Acc chp 2

Source: Chapter 2, Introduction to Managerial Accounting, Tenth edition © McGraw Hill LLC.

Comparison of Income Statements
- Traditional Format
  - Sales: $100,000
  - Cost of Goods Sold (COGS): $70,000
  - Gross Margin: $30,000
  - Selling & Administrative Expense: $20,000
  - Net Operating Income: $10,000
- Contribution Format
  - Sales: $100,000
  - Variable Expenses: $60,000
  - Contribution Margin: $40,000
  - Fixed Expenses: $30,000
  - Net Operating Income: $10,000
Use Cases:
- Traditional format is primarily for external reporting.
- Contribution format is mainly utilized by management for internal analysis.

Definition:
- All manufacturing costs are assigned to units of product; costs are considered “fully absorbed”.
Cost Behavior:
- Both fixed and variable costs are assigned to products regardless of their behavior.
Regulations:
- Required for external financial reporting and tax reporting in the US and most countries.
Usage:
- Most companies apply absorption costing for internal management reporting.

Utilization Conditions:
- Used when many different products are produced each period.
- Products are manufactured to order.
- The unique nature of each order necessitates tracing or allocating costs to each job and maintaining cost records.

Direct Materials and Direct Labor:
- Direct material and direct labor costs are charged to each job as work is performed.
Manufacturing Overhead:
- Manufacturing overhead costs, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced.

Purpose: Document used for tracking costs associated with a specific job,
Key Components: Includes records for direct materials, direct labor, and applied overhead.

Definition: An allocation base such as direct labor hours or machine hours is used to assign manufacturing overhead to individual jobs due to:
- Difficulty in tracing overhead costs to specific jobs.
- Existence of diverse items in manufacturing overhead.
- Many manufacturing overhead costs are fixed, with output fluctuations.

Calculation:
- Determined before the period begins;
- Formula: ext{POHR} = rac{ ext{Estimated Total Manufacturing Overhead Cost}}{ ext{Estimated Total Units in Allocation Base}}
Cost Driver: Ideally, the allocation base serves as a cost driver that causes overhead.
Reason for Using Estimated Data:
- Actual overhead is not available until period close.
- Seasonality can mislead decision-making.

Process:
1. Estimate total allocation base needed for production.
2. Estimate total fixed manufacturing overhead and variable costs per unit.
3. Use Y = a + bX:
  - Y = estimated total manufacturing overhead cost
  - a = estimated total fixed manufacturing overhead
  - b = estimated variable cost per unit
  - X = total amount of allocation base.
4. Compute the predetermined overhead rate.

Example Calculation: Overhead application rate such as $20.00 per direct labor-hour, estimated overhead, and direct labor hours.

Total Cost Compute: Learn to compute total cost and unit product cost of a job using a plantwide predetermined overhead rate.

Job cost sheets collectively form a subsidiary ledger, detailing job specifics for balance sheet entries.
Balance Sheet Reporting: Job cost sheets provide reports on Work-in-Process and Finished Goods.
Income Statement Reporting: Details specific jobs that comprise Cost of Goods Sold.

Three Amounts of Manufacturing Overhead:
1. Estimated MOH: Total expected overhead for the period, used to calculate the predetermined overhead rate.
2. Applied MOH: Overhead costs applied to jobs, calculated as POHR x actual amount of allocation base.
3. Actual MOH: Total overhead incurred by period end.
Financial Statement Relevance: An overview of how these amounts impact financial statements.

Definition:
- Underapplied overhead occurs when less overhead is applied to jobs than incurred.
- Overapplied overhead occurs when more overhead is applied than incurred.
Income Statement Adjustments:
- Underapplied: increases cost of goods sold, decreases net income.
- Overapplied: decreases cost of goods sold, increases net income.

Job-order costing applies beyond manufacturing, also relevant in service industries such as law firms, accounting firms, and medical treatment.
Service Example:
- Law firms treat each case as a job, with direct materials including legal forms, direct labor represented by attorney time, and overhead encompassing salaries and office costs.
Yancey Productions: A film studio example, showcasing direct materials (costumes), direct labor (actors), and overhead (utilities, management salaries).

Cost Estimates: Specific estimates for labor-dollars, fixed and variable overhead costs.
Predetermined Overhead Rate Calculation: Using estimates to derive overall rate for job costing.
Total Job Cost Calculation: Breakdown of total cost including direct materials, direct labor, and applied overhead.

Total cost for a job includes actual direct materials, actual direct labor, and applied manufacturing overhead.
Unit Cost Calculation: Total manufacturing cost divided by the number of units produced.

This chapter provided an exhaustive explanation of job-order costing, its calculations, implications, and applicable examples, focusing on both manufacturing and service industries. Each component was dissected into measurable elements for better understanding and application in real-world scenarios.