JOB COSTING DISTINGUISH BETWEEN JOB COSTING PROCESS COSTING

JOB COSTING: DISTINGUISH BETWEEN JOB COSTING & PROCESS COSTING Chapter 3 Professor Debbie Garvin, JD; CPA – ACG 2071

Process Costing 2 Mass production Similar items Total costs are averaged over all units Examples Paint manufacturers Oil refineries Cereal manufacturers

Job Costing 3 Unique, custom products or small batches Total costs are accumulated by job Examples Hospitals Custom home builders Advertising agencies

4 Examples of Process and Job Costing A manufacturer of fiberglass insulation q A residential plumbing contractor q A manufacturer of fiber optic cable q A professional home builder q A hospital q

Flow of Inventory Through a Manufacturing System 5 Raw Materials Work in Process Finished Goods Cost of Goods Sold • Storeroom • Production Departmen t • Ready for Sale • Products Shipped to Customer

Production Schedule for the Month of December 6 Job Model Number Stock or Customer Quantity Scheduled Start Date Scheduled End date 603 X 4 Cross-Trainer For stock 50 12/2 12/6 604 T 5 -0 Treadmill For stock 60 12/7 12/17 605 Custom T 6 -C Treadmill Gator FT 15 12/18 12/21 606 Custom S 3 -C Stair-Climber Gator FT 12 12/24 12/25 12/31 FACTORY CLOSED FOR HOLIDAYS and ANNUAL MAINTENANCE

Bill of Materials 7 Job 603 Cross Trainer Part Number HRM 50812 LCD 620 B 4906 HG 2567 FP 689 Description Heart rate monitor LCD entertainment screen Front and rear rolling base Hand grips Foot platform Etc. Quantity: 50 units Quantity Needed 50 50 100 100

Purchasing Process 8 Purchasing determines ordering needs Purchasing issues purchase order Accounting matches invoice with purchase order Shipping and receiving prepare receiving report Accounting pays the invoice

Job Cost Record 9 Job Number: 603 Customer: For stock Job Description: 50 units of X 4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _____ Manufacturing Cost Information: Direct Materials Direct Labor Manufacturing Overhead Total Job Cost Number of Units Cost per Unit Shipping Information: Date Quantity Shipped Units Remaining Cost Summary $ $ ÷ 50 units $ Cost Balance

Work in Process Inventory 10 JOB 560 Direct Materials JOB 561 Direct Labor Direct Materials MOH Direct Labor Total Job MOH Cost Total Job Cost JOB 562 Direct Materials Direct Labor JOB 563 Direct Materials MOH Total Job Direct Labor MOH Cost Total Job Cost Balance Sheet Life Fitness, November 30 Assets: Cash Accounts Receivable Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Property and Equipment Total Assets Liabilities and Owners Equity: Accounts Payable Wages and Salaries Payable Other Liabilities Common Stock Retained Earnings Total Liabilities and Owner’s Equity The job cost records on incomplete jobs sum to the total Work in Process Inventory shown on the

Materials Requisition 11 Materials Requisition Number: #7568 Date: 12/2 Job: 603 Part Number HRM 50812 Description Heart rate monitor LCD 620 B 4906 Quantity 50 Unit Cost $60 Amount $3, 000 LCD entertainment screen 50 $100 5, 000 Front and rear rolling base 100 $5 500 Total $8, 500

12 Raw Materials Record Updated for Raw Materials Received and Used Raw Materials Record Item No. HRM 50812 Description: Heart rate monitor Received Used Date Units Cost Total 11 -25 100 $6, 000 11 -30 12 -1 12 -2 Requisition Number #7235 75 $60 Units 70 Balance Cost $60 Total Units Cost Total 100 $6, 000 $4, 200 30 $60 $1, 800 $3, 000 105 55 $60 $6, 300 $3, 300 $4, 500 #7568 50 $60

13 Direct Labor Costs are Traced to Individual Jobs Employee: Hannah Smith Hourly Wage Rate: $20 Date Job Number Labor Time Record Week: 12/2 - 12/9 Record #: 324 Start Time End Time Hours Cost 12/2 602 3 $ 60 12/2 603 5 $ 100 12/3 603 8 $ 160 12/4 etc.

14 Direct Labor & Materials Posted to Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X 4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _____ Manufacturing Cost Information: Direct Materials Req. #7568: $ 8, 500 Req. #7580: $ 14, 000 Req. # 7595: $ 13, 500 Req. # 7601: $ 4, 000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, etc. No. #333 (36 hours): $ 100, $ 120, etc. Etc. (a total of 500 direct labor hours) Manufacturing Overhead Total Job Cost Number of Units Cost per Unit Cost Summary $ 40, 000 $ 10, 000 $ $ ÷ 50 units $

15 Calculating Predetermined Manufacturing Overhead Allocation Rate POHR*= Total estimated mfg. overhead costs Total estimated amount of allocation base 4 steps in calculating POHR: 1. 2. 3. 4. Estimate total manufacturing overhead costs for next year Select an allocation base (cost driver) Estimate the total amount of allocation base to be used for next year Calculate predetermined manufacturing overhead rate *POHR stands for “Predetermined Manufacturing Overhead Rate”

16 Allocating Manufacturing Overhead (MOH) to Individual Jobs Allocated MOH = POHR* x Amount of cost allocation activity actually used Example: Total estimated manufacturing overhead costs = $1, 000 Cost allocation base is direct labor hours (DLH) Total estimated direct labor hours for the year = 62, 500 DLHs *POHR stands for “Predetermined Manufacturing Overhead Rate”

Allocating MOH to Individual Job (continued) 17 $1, 000 estimated overhead costs POHR* 62, 500 estimated direct labor hours = = $16 of MOH per direct labor hour charged to job Allocated MOH for Job #603 = $16 x 500 DLHs = $8, 000 *POHR stands for “Predetermined Manufacturing Overhead Rate”

Job Cost Record 18 Completin g the Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X 4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _____ Manufacturing Cost Information: Cost Summary Direct Materials $ 40, 000 Req. #7568: $ 8, 500 Req. # 7580: $ 14, 000 Req. # 7595: $ 13, 500 Req. # 7601: $ 4, 000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, etc. No. #333 (36 hours): $ 100, $ 120, etc. Etc. (a total of 500 direct labor hours) Manufacturing Overhead $ 10, 000 $ 8, 0000 $16/ DL hour × 500 DL hours= $8, 000 Total Job Cost Number of Units Cost per Unit $ 58, 000 ÷ 50 units $ 1. 160

Allocating Overhead to Jobs 19 Overhead Allocation Rate = Budgeted O/H Cost Allocation Base Overhead Allocation Base Alternatives Direct labor hours Direct labor cost Machine hours Direct material cost

Allocating Overhead Example 20 Gator Manuf. Co. expects annual MOH to be $800, 000. Co. also estimates 50, 000 direct labor hours costing $1, 600, 000 & machine run time of 25, 000 hours for year Calculate O/H allocation rates based on direct labor hours, direct labor cost & machine time Direct Labor Hours: $800, 000 ÷ 50, 000 DLH = $ /DLH Direct Labor Cost: $800, 000 ÷ $1, 600, 000 DLC = $ / dollar of direct labor Machine Time: $800, 000 ÷ 25, 000 machine hours = $ per machine hour

When is Manufacturing Overhead Allocated? 21 Indirect Materials Indirect Factory Overhead Labor Direct Allocate Direct Work in Process Finished Goods Cost of Goods Sold

22 Relation Between Cost of Job & Flow of Cost Direct Materials Direct Labor Manufacturing Overhead Work in Process Finished Goods Cost of Goods Sold

Dellroy Restaurant Supply 23 Dellroy Restaurant Supply manufactures commercial stoves & ovens for restaurants & bakeries. Dellroy uses job costing to calculate the costs of its jobs with direct labor cost as its manufacturing overhead allocation base. At the beginning of the current year, Dellroy estimated that its overhead for the coming year would be $300, 000. It also anticipated using 25, 000 direct labor hours for the year. Dellroy pays its employees an average of $20 per direct labor hour. Dellroy just finished Job 371, which consisted of two large ovens for a regional bakery.

Dellroy Restaurant Supply 24 The costs for Job 371 were as follows: Direct materials used $13, 000 Direct labor hours used: 110 1. 2. 3. What is Dellroy’s predetermined manufacturing overhead rate based on direct labor cost? Calculate the manufacturing overhead to be allocated based on direct labor cost to Job 371. What is the total cost of Job 371?

25 1. What is Dellroy’s predetermined manufacturing overhead rate based on direct labor cost? Total est. direct labor cost = $20 x 25, 000 est. hours = $500, 000 est. DLC for yr POHR = $300, 000(est. MOH for yr. ) ÷ $500, 000(est. DLC for yr. ) = 60% of direct labor cost actually traced to job will be allocation of MOH 2. Calculate manufacturing overhead to be allocated based on direct labor cost to Job 371. Direct labor hours used = 110 hrs x $20 per hour = $2, 200 DLC POHR = 60% x $2, 200 = $1, 320 Allocated MOH for Job 371 = $1, 320 3. What is the total cost of Job 371? Direct materials used $13, 000 Direct labor cost (110 hrs x $20) 2, 200

Reasons Why Management Needs Product Cost 26 Control costs Assess profitability of products Pricing decisions Discounts on high-volume sales Bids on contracts Financial statement preparation

Fed. Corp 27 Fed. Corp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200, 000. Total estimated direct labor cost is $140, 000, while total estimated direct labor hours to be worked are 10, 000. What is Fed. Corp’s predetermined manufacturing overhead rate? POHR = $200, 000 ÷ 10, 000 = $20 per DLH

28 How much MOH Actually Allocated? Fed. Corp’s actual manufacturing overhead for year was $190, 000. A total of 11, 000 dlh actually worked. Using Fed. Corp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of Fed. Corp’s jobs during the year? MOH Allocated = $20 x 11, 000 actual hrs. =

When Actual MOH ≠ Allocated MOH 29 Estimated overhead for POHR $200, 000 (Slide 27) $190, 000 Fed. Corp’s actual overhead $220, 000 Fed. Corp’s allocated overhead $ 30, 000 Difference “Target” was $190, 000; actually allocated $220, 000. Overapplied by $30, 000.

Underallocated or Overallocated Manufacturing Overhead 30 Underallocated (undercosted) – not enough MOH allocated to jobs by POHR – too little expense in MOH account Actual MOH more than Applied (Allocated) Overallocated (overcosted) – too much MOH allocated to jobs by POHR – too much expense in MOH account Actual MOH less than Applied (Allocated) MOH

Underallocated or Overallocated Manufacturing Overhead 31 Why/How? Estimated manufacturing overhead costs were higher or lower than actual Used more or less of the estimated allocation base than projected

Underallocated or Overallocated Manufacturing Overhead 32 2 Solutions: If amount not material, Adjust cost of goods sold If amount material, Prorate between Cost of Goods Sold, Work in Process Inventory, Finished Goods Inventory

33 Eliminating Under/Over Applied MOH Co. had $50, 000 actual MOH (rent, utilities & ins. on manufactoring facility) JE 1. Entry to record actual MOH Manuf. OH $50, 000 Rent payable $38, 000 Utilities payable 8, 000 Insurance payable 4, 000

34 Eliminating Under/Over Applied MOH applied to specific jobs periodically using POHR Total applied during period - $40, 000 JE 2. To record MOH applied to jobs using POHR WIP Inven $40, 000 Manuf OH $40, 000 Manuf. O/H Expense Accnt Actual $50, 000 $40, 000 applied through POHR

35 Eliminating Under/Over Applied MOH At end of acc. period, MOH expense account closed out If difference not material: COGS $10, 000 MOH $10, 000 If diff material, apportion among inv accounts: End bal: WIP Inv. -$9, 000; FG Inv-$15, 000; COGS$21, 000 Total Inventory Costs = $45, 000

36 Eliminating Under/Over Applied MOH WIP Inv $9, 000 ÷ $45, 000 x $10, 000 = $2, 000 increase FG Inv $15, 000 ÷ $45, 000 x $10, 000 = $3, 333 increase COGS $21, 000 ÷ $45, 000 x $10, 000 = $4, 667 increase JE: WIP Inv $2, 000 FG Inv 3, 333 COGS 4, 667

37 Resulting Difference in Inventory costs Difference between actual and applied MOH is not material, Method 1: Increase COGS by $10, 000 underapplied MOH Difference between actual and applied MOH is material, Method 2: Increase COGS by $4, 667 Increase B/S Inventory accounts by $5, 333 WIP Inv ($2, 000); FG Inv ($3, 333)

38 Resulting Difference in Inventory costs In this example we had underapplied MOH, if end up with overapplied MOH (too much MOH applied to inventory accounts), all entries would be opposite to reduce too much cost in COGS and inventory accounts Where we had credit to MOH & debit to COGS for $10, 000 underapplied MOH Would now have debit to MOH & credit to COGS for $10, 000 for overapplied MOH

How Do Manufacturers Treat Non. Manufacturing Costs? 39 GAAP – only inventoriable product costs added to the cost of assets (inventory) Internal decision-making – management wants to know the total cost of the product across the value chain

General Journal entries for Materials Procurement 40 GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Raw Materials inventory – canvas 70, 000 Accounts payable 70, 000 Raw Materials inventory – thread 1, 100 Accounts payable 1, 100

Accounting for Materials 41 Raw Materials Inv Material Purchases Work in Process Inv Direct Material Indirect Material (wood glue & screws) MOH (temp acct closed out y/end) Actual Overhead Costs

T-Account for Raw Materials 42 Co. manufactures backpacks. Records indicate: Purchases of canvas $70, 000; Purchases of thread $1, 100 Material requisitions: Canvas $63, 000; Thread $280 Raw Materials Inv Beginning bal 35, 680 Purchases 70, 000 63, 280 Requisitioned 1, 100 Ending bal 43, 500

Labor Journal Entries Examples JOB XYZ-1 Direct Materials Direct Labor Manufacturing Overhead Total Job Cost $40, 000 $10, 000 JOB XYZ-2 Direct Materials Direct Labor Manufacturing Overhead Total Job Cost $40, 000 $10, 000 GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Work in Process Inventory 20, 000 Wages payable 20, 000 Manufacturing Overhead 2, 500 Wages payable

Accounting for Labor 44 Wages Payable Direct Labor Indirect Labor Manufacturing Overhead Actual Overhead Costs Work in Process Inv Direct Material Direct Labor

45 Accounting for Manufacturing Overhead Actual Overhead Costs Overhead Applied to Work in Process Direct Material Direct Labor Overhead

46 Accounting for Finished Work in Process. Goods Finished Goods Direct Material Direct Labor Manufacturing Overhead Cost of Goods Manufactured Cost of Goods Sold

47 Manufacturing Overhead Analysis Difference in Actual & Applied MOH not material to Fin. Sts. Ex. 1 Manufacturing Overhead Ex. 2 Manufacturing Overhead Actual $20, 000 Actual $18, 000 $ 18, 000 $2, 000 Debit Balance in MOH: Overhead was under applied - Cost of Goods Sold (not material) is UNDERSTATED Cost of Goods Sold $20, 000 $2, 000 Credit Balance in MOH: Overhead was over applied - Cost of Goods Sold (not material) is OVERSTATED

48 Closing Manufacturing Overhead Difference in Actual & Applied MOH not material to Fin. Sts. Ex. 1 Under Allocated Manufacturing Overhead Actual $20, 000 $ 18, 000 applied Under $2, 000 Cost of Goods Sold inc. $2, 000 cost Ex. 2 Over allocated Manufacturing Overhead Actual $18, 000 20, 000 applied over $2, 000 Cost of Goods Sold $2, 000 reduce cost

Job Costing at a Service Firm 49 Similar to job costing at a manufacturer Examples: Hospital; Repair Shop; CPA Firm Main differences: Firm directly traces direct labor to cost of job Since no inventory, all costs of Service Co treated as period costs when incurred Co allocates indirect costs (all operating expenses) to each client job

Co. produces uniforms & allocates MOH based on Machine Hours 50 Following are costs for 2013: Direct Labor hours Machine hrs Dep on salesmen cars Indirect materials Dep. On delivery trucks Dep on manuf plant & equip Indirect manufacturing labor Customer service hotline Plant Utilities Direct Labor cost Budgeted & Actual MOH Budget Actual 7, 400 hrs. 6, 600 hrs. 7, 250 hrs. 6, 800 hrs. $21, 500 48, 500 54, 500 13, 500 11, 000 63, 500 65, 000 40, 500 42, 500 18, 000 20, 500 18, 500 19, 500 72, 500 84, 000 $171, 000 $181, 500

51 Uniform Co. Problem (cont. ) 1. Compute POHR: 2. Calculate allocated MOH for past year: 3. Compute under or overallocated MOH & how dispose of assuming it is not material?

Co. produces uniforms & allocates MOH based on Machine Hours 52 Following are costs for 2013: Budget Actual Direct Labor hours 7, 400 hrs. 6, 600 hrs. Machine hrs 7, 250 hrs. 6, 800 hrs. Dep on salesmen cars (Not MOH) $21, 500 Indirect materials 48, 500 54, 500 Dep. On delivery trucks (Not MOH) 13, 500 11, 000 Dep on manuf plant & equip 63, 500 65, 000 Indirect manufacturing labor 40, 500 42, 500 Customer service hotline (Not MOH) 18, 000 20, 500 Plant Utilities 18, 500 19, 500 Direct Labor cost (Not MOH) 72, 500 84, 000 Budgeted & Actual MOH $171, 000 $181, 500

53 Uniform Co. Problem (cont. ) 1. Compute POHR: Est MOH $171, 000 ÷ Est. Driver 7, 250 MH = $23. 59 POHR round to $24 2. Calculate allocated MOH for past year: Actual MHs 6, 800 MHs x POHR $24 = $163, 200 3. Compute under or overallocated MOH & how dispose of assuming it is not material?

54 Uniform Co. Problem (cont. ) 3. Compute under or overallocated MOH & how dispose of assuming it is not material? Ind. Mat MOH Difference not material 54, 500 COGS $18, 300 Dep-Mfg P&E 65, 000 $163, 200 Allocated MOH $18, 300 Ind. Labor 42, 500 Difference material Plant Util to WIP 19, 500 Close $18, 300 Inv, FG Inv & COGS proportionally

55 LCD Inc. produces touch screen products. Co. reports info at 12/31. Co. began operations on 1/31 of this year. WIP Inv. Wages Payable MOH 28, 000 125, 500 73, 000 60, 000 42, 000 Balance 0 FG Inv RM Inv 7, 500 42, 000 125, 500 111, 500 57, 500 35, 500 13, 000 41, 500 Questions: 1. What is cost of direct materials used? 2. Cost of indirect materials used? 3. Cost of direct labor? 4. Cost of indirect labor? 5. Cost of goods manufactured? 6. Cost of goods sold (before adjusting for any under or overallocated MOH? 7. Actual MOH? 8. How much MOH was allocated to jobs? 9. What is the POHR as a % of DLC? 10. Is MOH under or overallocated? By how much?

1)What is cost of direct materials used? 56 By analyzing the WIP T-account, we see that the amount of DM used is represented as a debit to WIP Inv. BB 0 DM 28, 000 60, 000 42, 000 125, 500 Answer: 28, 000

2) Cost of indirect materials used? 57 The credit to RM Inv. represents the total amount of materials (both direct and indirect) that were requisitioned (used). Since we know that the amount of Direct Materials used was $28, 000 based on the debit to the WIP account – this means that of the total credit of RM Inv. ($35, 500), the remaining value must represent the Indirect materials WIP Inv. used. RM Inv. 28, 000 Total Amount requisitioned: 35, 500 Amount of Direct Materials: 28, 000 = Amount of Indirect Materials: 7, 500 57, 500 35, 500 MOH 7, 500

3) Cost of direct labor? 58 By analyzing the WIP T-account, we see that the amount of DL is represented as a debit to WIP Inv. 0 DM 28, 000 DL 60, 000 42, 000 125, 500 Answer: 60, 000

4) Cost of indirect labor? 59 By analyzing the actual MOH T-account, we see that the amount of indirect labor is represented as a debit to MOH 0 Ind Mat 7, 500 Ind Labor 13, 000 41, 500 BB 42, 000 Answer: 13, 000

5) Cost of goods manufactured? 60 By analyzing the WIP T-account, we see that Cost of Goods Manufactured is a credit to WIP since we are transferring out the finished inventory to FG since it is now complete. Cost of Goods Manufactured is also represented as a debit to Final Goods Inventory. Answer: 125, 500 WIP Inv. 0 28, 000 60, 000 42, 000 125, 500 FG Inv. 0 125, 500 111, 500

6) Cost of goods sold (before adjusting for any under or overallocated MOH? 61 By analyzing the Finished Goods (FG) T-account, we see that COGS before any adjustment is the credit to this account (since the credit represents how much we transferred out of FG Inventory which is what we sold & the amount that will be transferred to COGS. Answer: 111, 500 FG Inv. 0 125, 500 111, 500 to COGS

7) Actual MOH? 62 By totaling the MOH T-account for the left (debit) side, we can see what actual amount of MOH was incurred. The right (credit) side of the account represents what was allocated, so we do not include that in the calculation of actual MOH 0 7, 500 13, 000 41, 500 42, 000 Answer: 7, 500+13, 000+41, 500 =62, 000

8) Allocated MOH? 63 By totaling the MOH T-account for the right (credit) side, we can see what amount of MOH was allocated to WIP inventory. We can also see this amount reported as a debit to WIP inventory since that’s the account we allocate MOH to. The left (debit) side of the MOH account represents what was actually incurred, so we do not include that in the calculation of allocated MOH 0 7, 500 13, 000 41, 500 42, 000 WIP Inv. 0 28, 000 60, 000 42, 000 125, 500 Answer: 42, 000

9) What is the POHR as a % of DLC? 64 To compute the POHR as a % of direct labor cost (DLC), we need to calculate the ratio of Allocated MOH to the DLC. WIP Inv. 0 28, 000 60, 000 42, 000 125, 500 Allocated MOH÷DLC 42, 000÷ 60, 000 = 70% MOH is allocated at 70% of DLC POHR is 70 cents of MOH for every $1 of DLC directly traced to product.

10) Is MOH under or overallocated? By how much? 65 By comparing the left (debit) side of the MOH T-account to the right (credit) side of the T-account, we can determine if MOH was under or overallocated. Recall: MOH 0 7, 500 13, 000 41, 500 Overallocated: Allocated > Actual; MOH has ending credit balance Underallocated: Allocated < Actual; MOH has an ending debit balance 42, 000 If amount is not material: close entirely to COGS; Actual MOH: 62, 000 increase COGS by $20, 000. Allocated MOH: 42, 000 If amount is material: prorate to WIP Inv. , FG Inv. , and Underallocated by: 20, 000 COGS.

END OF SEGMENT Professor Debbie Garvin, JD; CPA – ACG 2071