Systems Design: Job-Order Costing

UAA – ACCT 202 Principles of Managerial Accounting

Dr. Fred Barbee

Chapter

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Cost Measurement

Cost Accumulation

Cost Assignment

Goal: Accurately costed products.

Job-Order Costing Vs. Process Costing - Similarities

The same basic purpose exists in both systems.

To assign direct material, direct labor and manufacturing overhead to products.

To provide a mechanism for computing unit cost.

Let’s

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2

Job-Order Costing Vs. Process Costing - Similarities

The same basic purpose exists in both systems.

Both systems maintain and use the same manufacturing accounts.

The flow of costs through the accounts is basically the same.

Let’s

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Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm

DMDM

DLDL

MOHMOH

DM Inv.DM Inv.

WIP Inv.WIP Inv.

FG Inv.FG Inv.

WIPWIP

Manufacturing Costs

COGSCOGS

S&AS&A

Sales

-= Gross Margin

-Net Income=

Balance Sheet

Income Statement

Unfinished

Finished

Sold

UnusedUsed

Used

Applied

Differences arise from two factors . . .

The flow of units in a process costing system is more or less continuous.

These units are indistinguishable from one another.Let’s

Job-Order Costing Vs. Process Costing - DifferencesDifferences

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2

Job-Order Costing

DM DL

MOH

Job 100

Job 101

Job 102

Finished Goods

Cost of Goods

Sold

Cost of Goods SoldWork in Process Finished Goods

Process Costing System

DMDL

MOH

Process B

Process A

Finished Goods

Cost of Goods SoldProcess C

Equivalent Units of Production

Total Cost

Cost Per UnitCost of Units

in WIP

Information Provided by Cost System

Information provided by a cost system.

Valuing Inventory

Planning & Control

Pricing Products

Financial Reporting

Decision Making

Usefulness of Cost Information

Unit CostIs based on an averaging process . . .

. . . With the averaging process being dependant on the system used.

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2

Flow of Documents in a Job-Order Costing System

Sales Order

Production Order

A sales order is prepared as a basis for issuing a . . .

A production order initiates work on a job, whereby costs are charged through:

Materials Requisition

Form

Direct Labor Time Ticket

Predetermined Overhead Rates

Job Cost Sheet

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor

Mfg.Overhead

Mfg.Overhead

Work-in-Process

Work-in-Process

FinishedGoods

FinishedGoods

Cost-ofGoods Sold

Cost-ofGoods Sold

Cost Assignment Dilemma

DirectMaterials

Direct Labor

Assigned Overhead

TraceableUnit Costfor FinishedGoods

Problem

Mfg. Process

(Work in

Process)

Costs must be assigned using some activity base and a predetermined overhead rate.

Cost Assignment Dilemma

DirectMaterials

Direct Labor

Assigned Overhead

TraceableUnit Costfor FinishedGoods

Problem

Mfg. Process

(Work in

Process)

Estimated Overhead POR = ------------------------------------------- Estimated Units in Activity Base

Solution?

Timeliness

Why Allocate?

Simplify Record- keeping

Avoid Seasonal Factors

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3

Criterion: Cause-and-Effect

Relationship

Units produced

Direct Labor Hours

Direct Labor $

Machine Hours

Direct Materials

Choice of activity base used in the calculation of the Predetermined Overhead Rate.

Possible Drivers

POR

Selecting an Allocation Base

Basic Concept of Applied Overhead

Applied overhead = Overhead rate x Actual production activity

Two points to consider in the application of MOH

Applied overhead is the basis for computing per-unit overhead cost.

Applied overhead is rarely equal to a period's actual overhead costs.

Summary of Overhead Concepts

Estimated Overhead Cost

The amount of estimated overhead

costs.

Actual Overhead Cost

The amount of overhead costs

actually incurred.

Applied Overhead Cost

The amount of overhead costs applied to WIP.

Difference equals Under- or Over- applied Overhead.

The Manufacturing Overhead Account

Actual Overhead Costs

Overhead Applied to WIP

MOH

xxx xxx

A “Clearing” Account

Amounts rarely agree