Chapter 4 Job Order Costing 3 Learning Objectives
Chapter 4 Job Order Costing
3 Learning Objectives n Explain the types of costing systems n Explain the strategic role of product costing n Explain the flow of costs in a job costing system n Explain the application of factory overhead costs in a job costing system Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
4 Learning Objectives n Calculate underapplied and overapplied overhead and show to dispose of it at the end of the period n Apply job costing in service industries n Explain an operation costing system Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
5 Product costing is the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead costs to products or services Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
6 Learning Objective One Explain the types of costing systems Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
7 Product Costing Systems n 1. 2. 3. Several different product costing systems are available, including Cost accumulation method (job or process costing systems) Cost measurement method (actual, normal, or standard costing systems) Overhead assignment method (traditional or activity-based costing systems) Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
8 Product Costing Systems n 1. 2. 3. The choice of a particular system depends on the: nature of the industry and the product or service firm’s strategy and management information needs costs and benefits of acquiring, designing, modifying, and operating a particular system Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
9 Cost Accumulation Method n. A job costing system is appropriate in any environment in which costs can be readily identified with specific products, batches, contracts, or customers n A process costing system is usually used by firms having homogeneous products Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
10 Job Costing l l l l Mc. Graw-Hill/Irwin Printing shops Ship-builders Custom furniture manufacturers Contractors Film-producing companies Accounting and law firms Advertising agencies Medical clinics © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
11 Process Costing l l l l Chemical plants Food processors Household appliance manufacturers Textile companies Petroleum products manufacturers Paper Lumber and pulp mills Glass factories Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
12 Cost Measurement Method n Costs in either a job or process costing system can be measured in their actual, normal, or standard amount n Actual – uses actual costs incurred for all product costs n Normal – used actual costs for direct materials and labor and normal costs for factory overhead n Standard – uses standard costs for all three types of product costs Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
13 Cost Measurement Systems Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
14 Overhead Assignment Method n Traditional product costing systems allocate overhead to products or jobs using a volumebased cost driver (such as units produced) n Activity-based costing (ABC) systems allocate factory overhead costs to products using causeand-effect criteria with multiple cost drivers n ABC systems use both volume-based and nonvolume-based cost drivers Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
15 Learning Objective Two Explain the strategic role of product costing Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
16 The Strategic Role of Product Costing n Effective management of manufacturing costs requires timely and accurate cost information n Getting timely and accurate information requires that the firm choose a cost system that is a good match for its competitive strategy n To provide meaningful information, a product costing system must keep up with the constantly changing manufacturing environment Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
17 The Strategic Role of Product Costing n An important strategic issue (and a potential ethical issue) for product costing involves the decisions the firm makes about the basis for allocating overhead costs n When manufacturing cost-plus products, managers can be tempted to overcost them by choosing an allocation basis that achieves the desired result Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
18 Learning Objective Three Explain the flow of costs in a job costing system Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
19 Job Costing n Job costing is a product costing system that accumulates costs and assigns them to a specific job n A job cost sheet records and summarizes the costs of direct materials, direct labor, and factory overhead for a particular job n All costs are recorded on the sheet as materials and labor are added Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
20 Job Costing n All costs shown in the job cost sheet are recorded in the Work-in-Process Inventory account n A material requisition form is a source document that the production department supervisor uses to request materials for production n A time ticket shows the time an employee worked on each job, the pay rate, and the total cost chargeable to each job Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
21 Job Costing Insert Exhibit 4. 4 (Materials Requisition Form) Here Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
22 Job Costing Insert Exhibit 4. 6 (Time Ticket) Here Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
23 Flow of Costs Direct Materials Job No. 1 Direct Labor Factory Overhead Mc. Graw-Hill/Irwin Job No. 2 Job No. 3 Charge direct materials costs to each job as the materials are used. © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
24 Flow of Costs Direct Materials Job No. 1 Direct Labor Factory Overhead Mc. Graw-Hill/Irwin Job No. 2 Job No. 3 Charge direct labor costs to each job as the work is performed. © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
25 Flow of Costs Materials Inventory • Materials • Direct Purchases Materials • Indirect Materials Work-in-Process Inventory (Job Cost Sheet) • Direct Materials Factory Overhead • Indirect Materials Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
26 Flow of Costs Accrued Payroll • Direct Labor • Indirect Labor Factory Overhead • Indirect • Overhead Materials Applied to • Indirect Work in Labor Process Mc. Graw-Hill/Irwin Work-in-Process Inventory (Job Cost Sheet) • Direct Materials • Direct Labor • Overhead Applied If actual and applied factory overhead are not equal, a year-end adjustment is required. © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
27 Flow of Costs Work-in-Process Inventory (Job Cost Sheet) • Direct • Cost of Materials Goods • Direct Mfd. Labor • Overhead Applied Finished Goods Inventory • Cost of Goods Mfd. • Cost of Goods Sold Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
28 Learning Objective Four Explain the application of factory overhead costs in a job costing system Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
29 Application of Factory Overhead n To apply overhead cost to each job, normal costing requires a per product rate, which is often called a predetermined rate (since it is calculated at the beginning of the accounting period) n The predetermined factory overhead rate is an estimated factory overhead rate used to apply factory overhead cost to a specific job Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
30 Application of Factory Overhead Predetermined overhead rates are established using a fourstep approach: Determine the budgeted factory overhead costs for the period Select the appropriate cost driver(s) Estimate the total amount of the chosen cost driver(s) for the period Compute the predetermined overhead rate by dividing the results of step 1 by the results of step 3 Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
31 Application of Factory Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. POHR = Budgeted factory overhead amount for the year Expected level of cost driver for the year 1. direct labor hours 2. machine hours 3. number of set-ups 4. number of orders 5. manufacturing cycle time Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
32 Application of Factory Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. POHR = Budgeted factory overhead amount for the year Expected level of cost driver for the year Overhead applied = POHR × Actual activity Based on estimates, and determined before the period begins Mc. Graw-Hill/Irwin Actual amount of the allocation base, such as direct labor hours, incurred during the period © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
33 Factory Overhead Applied n Factory overhead applied is the amount of overhead assigned to a specific job using a predetermined factory overhead rate n Overapplied overhead is the amount of factory overhead applied that exceeds actual factory overhead cost n Underapplied overhead is the amount by which actual factory overhead exceeds factory overhead applied Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
34 Learning Objective Five Calculate underapplied and overapplied overhead and show to dispose of it at the end of the period Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
35 Disposition of Factory Overhead n 1. 2. n n Underapplied or overapplied overhead can be disposed of in two ways: Adjust the Cost of Goods Sold account Adjust the production costs of the period When the amount of underapplied or overapplied overhead is not significant, it generally is adjusted to Cost of Goods sold If the amount is significant, it is often prorated Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
36 Disposition of Factory Overhead n Proration is the process of allocating underapplied or overapplied overhead to Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts n The proration of the difference is based on the current period’s applied overhead in the cost of goods sold and ending inventories of the accounts Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
37 Disposition of Factory Overhead n To determine the ratios for the proration, compute the sum of the applied overhead in the cost of goods sold and ending inventories of the accounts n The ratio of each of the components to this sum is the amount of the underapplied or overapplied overhead that should be prorated to the cost of the component Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
38 Learning Objective Six Apply job costing in service industries Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
39 Job Costing in Service Industries n n n Job costing in service industries uses recording procedures and accounts similar to those in manufacturing except for direct materials involved In service industries, the primary focus is on direct labor The overhead costs are usually applied to jobs based on direct labor-hours or dollars Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
40 Job Costing in Service Industries Insert Exhibit 4. 10 (Job Costing for Freed and Swenson Law Firm) Here Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
41 Learning Objective Seven Explain an operation costing system Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
42 Operation Costing n Operation costing is a hybrid costing system that uses job costing to assign direct materials costs and process costing to assign conversion costs to products or services n Industries suitable for applying operation costing include clothing, food processing, textiles, shoes, furniture, metalworking, jewelry, and electronic equipment Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
43 End of Chapter Four Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.
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