Chapter 3 Anup Kumar Saha Mc GrawHillIrwin Copyright

Systems Design: Job-Order Costing Chapter Three Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill

Types of Product Costing Systems Process Costing Job-order Costing v A company produces many

Types of Product Costing Systems Process Costing Job-order Costing v v Many different products

Types of Product Costing Systems Process Costing v v v Job-order Costing Many different

Comparing Process and Job-Order Costing Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies,

Quick Check Which of the following companies would be likely to use job-order costing

Direct Manufacturing Costs Direct Materials Job No. 1 Direct Labor Manufacturing Overhead Mc. Graw-Hill/Irwin

Job-Order Cost Accounting Pear. Co Job Cost Sheet Job Number A - 143 Department

Materials Requisition Form Will E. Delite Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill

Job-Order Cost Accounting Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Employee Time Ticket Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in

Manufacturing Overhead Application The predetermined overhead rate (POHR) used to apply overhead to jobs

The Need for a POHR Using a predetermined rate makes it possible to estimate

Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Overhead

Overhead Application Rate POHR = Estimated total manufacturing overhead cost for the coming period

Interpreting the Average Unit Cost The average unit cost should not be interpreted as

Quick Check Job WR 53 at NW Fab, Inc. required $200 of direct materials

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

Job-Order Costing Document Flow Summary A sales order is the basis of issuing a

Job-Order Costing Document Flow Summary Materials used may be either direct or indirect. Direct

Job-Order Costing Document Flow Summary An employee’s time may be either direct or indirect.

Job-Order Costing Document Flow Summary Employee Time Ticket Other Actual OH Charges Materials Requisition

Job-Order System Cost Flows Let’s examine the cost flows in a job -order costing

Job-Order System Cost Flows Raw Materials Material l. Direct Purchases Materials l. Indirect Materials

Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

Cost Flows – Material Usage Direct materials issued to a job increase Work in

Job-Order System Cost Flows Salaries and Wages Payable Direct Labor l. Indirect Labor l

Cost Flows – Labor The cost of direct labor incurred increases Work in Process

Cost Flows – Actual Overhead In addition to indirect materials and indirect labor, other

Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is

Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are

Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are

Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials l. Direct

Cost Flows – Cost of Goods Manufactured As jobs are completed, the Cost of

Cost Flows – Sales When finished goods are sold, two entries are required: (1)

Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work

Overhead Application Example Pear. Co’s actual overhead for the year was $650, 000 with

Quick Check Tiger, Inc. had actual manufacturing overhead costs of $1, 210, 000 and

Disposition of Under- or Overapplied Overhead Pear. Co’s Method $30, 000 may be allocated

Disposition of Under- or Overapplied Overhead Pear. Co’s Cost of Goods Sold Actual Overhead

Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work

Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of

Allocating Under- or Overapplied Overhead Between Accounts Mc. Graw-Hill/Irwin Copyright © 2006, The Mc.

Overapplied and Underapplied Manufacturing Overhead - Summary Pear. Co’s Method Mc. Graw-Hill/Irwin Copyright ©

Quick Check What effect will the overapplied overhead have on Pear. Co’s net operating

Multiple Predetermined Overhead Rates To this point we have assumed that there is a

Job-Order Costing in Service Companies Job-order costing is used in many difference types of

The Use of Information Technology plays an important part in many job -order cost

Appendix 3 a The Predetermined Overhead Rate & Capacity Mc. Graw-Hill/Irwin Copyright © 2006,

Predetermined Overhead Rate and Capacity Calculating predetermined overhead rates using an estimated, or budgeted

Capacity-Based Overhead Rates Criticisms can be overcome by using estimated total units in the

An Example Equipment is leased for $100, 000 per year. Running at full capacity,

Quick Check Crest Winery in Woodinville leases an automatic corking machine for $100, 000

Quick Check When capacity is used in the denominator in the predetermined rate, what

Quick Check When estimated activity is used in the denominator in the predetermined rate,

Basing the rate on capacity Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies,

Basing the rate on expected volume Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill

End of Chapter 3 Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Slides: 79

Download presentation

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Types of Product Costing Systems Process Costing Job-order Costing v A company produces many units of a single product. companies: Example v unit of product is indistinguishable 1. One Weyerhaeuser (paper manufacturing) from units Aluminum of product. (refining aluminum ingots) 2. other Reynolds identical(mixing nature and of each unit beverages) of product enables 3. The Coca-Cola bottling v assigning the same average cost per unit. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Types of Product Costing Systems Process Costing Job-order Costing v v Many different products are produced each period. v The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Products are manufactured to order. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Types of Product Costing Systems Process Costing v v v Job-order Costing Many different products are produced each period. Example companies: Products are manufactured to order. 1. Boeing (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 Walt Disney Studios for each job. (movie production) Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Direct Manufacturing Costs Direct Materials Job No. 1 Direct Labor Manufacturing Overhead Mc. Graw-Hill/Irwin Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Direct Manufacturing Costs Direct Materials Job No. 1 Direct Labor Manufacturing Overhead Mc. Graw-Hill/Irwin 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. Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order Cost Accounting Pear. Co Job Cost Sheet Job Number A - 143 Department B 3 Item Wooden cargo crate Date Initiated 3 -4 -05 Date Completed Units Completed Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost Mc. Graw-Hill/Irwin Units Shipped Date Number Balance Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Why Use an Allocation Base? 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 production manager’s salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Overhead Application Rate 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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. Mc. Graw-Hill/Irwin A production order initiates work on a job. Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order Costing Document Flow Summary Materials used may be either direct or indirect. Direct materials Job Cost Sheets Materials Requisition Indirect materials Mc. Graw-Hill/Irwin Manufacturing Overhead Account Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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 Mc. Graw-Hill/Irwin Manufacturing Overhead Account Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order Costing Document Flow Summary Employee Time Ticket Other Actual OH Charges Materials Requisition Mc. Graw-Hill/Irwin Indirect Labor Manufacturing Applied Overhead Account Job Cost Sheets Indirect Material Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order System Cost Flows Raw Materials Material l. Direct Purchases Materials l. Indirect Materials l Work in Process (Job Cost Sheet) Direct Materials l Mfg. Overhead Actual Applied l. Indirect Materials Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order System Cost Flows Salaries and Wages Payable Direct Labor l. Indirect Labor l Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l Mfg. Overhead Actual l. Indirect Materials l. Indirect Labor Mc. Graw-Hill/Irwin Applied Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order System Cost Flows Salaries and Wages Payable Direct Labor l. Indirect Labor l Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l Mfg. Overhead Actual l. Indirect Materials l. Indirect Labor l. Other Overhead Mc. Graw-Hill/Irwin Applied Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order System Cost Flows Salaries and Wages Payable Direct Labor l. Indirect Labor l Mfg. Overhead Actual Applied l. Indirect Materials l. Overhead l. Indirect Applied to Labor Work in l. Other Process Overhead Mc. Graw-Hill/Irwin Work in Process (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. Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l. Overhead Applied l Mc. Graw-Hill/Irwin l Cost of Goods Mfd. Finished Goods l Cost of Goods Mfd. Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Cost Flows – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. l Cost of Goods Sold l Mc. Graw-Hill/Irwin Finished Goods Cost of Goods Sold Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Cost Flows – Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin 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. Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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 Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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 has overapplied How 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? $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 Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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 Overhead Applied $4. 00 per overhead hour × 290, 000 period. Tiger’s manufacturing is hours = $1, 160, 000 a. $50, 000 overapplied. Underapplied Overhead $1, 210, 000 - $1, 160, 000 b. $50, 000 underapplied. = $50, 000 c. $60, 000 overapplied. d. $60, 000 underapplied. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Disposition of Under- or Overapplied Overhead Pear. Co’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 Mc. Graw-Hill/Irwin Cost of Goods Sold Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Disposition of Under- or Overapplied Overhead Pear. Co’s Cost of Goods Sold Actual Overhead overhead applied costs to jobs Unadjusted Balance $30, 000 Adjusted Balance Mc. Graw-Hill/Irwin Pear. Co’s Mfg. Overhead $650, 000 $30, 000 $680, 000 $30, 000 overapplied Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below: Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30, 000 overapplied overhead: Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Quick Check What effect will 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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin May be more complex but. . . May be more accurate because it reflects differences across departments. Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

The Use of Information 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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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! Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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? Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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? Mc. Graw-Hill/Irwin Traditional = Method $100, 000 40, 000 = $2. 50 per unit Capacity Method $100, 000 50, 000 = $2. 00 per unit = Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Quick Check When capacity is used in the denominator in 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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.

Quick Check When estimated activity is used in the denominator in 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. Mc. Graw-Hill/Irwin Copyright © 2006, The Mc. Graw-Hill Companies, Inc.