Professional Documents
Culture Documents
Cost 1 Chapt-3
Cost 1 Chapt-3
The cost per campaign poster is Br 0.50 (Br 500 divided by 1000 posters)
and the cost per wedding invitation is Br 1.00 (Birr 100 divided by 100
invitations)
Processes costing
Process costing is used by companies that produce large numbers of
identical products and/or when units are not distinguishable from
one another during one or more manufacturing processes.
The following conditions may also exist in process costing:
1. The product of one process becomes the material (input) of the next
process.
2. Different products or even by-products are produced by the same
process.
The process costing method is applicable to industries such as:
Flour mills,
Breweries,
Chemical Industries,
Oil refining, and
Many others.
For example: Moha millennium plant at Hawassa produced
400,000 bottles of soft drink specifically Pepsi cola during
September, 2013. The following manufacturing costs were
incurred in September.
Direct Materials Birr 150,000
Direct labor 200,000
Factory over head 150, 000
Both the actual and standard cost systems may be used in connection with
either job order or process costing.
JOB ORDER COSTING
Job-order costing is the cost accumulation system under
which costs are accumulated by jobs, contracts, or orders.
Job-order costing keeps track of costs as follows:
Direct material and direct labor are traced to a particular
job.
Costs that are not directly traceable-factory overhead-are
applied to individual jobs using a predetermined overhead
(application) rate.
JOB COST SHEET
Material
March March
1. Inventory $100,000 31, Return 2,000
31. Purchase 25,000 31 Direct Material Requisition $31,000
31 Indirect Material Requisition 6,000
125,000 $39,000
$86,000
Accounting for Labor
The accounting procedure for labor may be divided into two
distinct phases:
1. Collection of payroll data, computation of earnings,
calculation of payroll taxes and payment of wages
2. Distribution & allocation of labor costs to jobs, departments
and other cost classifications.
Example: Payroll during the month of Dec, 2011
Dec, 15th Dec 31st
Direct labor $12,000 Direct labor $15,000
Indirect Labor 1,800 Indirect Labor 2,200
Assume further that the Co. withholds 15% for Income tax and 6% of
Pension tax. The journal entry would be
Dec, 15th Dec, 31st
Payroll ---------------------13,800 Payrolls ----------------------- 17,200
Employer inc. tax payable ----- 2,070 Employer Inc. tax payable-------
2,580
Pension tax payable -----------828 Pension tax payable ------------- 1,032
Accrued payroll --------------10,902 Accrued payroll ----------------- -13,588
At each payroll date payment to workers would be recorded as follows
Dec, 15th Dec, 31st
Accrued payroll ------------10,902 13,588
Cash -----------------------------10,902 13,588
If the employer is expected to contribute 7.5% Pension tax, 2.7%
state unemployment tax and 0.7% federal unemployment tax, the
entry at end of the month would be recorded as follows.
FOH ------------------------$ 3,379
Pension tax payable -------------------2,325
State unemployment tax payable-------837
Federal unemployment tax payable-----217
To distribute the total cost incurred, the following month –end
summary, entry would be recorded (indirect labor, 4,000)
Work in process ---------------------27,000
FOH -----------------------------------4,000
Payroll ---------------------------------------31,000
Accounting for Factory Overhead
a) Estimated Factory Overhead: - is FOH entered on the job order
cost sheets on the basis of a predetermined factory overhead
based on:
direct labor hours,
direct labor cost,
Machine hours or
Other appropriate base.
In principle, the accountants determine causal relationship
between two factors, such as the direct labor hours and FOH,
and use this relationship as a means of charging factory
overhead to jobs.
Conti--
For example: assume that the direct labor hours of company “X” for the month of
Jan, 2011 were estimated to be 9,000 hours and factory overhead is as estimated to
be $22,500. These estimates lead to the assumption that for each hours of direct
labor there should be $2.5 ($22,500)/ (9000) of factory overhead to be applied for
production. The job order cost sheet for any job done during the period would
disclose the factory overhead applied to the job (Direct labor hours x predetermined
rate).
Applied FOH account: - The applied FOH entered on the job order cost sheet for
each job is the basis for the following entry (Assume that the job consumes 5,280
direct labor hours):
Work in process ………………………………………. 13,200
Applied Factory overhead, (5,280 hrs x $2.5) …………. 13,200
The applied FOH account is closed to the actual factory overhead control
account at the end of the accounting period by the following entry.
Applied Factory overhead …………………………. 13,200
Factory overhead Control………………………….…. 13,200
b) Actual FOH
Some actual overhead costs such as indirect materials and labor
and payroll taxes are charged to factory overhead control as they
are incurred. Other overhead costs, such as depreciation and
expired insurance, are charged to FOH control account when
adjusting entries are recoded.
For example: factory depreciation and expired insurance with a
value of $682 & $516 respectively are recorded at the end of the
accounting period by the following entry.
FOH Control……………………… 1, 198
Accumulated Depreciation …………….. 682
Prepaid insurance………………-……… 516
The balance of FOH control account for Co. “X” can be summarized
as follows
FOH
Mar. 31 indirect materials $ 6,000 Mar. 31. Over head
31, indirect labor 4,000 Applied to WIP 13,200
31,indirect taxes 3,379
31, Depreciation 682
31, insurance expense 516
$14,577 $1,377
Example:
Department Budgeted over Budgeted labor Overhead rate
head (a) hours(b) (a/b)
Under applied FOH occurs when the allocated (applied) amount of indirect costs in an accounting
period is less than the actual (incurred) amount in that period.
Over applied FOH occurs when the allocated (applied) amount of indirect costs in an accounting
period is more than the actual (incurred) amount in that period.
Under or Over applied = Actual factory – Applied factory
Factory overhead overhead incurred overhead
Adjustments
Conti--