Chapter 3

1. Chapter 3 Job Order Costing

2. Review: Control and Subsidiary Accounts • Most financial statement line items are totals of multiple lower level accounts • Subsidiary accounts aggregate to the total in the control account • Accounts receivable total might be the totals from several divisions, each of which classifies by customer type, and then by customer

3. Control and Subsidiary Accounts: Job order costing • Subsidiary and control accounts are important for job order costing. • Costs for each separate job are accumulated in a subsidiary account for that job • Amounts are totaled when preparing financial statements

4. Product costing: 2 extremes • Process costing: Large numbers of identical products. • Total costs for period calculated • Total production calculated • Per unit cost calculated • Costs assigned to accounts based on number of units at each stage • Uses “equivalent units”

5. Product costing: 2 extremes • Job order costing • Each job is different and separate subsidiary account is set up • Each job is accounted for individually • Costs assigned to each job as incurred • Overhead presents special problems • At end of period, job costs classified based on stage of where the job is

6. Product costing: hybrid=operation costing • Many processes are a middle ground • Car Manufacturing • Dell’s computer manufacturing • Clothing makers • Can be called “operation costing” • Combines elements of job order and process costing

7. Job costing: cost flows • For an individual account • Beg. Balance • + transfers in • - transfers out • = End. Balance • Transfers out for certain accounts = transfers in for other accounts

8. Job order costing: basic flow • Set up a subsidiary account in WIP for each new job as accepted or started • Add materials and direct labor to this account as work is done on the job • Add overhead based on an allocation formula • Transfer to finished goods when complete, than to COGS when sold

9. Overhead Issues • Determining allocation formula • Looking for cost driver that reasonably measures use of overhead resources • Multiple input formulas possible, but usually not worth the cost to use • Process of assigning overhead costs to specific job involves the use of estimates.

10. Overhead estimates • Would not be needed if could wait till end of year to assign all overhead • At that point would know actual costs and actual production levels • Relevance is more important that reliability, thus…. • Use estimates, because more timely, even though less accurate

11. Overhead: What must be estimated • What our costs will be for overhead inputs • How much of certain overhead items will be used for each job • What our production level will be • This last is mainly a fixed overhead issue

12. Overhead: Predetermined Rates • Estimate overhead input costs, overhead usage, level of production, and use of cost driver. (activity level) • From this calculate a predetermined rate per unit of cost driver. • Overhead costs assigned to jobs based on use of cost driver and predetermined rate. • e.g. labor hours or machine hours

13. Effects of using predetermined overhead rates • Costs assigned to jobs as work is done • Costs won’t be exactly correct because of use of estimates • Leads to too much or too little in costs being assigned • Adjustment for this must be done at the end of the year.

14. Overhead variance • Difference in actual overhead costs and costs that have been assigned to jobs. • At year end, overhead account must be closed to zero, thus variance must be closed out

15. Overhead control account • A cost accumulation account • Overhead costs debited to account as incurred • Overhead “applied” to jobs recorded as a credit to control account • Applied, as jobs completed, and at end of period for jobs in process • Balance remaining is variance • This must be closed out at period end

16. Closing out overhead variance • Variance represents unassigned (if debit balance) or over-assigned (if credit balance) overhead costs • Debit or credit to zero out, with other half of entry to either • COGS only • WIP, Fin. Gds., and COGS (prorate) • Advantages of each?

17. Overhead Variances: terminology • Debit balance in overhead account = underapplied overhead = unfavorable overhead variance • Credit balance in overhead account = overapplied overhead = favorable overhead variance

18. Favorable and Unfavorable Variances • What makes a variance favorable or unfavorable? • Factors that cause a variance?

19. Costing Systems • Should product costs be recorded based on actual expenditures or what “should have been” spent? • Stated differently, should “inefficiency” costs be added to the product or considered an expense of the period?

20. 3 Costing Systems • Actual: All costs direct and indirect, added based on actual usage and actual prices • Normal: Indirect costs added based on set prices, typically based on past long-term averages • Standard: All costs added based on standard amounts and standard prices

21. Cost of Goods Manufactured & cost flows • For an individual account • Beg. Balance • + transfers in • - transfers out • = End. Balance • For merchandiser, this appears as: BI + Purchases – COGS = EI

22. COGM & Cost Flow • COGM must show the “flow” for: • Raw Materials • WIP • Finished goods • ….and remember: • Flow is same for each • Xfers out for one is xfer in for next • WIP has multiple “xfers in”

23. COGM format issues • Multi-column format • “Big Picture” down rightmost column • Go one column to the left to show detail of an amount • Can be as many as 4 columns

24. Final Points: COGM • BB + xfers in – xfers out = EB Can show this in different ways, eg: Xfers in + bb – xfers out = EB Or BB xfers in – EB = xfers out