JobOrder Costing Chapter 2 Introduction to Managerial Accounting

Job-Order Costing Chapter 2 Introduction to Managerial Accounting, Brewer, Garrison, Noreen Power Points from website - adapted by Cynthia Fortin, CPA, CMA http: //highered. mheducation. com/sites/0078025419/student_view 0/chap ter 2/index. html 2 -1

Basic Costing Systems Job Costing • Distinct products or service • Products manufactured to order • Cost traced or allocated to jobs • Cost records maintained for each job 2 -2

Basic Costing Systems Process Costing • Many units of a single, homogeneous product flow evenly through a continuous production process. • One unit of product is indistinguishable from any other unit of product. • Each unit of product is assigned the same average cost. 2 -3

Job Costing Applications • Manufacturing sector – Building construction – Aircraft industry – Semi-conductor • Service industry – Law firms – Accounting firms – Advertising agencies 2 -4

Examples of job costing and process costing in 3 types of sector 2 -5

Cost assignment process 1. Identify the cost object(s) 2. Identify direct costs (DM, DL) 3. Select cost-allocation bases to allocate indirect costs 4. Identify the indirect costs associated with each cost-allocation base 5. Compute the predetermined overhead rate 6. Compute the indirect costs allocated 7. Add direct and indirect costs 2 -6

Robinson Company Small pulp machine 2 -7

Robinson Company • Job: to make a small pulp machine that will have a price tag of $15, 000. • Direct materials costs for the job: $4, 606. • Direct manufacturing labour costs: $1, 579. • Cost Allocation base is direct labour hours, estimated direct manufacturing labour hours are 27, 000. • Estimated indirect costs are $1, 215, 000. • Hours to make the machine: 88 hours. 2 -8

Job-costing steps 1. Pulp machine 2. DM + DL $4, 606+$1, 579= $ 6, 185 3. 27, 000 labor hours 4. Overhead $1, 215, 000 5. $1, 215, 000/27, 000 = $45 per hour 6. $45 * 88 hours = $ 3, 960 7. Total cost of job $10, 145 2 -9

Job Cost Record 2 -10

Materials (A) and Labor (B) source documents 2 -11

Why Use an Allocation Base? To assign manufacturing overhead to individual jobs. Types of allocation bases • Direct labor hours • Direct labor dollars • Direct machine-hours 2 -12

Manufacturing Overhead Application The predetermined overhead rate (POHR) is determined before the period begins. 2 -13

The Need for a POHR Actual overhead for the period is not known until the end of the period. Actual overhead costs can fluctuate seasonally, thus misleading decision makers. 2 -14

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 $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. 2 -15

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. 2 -16

Key Definitions 1. Raw materials include any materials that go into the final product. 2. Work in process consists of units of production that are only partially complete and will require further work before they are ready for sale to customers. 3. Finished goods consist of completed units of product that have not been sold to customers. 4. Cost of goods manufactured include the manufacturing costs associated with the goods that were finished during the period. 2 -17

Typical Manufacturing Flow. To the customer Materials stockroom Shipping Manufacturing Assembly line Receiving Finished goods stockroom

Typical Accounting Flow Direct Materials Inventory To the customer Sales & Cost of Goods sold Work in Process (Direct Labour, Materials & Overhead Accounts Payable Finished goods inventory

Flow of Costs: A Conceptual Overview Costs Balance Sheet Inventories Material Purchases Raw Materials Direct Labor Work in Process Manufacturing Overhead Selling and Administrative Finished Goods Period Costs Income Statement Expenses Cost of Goods Sold Selling and Administrative 2 -20

Journal entries 1. Raw materials purchase $89, 000 Raw Materials Accounts Payable 89, 000 2. Materials sent to manufacturing plant floor: direct materials $81, 000, and indirect materials, $4, 000 Work-in-Process Manufacturing Overhead Materials 81, 000 4, 000 85, 000

The Purchase and Issue of Raw Materials: T-Account Form 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 2 -22

Journal entries 3. Manufacturing labor wages liability incurred, direct ($39, 000) and indirect ($15, 000). Work-in-Process Manufacturing Overhead Wages Payable 39, 000 15, 000 54, 000 4. Payment of total manufacturing payroll for the month, $54, 000. Wages Payable Cash 54, 000 2 -23

Labor Costs 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 Applied 2 -24

5. Additional overhead $75, 000 consists of salaries: $44, 000; payables: $11, 000; insurance expired: $2, 000; and depreciation on equipment: $18, 000. MANUFACTURING Overhead 75, 000 Salaries Payable Accounts Payable Accumulated Depreciation Prepaid Insurance 44, 000 11, 000 18, 000 2, 000 6. Allocate Overhead to products Work-in-Process Control Manufacturing Overhead 80, 000 2 -25

Recording Actual Manufacturing Overhead 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 Applied 2 -26

Applying Manufacturing Overhead 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 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. 2 -27

7. Completion and transfer to finished goods of 12 individual jobs: $188, 000. Finished Goods Work-in-Process 188, 000 8. Sales, all on accounts, are $270, 000 Accounts Receivable Sales 270, 000 2 -28

Transferring Completed Units Work in Process (Job Cost Sheet ) Direct Materials l. Direct Labor l. Overhead Applied l l Cost of Goods Mfd. Finished Goods l Cost of Goods Mfd. 2 -29

9. Advertising $10, 000 Customer service salaries: $15, 000 Marketing and Admin salaries $35, 000 Marketing, Advertising and Admin Expense Customer service Salaries Payable Control Accounts Payable Control 45, 000 15, 000 50, 000 10. Cost of Goods Sold: $180, 000 Cost of Goods Sold Finished Goods 180, 000 2 -30

Transferring Units Sold Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l. Overhead Applied l l Cost of Goods Mfd. Finished Goods l Cost of Goods Mfd. l Cost of Goods Sold 2 -31

Accounting for Nonmanufacturing Cost Not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. 2 -32

Cost of good manufactured and sold statement Raw materials used Beginning inventory of raw materials + Purchases of raw materials − Ending raw materials inventory__ = Raw materials used Costs of goods manufactured - Ind. Materials in Mfg O/H (if applicable) = Direct materials (DM) Beginning work in process inventory + Direct materials (DM) + Direct manufacturing labour (DL) + Manufacturing Overhead applied (MOH) = Total work in process costs − Ending work in process inventory = Cost of goods manufactured Cost of goods sold Beginning finished goods inventory + Cost of goods manufactured − Ending finished goods inventory__ = Unadjusted Cost of goods sold + Underapplied/ - Overapplied = Adjusted Cost of goods sold (to I. S. ) 2 -33

Underapplied and Overapplied Overhead―A Closer Look Underapplied overhead is when the balance is debit. Mfg. Overhead Actual Applied l. Indirect Materials l. Overhead l. Indirect Applied to Labor Work in l. Other Process Overhead Overapplied overhead is when the balance is credit. xxx 2 -34

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 2 -35

Overhead Application Example Manufacturing Overhead Actual Applied $650, 000 $680, 000 $ 30, 000 The balance is a credit, therefore MO was overapplied by $30, 000. 2 -36

What happens to the balance? 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 Pear. Co’s Mfg. Overhead $650, 000 $30, 000 $680, 000 $30, 000 overapplied 2 -37

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. 2 -38

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. Because it decreases cost, therefore increasing net income. 2 -39

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. May be more complex but. . . May be more accurate because it reflects differences across departments. 2 -40