Costing Systems: Job Order Costing

1. Costing Systems: Job Order Costing 20

2. Product Unit Cost Information and the Management Process OBJECTIVE 1: Explain why unit cost is important in the management process.

3. Product Unit Cost Information and the Management Process • In the planning stage, managers use cost information to • Develop budgets. • Establish prices. • Set sales goals.

4. Product Unit Cost Information and the Management Process • In the planning stage, managers use cost information to (cont.) • Plan production volume. • Estimate product or service unit costs. • Determine human resource needs.

5. Product Unit Cost Information and the Management Process • During the year, managers use cost information to • Make decisions about controlling costs. • Manage the company’s volume of activity. • Ensure the quality of products or services. • Negotiate prices.

6. Product Unit Cost Information and the Management Process • When evaluating performance, managers use cost information to • Evaluate actual and planned performance. • Adjust planning and decision-making strategies.

7. Product Unit Cost Information and the Management Process • When communicating in reports, managers use cost information to • Determine inventory balances and the cost of goods or services sold for the financial statements. • Prepare internal reports that compare actual unit costs and targeted costs.

9. Product Costing Systems OBJECTIVE 2: Distinguish between the two basic types of product costing systems, and identify the information each provides.

10. Table 1: Characteristics of Job Order Costing and Process Costing Systems

11. Product Costing Systems • To track product costs throughout the management process, an organization may use a job order costing system, a process costing system, or a hybrid version of the two.

12. Product Costing Systems • The type of product costing system an organization uses depends on the nature of its production process.

13. Product Costing Systems • Organizations whose units of output are quite different—that is, they make custom, unique, or special-order products—typically use job order costing. • A job order costing system traces the costs of direct materials, direct labor, and overhead to a specific batch of products or a specific job order. • A job order is a customer order for a specific number of specially designed, made-to-order products.

14. Product Costing Systems • Organizations whose units of output are quite different—that is, they make custom, unique, or special-order products—typically use job order costing. • A job order costing system traces the costs of direct materials, direct labor, and overhead to a specific batch of products or a specific job order. (cont.) • A job order cost card is the document on which all costs incurred in the production of a particular job order are recorded.

15. Product Costing Systems • Organizations that produce large amounts of similar products or liquids or that have a continuous flow of identical products typically use process costing. • Examples of products whose production flow makes them suitable for process costing include bricks, beverages, paint, and paper.

16. Product Costing Systems • Organizations that produce large amounts of similar products or liquids or that have a continuous flow of identical products typically use process costing. • A process costing system first traces the costs of direct materials, direct labor, and overhead to processes, departments, or work cells and then assigns an average cost per unit to the products produced by those processes, departments, or work cells.

18. Job Order Costing in a Manufacturing Company OBJECTIVE 3: Explain the cost flow in a manufacturer’s job order costing system.

19. Exhibit 1: The Job Order Costing System—Augusta, Inc.

20. Exhibit 1: The Job Order Costing System—Augusta, Inc.

21. Job Order Costing in a Manufacturing Company • Cost flows in a manufacturer’s job order costing system are recorded as follows: • The costs of materials are first charged to the Materials Inventory account and are recorded in the corresponding accounts in the Materials Inventory account’s subsidiary ledger.

22. Job Order Costing in a Manufacturing Company

23. Job Order Costing in a Manufacturing Company • Labor costs are first accumulated in the Factory Payroll account.

24. Job Order Costing in a Manufacturing Company • The various overhead costs (including indirect labor costs and indirect materials) are first charged to the Overhead account. • As products are manufactured, the costs of direct materials and direct labor are transferred to the Work in Process Inventory account and are recorded in a subsidiary ledger of job order cost cards that supports the Work in Process Inventory account.

25. Job Order Costing in a Manufacturing Company • Overhead costs applied at a predetermined overhead rate are charged to the Work in Process Inventory account and are recorded in that account’s subsidiary ledger. These charges are used to reduce the balance in the Overhead account.

26. Job Order Costing in a Manufacturing Company • When products and jobs are completed, the costs assigned to them are transferred to the Finished Goods Inventory account and are recorded in that account’s subsidiary ledger.

27. Job Order Costing in a Manufacturing Company • When the products are sold and shipped, their costs are transferred to the Cost of Goods Sold account.

28. Job Order Costing in a Manufacturing Company • Any balance in the Overhead account at the end of the period is closed to Cost of Goods Sold. • Underapplied overhead • Overapplied overhead

30. A Job Order Cost Card and the Computation of Unit Cost OBJECTIVE 4: Prepare a job order cost card, and compute a job order’s product or service unit cost.

31. Figure 1: Job Order Cost Card for a Manufacturing Company

32. Figure 2: Job Order Cost Card for a Service Organization

33. A Job Order Cost Card and the Computation of Unit Cost • In a job order costing system, all the costs of a particular job’s direct materials, direct labor, and overhead are accumulated on a job order cost card. • Because all manufacturing costs are accumulated in one Work in Process Inventory account, a subsidiary ledger made up of job order cost cards is needed to trace the costs of specific jobs.

34. A Job Order Cost Card and the Computation of Unit Cost • Product unit cost in a job order costing system is calculated as follows: • Total all manufacturing costs recorded on a particular job order cost card. • Divide total manufacturing costs by the number of units produced for that job.

35. A Job Order Cost Card and the Computation of Unit Cost • Service organizations use job order cost cards to record the costs of labor, materials and supplies, and overhead incurred in performing a particular job and to determine selling prices in cost-plus contracts.