3-1
MANAGERIAL
ACCOUNTING
Ninth Canadian Edition
GARRISON, CHESLEY, CARROLL, WEBB, LIBBY
Systems Design:
Job-Order Costing
Chapter 3
PowerPoint Author:
Robert G. Ducharme, MAcc, CA
University of Waterloo, School of Accounting and Finance
Copyright © 2012 McGraw-Hill Ryerson Limited
3-2
Types of Product Costing Systems
Process
Costing
Job-order
Costing

A company produces many units of a single
product.

One unit of product is indistinguishable from
other units of product.

The identical nature of each unit of product enables
assigning the same average cost per unit.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
3-3
Types of Product Costing Systems
Process
Costing
Job-order
Costing

A company produces many units of a single
product.companies:
Example

unit of product
indistinguishable
from
1.One
St. Mary’s
Cement is
(cement
mixing)
units of product.
2.other
Petro-Canada
(refining oil)
identical(mixing
nature and
of each
unit beverages)
of product enables
3.The
Coca-Cola
bottling

assigning the same average cost per unit.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
3-4
Types of Product Costing Systems
Process
Costing
Job-order
Costing

Many different products are produced each period.

Products are manufactured to order.

The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
3-5
Types of Product Costing Systems
Process
Costing



Job-order
Costing
Many different products are produced each period.
Example companies:
Products are manufactured to order.
1. Bombardier (aircraft manufacturing)
unique
nature of each
order
requires
tracing or
2.The
Bechtel
International
(large
scale
construction)
allocating costs to each job, and maintaining cost
3.records
Hallmark
for(greeting
each job.card design and printing)
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
3-6
Comparing Process and Job-Order Costing
Job-Order
Number of jobs worked
Cost accumulated by
Average cost computed by
Copyright © 2012 McGraw-Hill Ryerson Limited
Process
Many
Individual
Job
Single Product
Job
Department
Department
LO 1
3-7
Quick Check 
Which of the following companies
would be likely to use job-order costing
rather than process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
3-8
Quick Check 
Which of the following companies
would be likely to use job-order costing
rather than process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 1
3-9
Job-Order Costing – An Overview
Direct Materials
Job No. 1
Direct Labour
Job No. 2
Job No. 3
Copyright © 2012 McGraw-Hill Ryerson Limited
Charge
direct
material and
direct labour
costs to
each job as
work is
performed.
LO 2
3-10
Job-Order Costing – An Overview
Direct Materials
Job No. 1
Direct Labour
Manufacturing
Overhead
Copyright © 2012 McGraw-Hill Ryerson Limited
Job No. 2
Job No. 3
Manufacturing
Overhead,
including
indirect
materials and
indirect labour,
are allocated
to all jobs
rather than
directly traced
to each job.
LO 2
3-11
The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
Direct Labour
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labour
Manufacturing Overhead
Total Cost
Unit Product Cost
Copyright © 2012 McGraw-Hill Ryerson Limited
Date Initiated 3-4-11
Date Completed
Units Completed
Units Shipped
Date Number Balance
LO 2
3-12
Measuring Direct Materials Cost
Will E. Delite
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
3-13
Measuring Direct Materials Cost
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
3-14
Measuring Direct Labour Costs
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
3-15
Job-Order Cost Accounting
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 2
3-16
Why Use an Allocation Base?
An allocation base, such as direct labour hours,
direct labour dollars, or machine hours, is used to
assign manufacturing overhead to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular
jobs.
2. Manufacturing overhead consists of many different items
ranging from the grease used in machines to the production
manager’s salary.
3. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-17
Manufacturing Overhead Application
The predetermined overhead rate (POHR)
used to apply overhead to jobs is
determined before the period begins.
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base
is a cost driver that causes
overhead.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-18
The Need for a POHR
Using a predetermined rate makes it
possible to estimate total job costs sooner.
Actual overhead for the period is not
known until the end of the period.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-19
Application of Manufacturing Overhead
Based on estimates, and
determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation
based upon the actual level of
activity.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-20
Overhead Application Rate
POHR =
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
$640,000
160,000 direct labour hours (DLH)
POHR = $4.00 per DLH
For each direct labour hour worked on a
particular job, $4.00 of factory overhead
will be applied to that job.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-21
Job-Order Cost Accounting
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-22
Job-Order Cost Accounting
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-23
Job-Order Cost Accounting
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-24
Interpreting the Average Unit Cost
The average unit cost should not be interpreted
as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit
were produced, so the incremental cost of
another unit may be somewhat less than $118.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-25
Quick Check 
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labour hours at
$15 per hour. Estimated total overhead for
the year was $760,000 and estimated direct
labour hours were 20,000. What would be
recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-26
Quick Check 
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labour hours at
$15 per hour. Estimated total overhead for
the year was $760,000 and estimated direct
labour hours were 20,000. What would be
recorded as the cost of job WR53?
a. $200. Pred. ovhd. rate $760,000/20,000hours $38
b. $350. Direct materials
$200
labour
$15 x 10 hours $150
c. $380. Direct
Manufacturing overhead $38 x 10 hours $380
$730
d. $730. Total cost
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
Job-Order Costing
Document Flow Summary
3-27
Let’s summarize
the document flow
in a job-order
costing system.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 3
3-28
Job-Order Costing
Document Flow Summary
A sales order is the
basis of issuing a
production order.
Copyright © 2012 McGraw-Hill Ryerson Limited
A production
order initiates
work on a job.
LO 3
3-29
Job-Order Costing
Document Flow Summary
Materials used
may be either
direct or
indirect.
Direct
materials
Job Cost
Sheets
Materials
Requisition
Indirect
materials
Copyright © 2012 McGraw-Hill Ryerson Limited
Manufacturing
Overhead
Account
LO 3
3-30
Job-Order Costing
Document Flow Summary
An employee’s
time may be either
direct or indirect.
Direct
Labour
Job Cost
Sheets
Employee Time
Ticket
Indirect
Labour
Copyright © 2012 McGraw-Hill Ryerson Limited
Manufacturing
Overhead
Account
LO 3
Job-Order Costing
Document Flow Summary
Employee
Time Ticket
Other
Actual OH
Charges
Materials
Requisition
Copyright © 2012 McGraw-Hill Ryerson Limited
3-31
Indirect
Labour
Manufacturing Applied
Overhead
Overhead
Account
Job Cost
Sheets
Indirect
Material
LO 3
3-32
Job-Order Costing: The Flow of Costs
The transactions (in Taccount and journal entry
form) that capture the
flow of costs in a joborder costing system are
illustrated on the
following slides.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
3-33
The Purchase and Issue of Raw Materials
Raw Materials
Inventory
Material Direct
Purchases Materials
Indirect
Materials

Work in Process
Inventory
(Job Cost Sheet)
Direct
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
3-34
Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
3-35
Cost Flows – Material Usage
Direct materials issued to a job increase Work in
Process and decrease Raw Materials. Indirect
materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
3-36
The Recording of Labour Costs
Salaries and
Wages Payable
Direct
Labour
Indirect
Labour

Work in Process
Inventory
(Job Cost Sheet)
Direct
Materials
Direct
Labour

Mfg. Overhead
Actual
Indirect
Materials
Indirect
Labour
Copyright © 2012 McGraw-Hill Ryerson Limited
Applied
LO 4
3-37
The Recording of Labour Costs
The cost of direct labour incurred increases Work in
Process and the cost of indirect labour increases
Manufacturing Overhead.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
3-38
Recording Actual Manufacturing Overhead
Salaries and
Wages Payable
Direct
Labour
Indirect
Labour

Work in Process
Inventory
(Job Cost Sheet)
Direct
Materials
Direct
Labour

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labour
Other
Overhead
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
3-39
Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect
labour, other manufacturing overhead costs are
charged to the Manufacturing Overhead account
as they are incurred.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 4
3-40
Applying Manufacturing Overhead
Salaries and
Wages Payable
Direct
Labour
Indirect
Labour

Mfg. Overhead
Actual Applied
Indirect
Materials Overhead
Indirect
Applied to
Labour
Work in
Other
Process
Overhead
Copyright © 2012 McGraw-Hill Ryerson Limited
Work in Process
Inventory
(Job Cost Sheet)
Direct
Materials
Direct
Labour
Overhead
Applied

If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
LO 5
3-41
Applying Manufacturing Overhead
Work in Process is increased when
Manufacturing Overhead is applied to jobs.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 5
3-42
Accounting for Non-Manufacturing Cost
Non-manufacturing costs are not assigned to
individual jobs; rather they are expensed in the
period incurred.
Examples:
1.
Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2.
Advertising expenses are expensed
in the period incurred.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 5
3-43
Accounting for Non-Manufacturing Cost
Non-manufacturing costs (period expenses) are
charged to expense as they are incurred.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 5
3-44
Transferring Completed Units
Work in Process
Inventory
(Job Cost Sheet)
Direct
Materials
Direct
Labour
Overhead
Applied

Finished Goods
Inventory
Cost of
Goods
Mfd.

Cost of
Goods
Mfd.

Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
3-45
Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods
from Work in Process.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
3-46
Transferring Units Sold
Work in Process
Inventory
(Job Cost Sheet)
Direct
Materials
Direct
Labour
Overhead
Applied

Finished Goods
Inventory
Cost of
Goods
Mfd.

Cost of
Goods
Mfd.

Cost of
Goods
Sold

Cost of Goods Sold
Cost of
Goods
Sold

Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
3-47
Transferring Units Sold
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record
COGS and reduce Finished Goods Inventory.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 6
3-48
Complications of Overhead Application
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is less than the total
amount of overhead actually
incurred during the period.
Copyright © 2012 McGraw-Hill Ryerson Limited
Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.
LO 7
3-49
Overhead Application Example
PearCo’s actual overhead for the year was
$650,000 with a total of 170,000 direct labour
hours worked on jobs.
How much total overhead was applied to
PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of
$4.00 per direct labour hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labour Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-50
Overhead Application Example
PearCo’s actual overhead for the year was
$650,000 with a total of 170,000 direct labour
hours worked on jobs.
Howhas
much
total overhead was applied to
PearCo
overapplied
PearCo’s
overhead
for thejobs
yearduring the year? Use
PearCo’s What
predetermined
overhead rate of
by $30,000.
will
$4.00
PearCo
do?per direct labour hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labour Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-51
Quick Check 
Tiger, Inc. had actual manufacturing
overhead costs of $1,210,000 and a
predetermined overhead rate of $4.00 per
machine hour. Tiger, Inc. worked 290,000
machine hours during the period. Tiger’s
manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-52
Quick Check 
Tiger, Inc. had actual manufacturing
overhead costs of $1,210,000 and a
predetermined overhead rate of $4.00 per
Overhead Applied
machine hour. Tiger, Inc.
290,000
$4.00 worked
per hour × 290,000
hours
$1,160,000
machine hours during=the
period. Tiger’s
manufacturing overhead
is Overhead
Underapplied
a. $50,000
$1,210,000 – $1,160,000
overapplied.
= $50,000
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-53
Disposition of Under- or Overapplied Overhead
PearCo’s Method
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
Copyright © 2012 McGraw-Hill Ryerson Limited
Cost of
Goods Sold
LO 7
3-54
Disposition of Under- or Overapplied Overhead
PearCo’s Cost
of Goods Sold
PearCo’s
Mfg. Overhead
Actual Overhead
overhead applied
costs
to jobs
Unadjusted
Balance
$30,000
Adjusted
Balance
$650,000
$680,000
$30,000
overapplied
$30,000
$0
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
Allocating Under- or Overapplied Overhead
Between Accounts
3-55
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
Total
Copyright © 2012 McGraw-Hill Ryerson Limited
Amount
$
68,000
204,000
408,000
$ 680,000
Percent of
Total
10%
30%
60%
100%
Allocation
of $30,000
$
3,000
9,000
18,000
$
30,000
LO 7
Allocating Under- or Overapplied Overhead
Between Accounts
3-56
We would complete the following allocation of
$30,000 overapplied overhead:
Work in process
Finished Goods
Cost of Goods Sold
Total
Copyright © 2012 McGraw-Hill Ryerson Limited
Amount
$
68,000
204,000
408,000
$
680,000
Percent of
Total
10%
30%
60%
100%
Allocation of
$30,000
$
3,000
9,000
18,000
$
30,000
LO 7
Allocating Under- or Overapplied Overhead
Between Accounts
Work in process
Finished Goods
Cost of Goods Sold
Total
Copyright © 2012 McGraw-Hill Ryerson Limited
Amount
$
68,000
204,000
408,000
$
680,000
Percent of
Total
10%
30%
60%
100%
3-57
Allocation of
$30,000
$
3,000
9,000
18,000
$
30,000
LO 7
Overapplied and Underapplied Manufacturing
Overhead - Summary
3-58
PearCo’s
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
Copyright © 2012 McGraw-Hill Ryerson Limited
Allocation
LO 7
3-59
Quick Check 
What effect will the overapplied overhead
have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-60
Quick Check 
What effect will the overapplied overhead
have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-61
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a
single predetermined overhead rate called a
plantwide overhead rate.
Large companies
often use multiple
predetermined
overhead rates.
Copyright © 2012 McGraw-Hill Ryerson Limited
May be more
complex but . . .
May be more accurate
because it reflects
differences across
departments.
LO 7
3-62
The Use of Information Technology
Technology plays an important part in many
job-order cost systems. When combined with
Electronic Data Interchange (EDI) or a webbased programming language called
Extensible Markup Language (XML), bar
coding eliminates the inefficiencies and
inaccuracies associated with manual clerical
processes.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-63
Recorded Costs for Quality
Deficiencies in quality result in scrap, rework,
delays in production, extra inventory, warranty
claims, and poor customer relations.
Scrap or rework costs should be charged to:
1. overhead if the defect costs were a normal cost of all
production, or
2. a particular job if the defect cost was due to a specific
situation surrounding that particular job.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 7
3-64
The Predetermined
Overhead Rate & Capacity
Appendix 3A
Copyright © 2012 McGraw-Hill Ryerson Limited
3-65
Predetermined Overhead Rate and Capacity
Calculating predetermined overhead rates using
an estimated, or budgeted amount of the
allocation base has been criticized because:
1. Basing the predetermined overhead rate upon
budgeted activity results in product costs that
fluctuate depending upon the activity level.
2. Calculating predetermined rates based upon
budgeted activity charges products for costs that
they do not use.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-66
Capacity-Based Overhead Rates
Criticisms can be overcome by using
estimated total units in the allocation base at
capacity in the denominator of the
predetermined overhead rate calculation.
Let’s look at the difference!
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-67
An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year. What is the
predetermined overhead rate?
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-68
An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year. What is the
predetermined overhead rate?
Traditional
=
Method
$100,000
40,000
= $2.50 per unit
Capacity
Method
$100,000
50,000
= $2.00 per unit
Copyright © 2012 McGraw-Hill Ryerson Limited
=
LO 8
3-69
Quick Check 
Crest Winery in Woodinville leases an
automatic corking machine for $100,000 per
year. If run at full capacity, it can cork 50,000
cases of wine per year. The company
estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-70
Quick Check 
Crest Winery in Woodinville leases an
automatic corking machine for $100,000 per
year. If run at full capacity, it can cork 50,000
cases of wine per year. The company
estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-71
Quick Check 
Crest Winery in Woodinville leases an
automatic corking machine for $100,000 per
year. If run at full capacity, it can cork 50,000
cases of wine per year. The company
estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-72
Quick Check 
Crest Winery in Woodinville leases an
automatic corking machine for $100,000 per
year. If run at full capacity, it can cork 50,000
cases of wine per year. The company
estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-73
Quick Check 
When capacity is used in the denominator of
the predetermined rate, what happens to the
predetermined overhead rate as estimated
activity decreases?
a. The predetermined overhead rate goes up
when activity goes down.
b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-74
Quick Check 
When capacity is used in the denominator of
the predetermined rate, what happens to the
predetermined overhead rate as estimated
activity decreases?
a. The predetermined overhead rate goes up
when activity goes down.
b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-75
Quick Check 
When estimated activity is used in the
denominator of the predetermined rate, what
happens to the predetermined overhead rate
as estimated activity decreases?
a. The predetermined overhead rate goes up
when activity goes down.
b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-76
Quick Check 
When estimated activity is used in the
denominator of the predetermined rate, what
happens to the predetermined overhead rate
as estimated activity decreases?
a. The predetermined overhead rate goes up
when activity goes down.
b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
Copyright © 2012 McGraw-Hill Ryerson Limited
LO 8
3-77
Income Statement Preparation –
Basing the rate on capacity
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
Copyright © 2012 McGraw-Hill Ryerson Limited
40,000
$40.00
$24.00
$100,000
50,000
$2.00
$500,000
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,040,000
560,000
20,000
500,000
$
40,000
LO 8
3-78
Income Statement Preparation –
Basing the rate on expected volume
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
Copyright © 2012 McGraw-Hill Ryerson Limited
40,000
$40.00
$24.00
$100,000
40,000
$2.50
$500,000
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,060,000
540,000
500,000
$
40,000
LO 8
3-79
End of Chapter 3
Copyright © 2012 McGraw-Hill Ryerson Limited