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Systems Design: Job-Order Costing

Systems Design: Job-Order Costing. Learning Objective 1. Distinguish between process costing and job-order costing and identify companies that would use each costing method. Products are manufactured by orders. Many different products are produced each period.

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Systems Design: Job-Order Costing

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  1. Systems Design: Job-Order Costing

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

  3. Products are manufactured by orders. • Many different products are produced each period. • 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

  4. 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. Hyundai Construction (large scale construction) 3. CJ Entertainment (movie production)

  5. 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

  6. 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. Kleenex (napkin, toilet paper)2. Coca-Cola (mixing and bottling beverages)

  7. 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.

  8. 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.

  9. Learning Objective 2 Identify the documents used in a job-order costing system.

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

  11. Direct Manufacturing Costs 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

  12. PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-05 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

  13. Will E. Delite Measuring Direct Materials Cost

  14. Measuring Direct Materials Cost

  15. Measuring Direct Labor Costs

  16. Job-Order Cost Accounting

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

  18. Why Use an Allocation Base? • Manufacturing overhead is applied/allocatedto jobs that are in process. • An allocation base (such as direct labor hours, direct labor dollars, or machine hours) is used to allocate manufacturing overhead to individual jobs.

  19. Why Use an Allocation Base? Why? • We use an allocation base because: • Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. And it is impossible or very difficult to trace these kinds of overhead costs to particular jobs. • Actual manufacturing overhead costs may not known when the job is completed. Using a predetermined rate makes it possible to estimatetotal job costs sooner. • Although output may fluctuate during the period, many types of manufacturing overhead costs (e.g., plant depreciation) are fixed.

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

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

  22. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total allocation base for the coming period $640,000 POHR = 160,000 direct labor hours (DLH) Overhead Application Rate 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 costs 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 may be somewhat less than $118.

  26. Quick Check  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.

  27. Quick Check  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.

  28. Journal Entries (may be skipped with a focus on T-accounts) Understand the flow of costs in a job-order 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.

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

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

  31. Cost Flows – Material Purchases Raw material purchases are recorded in aninventory account.

  32. 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.

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

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

  35. Recording Actual Manufacturing Overhead Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor Mfg. Overhead Actual Applied • Indirect Materials • IndirectLabor • OtherOverhead

  36. 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.

  37. Learning Objective 5 Apply overhead cost to Work in Process using a predetermined overhead rate.

  38. Overhead Applied • OverheadApplied to Work inProcess Applying Manufacturing Overhead Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor Mfg. Overhead Actual Applied • Indirect Materials If actual and applied manufacturing overheadare not equal, a year-end adjustment is required: will be discussed later. • IndirectLabor • OtherOverhead

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

  40. Accounting for Nonmanufacturing Cost Non-manufacturing 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.

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

  42. Learning Objective 6 Prepare schedules of cost of goods manufactured and cost of goods sold.

  43. Cost ofGoodsMfd. • Cost ofGoodsMfd. Transferring Completed Units Work in Process(Job Cost Sheet) Finished Goods • Direct Materials • Direct Labor • Overhead Applied

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

  45. Cost ofGoodsSold • Cost ofGoodsSold Transferring Units Sold Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied Cost of Goods Sold

  46. 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.

  47. Learning Objective 8 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

  48. 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.

  49. Overhead Application Example PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours actually 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

  50. PearCo has overappliedoverhead for the yearby $30,000. What willPearCo do? 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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