Job-Order, Process, and Hybrid Cost Systems

1. Job-Order, Process, and Hybrid Cost Systems Chapter 12

2. Job-Order Cost Systems ProcessCosting Job-OrderCosting • Product costs are traced to individual inventory items. • Products are manufactured to order. • Cost records must be maintained for each distinct product or job.

3. ProcessCosting Job-OrderCosting Job-Order Cost Systems • Typical job-order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals • Law firms

4. ProcessCosting Job-OrderCosting Process Cost Systems • Used for production of small, identical, low cost items. • Costs cannot be directly traced to each unit of product. • Costs are evenly distributed across total production by dividing total product cost by the number of units produced.

5. ProcessCosting Job-OrderCosting Process Cost Systems Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill

6. Hybrid Costing Hybrid costing employs some aspectsof both job-order and process costing. Job-orderHybrid Costing Process Costing (Products produced in batches)Costing Material Costs Chargedto batches as injob-order costing. Labour and overhead costs assigned to batches as in process costing.

7. Job-Order Cost Flow Receive orders from customers Begin production Schedulejobs Ordermaterials

8. Job-Order Cost Flow Manufacturingoverhead (OH) Applied to eachjob using apredeterminedrate Directmaterial Traced directly to each job THE JOB Traced directly to each job Direct labour

9. Job-Order Cost Flow Charge direct material and direct labour costs to each job as work is performed. Direct Materials Job No. 1 Direct Labour Job No. 2 Manufacturing Overhead Job No. 3

10. Job-Order Cost Flow Direct Materials Apply overhead to each job using a predeter-mined rate. Job No. 1 Direct Labour Job No. 2 Manufacturing Overhead Job No. 3

11. Documentation in a Job-OrderCost System The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate

12. Documentation in a Job-OrderCost System

13. Documentation in a Job-OrderCost System Amaterials requisition form is used to authorize the use of materials on a job. Let’s see one

14. Documentation in a Job-OrderCost System Will E. Delite

15. Documentation in a Job-OrderCost System Cost of material is charged to job A-143. Type, quantity, and total cost of material charged to job A-143. Will E. Delite

16. Documentation in a Job-OrderCost System

17. Documentation in a Job-OrderCost System Workers usetime ticketsto record the time spent on each job. Let’s see one

18. Documentation in a Job-OrderCost System

19. Documentation in a Job-OrderCost System

20. Documentation in a Job-OrderCost System Applymanufacturing overhead to jobs using apredetermined overhead rate of $4 per direct labour hour (DLH). Let’s do it

21. Documentation in a Job-OrderCost System

22. Documentation in a Job-OrderCost System Let’s summarize the document flow we have been discussing in a job-order costing system.

23. Documentation in a Job-OrderCost System Materials usedmay be eitherdirect orindirect. Job Cost Sheets Direct materials MaterialsRequisition Manufacturing Overhead Account Indirect materials

24. An employee’stime may be eitherdirect or indirect. Documentation in a Job-OrderCost System Job Cost Sheets Direct Labour Employee Time Ticket Manufacturing Overhead Account Indirect Labour

25. Documentation in a Job-OrderCost System IndirectLabour EmployeeTime Ticket OtherActual OHCharges Manufacturing Overhead Account AppliedOverhead Job Cost Sheets MaterialsRequisition IndirectMaterial

26. Job-Order Cost Flow Let’s return to WoodCo and see what we will do if actual and applied overhead are not equal.

27. Job-Order Cost Flow WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labour hours. How much total overhead was applied toWoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rateof $4.00 per direct labour hour.

28. Job-Order Cost Flow WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labour hours. How much total overhead was applied toWoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rateof $4.00 per direct labour hour. SOLUTION Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH =$680,000

29. Job-Order Cost Flow WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labour hours. How much total overhead was applied toWoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rateof $4.00 per direct labour hour. WoodCo hasoverappliedoverhead for the yearby $30,000. What willWoodCo do? SOLUTION Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH =$680,000

30. Job-Order Cost Flow WoodCo’s Method $30,000may be allocatedto these accounts. $30,000 may beclosed directly to cost of goods sold. OR Work inProcess FinishedGoods Cost of Goods Sold Cost of Goods Sold

31. Job-Order Cost Flow WoodCo’sMfg. Overhead WoodCo’s Costof Goods Sold Unadjusted Balance Actualoverheadcosts $650,000 OverheadAppliedto jobs $680,000 $30,000 $30,000 AdjustedBalance $30,000 overapplied

32. Job-Order Cost Flow WoodCo’s Method

33. Job-Order Cost Flow 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.

34. Job-Order Cost Flow 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. Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

35. Job-Order Cost Flow Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decreasecost of goods sold by $60,000. a. True b. False

36. Job-Order Cost Flow Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decreasecost of goods sold by $60,000. a. True b. False If overhead is underapplied, cost of goods sold is understated. The adjustment willincreasecost of goods sold.

37. Process Costing Let’s turn our attention to process cost systems.

38. Job-order costing Costs accumulated by thejob. Work in process has a job-cost sheet for each job. Many unique, high costjobs. Jobs built tocustomerorder. Process costing Costs accumulated by department or process. Work in process has a production report for each batch of products. A few identical,low costproducts. Unitscontinuouslyproduced for inventory. Comparison of Job-Order Costing and Process Costing

39. Differences Between Job-Order and Process Costing The work-in-process account consists of individual jobs in ajob-ordercost system. Direct Material FinishedGoods Jobs Direct Labour ManufacturingOverhead Cost of GoodsSold

40. Differences Between Job-Order and Process Costing The work-in-process account consists of batches of productsin aprocess cost system. Direct Material FinishedGoods Products Direct Labour ManufacturingOverhead Cost of GoodsSold

41. Equivalent Units: A Key Concept • Costs are accumulated for a period of timefor products in work-in-process inventory. • Products in work-in-process inventory at the beginning and end of the period are only partially complete. • Equivalent unitsis a concept expressing these partially completed products as a smaller number of fully completed products.

42. Equivalent Units: A Key Concept Two one-half completed products are equivalent to one completed product. + = So, 10,000 units 70 percent completeareequivalentto 7,000 complete units.

43. Equivalent Units For the current period, Jones started15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

44. 10,000 units + (5,000 units × .30) = 11,500 equivalent units Equivalent Units For the current period, Jones started15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

45. Calculating and Using Equivalent Units of Production To calculate the cost perequivalent unit for the period: Cost perequivalent unit Costs for the periodEquivalent units for the period =

46. Equivalent Units If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

47. $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit Equivalent Units If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

48. Computation of equivalent units. • Determination of cost per equivalent unit. • Allocation of total cost to goods transferred and ending WIP inventory. Cost of Production Report Cost of ProductionReport

49. Equivalent Units of Production –Weighted-Average Method The weighted-average method . . . • Makes no distinction between work done in the prior period and work done in the current period. • Blends together units and costs from the prior period and the current period. The FIFO method is a morecomplex method and israrely used in practice.

50. Cost of Production Report At this point, we need to look at an example to illustrate the departmental cost of production report.