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Chapter 4 Job Order Costing and Cost Allocation V2021

Financial Accounting 1 (Ateneo de Manila University)

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Accounting 122/125: Chapter 4 (Job Order Costing and Overhead Cost Allocation)

Job-Costing System - the cost object is a unit or multiple units of distinct product or service called job(house, car repair,
customized machine, wedding gown, wedding reception)

Product Costs/Inventoriable Cost/Manufacturing Costs:

Direct Materials - materials that are traceable to a specific product
Direct Labor - labor cost that is traceable to specific product
Overhead - cannot be traced to a specific product
- allocated to products using predetermined (budgeted) allocation rate

Allocation Base = quantity of input or cost driver incurred (direct materials, direct labor, or other levels of activity)

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
Predetermined (Budgeted) Overhead Allocation Rate =
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝐵𝑎𝑠𝑒
𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
Actual Overhead Allocation Rate =
𝐴𝑐𝑡𝑢𝑎𝑙 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝐵𝑎𝑠𝑒
Allocated or Applied Overhead = Budgeted Allocation Rate x Actual Quantity of Input or Allocation Base Incurred
= Actual Overhead + Overallocated Overhead
= Actual Overhead - Under allocated Overhead

Normal Costing VS. Actual Costing

Normal Costing Actual Costing
1. Actual Direct Materials 1. Actual Direct Materials
2. Actual Direct Labor 2. Actual Direct Labor
3. Budgeted Overhead Rate x Actual Quantity 3. Actual Overhead Rate x Actual Quantity
of Allocation Base Incurred of Allocation Base Incurred

Example 1. One Specific Job

Job: 101
Direct Materials: P20,000 (quantity: 100 m 2 )
Direct Labor: P15,000 (quantity: 80 direct labor hours)
Budgeted Overhead for the year: P1,000,000
Budgeted Direct Labor Hours for the year: 5,000
Overhead Allocation Base: Direct Labor Hours

Requirements:
a. Compute for the predetermined or budgeted overhead rate
b. Compute for the overhead to be charged to Job 101
c. Compute for the cost of Job 101

Solution:
𝑃1,000,000
a) Predetermined Overhead Rate = = 𝑃200/𝐷𝐿𝐻
5,000 𝐷𝐿𝐻
b) Overhead applied to Job 101 = (80 DLH x P200/DLH) = P16,000

c) Direct Materials 20,000

Direct Labor 15,000
Overhead 16,000
Total Cost 51,000

Example 2: Three Products

Products: Total Units Direct Materials Direct Labor DM (m2)
X 2,000 P150,000 P60,000 750
Y 8,000 P250,000 P160,000 1,250
Z 3,500 P100,000 P120,000 500
Total 13,500 P500,000 P340,000 2,500
DM Cost/m2 = P200 Total Overhead Cost = P300,000

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Requirements:
a. Compute for Overhead Rate (allocation base is direct materials)
b. Compute for the overhead cost to be allocated to products X, Y and Z
c. Compute for the cost per unit of each product

Solution:
𝑃300,000 𝑃120
a) Overhead Rate = =
2 ,500 𝑚 ! 𝑚!

b) Overhead to be allocated to each product: Alternative Formula:

2 2
Product X (P120/m 2 x 750 m 2 ) 90,000 [P300,000 x 750m /2,500m ]
2 2
Product Y (P120/m 2 x 1,250 m 2 ) 150,000 [P300,000 x 1,250m /2,500m ]
2 2
Product Z (P120/m 2 x 500 m 2 ) 60,000 [P300,000 x 500m /2,500m ]

c) Total Costs of each product:

Product Direct Material Direct Labor Overhead Total Cost
X P150,000 P60,000 P90,000 300,000
Y P250,000 P160,000 P150,000 560,000
Z P100,000 P120,000 P60,000 280,000

d) Cost Per Unit:

Product X (P300,000/2,000 units) 150
Product Y (P560,000/8,000 units) 70
Product Z (P280,000/3,500 units) 80

Example 3. Two or More Jobs

Products: Total Units Total Materials Total Labor

A 1,000 P150,000 P60,000
B 4,000 P250,000 P100,000
C 3,000 P120,000 P90,000
Total 8,000 P520,000 P250,000
Total Overhead: P1,000,000
Allocation Base: Direct Labor Cost

Requirements: Solution:
1. Compute for the budgeted overhead rate Requirement 1:
2. Compute for the overhead cost allocated to each product Budgeted Allocation Rate (P1,000,000/P250,000) 400%
3. Compute for the total cost of each product
4. Determine the cost per unit of each product Requirement 2:
5. Compute for the selling price if mark-up is 50% of cost. Product A (P60,000 x 400%) 240,000
Product B (P100,000 x 400%) 400,000
Product C (P90,000 x 400%) 360,000
Requirement 3
Product A B C
Direct Materials 150,000 250,000 120,000
Direct Labor 60,000 100,000 90,000
3
Overhead 240,000 400,000 360,000
Total 450,000 750,000 570,000

Requirement 4 Requirement 5:
Product A (P450,000/1,000 units 450 Selling Prices
Product B (P750,000/4,000 units 187.50 Product A (P450 x 50% + P450) = 675.00
Product C (P570,000/3,000 units 190 Product B (P187.50 x 50% + P187.50) = 281.25
Product C (P190 x 50% + P190) = 285.00

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MAGIS ACADEMIC MENTORS

Over/Under Allocated Overhead Costs

Overallocated Overhead: applied overhead is greater than actual overhead incurred
- (Budgeted Overhead Rate x Actual quantity of cost driver) > (Actual Overhead Cost)
Under allocated Overhead: applied overhead is lower than actual overhead incurred
- (Budgeted Overhead Rate x Actual quantity of cost driver) < (Actual Overhead Cost)

Example 4: Example 5:
Budgeted Overhead for 2021 (Php) : 1,400,000 Budgeted Overhead for 2021 (Php) : 260,000
Budgeted Direct Labor Hours for 2021: 20,000 Budgeted Materials Cost for 2021 (Php) : 800,000
Actual Overhead Cost for 2021 (Php) : 1,390,000 Actual Overhead Cost for 2021 (Php) : 290,000
Actual Direct Labor Hours in 2021: 20,200 Actual Direct Materials Cost in 2021 (Php) : 792,000
Allocation base or cost driver of overhead is direct labor hours Allocation base or cost driver of overhead is direct materials cost

Requirements: Requirements:
1. Overhead Rate 1. Overhead Rate
2. Allocated Overhead Cost 2. Allocated Overhead Cost
3. Under/Over allocated overhead amount 3. Under/Over allocated overhead amount

Solution: Solution:
1. Overhead Rate (P1,400,000/20,000 hours) 70 1. Overhead Rate (P260,000/P800,000) 32.50%
2. Allocated Overhead (P70/hr x 20,200 hours) 1,414,000 2. Allocated Overhead Cost (P792,000 x 32.50%) 257,400
3. Overallocated overhead cost 24,000 3. Under allocated overhead amount 32,600
(P1,414,000 - P1,390,000) (P290 - P257,400)

How to handle over/under allocated overhead costs?

1. Write-off to cost of goods sold
2. Prorate or distribute to work-in process inventory, finished goods and cost of goods sold
3. Recompute the overhead cost using the actual overhead rate

Example 6. Write-off the overallocated overhead cost of P24,000 Example 7. Write-off the under allocated overhead cost of
in example 4 to cost of goods sold. Unadjusted cost of P32,600 in example 5 to cost of goods sold.
goods sold is P4,500,000. Unadjusted cost of goods sold is P700,000.
Dr. Overhead Control 24,000 Dr. Cost of goods sold 32,600
Cr. Cost of goods sold 24,000 Cr. Overhead Control 32,600
Adjusted COGS (P4,500,000 - P24,000) 4,476,000 Adjusted COGS (P700,000 + P32,600) 832,600

Example 8. Prorate the overallocated overhead cost of P24,000 Example 9. Prorate the under allocated overhead cost of P32,600
in example 4 to work-in process inventory, finished goods in example 5 to work-in process inventory, finished goods
and cost of goods sold based on their ending values: and cost of goods sold based on their ending values:
Inventory Work-in Finished Cost of Total Inventory Work-in Finished Cost of Total
Process Goods Goods Sold Process Goods Goods Sold
Amount 2,000,000 1,500,000 4,500,000 8,000,000 Amount 400,000 400,000 800,000 1,600,000

Solution: Solution:
Step 1: Determine the weight of the inventories: Step 1: Determine the weight of the inventories:
Work-in Process (P2,000,000/P8,000,000) 25.00% Work-in Process (P400,000/P1,600,000) 25%
Finished Goods (P1,500,000/P8,000,000) 18.75% Finished Goods (P400,000/P1,600,000) 25%
Cost of Goods Sold (P4,500,000/P8,000,000) 56.25% Cost of Goods Sold (P800,000/P1,600,000) 50%

Step 2: Allocate the overallocated P24,000 based on the weights: Step 2: Allocate the overallocated P32,600:
Work-in Process (P24,000 x 25%) 6,000 Work-in Process (P32,600 x 25%) 8,150
Finished Goods (P24,000 x 18.75%) 4,500 Finished Goods (P32,600 x 25%) 8,150
Cost of Goods Sold (P24,000 x 56.25%) 13,500 Cost of Goods Sold (P32,600 x 50%) 16,300

Step 3: Compute for the ending values: Step 3: Compute for the ending values:
Work-in Process (P2,000,000 - P6,000) 1,994,000 Work-in Process (P400,000 + P8,150) 408,150
Finished Goods (P1,500,000 - P4,500) 1,495,500 Finished Goods (P400,000 + P8,150) 408,150
Cost of Goods Sold (P4,500,000 - P13,500) 4,486,500 Cost of Goods Sold (P800,000 + P16,300) 816,300

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MAGIS ACADEMIC MENTORS

Comprehensive Example: Cost FLOW with Applied Overhead

Dec. 31, 2015: Dec. 31, 2016: Direct Labor Hours in Ending Balances:
Raw Materials 24,000 20,000 Work-in Process Inventory 72 DLH
Work-in-Process Inventory 40,000 40,000 Finished Goods Inventory 108 DLH
Finished Goods Inventory 36,000 60,000 Cost of Goods Sold 270 DLH

Actual information during the year 2016 (Php.): Requirements:

Materials Purchases
Direct Labor
Sales Salaries
Store Equipment Depreciation
Office Salaries
Office Equipment Depreciation
Office Supplies Used
Depreciation - Factory Building
Depreciation - Factory Equipment
Factory Heat, Light and Power
Factory Indirect Materials
Factory Indirect Labor
Factory Insurance
Interest Expense
Sales
Tax Expense (40% of Income Before Tax)
Direct Labor Cost Per Hour = P200/hour
104,000 a) Compute for Budgeted Overhead Rate
90,000 b) Compute for Actual Number of Direct Labor Hours Consumed
24,500 c) Compute for the total actual overhead incurred
11,000 d) Compute for the Applied Overhead
14,500 e) Compute for under/over allocated overhead
12,000 f) Construct the cost flow diagram
6,500 g) Prorate the over/under applied overhead based on ending
14,250 balances of Work-in-Process, Finished Goods and
13,750 Cost of Goods Sold. Then determine their final balances
5,500 h) Prorate the under/over applied overhead to Work-in Process,
8,000 Finished Goods and Cost of Goods Sold based
12,000 on applied overhead.
8,500 i) Write-off the under/over applied overhead to Cost of Goods
2,800 Sold and determine its final balance.
350,000 j) Prepare the income statement using final balance of
Cost of Goods Sold from letter f.
k) Prepare the journal entries

Budgets during the year 2016:

Budgeted Overhead P60,000
Budgeted Direct Labor Hours 500 hours
Overhead is allocated using direct labor hours (DLH)

Solution:
a) Budgeted Overhead Rate (P60,000/500 hrs.) = 120 c.
b) Actual Direct Labor Hours Consumed (P90,000/P200) = 450 hrs. Depreciation - Factory Building 14,250
d) Applied Overhead = Budgeted Overhead Rate x Actual DLH Depreciation - Factory Equipment 13,750
= (P120 x 450 hours ) = 54,000 Factory Heat, Light and Power 5,500
e) Actual Overhead 62,000 Factory Indirect Materials 8,000
Applied Overhead 54,000 Factory Indirect Labor 12,000
Under-applied Overhead 8,000 Factory Insurance 8,500
Total Actual Overhead Costs 62,000

f) Raw Materials Control Work-in-Process Control Finished Goods Control

(1/1/2016) 24,000 100,000 (DM used) (1/1/2016) 40,000 244,000 (Cost of Goods (1/1/2016) 36,000 220,000 (COGS)
(Purchases) 104,000 8,000 (DM) 100,000 Manufactured) 244,000
(12/31/2016) 20,000 (DL) 90,000 (12/31/2016) 60,000
(OH) 54,000
(12/31/2016) 40,000

Wages Payable Overhead Control Overhead Applied

90,000 (DL) 14,250 62,000 54,000 54,000
12,000 (IDL) 13,750 Cost of Goods Sold
5,500 220,000
8,000
12,000
8,500
0

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g) Account Amount Percent Allocated Under-applied Overhead Final Balances

Work-in Process 40,000 12.50% 1,000 1 41,000
Finished Goods 60,000 18.75% 1,500 2 61,500
Cost of Goods Sold 220,000 68.75% 5,500 3 225,500
Total 320,000 100.00% 8,000 328,000
1 2 3
(12.5% x P8,000) (18.75% x P8,000) (68.75% x P8,000)

h) Account Amount Applied Overhead Percent Allocated Overhead Final Balances

Work-in Process 40,000 8,640 (72 DLH x P120) 16% 1,280 1 41,280
Finished Goods 60,000 12,960 (108 DLH x P120) 24% 1,920 2 61,920
Cost of Goods Sold 220,000 32,400 (270 DLH x P120) 60% 4,800 3 224,800
Total 320,000 54,000 100% 8,000 328,000
1 2 3
(16% x P8,000) (24% x P8,000) (60% x P8,000)

i) Dr. Overhead Applied 54,000 Cost of Goods Sold (unadjusted) 220,000

Cost of Goods Sold 8,000 Add: Under-applied Overhead 8,000
Cr. Overhead Control 62,000 Ending Balance 228,000

j) Magis Academic Mentors

Income Statement
For the year ended December 31, 2016

Sales 350,000
Less: Cost of Goods Sold 225,500
Gross Profit 124,500
Less: Operating Expenses
Sales Salaries 24,500
Store Equipment Depreciation 11,000
Office Salaries 14,500
Office Equipment Depreciation 12,000
Office Supplies Used 6,500 68,500
Operating Income 56,000
Less: Interest Expense 2,800
Income Before Tax 53,200
Less: Tax Expenses 21,280
Net Income 31,920

k) (1) Purchase of P104,000 materials on account:

Dr. Materials Control 104,000
Cr. Accounts Payable 104,000

(2) Use of P100,000 Direct Materials and P8,000 Indirect Materials

Dr. Work-in Process Control (direct materials) 100,000
Manufacturing Overhead Control (indirect materials) 8,000
Cr. Raw Materials Control 108,000

(3) Payment for P90,000 Direct Labor and P12,000 Indirect Labor
Dr. Work-in Process Control (direct labor) 90,000
Manufacturing Overhead Control (indirect labor) 12,000
Cr. Cash 102,000

(4) Other actual overhead costs (factory heat, light and power were paid)
Dr. Overhead Control (total of credited accounts) 42,000
Cr. Accumulated Depreciation - Factory Building 14,250
Accumulated Depreciation - Factory Equipment 13,750
Cash (Factory Heat, Light and Power) 5,500
Prepaid Insurance (Factory Insurance) 8,500

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(5) Allocation or Applying of Overhead Costs

Dr. Work-in Process Control 54,000
Cr. Overhead Applied 54,000

(6) Transfer of Cost of Goods Manufactured to Finished Goods

Dr. Finished Goods Control 244,000
Cr. Work-in Process Control (cost of goods manufactured) 244,000

(7) Cost of Goods Sold

Dr. Cost of Goods Sold 220,000
Cr. Finished Goods Control 220,000

(8) Adjustment (office supplies, depreciation) and Payment (salaries, interest, taxes) for Operating Expense
Dr. Office Supplies Expense 6,500
Cr. Office Supplies 6,500
Dr. Depreciation Expense - Store Equipment 11,000
Cr. Accumulated Depreciation - Store Equipment 11,000
Dr. Depreciation Expense - Office Equipment 12,000
Cr. Accumulated Depreciation - Office Equipment 12,000
Dr. Sales Salaries Expense 24,500
Office Salaries Expense 14,500
Interest Expense 2,800
Taxes Expense 21,280
Cr. Cash (total of expenses) 63,080

(9) Recording of sales on credit

Dr. Accounts Receivable 350,000
Cr. Sales 350,000

(10) Allocation of Underapplied using Proration to Work-in Process, Finished Goods and Cost of Goods Sold
Dr. Work-in Process Inventory Control (prorated amount) 1,000
Finished Goods Control (prorated amount) 1,500
Cost of Goods Sold (prorated amount) 5,500
Overhead Applied 54,000
Cr. Overhead Control (actual overhead cost) 62,000

*If Overapplied:
Dr. Work-in Process Inventory Control
Cr. Overhead Control (actual overhead cost)
Work-in Process Inventory Control (prorated amount)
Finished Goods Control (prorated amount)
Cost of Goods Sold (prorated amount)

(11) Writing-off of Underapplied Overhead to Cost of Goods Sold

Dr. Cost of Goods Sold (understated amount) 8,000
Overhead Applied 54,000
Cr. Overhead Control (actual overhead cost) 62,000

*If Overapplied:
Dr. Overhead Applied
Cr. Overhead Control (actual overhead cost)
Cost of Goods Sold (overstated amount)

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