Job Order Costing and Manufacturing Overhead Dynamics

Course Administration and Assessment Updates

  • Quiz 2 Performance Review:

    • Overall results were good, with several students achieving a score of 100%100\%.
    • The class average is currently in the mid-eighties (80s80\text{s}).
    • The instructor noted that performance is generally better than Quiz 1.
    • Common Mistakes: The primary error for students who did not get a perfect score related to mixed costs. Specifically, the high-low method requires identifying activity levels first. Some students looked at costs first rather than identifying the high and low activity months.
    • Activity Level First: The correct procedure involves covering the costs and identifying the high and low activity based on two months of data before calculating the variable and fixed components.
    • Scores were expected to be posted by 03:00 PM03:00\,PM on the day of the lecture.

  • Upcoming Schedule:

    • Today: Completion of Chapter 5 regarding Job Order Costing.
    • Next Week: Introduction to Chapter 9 on Budgeting.
    • Week After Next: Chapter 12, described as one of the most critical chapters in the course, which will be heavily featured on the final exam.
    • Course Scope: The course focuses on approximately 77 or 88 chapters rather than the full 1010 typically in the outline, prioritizing the most relevant topics.

  • Final Exam Details:

    • Date: August 13 (Thursday).
    • Time: 12:00 PM12:00\,PM (Noon) to 03:00 PM03:00\,PM.
    • Location: Room 104.
    • Students can confirm specific exam dates for all courses via the YouInsight portal (distinct from Brightspace).

Introduction to Job Order Costing

  • The Three Pillars of Managerial Accounting Costs:

    1. Direct Materials (DM).
    2. Direct Labor (DL).
    3. Manufacturing Overhead (MOH).

  • Manufacturing Overhead and Estimates:

    • Calculating actual DM and DL is generally straightforward for students.
    • Manufacturing Overhead requires the use of a predetermined overhead rate (POHR) because businesses must estimate costs to quote prices for jobs occurring months or years in the future.
    • Without estimation (a predetermined rate), businesses face "expensive learning pains" or financial loss.

  • Allocation Bases:

    • The allocation base is the cost driver used to assign overhead to products.
    • Common bases include direct labor hours, machine hours, or direct labor dollars.
    • In academic assessments, the allocation base will always be explicitly provided in the question.

Predetermined Overhead Rate (POHR) Calculation

  • The Formula for POHR:     POHR=Estimated Total Manufacturing OverheadEstimated Total Amount of Allocation Base\text{POHR} = \frac{\text{Estimated Total Manufacturing Overhead}}{\text{Estimated Total Amount of Allocation Base}}

  • In-Class Case Study: Job WR 53:

    • Job Data:
      • Direct Materials (DM) used for job: $200\$200
      • Direct Labor (DL) required: 10 hours10\,\text{hours}
      • Labor Rate: $15 per hour\$15\,\text{per hour}
      • Estimated Total Overhead for the year: $760,000\$760,000
      • Estimated Total Direct Labor Hours for the year: 20,000 hours20,000\,\text{hours}
    • Step 1: Calculate the POHR:         $760,00020,000 hours=$38 per hour\frac{\$760,000}{20,000\,\text{hours}} = \$38\,\text{per hour}
    • Step 2: Calculate Total Job Cost:
      • Direct Materials: $200\$200
      • Direct Labor (10 hours×$15/hr10\,\text{hours} \times \$15/\text{hr}): $150\$150
      • Manufacturing Overhead Applied (10 hours×$38/hr10\,\text{hours} \times \$38/\text{hr}): $380\$380
      • Total Cost for WR 53: $200+$150+$380=$730\$200 + \$150 + \$380 = \$730

  • Variations in Information Delivery:

    • Questions might provide the total DL cost (e.g., $150\$150 for 1010 hours) or ask you to calculate the hours based on the pay rate to find the overhead application requirement.

The Nature of Fixed Costs and Overhead

  • Fixed Costs Definition: Typically, fixed overhead does not change regardless of volume changes (e.g., number of students or number of flights).

  • Real-World Examples of Fixed Costs:

    • Public Sector: Municipalities (like Windsor and Amherstburg), hospitals, and school boards have high overhead.
    • Law Enforcement Case Study: Windsor has the highest-paid police force in Ontario because their union contract (collective agreement) ties their pay to the Ontario Provincial Police (OPP). Amherstburg attempted to save money by outsourcing to Windsor, but their costs eventually exceeded the provincial average due to overhead.
    • Pandemic Maintenance: Universities maintain air conditioning and lighting even when buildings are empty to prevent systems from seizing or deteriorating. Similarly, airlines have pilots taxi airplanes down runways daily during grounding periods to ensure functionality.
    • Staffing as "Legacy Costs": Tenure in universities creates "legacy costs" because professors cannot be laid off easily, making these costs fixed even if student enrollment dips.

Manufacturing Overhead T-Accounts and Reconciliation

  • Actual vs. Applied Overhead:

    • The Manufacturing Overhead account acts as a clearing account.
    • Debit Side (Left): Actual Manufacturing Overhead costs incurred (the true expenses).
    • Credit Side (Right): Applied Manufacturing Overhead (costs charged to jobs using the POHR).

  • Reconciliation Challenges:

    • Actual costs and applied costs will almost never balance perfectly because of fluctuations in volume (how busy the firm is) and prices (e.g., rising electricity or gasoline prices).
    • Underapplied Overhead: Occurs when Actual Costs > Applied Costs (results in a debit balance).
    • Overapplied Overhead: Occurs when Applied Costs > Actual Costs (results in a credit balance).

  • Reconciliation Methods:

    1. Close to Cost of Goods Sold (COGS): The entire variance is moved to COGS. This is the quickest method.
    2. Proportional Allocation: The variance is distributed among Work in Process (WIP), Finished Goods (FG), and COGS based on their relative values. This is more accurate but requires more calculation.

  • Example of Proportional Reallocation:

    • If there is a $30,000\$30,000 variance to reconcile:
      • Work in Process (WIP) portion: $3,000\$3,000
      • Finished Goods (FG) portion: $9,000\$9,000
      • Cost of Goods Sold (COGS) portion: $18,000\$18,000
    • Journal Entry Example (Reducing overapplied overhead):
      • Debit: Manufacturing Overhead $30,000\$30,000
      • Credit: Finished Goods $9,000\$9,000
      • Credit: Work in Process $3,000\$3,000
      • Credit: Cost of Goods Sold $18,000\$18,000

Departmental Overhead Rates

  • Different departments within a single organization may have unique overhead rates based on their specific cost drivers.
  • University Examples:
    • Registrar’s Office: Budget increases by roughly $8\$8 to $10 per student\$10\,\text{per student}.
    • Library: Charged an amount per student regardless of individual usage levels.
    • Recruitment Department: Receives a budget intended to attract students; if goals are not met, the overhead budget might be adjusted.

Preview of Budgeting (Chapter 9)

  • There are approximately 1010 different types of budgets within a master budget.
  • The course focuses on the first three budgets.
  • Sales Budget: The first and most critical budget. If the sales forecast is incorrect, all subsequent budgets (the "house of cards") will be flawed.
  • Logic: Mastering the first three budgets provides the skills necessary to handle the remaining seven.