Materials: Controlling, Costing, and Planning

Reorder Point

 𝑅𝑒𝑜𝑟𝑑𝑒𝑟 𝑃𝑜𝑖𝑛𝑡 = (𝑛𝑜𝑟𝑚𝑎𝑙 𝑑𝑎𝑖𝑙𝑦 𝑢𝑠𝑎𝑔𝑒 × 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒) + 𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 = (𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑢𝑠𝑎𝑔𝑒 − 𝑛𝑜𝑟𝑚𝑎𝑙 𝑢𝑠𝑎𝑔𝑒) × (𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 −
𝑛𝑜𝑟𝑚𝑎𝑙 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒) = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 = (𝑑𝑎𝑖𝑙𝑦 𝑢𝑠𝑎𝑔𝑒) × (𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 − 𝑛𝑜𝑟𝑚𝑎𝑙 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒) = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 𝑤ℎ𝑒𝑛 𝑡ℎ𝑒𝑟𝑒 𝑎𝑟𝑒 𝑢𝑛𝑖𝑡𝑠 𝑎𝑛𝑑 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑔𝑖𝑣𝑒𝑛 = 5 𝑐𝑜𝑙𝑢𝑚𝑛 𝑚𝑒𝑡ℎ𝑜𝑑

Illustration. P4-4 of Materials Quz.

B C
A Expected Stock-out per Total Stock-out D E
Safety Occurrence Cost Total Carrying Cost Total Cost
Stock [# or orders per year x [Cost per [A x carrying cost] [C + D]
(units) Probability] Occurrence x B] ($) ($)
($) ($)
10 2.5 = 5 x 50% 200 = 80 x 2.5 30 = 10 x 3 230
20 2 = 5 x 40% 160 = 80 x 2 60 = 20 x 3 220
30 1.5 = 5 x 30% 120 = 80 x 1.5 90 = 30 x 3 210
40 1 = 5 x 20% 80 = 80 x 1 120 = 40 x 3 200
50 0.5 = 5 x 10% 40 = 80 x 0.5 150 = 50 x 3 190
55 0.15 = 5 x 3% 12 = 80 x 0.15 165 = 55 x 3 177

55 is the safety stock. It has the lowest cost of 177.

Economic Order Quantity

2 × 𝐶𝑜𝑠𝑡 𝑡𝑜 𝑂𝑟𝑑𝑒𝑟 × 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡

 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝐸𝑂𝑄 ) = √ = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
𝐶𝑜𝑠𝑡 𝑡𝑜 𝐶𝑎𝑟𝑟𝑦

 𝐶𝑜𝑠𝑡 𝑡𝑜 𝑜𝑟𝑑𝑒𝑟 = 𝑔𝑖𝑣𝑒𝑛

 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 (𝑖𝑓 𝑛𝑜𝑡 𝑔𝑖𝑣𝑒𝑛) = 𝑛𝑜𝑟𝑚𝑎𝑙 𝑑𝑎𝑖𝑙𝑦 𝑢𝑠𝑒 × 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
 𝐶𝑜𝑠𝑡 𝑡𝑜 𝐶𝑎𝑟𝑟𝑦 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑖𝑛𝑔 𝑜𝑛𝑒 𝑢𝑛𝑖𝑡 × 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
Maximums

 𝑁𝑜𝑟𝑚𝑎𝑙 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 = 𝑟𝑒𝑜𝑟𝑑𝑒𝑟 𝑝𝑜𝑖𝑛𝑡 − (𝑛𝑜𝑟𝑚𝑎𝑙 𝑑𝑎𝑖𝑙𝑦 𝑢𝑠𝑎𝑔𝑒 × 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒) + 𝐸𝑂𝑄 = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 = 𝑟𝑒𝑜𝑟𝑑𝑒𝑟 𝑝𝑜𝑖𝑛𝑡 − (𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑑𝑎𝑖𝑙𝑦 𝑢𝑠𝑎𝑔𝑒 × 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒) + 𝐸𝑂𝑄 = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠

Cost Formulas

 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 × 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑐𝑎𝑟𝑟𝑦 𝑎𝑛 𝑖𝑡𝑒𝑚 =
𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
 𝑇𝑜𝑡𝑎𝑙 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = 𝑛𝑜. 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 × 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑛 𝑜𝑟𝑑𝑒𝑟 = 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑜𝑟𝑑𝑒𝑟 + 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐿𝑜𝑠𝑡 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 × 𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒 × 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 = 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑊𝐼𝑃𝐼 × 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑐𝑎𝑟𝑟𝑦 = 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑊𝐼𝑃𝐼 ×
𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 (𝑢𝑠𝑒 𝑤ℎ𝑎𝑡𝑒𝑣𝑒𝑟 𝑖𝑠 𝑎𝑣𝑎𝑖𝑎𝑏𝑙𝑒) = 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑡𝑜𝑟𝑖𝑛𝑔 𝑜𝑛𝑒 𝑢𝑛𝑖𝑡 𝑓𝑜𝑟 𝑜𝑛𝑒 𝑦𝑒𝑎𝑟 𝑜𝑟 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑐𝑎𝑟𝑟𝑦 (𝑑𝑒𝑟𝑖𝑣𝑖𝑛𝑔 𝑡ℎ𝑒 𝐸𝑂𝑄 𝑓𝑜𝑟𝑚𝑢𝑙𝑎) =
2 × 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 ×𝑐𝑜𝑠𝑡 𝑡𝑜 𝑜𝑟𝑑𝑒𝑟
(𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑟 𝐸𝑂𝑄)2

Days Formulas

 𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑙𝑒𝑓𝑡 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = (𝑢𝑛𝑖𝑡𝑠 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ÷ 𝐸𝑂𝑄 ) × 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 = 𝑖𝑛 𝑑𝑎𝑦𝑠

 𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑜𝑟𝑑𝑒𝑟 (𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑡ℎ𝑎𝑡 𝑜𝑟𝑑𝑒𝑟𝑠 𝑠ℎ𝑜𝑢𝑙𝑑 𝑏𝑒 𝑝𝑙𝑎𝑐𝑒𝑑 ) =
360 𝑜𝑟 365 𝑑𝑎𝑦𝑠 (𝑑𝑒𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑜𝑛 𝑤ℎ𝑎𝑡 𝑖𝑠 𝑔𝑖𝑣𝑒𝑛)
= 𝑎𝑙𝑠𝑜 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑒𝑑 𝑎𝑠 𝑡ℎ𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑓𝑜𝑟 𝑝𝑙𝑎𝑐𝑖𝑛𝑔 𝑜𝑟𝑑𝑒𝑟𝑠 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠

𝑖𝑛 𝑑𝑎𝑦𝑠

 𝑁𝑜. 𝑜𝑓 𝑂𝑟𝑑𝑒𝑟𝑠 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 ÷ 𝐸𝑂𝑄 = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠

𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘
 𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑓𝑜𝑟 𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 𝑡𝑜 𝑏𝑒 𝑓𝑢𝑙𝑙𝑦 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 = = 𝑖𝑛 𝑑𝑎𝑦𝑠
𝑑𝑎𝑖𝑙𝑦 𝑢𝑠𝑎𝑔𝑒

Other Formulas

 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = (𝑜𝑟𝑑𝑒𝑟 𝑠𝑖𝑧𝑒 ÷ 2) + 𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠

 𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑊𝐼𝑃𝐼 ÷ 𝑑𝑎𝑖𝑙𝑦 𝑢𝑠𝑎𝑔𝒆 = 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
 Labor

Budgeted Labor Cost

 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡 = 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 × 𝑛𝑜. 𝑜𝑓 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 ×
𝑙𝑎𝑏𝑜𝑟 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Number of Workers Needed

𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 ×𝑛𝑜.𝑜𝑓 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑊𝑜𝑟𝑘𝑒𝑟𝑠 𝑁𝑒𝑒𝑑𝑒𝑑 = 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑤𝑜𝑟𝑘𝑒𝑟

Incentive Wage System

 𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡 = 𝑑𝑎𝑖𝑙𝑦 𝑟𝑎𝑡𝑒 + (𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑥𝑐𝑒𝑠𝑠 𝑢𝑛𝑖𝑡𝑠 × 𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑎𝑦 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡) =
𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠

Estimated Daily Rate of Regular Monthly Earners

𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑟𝑎𝑡𝑒×12 𝑚𝑜𝑛𝑡ℎ𝑠

 𝐸𝐸𝐷𝑅 = = 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠
365 𝑑𝑎𝑦𝑠

Estimated Monthly Rate of Daily Paid Employees

𝑑𝑎𝑖𝑙𝑦 𝑟𝑎𝑡𝑒 ×𝑑𝑎𝑦𝑠

 𝐸𝐸𝑀𝑅 = = 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠
12 𝑚𝑜𝑛𝑡ℎ𝑠

DAYS
 393.5 Daily work (including Sundays or rest days, special days, and regular holidays)
 313 Six-day work week (Mon-Sat)
 261 Five-day work week (Mon-Fri)
Holiday Pay and Premium

Holiday Pay Holiday Premium

Regular working day Daily rate x 100% 0
Special or rest Daily rate x 130% Daily rate x 30%
Special and rest Daily rate x 150% Daily rate x 50%
Regular holiday Daily rate x 200% Daily rate x 100%
Regular holiday and rest Daily rate x 260% Daily rate x 160%

Overtime Pay and Premium

Overtime Pay Overtime Premium

Regular working day Hourly rate x OT hours x 125% Hourly rate x OT hours x 25%
Special or rest Hourly rate x OT hours x 130% x 130% Hourly rate x OT hours x 130% x 30%
Special and rest Hourly rate x OT hours x 150% x 130% Hourly rate x OT hours x 150% x 30%
Regular holiday Hourly rate x OT hours x 200% x 130% Hourly rate x OT hours x 200% x 30%
Regular holiday and rest Hourly rate x OT hours x 260% x 130% Hourly rate x OT hours x 260% x 30%
If the overtime is during a night shift, hourly rate used should be the 110% of the original hourly rate.

13th Month Pay

Depending on available information…

 Monthly Salary (if monthly pay is constant throughout the year)

 Prorated Salary

Illustration.

March 1 to October 30 P10 000

November 1 to December 30 P12000

Monthly Rate Months Average

10 000 8/10 8 000
12 000 2/10 2 400
Total 10400

*March 1 to December 30 is 10 months

*If there is no monthly rate, multiply the daily rate by the number of working days in a month.
 Overhead

Predetermined Overhead Rate

𝑡𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑

 𝑝𝑂𝐻𝑟 = 𝑣𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑐ℎ𝑜𝑠𝑒𝑛 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙

POHR for Different Bases (Activity Levels)

𝑡𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑

 𝐵𝑎𝑠𝑒𝑑 𝑜𝑛 𝑝ℎ𝑦𝑠𝑖𝑐𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑡𝑜 𝑏𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 = 𝑖𝑛 $ 𝑝𝑒𝑟 𝑜𝑢𝑡𝑝𝑢𝑡
𝑡𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
 𝐵𝑎𝑠𝑒𝑑 𝑜𝑛 𝑑𝑖𝑟𝑒𝑐𝑡 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑐𝑜𝑠𝑡 = 𝑑𝑖𝑟𝑒𝑐𝑡 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 ×𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 = 𝑖𝑛 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
𝑡𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
 𝐵𝑎𝑠𝑒𝑑 𝑜𝑛 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡 = 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 ×𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 = 𝑖𝑛 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
𝑡𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
 𝐵𝑎𝑠𝑒𝑑 𝑜𝑛 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟𝑠 = (𝐷𝐿 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡÷𝐷𝐿 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟) ×𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 = 𝑖𝑛 $ 𝑝𝑒𝑟 𝐷𝐿𝐻
𝑡𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
 𝐵𝑎𝑠𝑒𝑑 𝑜𝑛 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠 = (𝑚𝑖𝑛𝑢𝑡𝑒𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡÷60) ×𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 = 𝑖𝑛 $ 𝑝𝑒𝑟 𝑀𝐻

 If machine hours per unit is available, the denominator should be:

𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 × 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡𝑠

Long Disclaimer:

If the total budgeted overhead is based on expected capacity, compute all pOHr based on expected
units first then copy the expected variable overhead rates to the normal variable overhead rates.
Fixed overhead rates must be recomputed (except of course the vOHr) for normal capacity.

Likewise…

If the total budgeted overhead is based on normal capacity, compute all pOHr based on normal units
first then copy the normal variable overhead rates to the expected variable overhead rates. Fixed
overhead rates must be recomputed (except of course the vOHr) for expected capacity.
Applied Overhead

 𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 = 𝑎𝑐𝑡𝑢𝑎𝑙 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 × 𝑝𝑂𝐻𝑟 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑡𝑜 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙

 For applied overhead, use actual activity level, not expected.

Underapplied/Overapplied

Actual Applied (Over) Underapplied

xxx xxx (xxx) or xxx

*If actual minus applied is positive, UNDERAPPLIED.

*If actual minus applied is negative, OVERAPPLIED.

Disposition of Underapplied Overhead

 If underapplied overhead < [5% x (WIPI + FGI + COGS)]:

Cost of Goods Sold xxx

Manufacturing Overhead Control xxx

 If underapplied overhead > [5% x (WIPI + FGI + COGS)]:

Prorate!

Work in Process Inventory xxx

Finished Goods inventory xxx
Cost of Goods Sold xxx
Manufacturing Overhead Control xxx
 Mixed Costs

Total Cost = Fixed Cost + (Variable Cost x Activity Level)

y = a + bX

Variable Cost per Unit

 High Low Method (Base on highest and lowest activity levels, not highest and lowest cost)
𝑐𝑜𝑠𝑡 𝑜𝑓 ℎ𝑖𝑔ℎ𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙−𝑐𝑜𝑠𝑡 𝑜𝑓 𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙
 𝑏 (𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡) = ℎ𝑖𝑔ℎ𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙−𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙

 𝑎 (𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡) = 𝑐𝑜𝑠𝑡 𝑜𝑓 ℎ𝑖𝑔ℎ𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 − (𝑏 × ℎ𝑖𝑔ℎ𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 ) or

𝑎 (𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡) = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 − (𝑏 × 𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 )

Same results.
Disregard outiers.

 Least Squares Regression Analysis

 Use scientific calculator shortcut.
 Disregard outliers.

Departmentalization

 There’s no easy way to summarize computations.

 Solve all Carter Chapter 13 exercises and problems.

Job Order Costing Losses

 Review job order costing PPT

Cost Production Report

 Solve the exercises and problems.

Journal Entries

Job Order Costing Process Costing

Acquisition of Materials
Raw Materials Inventory xxx
Raw Materials Inventory xxx
Cash/Accounts Payable xxx
Cash/Accounts Payable xxx

Transfer of Materials

Work in Process Inventory-Job 1 xxx

Work in Process Inventory-Job 2 xxx
Raw Materials Inventory xxx
Work in Process Inventory-Dept. 1 xxx
If there is a specified department: Raw Material Inventory xxx

Work in Process Inventory-Dept. 1 (Job 1) xxx

Work in Process Inventory-Dept. 1 (Job 2) xxx
Raw Materials Inventory xxx

Incurrence of Labor

Work in Process Inventory-Job 1 xxx

Work in Process Inventory-Job 2 xxx
Wages Payable xxx
Work in Process Inventory-Dept. 1 xxx
If there is a specified department: Wages Payable xxx

Work in Process Inventory-Dept. 1 (Job 1) xxx

Work in Process Inventory-Dept. 1 (Job 2) xxx
Wages Payable xxx

Application of Overhead

Work in Process Inventory-Dept. 1 xxx Work in Process Inventory-Dept. 1 xxx

Manufacturing Overhead Manufacturing Overhead
Control-Dept. 1 xxx Control-Dept. 1 xxx

Incurrence of Overhead

Manufacturing Overhead Control-Dept. 1 xxx Manufacturing Overhead Control-Dept. 1 xxx

Various Accounts xxx Various Accounts xxx

Completed Goods

Finished Goods Inventory xxx Finished Goods Inventory xxx

Work in Process-Assembly xxx Work in Process-Assembly xxx

Transfer from one department to another

Work in Process-Painting xxx

Work in Process-Assembly xxx
Sale

Accounts Receivable xxx Accounts Receivable xxx

Sales xxx Sales xxx

Cost of Goods Sold xxx Cost of Goods Sold xxx

Finished Goods Inventory xxx Finished Goods Inventory xxx