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Chapter Three

Systems Design: Job-Order Costing. Chapter Three. Learning Objective 1. Distinguish between process costing and job-order costing and identify companies that would use each costing method. A company produces many units of a single product.

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Chapter Three

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  1. Systems Design: Job-Order Costing Chapter Three

  2. Learning Objective 1 Distinguish between process costing and job-order costing and identify companies that would use each costing method.

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

  4. A company produces many units of a single product. • One unit of product is indistinguishable from other units of product. • The identical nature of each unit of product enables assigning the same average cost per unit. Types of Product Costing Systems ProcessCosting Job-orderCosting Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)

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

  6. Many different products are produced each period. • Products are manufactured to order. • The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Types of Product Costing Systems ProcessCosting Job-orderCosting Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

  7. Comparing Process and Job-Order Costing

  8. Learning Objective 2 Identify the documents used in a job-ordercosting system.

  9. Job-Order Costing – An Overview Charge direct material and direct labor costs to each job as work is performed. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

  10. Job-Order Costing – An Overview Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

  11. PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-08 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units Shipped Direct Materials Date Number Balance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost The Job Cost Sheet

  12. Will E. Delite Measuring Direct Materials Cost

  13. PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-08 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116 Cost Summary Units Shipped Direct Materials $ 116 Date Number Balance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost Measuring Direct Materials Cost

  14. PearCo Employee Time Ticket Time Ticket No. 36 Date 3/5/2008 Employee I. M. Skilled Station 42 Starting Ending Hours Hourly Time Time Completed Rate Amount Job No. 0800 1600 8.00 $ 11.00 $ 88.00 A-143 Totals 8.00 $ 11.00 $ 88.00 A-143 Supervisor C. M. Workman Measuring Direct Labor Costs

  15. PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-08 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116 36 8 $ 88 Cost Summary Units Shipped Direct Materials $ 116 Date Number Balance Direct Labor $ 88 Manufacturing Overhead Total Cost Unit Product Cost Job-Order Cost Accounting

  16. Learning Objective 3 Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.

  17. 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: • It is impossible or difficult to trace overhead costs to particular jobs. • Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

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

  19. Application of Manufacturing Overhead Using a predetermined rate makes itpossible to estimate total job costs sooner. Actual overhead for the period is notknown until the end of the period. $

  20. Application of Manufacturing Overhead Predetermined overhead rates arecalculated using a three-step process.  Estimate the level ofproduction for the period.  Estimate the total amount of theallocation base in the denominator thatwould be required for that level of production.  Estimate the total manufacturing overheadcost in the numerator that would be incurredfor the estimated amount of the allocation base.

  21. Overhead applied = POHR × Actual activity Application of Manufacturing Overhead The predetermined overhead rate(POHR) is based on estimates and determined before the period begins. Actual amount of the allocation is based upon the actual level of activity.

  22. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period $640,000 POHR = 160,000 direct labor hours (DLH) Application of Manufacturing Overhead 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.

  23. Job-Order Cost Accounting

  24. Job-Order Cost Accounting

  25. Interpreting the Average Unit Cost The average unit cost should not be interpreted as the cost that would actually be incurred if anadditional unit were produced.Fixed overhead would not change if another unitwere produced, so the incremental cost of another unit is something less than $118.

  26. Job-Order CostingDocument Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.

  27. Direct materials Indirect materials Job-Order CostingDocument Flow Summary Materials usedmay be eitherdirect orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account

  28. Direct Labor Indirect Labor Job-Order CostingDocument Flow Summary An employee’stime may be eitherdirect or indirect. Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account

  29. IndirectLabor AppliedOverhead IndirectMaterial Job-Order CostingDocument Flow Summary EmployeeTime Ticket OtherActual OverheadCharges Manufacturing Overhead Account Job Cost Sheets MaterialsRequisition

  30. An Extended Exampleof Job-Order Costing Rand Company produces gold and silver commemorative medallions. At the beginning of April,Rand company had no finished goods inventory andone job (Job A) in process, a special mintingof 1,000 gold medallions commemorating theinvention of motion pictures. Manufacturing costsincurred to date on Job A total $30,000. Job A will becompleted in April and Job B, an order for 10,000 slivermedallions commemorating the fall of the Berlin Wall,will be started in April and finished in a subsequent month.

  31. An Extended Exampleof Job-Order Costing Given this information, we will nowtrack the flow of Rand Company’sraw materials, direct labor andoverhead costs for April and preparean income statement for the month.

  32. An Extended Exampleof Job-Order Costing

  33. An Extended Exampleof Job-Order Costing

  34. An Extended Exampleof Job-Order Costing

  35. Learning Objective 4 Apply overheadcosts to jobs usinga predeterminedoverhead rate.

  36. An Extended Exampleof Job-Order Costing • Let’s assume the following: • Rand’s predetermined overhead rate is $6 per machine hour. • During April, 10,000 machine hours were worked on Job A. • During April, 5,000 machine hours were worked on Job B.

  37. An Extended Exampleof Job-Order Costing

  38. Learning Objective 5 Determine underappliedor overapplied overhead.

  39. Underapplied or Overapplied Overhead 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.

  40. Rand’s Method $5,000can be allocatedto these accounts. $5,000 can beclosed directly to cost of goods sold. Work inProcess FinishedGoods Cost of Goods Sold Cost of Goods Sold Disposition of Under- or Overapplied Overhead OR

  41. Disposition of Under- or Overapplied Overhead We will alwaysassume that underapplied oroverapplied overhead is closed outto Cost of Goods Sold. Overapplied overhead isdeducted fromCost of Goods Sold. Underappliedoverhead isadded toCost of Goods Sold.

  42. Learning Objective 6 Use the direct method to determine cost of goods sold.

  43. Prepare an Income Statement Let’s recall some key facts from the Rand Company example: Job A, which consisted of 1,000 gold medallions, was completed during April,but Job B was not completed. The unit product cost for each of the 1,000 gold medallions included in Job A was $158 ($158,000 ÷ 1,000 units). The overhead for April was underappliedby $5,000.

  44. The Direct Method of DeterminingCost of Goods Sold 750 of the 1,000 gold medallions included in Job A were shipped to customers by the end of April. Cost of the medallions sold to customers 750 units @ $158 per unit = $118,500

  45. The Direct Method of DeterminingCost of Goods Sold

  46. Learning Objective 7 Use the indirect method to determine cost of goods sold.

  47. The Indirect Method of DeterminingCost of Goods Sold Let’s recall some key facts from the Rand Company example: The beginning work in process inventory was $30,000—the beginning balance on Job A’s cost sheet. There was no beginning finished goods inventory on April 1. The total manufacturing costs charged to jobs in April was $200,000 (direct materials of $50,000, direct labor of $60,000 and manufacturing overhead applied of $90,000). The ending work in process inventory is $72,000—the accumulated cost of Job B. • Manufacturing overhead was underapplied by $5,000.

  48. Computing Ending FinishedGoods Inventory 250 of the 1,000 gold medallions included in Job A were unsold and in ending finished goods inventory. Cost of the medallions in ending finished goods inventory 250 units @ $158 per unit = $39,500

  49. Computing Cost ofGoods Manufactured

  50. Computing Cost ofGoods Manufactured

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