Weeks Chapter 3 2 Costing Method Job Order

Weeks Chapter 3 2 # Costing Method Job Order & Process Costing

Systems Design: Job-Order Costing

Job Order Costing Cost Accounting Systems Job order cost system Process cost system Job Order Cost Flow Accumulating manufacturing costs Assigning manufacturing costs to work in process Assigning costs to finished goods Assigning costs to cost of goods sold Summary Reporting Job Cost Data Cost of goods manufactured schedule Income statement presentation Under-or overapplied manufacturing overhead

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

Quick Check 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.

Assigning Manufacturing Costs to Work In Process Job cost sheet Used to record costs of a specific job Used to determine the total and unit costs of a completed job Postings to job cost sheets are made daily The job cost sheet is the subsidiary ledger for the control account Work in Process. Each entry to a Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.

Measuring Direct Materials Cost

Job-Order Cost Accounting

Manufacturing Overhead Application The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

Determining Predetermined Overhead Rates Predetermined overhead rates are calculated using a three-step process. Estimate the level of production for the period. Estimate total amount of the allocation base for the period. Estimate total manufacturing overhead costs. POHR = ÷

Job-Order Cost Accounting

Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.

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.

Job-Order Costing Document Flow Summary Materials used may be either direct or indirect. Direct materials Job Cost Sheets Materials Requisition Indirect materials Manufacturing Overhead Account

Job-Order Costing Document Flow Summary An employee’s time may be either direct or indirect. Direct Labor Job Cost Sheets Employee Time Ticket Indirect Labor Manufacturing Overhead Account

Job-Order Costing Document Flow Summary Materials Requisition Other Actual OH Charges Employee Time Ticket Indirect Material Manufacturing Overhead Account Indirect Labor POHR rate used to apply overhead Job Cost Sheets

The Purchase and Issue of Raw Materials Material l. Direct Purchases Materials l. Indirect Materials l Mfg. Overhead Actual Applied l. Indirect Materials Work in Process (Job Cost Sheet) Direct Materials l

The Recording of Labor Costs Salaries and Wages Payable Direct Labor l. Indirect Labor l Mfg. Overhead Actual l. Indirect Materials l. Indirect Labor Applied Work in Process (Job Cost Sheet) Direct Materials l. Direct Labor l

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.

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.

Job Order Summary • When developing a product costing system, there are three choices that must be made: – Cost accumulation method (i. e. , job or process costing) – Cost measurement method (i. e. , actual, normal, or standard costs) – Overhead assignment method (i. e. , volume-based or activity-based) • A firm’s competitive strategy should affect its cost system design choices

Job Order Summary • Job costing is a product costing system that accumulates costs and assigns them to specific jobs, customers, projects, or contracts • At the end of the period the Factory Overhead account should be closed out to zero (i. e. , over- or underapplied overhead must be disposed of), using one of two methods: – Close the over/underapplied overhead entirely to the CGS account – Allocate (prorate) the over/underapplied overhead to the ending inventory and CGS accounts

Job Order Summary • Service industries use job costing with a focus on direct labor • Operation costing is a hybrid costing system that uses job costing to assign direct material costs to jobs and a departmental approach to assign conversion costs (DL and factory overhead) to products or services

Systems Design: Process Costing

Process Costing Nature of Process Cost Systems Uses Similarities and differences Process cost flow Assigning manufacturing costs Equivalent Units Weightedaverage method Refinements Production cost report Comprehensive Example of Process Costing Physical units Equivalent units of production Unit production costs Cost reconciliation schedule Production cost report Costing systems – Final comments

Nature of Process Cost Systems Use to apply costs to similar products that are mass produced in a continuous fashion Examples include the production of Ice Cream, Cereal, Paint, and Soft Drinks Once started, production continues until product is completed; processing is the same for the entire run

Comparison of Products Produced Under Process and Job Order Cost Systems

Job Order Cost and Process Cost Flow Job Order Cost Systems Costs are assigned to each job. Products have unique characteristics. Process Cost Systems Costs are tracked through a series of connected manufacturing processes or departments. Products are uniform or relatively homogeneous and produced in a large volume.

Job Order Cost vs Process Cost Flow

Similarities and Differences in Cost Systems Similarities Both costing systems track the three manufacturing cost elements: direct materials, direct labor, and manufacturing overhead. The accumulation of costs is the same in both systems. Flow of costs are assigned to the same general ledger accounts in both costing systems. However, the methods of assigning the costs differ significantly.

Similarities and Differences in Cost Systems Differences The number of work in process accounts Job Order – uses only one work in process account Process - uses multiple work in process accounts Documents used to track costs Job Order - charges to individual jobs and summarizes on job cost sheets Process – summarizes in production cost reports for each department

Similarities and Differences in Cost Systems Differences The point at which costs are totaled Job Order – totaled when job is completed Process - totaled at end of period of time Unit cost computation Job Order – total cost per job divided by units in job Process – total manufacturing costs for the period divided by units produced during the period

Major Differences Between Job Order and Process Cost Systems

Quick Check Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors.

Let’s Review Which of the following items is not a characteristic of a process cost system? a. Once production begins, it continues until the finished product emerges b. The focus is on continually producing homogenous products. c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead. d. The products produced are heterogenous in nature.

Comparing Job-Order and Process Costing Direct Materials Direct Labor Manufacturing Overhead Work in Process Finished Goods Cost of Goods Sold

Comparing Job-Order and Process Costing Direct Materials Direct Labor Manufacturing Overhead Costs are traced and applied to departments in a process cost system. Processing Department Finished Goods Cost of Goods Sold

Process Cost Flows: The Flow of Raw Materials (in T-account form) Raw Materials • Direct Materials Work in Process Department A • Direct Materials Work in Process Department B • Direct Materials

Process Cost Flows: The Flow of Labor Costs (in T-account form) Salaries and Wages Payable • Direct Labor Work in Process Department A • Direct Materials • Direct Labor Work in Process Department B • Direct Materials • Direct Labor

Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form) Work in Process Department A Manufacturing Overhead • Actual Overhead • Overhead Applied to Work in Process • Direct Materials • Direct Labor • Applied Overhead Work in Process Department B • Direct Materials • Direct Labor • Applied Overhead

Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form) Work in Process Department A • Direct Transferred Materials to Dept. B • Direct Labor • Applied Overhead Department A Work in Process Department B • Direct Materials • Direct Labor • Applied Overhead • Transferred from Dept. A Department B

Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form) Work in Process Department B • Direct • Cost of Materials Goods • Direct Manufactured Labor • Applied Overhead • Transferred from Dept. A Finished Goods • Cost of Goods Manufactured

Equivalent Units – The Basic Idea Two half completed products are equivalent to one complete product. + = 1 So, 10, 000 units 70% complete are equivalent to 7, 000 complete units.

Equivalent Units of Production Weighted-Average Method The weighted-average method. . . 1. Makes no distinction between work done in prior or current periods. 2. Blends together units and costs from prior and current periods. 3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.

Compute and Apply Costs The formula for computing the cost per equivalent unit is: Cost per equivalent = unit Cost of beginning Work in Process + Cost added during Inventory the period Equivalent units of production

Operation Costing Operation cost is a hybrid of job-order and process costing because it possesses attributes of both approaches Operation costing is commonly used when batches of many different products pass through the same processing department.

Actual Costing Actual costs of manufacturing overhead are entered in Work-in. Process Inventory vs. Normal Costing Manufacturing overhead is applied to Work-in. Process Inventory using a predetermined overhead rate

Departmental Production Report ÊAnalysis of physical flow of units. ËCalculation of equivalent units. ÌComputation of unit costs. ÍAnalysis of total costs.

Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Material Costs charged to batches as in job-order costing. Process Costing Conversion costs assigned to batches as in process costing.

End of Chapter I’m ready to process some leisure time. Hal Jazaa’ul Ikhsan Illa Ikhsan