McGraw-Hill /Irwin 2-2 A company produces many units of a single product. One unit of product is indistinguishable from other units of product.

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1 Chapter 2-1 Chapter 2 Systems Design: Job-Order Costing McGraw-Hill /Irwin The McGraw-Hill Companies, Inc., 2007 Learning Objective LO1 To distinguish between process costing and job-order costing and identify companies that would use each costing method 2-2 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. 2-3

2 Chapter 2-2 Types of Product Costing Systems Process Costing Job-order Costing Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages) 2-4 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. 2-5 Types of Product Costing Systems Process Costing Job-order Costing Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production) 2-6

3 Chapter 2-3 Comparing Process and Job-Order Costing Job-Order Process Number of jobs worked Many Single Product Cost accumulated by Job Department Average cost computed by Job Department 2-7 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. 2-8 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. 2-9

4 Chapter 2-4 Job-Order Costing Direct Direct Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed Job-Order Costing Direct Direct Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead, including indirect materials and indirect labor, are allocated to jobs rather than directly traced to each job Learning Objective LO2 To identify the documents used in a job-order costing system 2-12

5 Chapter 2-5 Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A-143 Date Initiated March 4 Date Completed Department B3 Units Completed Item 2 Wooden cargo crates For Stock Direct Direct Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units Shipped Direct $ Date Number Balance Direct $ Manufacturing Overhead $ Total Cost $ Unit Product Cost $ 2-13 Requisition Form PearCo Requisition Form Requisition Number X Date March 4 Job Number to Be Charged A Department B3 Description Quantity Unit Cost Total Cost 2 x 4, 12 feet 12 $ 3.00 $ x 6, 12 feet $ Authorized Signature Will E. Delite 2-14 Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A-143 Date Initiated March 4 Date Completed Department B3 Units Completed Item 2 Wooden cargo crates For Stock Direct Direct Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X $ 116 Cost Summary Units Shipped Direct $ Date Number Balance Direct $ Manufacturing Overhead $ Total Cost $ Unit Product Cost $ 2-15

6 Chapter 2-6 Employee Time Ticket PearCo Employee Time Ticket Time Ticket No. 36 Date March 5 Employee I. M. Skilled Station 42 Time Started Ended Completed Rate Amount Job No. 8:00 12: $ $ A-143 1:00 5: A-143 Totals 8.00 $ Supervisor C. M. Workman 2-16 Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A-143 Date Initiated March 4 Date Completed Department B3 Units Completed Item 2 Wooden cargo crates For Stock Direct Direct Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X $ $ 88 Cost Summary Units Shipped Direct $ Date Number Balance Direct $ Manufacturing Overhead $ Total Cost $ Unit Product Cost $ 2-17 Manufacturing Overhead Application Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor 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 a production manager s salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. 2-18

7 Chapter 2-7 Learning Objective LO3 To compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process 2-19 Manufacturing Overhead Application Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner. $ Actual overhead for the period is not known until sometime after the period has ended Manufacturing Overhead Application 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. 2-21

8 Chapter 2-8 Manufacturing Overhead Application POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = $640, ,000 direct labor hours (DLH) POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A-143 Date Initiated March 4 Date Completed Department B3 Units Completed Item 2 Wooden cargo crates For Stock Direct Direct Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X $ $ 88 8 $ 4 $ 32 Cost Summary Units Shipped Direct Date Number Balance Direct Manufacturing Overhead Total Cost Unit Product Cost 2-23 Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A-143 Date Initiated March 4 Date Completed Department B3 Units Completed Item 2 Wooden cargo crates For Stock Direct Direct Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X $ $ 88 8 $ 4 $ 32 Cost Summary Units Shipped Direct $ 116 Date Number Balance Direct $ 88 Manufacturing Overhead $ 32 Total Cost $ 236 Unit Product Cost $

9 Chapter 2-9 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 $ Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $ Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? Pred. ovhd. rate $760,000/20,000hours $38 a. $200. Direct materials $200 b. $350. Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 c. $380. Total cost $730 d. $

10 Chapter 2-10 Job-Order Costing Document Flow Summary Let s summarize the document flow in a job-order costing system Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job Job-Order Costing Document Flow Summary used may be either direct or indirect. Direct materials Job Cost Sheets Requisition Indirect materials Manufacturing Overhead Account 2-30

11 Chapter 2-11 Job-Order Costing Document Flow Summary An employee s time may be either direct or indirect. Direct Job Cost Sheets Employee Time Ticket Indirect Manufacturing Overhead Account 2-31 Job-Order Costing Document Flow Summary Employee Time Ticket Indirect Other Actual OH Charges Manufacturing Overhead Account Applied Overhead Job Cost Sheets Requisition Indirect Material 2-32 Learning Objective LO4 To prepare journal entries to record costs in a job-order costing system 2-33

12 Chapter 2-12 Learning Objective LO7 To use T accounts to show the flow of costs in a job-order costing system 2-34 Job-Order System Cost Flows Let s examine the transactions in T- account and journal entry form in a joborder costing system Summary of Cost Flows Raw Material Direct Purchases Indirect Work in Process (Job Cost Sheet) Direct Mfg. Overhead Actual Applied Indirect 2-36

13 Chapter 2-13 Cost Flows Material Purchases Raw material purchases are recorded in an inventory account. Date GENERAL JOURNAL Description Raw Accounts Payable Post. Ref. Debit Credit 2-37 Cost Flows Material Usage Direct materials issued to a job increase Work in Process and decrease Raw. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw. Date GENERAL JOURNAL Description Work in Process Manufacturing Overhead Raw Post. Ref. Debit Credit 2-38 Summary of Cost Flows Salaries and Wages Payable Direct Indirect Mfg. Overhead Actual Applied Indirect Indirect Work in Process (Job Cost Sheet) Direct Direct 2-39

14 Chapter 2-14 Cost Flows The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead. Date GENERAL JOURNAL Description Work in Process Manufacturing Overhead Salaries and Wages Payable Post. Ref. Debit Credit 2-40 Summary of Cost Flows Mfg. Overhead Actual Applied Indirect Indirect Other Overhead In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are debited to the Manufacturing Overhead account Cost Flows Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. Date GENERAL JOURNAL Description Manufacturing Overhead Accounts Payable Property Taxes Payable Prepaid Insurance Accumulated Depreciation Post. Ref. Debit Credit 2-42

15 Chapter 2-15 Learning Objective LO5 To apply overhead cost to Work in Process using a predetermined overhead rate 2-43 Summary of Manufacturing Overhead Cost Flows Work in Process Mfg. Overhead (Job Cost Sheet) Actual Applied Direct Indirect Indirect Other Overhead Applied to Work in Process Direct Overhead Applied Overhead If actual and applied manufacturing overhead are not equal, a year-end adjustment is required Cost Flows Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs. Date GENERAL JOURNAL Description Work in Process Manufacturing Overhead Post. Ref. Debit Credit 2-45

16 Chapter 2-16 Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are incurred. Date GENERAL JOURNAL Description Salaries Expense Salaries Payable Post. Ref. Debit Credit Advertising Expense Accounts Payable 2-47 Summary of Goods Manufactured Cost Flows Work in Process (Job Cost Sheet) Direct Direct Overhead Applied Cost of Goods Mfd. Finished Goods Cost of Goods Mfd. 2-48

17 Chapter 2-17 Cost Flows Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process. Date GENERAL JOURNAL Description Finished Goods Work in Process Post. Ref. Debit Credit 2-49 Learning Objective LO6 To prepare schedules of cost of goods manufactured and cost of goods sold 2-50 Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Direct Overhead Applied Cost of Goods Mfd. Cost of Goods Sold Cost of Goods Sold Finished Goods Cost of Goods Mfd. Cost of Goods Sold 2-51

18 Chapter 2-18 Cost Flows Sales Date When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods. GENERAL JOURNAL Description Accounts Receivable Sales Post. Ref. Debit Credit Cost of Goods Sold Finished Goods 2-52 Learning Objective LO8 To compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts 2-53 Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed 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. 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. 2-54

19 Chapter 2-19 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. What is Tiger s over- or underapplied overhead? a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied 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. What is Tiger s over- or underapplied overhead? Applied Overhead a. $50,000 overapplied. b. $50,000 underapplied. Manufacturing Overhead c. $60,000 overapplied. Underapplied 50,000 d. $60,000 underapplied. $ ,000 hours = $1,160,000 Actual 1,210,000 1,160,000 Applied 2-56 Disposition of Under- or Overapplied Overhead PearCo s Mfg. Overhead Actual overhead costs $650,000 $30,000 Overhead applied to jobs $680,000 $30,000 overapplied PearCo s Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,

20 Chapter 2-20 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 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 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. May be more complex but... May be more accurate because it reflects differences across departments. 2-60

21 Chapter 2-21 Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies End of Chapter

n System Design Job Order Costing n What is Product Costing n Types of Product Costing n When and how to use Job-Order Costing McGraw-Hill /Irwin

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