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13 - 1©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Chapter 13
Job Costing Systems
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 1Learning Objective 1
Distinguish between job costing
and process costing.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cost Systems
There are two basic systems used to assign costs to products:
1 Job-order costing2 Process costing
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cost Systems
In job-order costing, costs are accumulatedfor each individual job.
In process costing, costs are accumulatedfor each production process.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Job-Order Costing System
The basic records maintained in a job-order costing system include:
Job cost record
Materials requisitions
Labor time tickets
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Date Started: 6/5/02 Job Number: 963Date Completed: 6/7/02 Units completed: 10Cost Date Ref. Quantity Amount SummaryDirect Materials 6/5 N41 36 460.00 460.00Direct Labor 6/6 725 16 240.00 240.00Overhead 6/7 9 MHs 180.00 180.00Total Cost 880.00Unit Cost 88.00
Job Cost RecordJob Cost Record
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 2Learning Objective 2
Prepare summary journal
entries for the typical
transactions of a
job-costing system.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
General Flow of Costs
BeginningDirect MaterialsInventory $1,000
Purchases$5,000
Direct MaterialsAvailable forUse $6,000
+ =
EndingInventory$2,000
=Direct MaterialsUsed$4,000
–
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
General Flow of Costs
BeginningWIPInventory $8,000
Direct MaterialsUsed$4,000
Direct Laborand Overhead$18,000
+
EndingInventory$10,000
=Cost of GoodsManufactured$20,000
–
+
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
General Flow of Costs
BeginningFinished GoodsInventory $5,000
Cost of GoodsManufactured$20,000
Cost of GoodsAvailable forSale $25,000
+ =
EndingInventory$4,000
=Cost of GoodsSold$21,000
–
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Direct Materials Inventory
Increased by purchasesof direct materials
Decreased by use of direct materials
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Direct materials
1,0005,0002,000
4,000 4,000Materials Inventory WIP Inventory
Materials Cost
Work in Process Inventory 4,000Materials Inventory 4,000
To record usage of direct materials
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Labor and Overhead Costs
Work in Process Inventory 9,000Accrued Payroll 9,000
To record actual labor costs incurred
Work in Process Inventory 9,000Overhead Control 9,000
To record overhead applied
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Work in Process Inventory
Increased by use of directmaterials, direct labor, ormanufacturing overhead applied
Decreased by transfer of completed goods to finishedgoods inventory
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Finished Goods Inventory
Increased by transfers ofcompleted goods from workin process inventory
Decreased by the amountof cost of goods sold at thetime of sale
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 3Learning Objective 3
Compute budgeted factory-
overhead rates and factory
overhead applied to production.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
How Factory Overhead is Applied to Products
Managers need to know product costs in order to make ongoing decisions such as which products to emphasize or de-emphasize and the pricing of products.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
How Factory Overhead is Applied to Products
Ideally, all costs, including overhead, are known when these decisions must be made.
Unfortunately, actual overhead costs are not available when managers need them.
For this reason, budgeted overhead rates are used to apply overhead to jobs as they are completed.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Budgeted overhead application rate= Total budgeted factory overhead÷ Total budgeted amount of cost driver
Manufacturing Overhead Rate
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Manufacturing Overhead Rate
Bay Company total budgeted overhead for the year equals $200,000.
The allocation rate is based on $200,000 direct labor cost.
What is the allocation rate?
Budgeted overhead ÷ Direct labor cost = 100%
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Manufacturing Overhead Costs
Accountants trace direct costs to each costobject or “job.”
Accountants must allocate manufacturingoverhead costs to the cost objects.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Manufacturing Overhead Control(Plant and Equipment) 30,000
Accumulated Depreciation(Plant and Equipment) 30,000
To record plant and equipment depreciation
Manufacturing Overhead Costs
Assume Bay Company incurred $30,000 of plant equipment depreciation.
What is the journal entry?
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Manufacturing Overhead Costs
Assume that Job 11 incurred $9,000 of direct labor cost.
What is the manufacturing overhead cost allocated to this job?
9,000 × 100% = $9,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 4
Use appropriate cost drivers
for overhead application.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Cost Driver
A cost driver is any factor that affects cost. To assign job costs accurately, accountants
try to determine the drivers of the costs. No one cost driver is right for all situations.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 5
Identify the meaning and
purpose of normalized
overhead rates.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Normalized Overhead Rates
An annual average overhead rate is usedconsistently during the year.
The normal product cost includes an averageor normalized chunk of overhead.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Disposing of Underallocated or Overallocated Overhead
During the year, Manufacturing Overhead is credited for applied amounts and debited for actual costs incurred.
Accountants apply overhead using budgeted rates based on estimated overhead costs and estimated allocation base.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Disposing of Underallocated or Overallocated Overhead
Suppose that Bay Company incurred $222,000 of actual manufacturing overhead during the year, and that actual direct labor cost was $200,000.
The actual manufacturing overhead rate would have been $222,000 ÷ $200,000, or 111%.
How much overhead was applied?
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Disposing of Underallocated or Overallocated Overhead
$200,000 × 100% = $200,000 What is the underapplied amount?
$222,000 actual – $200,000 applied = $22,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Disposing of Underallocated or Overallocated Overhead
Manufacturing overhead rate was underestimated.
Because the predetermined manufacturing overhead rate used to allocate overhead to each job was less than the actual rate, too little manufacturing overhead was allocated to each job.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Disposing of Underallocated or Overallocated Overhead
How do accountants close the Manufacturing Overhead account?
Close the balance directly to Cost of Goods Sold (if insignificant).
Close the balance by prorating it to the accounts that should be corrected (if significant).
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Manufacturing Overhead 222,000 200,000
22,000
0
Cost of Goods Sold 22,000
Disposing of Underallocated or Overallocated Overhead
22
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Prorating Underallocated Overhead
Prorate $22,000 of underallocated overhead assuming the following ending account balances:
Work in Process Inventory $ 27,360 3%Finished Goods Inventory 18,240 2%Cost of Goods Sold 866,400 95%Total $912,000 100%
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Prorating Underallocated Overhead
$22,000 × 3% = $660 to Work in Process Inventory
$22,000 × 2% = $440 to Finished Goods Inventory
$22,000 × 95% = $20,900 to Cost of Goods Sold
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Prorating Underallocated Overhead
What is the journal entry?
Work in Process Inventory 660Finished Goods Inventory 440Cost of Goods Sold 20,900
Manufacturing Overhead 22,000To close manufacturing overhead
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 6
Use an activity-based-costing
system in a job-order
environment.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Activity-Based Costing in aJob-Order Environment
Understanding profitability meansunderstanding the cost structureof the entire business.
A key advantages of an ABC systemis its focus on understanding howwork (activity) is related to theconsumption of resources (costs).
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Activity-Based Costing in aJob-Order Environment
Focus on the most critical (core)processes across the value chain.
After the initial system is in place,the remaining phases of the valuechain can be added.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Activity-Based Costing in aJob-Order Environment
Key activities must be identified.
Appropriate cost drivers are usedto allocate activity costs to theassembly lines that producedthe product lines.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 7Learning Objective 7
Show how job costing is used
in service organizations.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Nonmanufacturing Situations
Manufacturing managers often want to know the full costs of a product (or job), not just the inventoriable costs.
The same principles of tracing direct costs and allocating indirect costs apply to costs incurred in nonprofit organizations.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Nonmanufacturing Situations
Costs are assigned to a program or class of service only for internal decision making.
Costs are not assigned for external reporting.
They go straight to the income statement as a period cost.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Nonmanufacturing Situations
Advertising $ 15,000Depreciation 6,000Maintenance 12,000Office rent 60,000Office support staff 47,000Travel 20,000Total indirect costs $160,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Nonmanufacturing Situations
Assume that this service firm estimates that the staff will work 10,000 direct labor hours during the year.
What is the predetermined indirect cost allocation rate?
$160,000 ÷ 10,000 = $16 per direct labor hour
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 8
Understand how a job-order-
costing system tracks the
flow of costs to products.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Job-Order-Costing Systems Track Costs to Products
Journal entries that record the basic transactions center around the three inventory accounts with particular focus on the WIP Inventory account.
13 - 48©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
End of Chapter 13