entdis
pos
alval
ue: 3000
Los
sfromAbnor malSpoilage 7000
Work-i
nProcessControl(
speci
fi
cjob) 10000
Ac
count
ingf
ordef
ect
ive(
rewor
k)uni
ts
Aswi t
hs poileduni ts,def ec ti
veuni tsar ec l
as sif
iedasei thernormalorabnor mal .
Normaldef ec tiveuni ts :Thenumber sofdef ectiveuni tsinanypar t
icularpr oducti
onpr oces sthat
canbeexpec teddes piteef ficientoper ati
onsar eknownasnor maldefectiveuni t
s.Normaldef ec t
ive
reworkc ostsmaybe:
A)Appl i
edt oas pec ificjob.
B)Appl i
edt oal ljobs .
Abnormaldef ec tiveuni ts:Thenumberofdef ec ti
veuni tsi
nexc essofwhati sconsi
der edt obe
normalf oranef f
icientpr oduc t
iveoper ationi sc all
edabnor maldef ecti
veuni t
s.Thet otalc ostof
reworkingabnor maldef ec ti
veuni tss houldbec har gedt o“Lossf
romAbnor malDef ecti
ve”Ac count.
Exampl e-1
Assumet hat40, 000uni tsar epl acedi ntopr oduc tionf orjob10.Normaldef ecti
veunitsfort hisjob
areestimat edt obe400wher easac tualdef ecti
veuni tswer e1000.
Thet otalc os
ttor eworkt he1000
defecti
veuni tswasasf ol l
ows :
Peruni t
Direc tmat er i
al s…………. .
$500……$0. 50
Direc tlabor ………………. .1000……1. 00
FOH- appl i
ed………………500……. 0.50
$2000 $2. 00
Required:Pr esentt her equi redent r
yas sumi ngt hatnor malreworkcostsar eappliedto
a.As pec if
icj ob
b.Al ljobs
Soluti
on
Abnormaldef ec tive=t ot aldef ecti
ve–nor maldef ec t
ive.
=1000uni ts–400uni ts=600uni t s
Torecordnor maldef ec tive
A)Tos pec i
ficjob
WIP-job10( 400xBr2) ………………. 800
Mat er i
als( 400x0. 5)………. .
...
..
..
..
...
....
..
200
Payr oll(400x 0.1)…………………. …...400
FOH- Appl ied………. …………. ..
……. 200
B)Toal ljobs
FOH- c
ont rol………………………. .
800
Mat er i
al s……………. ……………. ..
200
Payr oll……………………………. .400
21
 FOH-
Appl
ied………….
……………200

Torec
ordabnormalDef ecti
ves:
Lossf
romAbnor malDefect
s( 600x$2)
……….
.
1,200
Mater i
al(600x0.5)
………………………………. .
300
Payroll(600x1)……………………………………600
FOH- Applied(600x0.
5)…………………………. .
300
Acompoundent
rycanal
sobemade
a)WI P-J
ob10………………………………. .800
LossfromAbnor malDefect
ives…………1, 200
Mat erial
s………………………………… 500
Payrol l
…………………………. ……. ….1,000
FOH- Appl i
ed…….…………………………500
b)FOH-c ontrol………………. ………. .800
Lossfromdef ects……….…………. .1,200
Mat er i
als …………………. ……………. 500
Payr oll……………………………………. 1,000
FOH- Appli
ed……………………………. ...
500
Exampl
e-2
Consi
derHullMachineShop;assumet
hatthe5spoi
ledpar
tsusedi
ntheil
lus
trat
ionarereworked.
Thejour
nalentryforthe$10,000oft
otalcos
tassi
gnedtothe5spoi
leduni
tsbefor
ec onsi
deri
ng
reworkcos
tsareasfol
lows:
Wor
k-i
nPr
oces
sCont
rol(
Spec
ifi
cJob) 10000
Mat
eri
alsCont
rol 4000
Wagepayabl
eCont
rol 4000
MOHAl
loc
ated 2000
Nor
malRewor
kcommont
oal
ljobs
:
MOHCont
rol(
rewor
kcos
ts) 3800
Mat
eri
alsCont
rol 800
Wagepayabl
econt
rol 2000
MOHAl
loc
ated 1000
Abnor
malr
ewor
k:
Los
sfr
omAbnor
malRewor
k 3800
Mat
eri
alsCont
rol 800
WagePayabl
eCont
rol 2000
MOHAl
loc
ated 1000
Ac
count
ingf
orSc
rapMat
eri
als
Asf orspoil
ageanddef ec
tiveunit
s ,t
hecostaccount
ingsystem shouldprovideamet hodofcost
ing
andc ontrolf
orscr
ap.Whent heamountofs c r
approducedexceedsthenor mi tc
ouldbeanindic
ator
ofineffi
ci
ency.Whent hescarpvalueiss
mal lnoentr
yismadeunt ilthesc
ar pissol
d.Attheti
met he
scarpissoldthef
ollowingentrywillbemade:

22
 Cas h( A/R) …………. xxx
Sc rapRevenue/ WI P/FOH- c on……………. .xxx
Thei nc omef rom s craps alesi sus ual l
yr epor t
edas“ Ot herIncome”i nt heincomes t
atement .When
theval ueoft hes car pi sr elativel yhi ghani nvent or yc ardwi llbepr eparedandi fbot hthequant i
ty
andt hemar ketval ueoft hes c rapar eknown, thef ollowi ngjournalent ri
esaremade.
Tor ec ordt hei nvent or y:
ScrapMat er i
al s………………………. .
xxx
ScrapRevenue/ WI P/FOH- ctrl…………. .
xxx
Whent hes crapi ss old:
Cas h( A/R) …………………xxx
ScrapMat er i
als …………………. xxx
Not e:
1.Somet i
mess c r
apmaybes oldf ormor eorl esst hant hevalueatwhi chiti
srec orded.
Anydi fferenc ebet weent hes alespr i
ceandt her ec ordedval ueist r
eatedasanadj ustmentt othe
ac countt hatwasor iginal l
yc redi t
ed.( i
.e.
,WI P,FOH-c ontrol
,Sc rapRevenue,Mi scel
laneous
inc ome, et c
)
2.Ift hemar ketval ueoft hes c rapi snotknown,noj our nalent r
yismadeunt ilthes crapissold.At
t het imeofs ale,thef ollowi ngent ryismade:
Cas h……………. ……………………. .xxx
Scr apRevenue( WIPorFOH- ctrl
)…………. .xxx
Exampl e
Bisr atTes homeCompanymai ntai nsaSc rapI nvent oryac countf ormet als crapr ecoveredf r
om
oper at ionsi nt hec ut tingdepar tment .OnSept ember8,20055, 300poundsofs crapwi than
estimat edmar ketval ueof$2, 385ar et r
ans ferredf romt heFac torytot hestor
eroom.
Inst ruc t i
on:makej our nalent riest or ecord
1.Thes torageoft hemet als crap. (Cr editWI Pac count )
2.Thec ashs aleof1, 900poundsofs crapatr ec ordedval ue.
3.Thes aleof2, 100poundsofs crapat$0. 52perpoundonc redit.
4.Thes aleof1, 300poundsofs crapat$0. 39perpoundonc redit.
Sol ut i
on
1.Sc rapMat erial……………. .2,385
WI P……………………………. 2, 385
2.Cas h………………………. 855
Sc rapMat eri
al s……………855
3.A/ R……………………. .
1,092
Sc rapMat er i
al………………945
WI P…………………………147
4.A/ R……………………507
WI P…………………. ..
.78
Sc rapMat er i
al……………585

23