GNBCY Chap08 Job Order Costing

Job-Order Costing Chapter 8

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Learning Objective 1

Distinguish between process costing and joborder costing, and identify companies that would use each costing method.

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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.

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Types of Product Costing Systems

Process Costing

Job-order Costing

v 

A company produces many units of a single product.companies: Example

v 

1.One Asiaunit Pulp Paper (paper manufacturing) of&product is indistinguishable from units of(Instant product.Noodle Producer) 2.other Kang-shi-fu 3.The Coca-Cola bottling identical(mixing nature and of each unit beverages) of product enables

v 

assigning the same average cost per unit.

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Types of Product Costing Systems

Process Costing

Job-order Costing

v 

Many different products are produced each period.

v 

Products are manufactured to order.

v 

The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

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Types of Product Costing Systems

Process Costing

Job-order Costing

v  Example Many companies: different products are produced each period.

Aircraft Corporation of China v  1. Commercial Products are manufactured to order.

(aircraft manufacturer) v  The unique nature of each order requires tracing or 2. Tata Consultancy Services (Information Technology) allocating costs to each job, and maintaining cost 3. Hong Kong Engineering (aircraft maintenance) records forAircraft each job.

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Comparing Process and Job-Order Costing Number of jobs worked Cost accumulated by Average cost computed by

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Job-Order Many

Process Single Product

Individual Job

Department or Process

Job

Department or Process

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Quick Check ü 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.

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Quick Check ü 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.

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Learning Objective 2

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

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Job-Order Costing – An Overview

Direct Materials Job No. 1 Direct Labor

Manufacturing Overhead

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Job No. 2 Job No. 3

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Charge direct material and direct labor costs to each job as work is performed. 11

Indirect Manufacturing Costs

Direct Materials Job No. 1 Direct Labor

Manufacturing Overhead

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Job No. 2 Job No. 3

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Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. 12

The Job Cost Sheet PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate

Date Initiated 3-4-09 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

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Units Shipped Date Number Balance

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Measuring Direct Materials Cost PearCo Materials Requisition Form Requisition No. X7 - 6890 Job No. A - 143 Department B3 Description 2 x 4, 12 feet 1 x 6, 12 feet

Quantity 12 20

Authorized Signature © 2015 McGraw-Hill Educa4on

Date 3-4-09

$

Unit Cost Total Cost 3.00 $ 36.00 4.00 80.00 $ 116.00

Will E. Delite!

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Measuring Direct Materials Cost PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate

Date Initiated 3-4-09 Date Completed Units Completed

Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

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$

116

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Units Shipped Date Number Balance

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Measuring Direct Labor Costs PearCo Employee Time Ticket Time Ticket No.

36

Employee I. M. Skilled Starting Time 0800

Ending Time 1600

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3/5/2009

Station

42

Hours Hourly Completed Rate Amount 8.00 $ 11.00 $ 88.00

Totals

Supervisor

Date

8.00

$

11.00 $

88.00

Job No. A-143

A-143

C. M. Wo r km an Garrison, Noreen, Brewer, Cheng & Yuen

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Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate

Date Initiated 3-4-09 Date Completed Units Completed

Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116 36 8 $ 88

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

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$ $

116 88

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Units Shipped Date Number Balance

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Learning Objective 3

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

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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.

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

POHR =

Estimated total manufacturing 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. © 2015 McGraw-Hill Educa4on

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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. © 2015 McGraw-Hill Educa4on

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Determining Predetermined Overhead Rates Predetermined overhead rates are calculated using a three-step process.

Œ



Ž

Estimate the level of production for the period.

Estimate total amount of the allocation base for the period.

Estimate total manufacturing overhead costs.

POHR = Ž ÷  © 2015 McGraw-Hill Educa4on

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Application of Manufacturing Overhead Based on estimates, and determined before the period begins.

Overhead applied = POHR × Actual activity Actual amount of allocation is based upon the actual level of activity (normal costing system).

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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 POHR = 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. © 2015 McGraw-Hill Educa4on

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Learning Objective 4

Compute the total cost and average cost per unit of a job.

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Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate

Date Initiated 3-4-09 Date Completed 3-5-09 Units Completed 2

Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

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$ $ $

116 88 32

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Units Shipped Date Number Balance

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Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate

Date Initiated 3-4-09 Date Completed 3-5-09 Units Completed 2

Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

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$ $ $ $ $

116 88 32 236 118

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Units Shipped Date Number Balance

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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 was produced. Fixed overhead would not change if another unit was produced, so the incremental cost of another unit is something less than $118.

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Quick Check ü Job WR53 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 WR53?

a. $200. b. $350. c. $380. d. $730.

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Quick Check ü Job WR53 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 WR53?

a. $200. b. $350. c. $380. d. $730.

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POHR = $760,000/20,000 hours

$38

Direct materials $200 Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 Total cost $730 Garrison, Noreen, Brewer, Cheng & Yuen

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Learning Objective 5

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

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Job-Order Costing Document Flow Summary

A sales order is the basis of issuing a production order.

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A production order initiates work on a job.

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Job-Order Costing Document Flow Summary

Materials used may be either direct or indirect.

Direct materials

Job Cost Sheets

Materials Requisition Indirect materials

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Manufacturing Overhead Account

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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

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Manufacturing Overhead Account 34

Job-Order Costing Document Flow Summary Materials Requisition

Other Actual OH Charges Employee Time Ticket © 2015 McGraw-Hill Educa4on

Indirect Material

Manufacturing Overhead Account

POHR rate used to apply overhead

Job Cost Sheets

Indirect Labor Garrison, Noreen, Brewer, Cheng & Yuen

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Learning Objectives 5 and 8 Understand the flow of costs in a joborder costing system and prepare appropriate journal entries to record costs. Use T-accounts to show the flow of costs in a job-order costing system.

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Job-Order Costing: The Flow of Costs The transactions (in Taccount and journal entry form) that capture the flow of costs in a job-order costing system are illustrated on the following slides.

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The Purchase and Issue of Raw Materials 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

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

Description

Post. Ref.

Raw Materials Accounts Payable

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Debit

Credit

XXXXX XXXXX

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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. GENERAL JOURNAL Date

Description

Post. Ref.

Work in Process Manufacturing Overhead Raw Materials

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Debit

Credit

XXXXX XXXXX XXXXX

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The Recording of Labor Costs Salaries and Wages Payable

Work in Process (Job Cost Sheet)

Direct Labor l Indirect Labor

Direct Materials l Direct Labor

l 

l 

Mfg. Overhead Actual Applied l Indirect Materials l Indirect Labor © 2015 McGraw-Hill Educa4on

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

Description

Post. Ref.

Work in Process Manufacturing Overhead Salaries and Wages Payable

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Debit

Credit

XXXXX XXXXX XXXXX

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Recording Actual Manufacturing Overhead Salaries and Wages Payable

Work in Process (Job Cost Sheet)

Direct Labor l Indirect Labor

Direct Materials l Direct Labor

l 

l 

Mfg. Overhead Actual Applied l Indirect Materials l Indirect Labor l Other Overhead © 2015 McGraw-Hill Educa4on

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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. GENERAL JOURNAL Date

Description

Post. Ref.

Manufacturing Overhead Accounts Payable Property Taxes Payable Prepaid Insurance Accumulated Depreciation

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Debit

Credit

XXXXX XXXXX XXXXX XXXXX XXXXX

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Learning Objective 6

Apply overhead cost to Work in Process using a predetermined overhead rate.

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Applying Manufacturing Overhead Salaries and Wages Payable

Work in Process (Job Cost Sheet)

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 © 2015 McGraw-Hill Educa4on

Direct Materials l Direct Labor l Overhead Applied l 

If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

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

Description

Post. Ref.

Work in Process Manufacturing Overhead

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Debit

Credit

XXXXX XXXXX

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Accounting for Nonmanufacturing Cost Nonmanufacturing costs are 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. © 2015 McGraw-Hill Educa4on

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

Description

Post. Ref.

Debit

Salaries Expense Salaries Payable

XXXXX

Advertising Expense Accounts Payable

XXXXX

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Credit

XXXXX

XXXXX

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Learning Objective 7

Prepare schedules of cost of goods manufactured and cost of goods sold.

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Transferring Completed Units Work in Process (Job Cost Sheet ) Direct Materials l Direct Labor l Overhead Applied l 

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Cost of Goods Mfd.

l 

Finished Goods Cost of Goods Mfd.

l 

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

Description

Post. Ref.

Finished Goods Work in Process

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Debit

Credit

XXXXX XXXXX

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Transferring Units Sold Work in Process (Job Cost Sheet) Direct Materials l Direct Labor l Overhead Applied l 

Cost of Goods Mfd.

l 

Finished Goods Cost of Goods Mfd.

l 

Cost of Goods Sold

l 

Cost of Goods Sold Cost of Goods Sold

l 

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Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record the Cost of Goods Sold. GENERAL JOURNAL Date

Description

Post. Ref.

Debit

Accounts Receivable Sales

XXXXX

Cost of Goods Sold Finished Goods

XXXXX

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Credit

XXXXX

XXXXX

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Learning Objective 9 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

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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. © 2015 McGraw-Hill Educa4on

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.

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Overhead Application Example PearCo’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 PearCo’s jobs during the year? Use PearCo’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

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Overhead Application Example PearCo’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 PearCo’s jobs during the year? Use PearCo’s predetermined overhead PearCo has overapplied $4.00 per direct labor hour. overheadrate forofthe year

by $30,000. What will PearCo Applied do? Overhead During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

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Quick Check ü Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.

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Quick Check ü Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 andOverhead a predetermined overhead Applied rate of $4.00 per machine$4.00 hour. Inc. worked perTiger, hour × 290,000 hours = $1,160,000 290,000 machine hours during the period. Tiger’s manufacturing overhead is Underapplied Overhead a. $50,000 overapplied.

$1,210,000 - $1,160,000 = $50,000

b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.

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Disposition of Under- or Overapplied Overhead PearCo’s Method

$30,000 may be allocated to these accounts.

$30,000 may be closed directly to cost of goods sold.

OR Work in Process

Finished Goods

Cost of Goods Sold © 2015 McGraw-Hill Educa4on

Cost of Goods Sold Garrison, Noreen, Brewer, Cheng & Yuen

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Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead

PearCo’s Cost of Goods Sold

Actual Overhead overhead applied costs to jobs

Unadjusted Balance $30,000 Adjusted Balance

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$650,000 $30,000

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$680,000 $30,000 overapplied

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Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below: Work in process Finished Goods Cost of Goods Sold Total

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Amount $ 68,000 204,000 408,000 $ 680,000

Percent of Total 10% 30% 60% 100%

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Allocation of $30,000 $ 3,000 9,000 18,000 $ 30,000

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Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead:

Work in process Finished Goods Cost of Goods Sold Total

Amount $ 68,000 204,000 408,000 $ 680,000

Percent of Total 10% 30% 60% 100%

Allocation of $30,000 $ 3,000 9,000 18,000 $ 30,000

10% × $30,000

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Allocating Under- or Overapplied Overhead Between Accounts Work in process Finished Goods Cost of Goods Sold Total

Amount $ 68,000 204,000 408,000 $ 680,000

Percent of Total 10% 30% 60% 100%

Allocation of $30,000 $ 3,000 9,000 18,000 $ 30,000

GENERAL JOURNAL Date

Description

Post. Ref.

Manufacturing Overhead Work in Process Inventory Finished Goods Inventory Cost of Goods Sold © 2015 McGraw-Hill Educa4on

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Debit

Credit

30,000 3,000 9,000 18,000 65

Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method If Manufacturing Overhead is . . . UNDERAPPLIED

Alternative 1 Close to Cost of Goods Sold

Alternative 2

INCREASE Cost of Goods Sold

INCREASE Work in Process Finished Goods Cost of Goods Sold

DECREASE Cost of Goods Sold

DECREASE Work in Process Finished Goods Cost of Goods Sold

(Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH)

Allocation

More accurate but more complex to compute. © 2015 McGraw-Hill Educa4on

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Quick Check ü What effect will the overapplied overhead have on PearCo’s net operating income?

a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

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Quick Check ü What effect will the overapplied overhead have on PearCo’s net operating income?

a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

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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. © 2015 McGraw-Hill Educa4on

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Job-Order Costing in Service Companies Job-order costing is used in many different types of service companies.

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The Use of Information Technology Technology plays an important part in many job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.

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Activity-based Job-order Costing Appendix 8A

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Learning Objective 10 (Appendix 8A) Apply Job-order Costing in Activity-based Costing Environment.

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Activity-based Job-order Costing: Example at Dell

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Activity-based Job-order Costing: Example at Paperart

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End of Chapter 8

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