Page 742 - Accounting Principles (A Business Perspective)

18. Managerial accounting concepts/job costing

Creative Printers
Income statement
For the month ended 2010 July 31
Sales $9,000
Cost of goods sold:
Finished goods inventory, July 1 $ 5,500
Cost of goods manufactured 29,400
Cost of goods available for sale $34,900
Less: Finished goods inventory, July 31 29,400
Cost of goods sold before transfer of overapplied $ 5,500
overhead
Less: Overapplied overhead 200
Cost of goods sold 5,300
Gross margin $3,700
Selling and administrative expenses 3,000
Net income $ 700
Exhibit 147: Creative Printers-Income statement
Sometime in July or August, Creative Printers would collect its receivables in cash and pay its payables. The

accounts payable for July amount to USD 32,300 (USD 25,000 for the materials purchase + USD 7,300 payables
for overhead costs). The payroll liabilities amount to USD 25,000. Here are the entries recording Creative Printers'
payment of payables and payroll liabilities, and the collection of its receivables of USD 9,000:
Accounts payable (-L) 32,300
Cash (-A) 32,300
Payroll liabilities (-L) 25,000
Cash (-A) 25,000
Cash (+A) 9,000
Accounts receivable (-A) 9,000
Note that in Exhibit 147 we present the income statement for Creative Printers. Assume the selling and
administrative expenses for July are USD 3,000.
Managers would use the preceding cost information for several purposes: First, they would compare the actual
costs of the job with expected costs, both as the work is being done and after the job has been completed. Later
chapters discuss the role of managerial accounting in performance evaluation. Second, managers would assess the

profitability of jobs. For example, Job 105 had revenue of USD 9,000 and costs of USD 5,500.
Third, managers would compare actual overhead on the left side of the Overhead account, with the overhead
applied to jobs on the right side. If the actual overhead exceeds the applied overhead, they may wish to learn why
the actual overhead is so high. Also, they may ask the accountants to increase the overhead applied to jobs to give
them a better idea of the cost of jobs. If the actual is less than the applied overhead, they may ask the accountants to
reduce the overhead applied to jobs.

Predetermined overhead rates
Creative Printers used predetermined rates to apply overhead to jobs. For example, they determined the 5 per
cent rate used to apply materials-related overhead to jobs before the month of July. Most manufacturing and
service organizations use predetermined rates.

To calculate a predetermined overhead rate, a company divides the estimated total overhead costs for a
period by an expected level of activity. This activity could be total expected machine-hours, total expected direct
labor-hours, or total expected direct labor cost for the period. Companies set predetermined overhead rates at the
beginning of the year in which they will use them. Thus, the rates for July may have been computed in November or
December of the previous year. This formula computes a predetermined rate:

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