Chapter 3

Job Order Costing

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

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

Product costing: 2 extremes

Process costing: Large numbers of identical products.Total costs for period calculatedTotal production calculatedPer unit cost calculatedCosts assigned to accounts based on

number of units at each stageUses “equivalent units”

Product costing: 2 extremes

Job order costingEach job is different and separate

subsidiary account is set upEach job is accounted for individuallyCosts assigned to each job as

incurredOverhead presents special problemsAt end of period, job costs classified

based on stage of where the job is

Product costing: hybrid=operation costing

Many processes are a middle groundCar ManufacturingDell’s computer manufacturingClothing makers

Can be called “operation costing” Combines elements of job order and

process costing

Job costing: cost flows

For an individual accountBeg. Balance+ transfers in- transfers out= End. Balance

Transfers out for certain accounts = transfers in for other accounts

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

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.

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

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 beThis last is mainly a fixed overhead

issue

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

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.

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

Overhead control account

A cost accumulation accountOverhead costs debited to account as

incurredOverhead “applied” to jobs recorded

as a credit to control account• Applied, as jobs completed, and at end of

period for jobs in processBalance remaining is variance

• This must be closed out at period end

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 eitherCOGS onlyWIP, Fin. Gds., and COGS (prorate)

Advantages of each?

Overhead Variances: terminology

Debit balance in overhead account = underapplied overhead = unfavorable overhead variance

Credit balance in overhead account = overapplied overhead = favorable overhead variance

Favorable and Unfavorable Variances

What makes a variance favorable or unfavorable?

Factors that cause a variance?

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?

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

Cost of Goods Manufactured & cost flows

For an individual accountBeg. Balance+ transfers in- transfers out= End. Balance

For merchandiser, this appears as: BI + Purchases – COGS = EI

COGM & Cost Flow

COGM must show the “flow” for:Raw MaterialsWIPFinished goods

….and remember:Flow is same for eachXfers out for one is xfer in for nextWIP has multiple “xfers in”

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

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