Chapter 5 Job Order Costing Cost Accounting Foundations

Chapter 5: Job Order Costing Cost Accounting: Foundations and Evolutions, 8 e Kinney ● Raiborn

Learning Objectives n n n n How do job order and process costing systems, as well as their related valuation methods, differ? What are the fundamental characteristics of a job order costing system? What are the primary documents supporting a job order costing system and what purposes are served by each of them? How are costs accumulated in a job order costing system? How are standard costs used in a job order costing system? How does information from a job order costing support management decision making? How are losses treated in a job order costing system?

Job Order or Process Costing Job Order n n Small quantities Batches of identifiable, tailor-made products User-specific services Tracks costs by job Process n n n Large quantities Homogeneous goods Tracks costs by batch of goods by department

Job Order Costing n n A job is a single unit or group of units identifiable as being produced to distinct customer specifications A job can be a q q Client Engagement Project Contract

Product Costing Cost identification n Cost measurement n Product cost assignment n Methods of product costing: n q Cost Accumulation System defines n n q Cost object Method of assigning costs to production Valuation Method specifies n How product costs will be measured

Six Possibilities V A L U A T I O N COST ACCUMULATION SYSTEM M E T H O D Job Order n n n Actual Normal Standard Process n n n Actual Normal Standard

Valuation Methods n Actual q q q n Actual direct material Actual direct labor Actual overhead n Standard q q q Standard direct material Standard direct labor Standard overhead Normal q q q Actual direct material Actual direct labor Predetermined overhead The Difference

Job Order Costing System n n Each job is a cost object Costs are accumulated for each job A job can consist of one or more units of output There is a subsidiary ledger for each job

Job Order Costing System WIP Subsidiary Ledger Job 1 100 Job 2 Job 3 200 500 Job 1 + Job 2 + Job 3 = = WIP Control Job 1 Job 2 Job 3 Total 100 200 500 800 WIP Control

Material Requisition Form n n n Tracks who is responsible for materials Verifies flow of materials from warehouse to department to job Journal entry Work in Process Inventory (direct material) Manufacturing Overhead (indirect material) Raw Material Inventory

Materials Requisition Form Date __________ No. 341 Job No. _________ Department ________ Authorized by ______ Issued by _________ Received by _______ Inspected by ________ Item Part Unit of Quantity Unit Total No. Descrip. Measure Required Issued Cost

Job Order Cost Sheet n All financial information about a job q q n Direct material (from material requisitions) Direct labor (from time sheets or labor tickets) Applied overhead Budgeted cost information When job is complete, use job order cost sheet to analyze actual costs compared with budgeted costs

Job Order Cost Sheet Customer ______ Job No. 315 Starting Date _____ Job Description ______ Completion Date ______ Contract Price _______ Materials Direct Labor Overhead Applied Date Ref# Amount Date Ref# Amount Total Materials _____ Total Labor _____ Total Cost of Job Total OH Applied _____ ====

Employee Time Sheet n n Time worked on each job Journal entry Work in Process Inventory (direct labor) Manufacturing Overhead (indirect labor) Salaries and Wages Payable

Employee Time Sheet Employee Name ________ Employee No. ________ Department ________ Type of Work Job No. Employee Signature Start Time For week ending _______ Stop Time Day Total Hours Supervisor’s Signature

Manufacturing Overhead Account Actual Overhead Applied Overhead § Journal Entry Work in Process Inventory Manufacturing Overhead (applied)

Completion of a Job n n Move job cost sheet from WIP subsidiary to Finished Goods subsidiary Journal entry Finished Goods Inventory Work in Process Inventory

Sale n Journal entry Accounts Receivable Sale Cost of Goods Sold Finished Goods Inventory Matches revenues and expenses on the income statement

Job Order Costing and Technology Automate data collection and data entry n Accounting software includes job costing modules n Share information using intranet n q Intranet: Restricted network for sharing information and delivering data from corporate databases to local-area network (LAN) desktops

Journal Entries W & Sal Pay Materials WIP-Job 1 FG Accts Pay Overhead WIP-Job 2 CGS WIP consists of job cost sheets

Purchase Materials on Account (a) W & Sal Pay Materials WIP-Job 1 FG WIP-Job 2 CGS a Accts Pay a Overhead

Use Materials Requisition to Request Materials for Jobs (b) W & Sal Pay Materials a Accts Pay a b Overhead b WIP-Job 1 FG b WIP-Job 2 b Direct materials to WIP Indirect materials to Overhead CGS

Apply Overhead (d) W & Sal Pay c Accts Pay a Materials a b Overhead b c d WIP-Job 1 b c d WIP-Job 2 b c d FG CGS

Complete Job 1 (e) W & Sal Pay c Accts Pay a Materials a b Overhead b c d WIP-Job 1 b c d e WIP-Job 2 b c d FG e CGS

Sell Job (f, g) W & Sal Pay Materials c Accts Pay a b Overhead a b c d Accts Rec g WIP-Job 1 e b c d WIP-Job 2 b c d FG e CGS f Sales g f

Standard Cost System n n n Actual cost Normal cost Standard cost q Predetermined norms (or standards) for materials, labor, and overhead q Compare actual costs to standard costs— difference is a variance

Management Use of Job Order Costing Systems n n n Estimate future job costs Establish realistic bids and selling prices Develop budgets and standards Compare actual costs to estimated costs Furnish performance evaluation information based on profitability of jobs

Product and Material Losses n Shrinkage q q q n Evaporation Leakage Oxidation Production errors q q Defects can be economically reworked Spoilage cannot be economically reworked

Normal vs. Abnormal Loss n Normal Loss—expected during production q q Anticipated on all jobs n Include cost when calculating predetermined overhead application rate n Include cost less the estimated disposal value Specific to a job n Applied to the specific job n Include cost less the estimated disposal value n Abnormal Loss— exceeds what is expected during production q Abnormal spoilage n Period cost—includes cost of abnormal loss less any disposal value

Product and Material Losses Normal Loss for most jobs Loss identified with a specific job Abnormal Loss In overhead rate Period cost Charge to specific job Period cost

Questions What is the difference between job order and process costing systems? n How do actual, normal, and standard costing valuation methods differ? n How is the job order cost sheet used? n

Potential Ethical Issues n n n Inflating costs assigned to cost-plus contracts Assigning costs from a fixed-fee contract to a cost-plus contract Substituting materials with inferior quality Overstating costs included in Work in Process Using methods or materials that violate intellectual property rights of other firms Recording sales value of defective work as “Other Revenue”