Systems Design JobOrder Costing Objectives Uses of product

Systems Design: Job-Order Costing

Objectives § Uses of product costs for different organizations. § Types of product costing systems. § Distinguish between job order and process costing systems. § Understanding the cost accumulation procedures utilized in job order costing.

Product and Service Costing § A product costing system accumulates the costs incurred in a production process and assigns those costs to the organization’s final products. § Use in Financial accounting: § Value inventory on the balance sheet § Compute cost of goods sold expense on the income statement.

Product and Service Costing § Use in Managerial Accounting: § Help managers with planning and decision making. § Decisions about product prices, the mix of products to be produced and the quantity of the output to be manufactured involves the usage of product costs. § Use in Cost management: § For controlling or reducing production costs of a product. § Use in reporting to interested organizations

Product and Service Costing § § § Service firms and non profit organizations: Service firms do not have inventories. Their costs involve costs that are incurred in producing the services which are provided. § Costs are then used for planning, cost control and decision making purposes.

Introduction § An enterprise seeks to profit by providing customers with goods and services. § To realize this profit, it is necessary to make decisions based upon appropriate and timely information provided by the accounting reports. § So in order to fulfill the management needs, cost accounting consists of basic three phases, 1)cost determination and measurement, 2)cost planning and control through budgets and standards 3)cost analysis for decision making purposes.

Cost systems: Actual or Standard. § Determination of a product’s cost is a basic objective of cost accounting and when the unit cost is identified, the obvious question arises, " how are these costs accumulated? § In actual costs systems, costs are collected as they occur but they are determined at the end of the manufacturing procedures.

Cost systems: Actual or Standard. § In standard cost system, unit cost are predetermined in advance of production. Costing of the products, operations and processes are done by using standards for both quantity and dollar amount. § Difference between actual cost and standard cost gives the variance. And management’s role is to overcome the unfavorable conditions from predetermined standards. § Both actual cost system and standard cost system may be used in connection with either job order pr process costing.

Types of Product Costing Systems Process Costing Job-order Costing v A company produces many units of a single product. v One unit of product is indistinguishable from other units of product. v The identical nature of each unit of product enables assigning the same average cost per unit.

Types of Product Costing Systems Process Costing Job-order Costing v v Many different products are produced each period. v The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Products are manufactured to order.

Comparing Process and Job. Order Costing This table presents an overview of the differences between a joborder and process costing system. Notice that costs are accumulated by the job in a job-order system and by department in the process system. If you think of building a house, you can see how easy it is to accumulate costs for a particular house, even though you may be building more than one house at a time. If you think of mixing Coca-Cola, costs would naturally be accumulated by the department working on the current batch.

Example : Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

Identify the documents used in a job-order costing system.

Job-Order Costing – An Overview Direct Materials Job No. 1 Direct Labor Manufacturing Overhead Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. In a job-order costing system, direct materials and direct labor are traced directly to each job as the work is preformed.

Direct Manufacturing Costs Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3 Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. Manufacturing overhead (including indirect materials and indirect labor) represents other manufacturing costs like the power used to run the machinery in the factory. Manufacturing overhead cannot be traced directly to specific jobs. Rather, it is allocated to jobs on the basis of a predetermined rate.

Job Order Cost sheet § The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a given job. § We will look at a job cost sheet used by a hypothetical company called Pear. Co. The company has a job that calls for the construction of wooden cargo crates.

The Job Cost Sheet Pear. Co Job Cost Sheet Job Number A - 143 Department B 3 Item Wooden cargo crate Date Initiated 3 -4 -05 Date Completed Units Completed Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost Units Shipped Date Number Balance

Measuring Direct Materials Cost Will E. Delite

Description for Direct material Cost § Once a sales order has been received and a production order issued, the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials. Here is the materials requisition form completed for job A - 143. The requisition is number X 7 - 6890. The worker has requested twelve 2 x 4 s, 12 feet long, and twenty 1 x 6 s, 12 feet long. The unit cost of the lumber is shown in the unit cost column. The quantity requested is multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the store room will issue the number once the materials requisition form has been properly authorized.

Measuring Direct Materials Cost

Measuring Direct Labor Costs

Description For Direct Labor: § Here is the time ticket for an employee who worked eight hours on job A – 143. The employee’s hourly pay rate is $11, so the total labor cost charged to the job will be $88. The time ticket, number 36, serves as the major source document for labor costs charged to this job. Let’s look at the labor posting to the job cost sheet.

Job-Order Cost Accounting

Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.

Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: 1. It is impossible or difficult to trace overhead costs to particular jobs. 2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Manufacturing Overhead Application The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Estimated total manufacturing POHR = overhead cost for the coming period Estimated total units in the allocation base for the coming period Ideally, the allocation base is a cost driver that causes overhead.

The Need for a POHR § Using a predetermined rate makes it possible to estimate total job costs sooner. § Actual overhead for the period is not known until the end of the period, thus slowing down the ability to estimate job costs during the period; § Actual overhead costs can fluctuate seasonally, thus misleading decision makers; § It simplifies record keeping.

Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actual amount of the allocation based upon the actual level of activity.

Overhead Application Rate POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period $640, 000 160, 000 direct labor hours (DLH) POHR = $4. 00 per DLH For each direct labor hour worked on a particular job, $4. 00 of factory overhead will be applied to that job.

Job-Order Cost Accounting

Example: 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.

Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs.

Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

Cost Flows – Material Usage Direct materials issued to a job increase Work in Process and decrease Raw Materials.

Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.

The Recording of Labor Costs The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

Recording Actual Manufacturing Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

Applying Manufacturing Overhead Work in Process is increased when Manufacturing Overhead is applied to jobs.

Accounting for Nonmanufacturing Cost Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

Transferring Completed Units As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

Problems of Overhead Application The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead. Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

Allocating Under- or Overapplied Overhead Between Accounts