Chapter 2 Systems Design JobOrder Costing Power Point

Chapter 2 Systems Design: Job-Order Costing Power. Point Authors: Jon A. Booker, Ph. D. , CPA, CIA Charles W. Caldwell, D. B. A. , CMA Susan Coomer Galbreath, Ph. D. , CPA Mc. Graw-Hill/Irwin Copyright © 2010 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

2 -2 Types of Product Costing Systems Process Costing Job-order Costing v A company produces many units of a single product. v One unit of product is indistinguishable from other units of product. v The identical nature of each unit of product enables assigning the same average cost per unit.

2 -3 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 v Many different products are produced each period. v Products are manufactured to order. v 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 Comparing Process and Job-Order Costing

2 -7 Job-Order Costing—An Overview Direct Materials Job No. 1 Direct Labor Manufacturing Overhead Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed.

2 -8 Job-Order Costing—An Overview Direct Materials Job No. 1 Direct Labor Manufacturing Overhead 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.

2 -9 Job Cost Sheet

2 -10 Materials Requisition Form

2 -11 Job Cost Sheet

2 -12 Employee Time Ticket

2 -13 Job Cost Sheet

2 -14 Application of Manufacturing Overhead 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 -15 Application of Manufacturing Overhead 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.

2 -16 Application of Manufacturing Overhead 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. Actual overhead costs can fluctuate seasonally, thus misleading decision makers. It simplifies record keeping.

2 -17 Determining Predetermined Overhead Rates Predetermined overhead rates are calculated using a three-step process. Estimate the level of production for the period. Estimate total amount of the allocation base for the period. Estimate total manufacturing overhead costs. POHR = ÷

2 -18 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 (this is called a normal costing system).

2 -19 Application of Manufacturing Overhead 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 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.

2 -20 Application of Manufacturing Overhead

2 -21 Completing the Job Cost Sheet

2 -22 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 is something less than $118.

2 -23 Quick Check Job WR 53 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 WR 53? a. $200. b. $350. c. $380. d. $730.

2 -24 Job-Order Costing Document Flow Summary Let’s summarize the document flow in a job-order costing system.

2 -25 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.

2 -26 Job-Order Costing Document Flow Summary Materials used may be either direct or indirect. Direct materials Job Cost Sheets Materials Requisition Indirect materials Manufacturing Overhead Account

2 -27 Job-Order Costing Document Flow Summary An employee’s time may be either direct or indirect. Direct Labor Job Cost Sheets Employee Time Ticket Indirect Labor Manufacturing Overhead Account

2 -28 Job-Order Costing Document Flow Summary Employee Time Ticket Other Actual OH Charges Materials Requisition Indirect Labor Manufacturing Applied Overhead Account Indirect Material Job Cost Sheets

2 -29 Job-Order Costing—The Flow of Costs Let’s examine the transactions in T-account and journal entry forms in a joborder costing system.

2 -30 Summary of Cost Flows Raw Materials Material l. Direct Purchases Materials l. Indirect Materials l Mfg. Overhead Actual Applied l. Indirect Materials Work in Process (Job Cost Sheet) Direct Materials l

2 -31 Journal Entry – Material Purchases Raw material purchases are recorded in an inventory account.

2 -32 Journal Entry – 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 decrease Raw Materials.

2 -33 Summary of Cost Flows Salaries and Wages Payable Direct Labor l. Indirect Labor l Mfg. Overhead Actual l. Indirect Materials l. Indirect Labor Applied Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l

2 -34 Journal Entry – Labor Costs The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

2 -35 Summary of Cost Flows Mfg. Overhead Actual l. Indirect Materials l. Indirect Labor l. Other Overhead Applied In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are debited to the Manufacturing Overhead account.

2 -36 Journal Entry – 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.

2 -37 Summary of Manufacturing Overhead Cost Flows Work in Process Mfg. Overhead Actual Applied l. Indirect l. Overhead Materials Applied to Work in l. Indirect Process Labor l. Other Overhead (Job Cost Sheet) Direct Materials l. Direct Labor l. Overhead Applied l If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

2 -38 Journal Entry – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.

2 -39 Accounting for Nonmanufacturing Costs Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Income Statement Expense nonmanufacturing costs as incurred.

2 -40 Journal Entry – Accounting for Nonmanufacturing Costs Nonmanufacturing Cost Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

2 -41 Summary of Goods Manufactured Cost Flows Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l. Overhead Applied l l Cost of Goods Mfd. Finished Goods l Cost of Goods Mfd.

2 -42 Journal Entry – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

2 -43 Learning Objective 6 Prepare schedules of cost of goods manufactured and cost of goods sold.

2 -44 Summary of Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l. Overhead Applied l l Cost of Goods Mfd. Finished Goods l Cost of Goods Mfd. Cost of Goods Sold l Cost of Goods Sold

2 -45 Journal Entry – Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

2 -46 Learning Objective 8 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

2 -47 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 -48 Overhead Application Example Pear. Co’s actual overhead for the year was $650, 000 with a total of 170, 000 direct labor hours worked on jobs. How much total overhead was applied to Pear. Co’s jobs during the year? Use Pear. Co’s predetermined overhead rate of $4. 00 per direct labor hour. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4. 00 per DLH × 170, 000 DLH = $680, 000

2 -49 Overhead Application Example Pear. Co’s actual overhead for the year was $650, 000 with a total of 170, 000 direct labor hours worked on jobs. Pear. Co overapplied Howhas much total overhead was applied to overhead for the year Pear. Co’s jobs during the year? Use by $30, 000. What will Pear. Co’s predetermined overhead rate of Pear. Co do? per direct labor hour. $4. 00 Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4. 00 per DLH × 170, 000 DLH = $680, 000

2 -50 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.

2 -51 Disposition of Under- or Overapplied Overhead Pear. Co’s Mfg. Overhead Actual Overhead overhead applied costs to jobs $650, 000 $30, 000 Pear. Co’s Cost of Goods Sold Unadjusted Balance $30, 000 $680, 000 $30, 000 overapplied Adjusted Balance

2 -52 Quick Check What effect will the adjustment of the overapplied overhead have on Pear. Co’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

2 -53 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 -54 Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies.