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Systems Design: Job-Order Costing

Systems Design: Job-Order Costing. Chapter 3. Types of Product Costing Systems. Process Costing. Job-order Costing. 3- 2. Process Costing

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Systems Design: Job-Order Costing

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  1. Systems Design: Job-Order Costing Chapter 3

  2. Types of Product Costing Systems ProcessCosting Job-orderCosting 3-2

  3. Process Costing • A process costing system is used in situations where the company produces many units of a single product for long periods. Examples include producing paper at Weyerhaeuser, refining aluminum ingots at Reynolds Aluminum, mixing and bottling beverages at Coca Cola, and making wieners at Oscar Meyer. All of these industries are characterized by an essentially homogeneous product that flows through the production process on a continuous basis. • Process costing systems accumulate costs in a particular operation or department for an entire period (month, quarter, year) and then divide this total cost by the number of units produced during the period. The basic formula for process costing is: Total manufacturing cost Unit product cost = Total units produced

  4. Job-Order Costing • A job-order costing system is used in situations where many different products are produced each period. For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. • A particular order might consist of 1,000 stonewashed men's blue denim jeans. This order of 1,000 jeans is called a batch or a job. • In a job-order costing system, costs are traced and allocated to jobs and then the costs of the job are divided by the number of units in the job to arrive at an average cost per unit.

  5. Job-Order Costing • Other examples of situations where job-order costing would be used include large-scale construction projects managed by Bechtel International, commercial aircraft produced by Boeing, greeting cards designed and printed by Hallmark, and airline meals prepared by LSG SkyChefs. All of these examples are characterized by diverse outputs. • Each project is unique and different from every other-the company may be simultaneously constructing a dam in Zaire and a bridge in Indonesia. Likewise, each airline orders a different type of meal from LSG SkyChefs' catering service.

  6. Job-Order Costing • Job-order costing is also used extensively in Service Industries. Hospitals, law firms, movie studios, accounting firms, advertising agencies, and repair shops, for example, all use a variation of job-order costing to accumulate costs for accounting and billing purposes. • Although the detailed example of job-order costing provided in the following section deals with a manufacturing company, the same basic concepts and procedures are used by many service organizations.

  7. 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 3-7

  8. Comparing Process and Job-Order Costing 3-8

  9. Measuring Direct Materials Cost • Bill of Materials - A bill of materials is a document that lists the type and quantity of each type of direct material needed to complete a unit of product. • Production Order - A production order is issued when an agreement has been reached with the customer concerning the quantities, prices, and shipment date for the order. The Production Department then prepares a materials requisition form. 3-9

  10. Measuring Direct Materials Cost • The Production Department then prepares a materials requisition form. • Materials Requisition Form - The materials requisition form is a detailed source document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials. • The form is used to control the flow of materials into production and also for making entries in the accounting records. 3-10

  11. Materials Requisition Form

  12. Measuring Direct Materials Cost • After being notified that the production order has been issued, the Accounting Department prepares a job cost sheet. Job Cost Sheet • A job cost sheet is a form prepared for a job that records the materials, labor, and manufacturing overhead costs charged to that job. 3-12

  13. Job Cost Sheet

  14. Job Cost Sheet • The requisitioned material is recorded on the job cost sheet in order to make it easier to identify the source document for the direct materials charge. • Job cost sheets serve as a subsidiary ledger to the Work in Process account because the detailed records that they provide for the jobs in process add up to the balance in Work in Process.

  15. Measuring Direct Materials Cost 3-15

  16. Measuring Direct Labor Cost • Direct labor cost is handled similarly to direct materials cost. • Direct labor consists of labor charges that are easily traced to a particular job. • Labor charges that cannot be easily traced directly to any job are treated as part of manufacturing overhead (called indirect labor and includes tasks such as maintenance, supervision, and cleanup).

  17. Measuring Direct Labor Cost • Workers use time tickets to record the time they spend on each job and task. • Time Ticket - A completed time ticket is an hour-by-hour summary of the employee's activities throughout the day. • When working on a specific job, the employee enters the job number on the time ticket and notes the amount of time spent on that job. When not assigned to a particular job, the employee records the nature of the indirect labor task (such as cleanup and maintenance) and the amount of time spent on the task.

  18. Measuring Direct Labor Cost • At the end of the day, the time tickets are gathered and the Accounting Department enters • the direct labor-hours and costs on individual job cost sheets. • The daily time tickets are source documents that are used as the basis for labor cost entries into the accounting records.

  19. Employee Time Ticket

  20. Measuring Direct Labor Cost • The system we have just described is a manual method for recording and posting labor costs. • Today many companies rely on computerized systems and no longer record labor time by hand on sheets of paper. • One computerized approach uses bar codes to capture data. Each employee and each job has a unique bar code. When beginning work on a job, the employee scans three bar codes using a handheld device much like the bar code readers at grocery store check-outs.

  21. Job-Order Cost Accounting 3-21

  22. Manufacturing Overhead Application Assigning manufacturing overhead to a specific job involves some difficulties: • Manufacturing overhead is an indirect cost. This means that it i s either impossible or difficult to trace these costs to a particular product or job. • Manufacturing overhead consists of many different items ranging from the grease used in machines to the annual salary of the production manager. • Even though output may fluctuate due to seasonal or other factors, total manufacturing overhead costs tend to remain relatively constant due to the presence of fixed costs. 3-22

  23. Manufacturing Overhead Application • Overhead costs are usually assigned to products using an Allocation Process. • This allocation of overhead costs is accomplished by selecting an Allocation Base that is common to all of the company's products and services. • Allocation Base - An allocation base is a measure such as direct labor-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services. • The most widely used allocation bases are direct labor-hours and direct labor cost, with machine-hours and even units of product (where a company has only a single product) also used to some extent. 3-23

  24. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total amount of the allocation base 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. Overhead applied to = Predetermined X Amount of the a a particular job overhead rate allocation incurred by job 3-24

  25. Determining Predetermined Overhead Rates Predetermined overhead rates are calculated using a three-step process. Estimate total amount of the allocation base for the period. Estimate total manufacturing overhead costs.  Estimate the level of production for the period. POHR =  ÷  3-25

  26. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total amount of the allocation base Manufacturing Overhead Application • The company has estimated its total manufacturing overhead costs is $320,000 for the year and its total direct labor-hours will be 40,000. • Using above formula, the predetermined overhead rate for the year would be $8 per direct labor-hour. 3-26

  27. Job-Order Cost Accounting 3-27

  28. A Completed Job Cost Sheet

  29. Direct materials Indirect materials Job-Order CostingDocument Flow Summary Materialsused may beeither direct orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account 3-29

  30. Direct Labor Indirect Labor Job-Order CostingDocument Flow Summary Anemployee’stime may be eitherdirect orindirect. Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account 3-30

  31. IndirectMaterial POHR rate used to apply overhead IndirectLabor Job-Order CostingDocument Flow Summary MaterialsRequisition OtherActual OHCharges Manufacturing Overhead Account Job Cost Sheets EmployeeTime Ticket 3-31

  32. 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 3-32

  33. Cost Flows – Material Purchases Raw material purchases are recorded in aninventory account. 3-33

  34. 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. 3-34

  35. 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 3-35

  36. 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. • IndirectLabor • OtherOverhead 3-36

  37. Cost ofGoodsMfd. • Cost ofGoodsMfd. Transferring Completed Units Work in Process(Job Cost Sheet ) Finished Goods • Direct Materials • Direct Labor • Overhead Applied 3-37

  38. Process Costing and Job-Order Costing Which would be more appropriate in each of the following situations-job-order costing or process costing? • a. A custom ship builder (JOC) • b. A golf course designer(JOC) • c. A potato chip manufacturer (PC) • d. A business consultant (JOC) • e. A plywood manufacturer(PC/JOC)

  39. Process Costing and Job-Order Costing • f. A soft-drink bottler (PC) • g. A film studio(JOC) • h. A firm that supervises bridge construction projects (JOC) • i. A manufacturer of fine custom jewelry (JOC) • j. A made-to-order clothing factory (JOC) • k . A factory making one personal computer model (JOC) • l. A fertilizer factory (PC/JOC)

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