Job Order and Process Costing Chapter 17 1

Learning Objectives Distinguish between job order costing and process costing Record materials and labor in a job order costing system Record overhead in a job order costing system 2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objectives Record completion and sales of finished goods and the adjustment for under- or overallocated overhead Calculate unit costs for a service company Allocate costs using a process costing system—weighted-average method (see Appendix 17 A) 3 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

1 Distinguish between job order costing and process costing 4 Copyright © 2012 Pearson

Cost Accounting Systems Gather information to determine the production cost per unit Help managers: set selling prices that will lead to profits compute cost of goods sold for the income statement compute the cost of inventory for the balance sheet Assign these costs to the company’s product or service using: Job order costing Process costing 5 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Job Order vs. Process Costing Job Order Costing For manufactured batches of unique products or specialized services Accumulates cost per batch or job More prevalent with servicebased companies and with ERP systems 6 Process Costing For companies that produce identical units through a series of processes Used by large producers of similar goods Accumulates cost of each process needed to complete the product Assigns costs to products Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Job Order vs. Process Costing Cost tracing is used to assign directly traceable costs

Job costing and process costing track costs differently. Would the following companies use job order costing or process costing? a. A manufacturer of refrigerators _________ b. A manufacturer of specialty wakeboards _________ c. A manufacturer of luxury yachts _________ d. A professional services firm _________ e. A landscape contractor _________ f. A custom home builder _________ g. A cell phone manufacturer _________ h. A manufacturer of frozen pizzas _________ i. A manufacturer of multivitamins _________ j. A manufacturer of tennis shoes _________ 8 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

2 Record materials and labor in a job order costing system 9 Copyright ©

Flow of Costs Job 293 Direct materials Work in process Finished goods Direct labor

Purchasing Materials Purchasing for cash or on account Debit materials inventory 11 Copyright ©

Using Materials Direct materials debited to Work in process Indirect materials debited to Manufacturing overhead Inventory is credited for materials removed 12 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Materials Requisition Used to request the transfer of materials to Work in process Assigns the cost of the direct material to a job (Job 16) Shows the company cost of the material requested 13 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Job Cost Record 14 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Labor Use electronic labor/time records to streamline the labor tracking costs Debit Work in process inventory (for direct labor) Debit Manufacturing overhead (for indirect labor) Credit Wages payable 15 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Job Cost Record with Labor Added 16 Copyright © 2012 Pearson Education, Inc. Publishing

Rite Packs manufactures backpacks. Its plant records include the following materials-related transactions: Purchases of canvas (on account). . . . . $71, 000 Purchases of sewing machine lubricating oil (on account). . . 1, 100 Materials requisitions: Canvas. . . . . Sewing machine lubricating oil. . . . . 64, 000 250 1. Journalize the entries to record these transactions. 2. Post these transactions to the Materials inventory account. 3. If the company had $34, 000 of Materials inventory at the beginning of the period, what is the ending balance of Materials inventory? 17 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

1. Journalize the entries to record these transactions. Purchases Requisitions 18 Copyright © 2012

2. Post these transactions to the Materials inventory account. 3. If the company had $34, 000 of Materials inventory at the beginning of the period, what is the ending balance of Materials inventory? 19 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Seattle Enterprises produces LCD touch screen products. The company reports the following information at December 31, 2012: Seattle began operations on January 30, 2012. 1. What is the cost of direct materials used? The cost of indirect materials used? 2. What is the cost of direct labor? The cost of indirect labor? 20 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

3 Record overhead in a job order costing system 21 Copyright © 2012 Pearson

Accounting for Manufacturing Overhead 22 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice

Assigning Manufacturing Overhead to Jobs Actual overhead costs are accumulated in the Manufacturing overhead account Overhead costs are essential to production 23 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Predetermined Manufacturing Overhead Rate Most accurate allocation when total overhead cost is known A predetermined rate is calculated before the period begins using estimates Use this rate to allocate estimated overhead cost to jobs Rate is based upon two factors: 24 Total estimated manufacturing overhead costs for the period Total estimated quantity of the manufacturing overhead allocation base Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Predetermined Manufacturing Overhead Rate Identify an allocation base Direct labor hours (labor-intensive production) Direct labor cost (labor-intensive production) Machine hours (machine-intensive production) 25 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Allocate Overhead Costs to Jobs How to allocate overhead cost to jobs Compute the predetermined manufacturing overhead rate The application rate is multiplied by the actual quantity of allocation base used on the job 26 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Manufacturing Overhead on Job Cost Record 27 Copyright © 2012 Pearson Education, Inc. Publishing

Assignment of Overhead to Jobs Overhead is allocated to jobs in process The journal entry includes: At the end of the period, when a balance exists If allocated amount is less than actual overhead— underallocated If allocated amount is more than actual overhead— overallocated 28 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Teak Outdoor Furniture manufactures wood patio furniture. The company reports the following costs for June 2012: Wood. . . $ 250, 000 Nails, glue, and stain. . . 26, 000 Depreciation on saws. . . 5, 500 Indirect manufacturing labor. . . 38, 000 Depreciation on delivery truck. . . 2, 300 Assembly-line workers’ wages. . . 57, 000 1. What is the balance in the Manufacturing overhead account before overhead is applied to jobs? 29 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Job 303 includes direct materials costs of $500 and direct labor costs of $430. Requirement 1. If the manufacturing overhead allocation rate is 80% of direct labor cost, what is the total cost assigned to Job 303? 30 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Seattle Enterprises produces LCD touch screen products. The company reports the following information at December 31, 2012: 1. What is the actual manufacturing overhead of Seattle Enterprises? 2. What is the allocated manufacturing overhead? 3. Is manufacturing overhead underallocated or overallocated? By how much? 31 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

4 Record completion and sales of finished goods and the adjustment for under- or

Completion and Sale of Finished Goods To complete the process, we must: Account for the completion and sale of finished goods Adjust manufacturing overhead at the end of the period 33 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Accounting for the Completion and Sale of Finished Goods Remember the flow of costs—a job goes from: work in process to finished goods to cost of goods sold 34 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Accounting for Finished Goods Cost Flows T-account example of cost flows 35 Copyright ©

Adjusting Manufacturing Overhead is allocated to jobs in process At the end of the period, when a balance exists If allocated amount is less than actual overhead— underallocated If allocated amount is more than actual overhead— overallocated An adjustment is made to close out the account Adjustment should increase (decrease) Cost of goods sold 36 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Adjusting Manufacturing Overhead To close Manufacturing overhead If underallocated: Debit Cost of goods sold Credit Manufacturing overhead Increases Cost of goods sold for unallocated amount If overallocated: Debit Manufacturing overhead Credit Cost of goods sold Decreases Cost of goods sold for overallocated amount 37 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Selected cost data for Antique Print, Co. are as follows: Estimated manufacturing overhead cost for the year. . . $ 115, 000 Estimated direct labor cost for the year. . . . 71, 875 Actual manufacturing overhead cost for the year. . . . 119, 000 Actual direct labor cost for the year. . . . 73, 000 1. Compute the predetermined manufacturing overhead rate per direct labor dollar. 2. Prepare the journal entry to allocate overhead cost for the year. 38 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Selected cost data for Antique Print, Co. , are as follows: Estimated manufacturing overhead cost for the year. . . $ 115, 000 Estimated direct labor cost for the year. . . . 71, 875 Actual manufacturing overhead cost for the year. . . . 119, 000 Actual direct labor cost for the year. . . . 73, 000 3. Use a T-account to determine the amount of underallocated or overallocated manufacturing overhead. 4. Prepare the journal entry to close the balance of the Manufacturing overhead account. 39 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

5 Calculate unit costs for a service company 40 Copyright © 2012 Pearson Education,

Service Companies Have no inventory Need to know the cost of jobs to set prices How do service firms trace direct labor to individual jobs? 41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Assigning Labor Costs to Service Jobs Often service companies largest cost is labor Once

Roth Accounting pays Jaclyn Sawyer $104, 400 per year. Sawyer works 1, 800 hours per year. 1. What is the hourly cost to Roth Accounting of employing Sawyer? 2. What direct labor cost would be traced to client 507 if Sawyer works 12 hours to prepare client 507’s financial statements? 43 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

6 Allocate costs using a process costing system— weighted-average method (see Appendix 17 A)

Process Costing Used where large quantities of similar products are produced Two methods: Weighted-average FIFO Costs accumulated in each manufacturing process Company then assigns these costs to products passing through that process Sum of the costs applied to units produced to determine costs per unit 45 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Job Order Costing 46 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Process Costing 47 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Process Costing: Building Blocks Two cost categories: Direct materials Conversion costs Equivalent units Allow measurement of partially finished goods Express production in terms of fully completed units Materials may have different percentage completed than conversion costs 48 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Process Costing: Building Blocks Equivalent units Compute separate equivalent units 49 Copyright © 2012

Steps of Process Costing 50 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice

Process Costing Example 51 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Step 1: Summarize the flow of physical units Step 2: Compute output in terms

Step 3: Compute Cost per Equivalent Unit Cost of direct materials is divided by the equivalent units For conversion costs, direct labor and overhead costs are added together and divided by the equivalent units for conversion costs 53 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Step 4: Assign Costs For the 40, 000 units transferred out, multiply them by both the materials and labor cost per unit Ending inventory needs to be split between materials and conversion 54 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Journal Entries Journal entries to record July costs placed into production The entry to transfer the cost of the 40, 000 completed puzzles 55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Work in Process: Dept. 1 Account This costing system continues for each remaining department

Total Process 57 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

58 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 59 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.