Chapter 5 Job Order Costing COPYRIGHT © 2012 Nelson Education Ltd.

Chapter 5Job Order Costing

Chapter 5Job Order Costing

COPYRIGHT © 2012 Nelson Education Ltd.


Learning ObjectivesLearning Objectives

1. Describe the difference between job-order costing and process costing and identify the types of firms that would use each method

2. Compute the predetermined overhead rate and use the rate to assign overhead to units or services produced

3. Identify and set up the source documents used in job-order costing

4. Describe the cost flows associated with job-order costing

5. (Appendix 5A) Prepare the journal entries associated with job-order costing

6. (Appendix 5B) Allocate support department costs to producing departments

5-2

Describe the differences between job-order

costing and identify the types of firms that would

use each method

OBJECTIVE OBJECTIVE 11


Job-Order Production and CostingJob-Order Production and Costing

Firms operating in job-order industries produce a wide-variety of services or products that are quite

distinct from each other

Printing

5-4

Construction

Furniture making

Medical and dental services

Automobile repair

Beautician services

Example industries:

The key feature is that the cost of one job differs from that of another job and must be kept track of separately


Process Production and CostingProcess Production and Costing

Firms in process industries mass-produce large quantities of similar or homogeneous products

5-5

Food Cement

ChemicalsPetroleum

Example industries:

The key feature is that the cost of one unit of a product is identical to the cost of another


Production Costs in Job-Order CostingProduction Costs in Job-Order Costing

Direct materials

5-6

Direct labour

Job #1 Job #2 Job #3

Direct materials and direct labour are fairly easy to trace to individual jobs


Production Costs in Job-Order CostingProduction Costs in Job-Order Costing

Overhead

5-7

Overhead is not so easy to trace to individual jobs

Instead overhead is applied to production

Compute the predetermined overhead rate and use the rate to assign overhead to units or services provided



Actual CostingActual Costing

5-9

Actual costs of direct materials, direct labour, and overhead are used to determine unit cost

Actual overhead can be hard to track

Problems with Actual Costing:• Many overhead costs are not incurred uniformly

through the year• Uneven production levels

– Give rise to fluctuating unit overhead costs


Normal CostingNormal Costing

5-10

Determine unit cost by adding actual direct materials, actual direct labour,

and estimated overhead

Virtually all firms use normal costing


Importance of Unit Costs to FirmsImportance of Unit Costs to Firms

• valuing inventory• determining income • making important decisions

For manufacturing firms, essential for:

5-11

• profitability• feasibility of introducing new services

For service firms, used to determine:


Normal Costing and Estimating OverheadNormal Costing and Estimating Overhead

1. Calculate the predetermined overhead rate2. Apply overhead to production3. Reconcile applied overhead with actual

overhead or allocate applied overhead to WIP and finished goods ending inventories

Three step process:

5-12


Example: Cornerstone 5-1Example: Cornerstone 5-1

Information:

5-13

At the beginning of the year, Argus Company estimated the following costs:

Overhead$360,000

Direct labour cost$720,000

Argus uses normal costing and applies overhead on the basis of direct labour cost. For the month of

February, direct labour cost was $56,000

How to Calculate the Predetermined Overhead Rate and Apply Overhead to Production


ExampleExample

• Calculate the predetermined overhead rate for the year• Calculate the overhead applied to production in February

Required:

5-14


Calculate the Predetermined Overhead RateCalculate the Predetermined Overhead Rate

Overhead Rate =

Estimated Annual Overhead

Formula:

5-15

Estimated Annual Activity Level

Best estimate of manufacturing-related costs, such as factory-related costs, indirect

materials, and indirect labour

Both overhead and activity level are estimated because overhead rate must be calculated at

beginning of year


ExampleExample

Overhead rate =

Overhead

Direct labour cost

Overhead rate =

$360,000

$720,000

Overhead rate =

50% of direct labour cost

5-16


Applying Overhead to ProductionApplying Overhead to Production

Applied overhead =

Predetermined overhead rate

Actual activity level

×

5-17

Let’s look at an exampleOverhead applied to February

production

= 50% $56,000×

Overhead Direct labour Cost

Overhead applied to February

production

= $28,000


Reconciling Applied Overhead with Actual OverheadReconciling Applied Overhead with Actual Overhead

Example:

Proto Company had actual overhead of $400,000 for the year but had applied

$390,000 to production

5-18


5-19


Example:

Actual Overhead Applied Overhead

$400,000 $390,000

Actual ≠ Applied This is called an overhead variance


5-20


$400,000 $390,000

Underapplied – Overhead of $10,000

Actual Overhead > Applied

Overhead = Underapplied Overhead

Actual Overhead < Applied

Overhead = Overapplied Overhead



Disposition of Overhead VarianceDisposition of Overhead Variance

At year end, costs reported on the financial statements must be actual, not

estimated, amounts

5-21

Overhead Variance is assigned to Cost of Goods Sold


Disposition of Overapplied OverheadDisposition of Overapplied Overhead

Actual Overhead > Applied

Overhead =Underapplied

Overhead

Actual Overhead < Applied

Overhead=

Overapplied Overhead

5-22

Underapplied overhead would be SUBTRACTED from Cost of Goods Sold

Underapplied overhead would be ADDED to Cost of Goods Sold


How to Reconcile Actual Overhead with Applied Overhead


At the beginning of the year, Argus Company estimated the following:

5-23

Information:

Overhead $360,000

Direct labour Cost$720,000

By the end of the year, actual data are:Overhead $375,400

Direct labour Cost$750,000


ExampleExample

Information continued:Argus uses normal costing and applies overhead on the basis of direct labour cost At the end of the year, cost of goods sold (before adjusting for any overhead variance) is $632,000

5-24

• Calculate the overhead variance for the year• Dispose of the overhead variance by adjusting cost of

goods sold

Required:


5-25

Overhead Variance CalculationOverhead Variance Calculation


$375,400 $375,000

Overhead Variance – Underapplied = $400

Overhead Rate × Actual labour Cost 0.50 × $750,000


Unadjusted COGS $632,000

Add: Underapplied variance 400

Adjusted COGS $632,400

Underapplied variances are added since not enough overhead was applied

5-26

Disposition of Overhead VarianceDisposition of Overhead Variance


Linear Cost and Revenue Functions: Cornerstone 5-3Linear Cost and Revenue Functions: Cornerstone 5-3

Plantwide Overhead Rate

5-27

Departmental Overhead Rate

Single overhead rate calculated using all estimated overhead for a factory and dividing by estimated activity for entire plant

Estimated overhead for a department divided by estimated activity level for that same department

How To Calculate Predetermined Departmental Overhead Rates and Apply Overhead to Production


ExampleExample

At the beginning of the year, Sorrel Company estimated:Machining

Dept.Overhead $240,000 $360,000Direct labour hours

$600,000

Information:

5-28

Assembly Dept.

Total

135,000 240,000 375,000Machine hours 200,000 --- 200,000

Sorrel uses departmental overhead rates:• Machining dept: overhead is applied on basis of machine

hours• Assembly dept: overhead is applied on basis of direct labour

hours


ExampleExample

• Calculate the predetermined overhead rates for the machining and assembly departments

• Calculate the overhead applied to production in each department for the month of June

• By how much has each department’s overhead been overapplied? underapplied?

Required:

5-29


Overhead RatesOverhead Rates

Machining dept. Overhead rates

Estimated overhead

Estimated machine hours=

5-30

Machining department’s overhead is applied on the basis of machine hours

Machining dept. Overhead rates =

$240,000

200,000

Machining dept. Overhead rates

$1.20 per machine hour=


Overhead RatesOverhead Rates

Assembly dept. overhead rates

Estimated overhead

Estimated direct labour hours=

5-31

Assembly dept. overhead rates =

$360,000

240,000

Assembly dept. overhead rates

$1.50 per direct labour hour=


ExampleExample

Sorrel Company’s actual data for June:

Machining Dept.

Overhead $22,500 $30,750

Direct labour hours

$53,250

Information continued:

5-32

Assembly Dept.

Total

11,000 20,000 31,000

Machine hours 17,000 --- 17,000


5-33


=Overhead

RateActual Machine

Hours×

Machining Department

Overhead applied in June

$1.20Overhead applied

in June = × 17,000

Overhead applied in June = $20,400


5-34


=Overhead

RateActual Direct labour Hours×

Assembly Department


$1.50 20,000

=

×

$30,000

Overhead applied in June =



Under of Overapplied Overhead?Under of Overapplied Overhead?

5-35

Machining Dept.

$22,500

Assembly Dept.

Underapplied overhead

$30,750Actual overhead

Applied overhead 20,400 30,000

$2,100 $ 750

Actual overhead exceeded applied overhead in both departments



At the beginning of the year, Sorrel Company estimated:

Machining Dept.

Overhead $240,000 $360,000

Direct labour hours

$600,000

Information:

5-36

Assembly Dept. Total

135,000 240,000 375,000Machine hours 200,000 --- 200,000

Sorrel has decided to use a plant-wide overhead rate based on direct labour hours

How to Convert Departmental Data to Plantwide Data to Calculate the Overhead Rate and Apply Overhead to Production


ExampleExample

• Calculate the predetermined plant-wide overhead rate• Calculate the overhead applied to production for the

month of June• Calculate the overhead variance for the month of June

Required:

5-37


Plantwide Overhead RatePlantwide Overhead Rate

Plantwide overhead rate

Total overhead

Direct labour Hours=

5-38

Plantwide overhead rate =

$600,000

375,000

Plantwide overhead rate

$1.60 per direct labour hour

=

Total Estimated Overhead


ExampleExample

Sorrel Company’s actual data June:

Machining Dept.

Overhead $22,500 $30,750

Direct labour hours

$53,250

Information continued:

5-39

Assembly Dept.

Total

11,000 20,000 31,000

Machine hours 17,000 --- 17,000


5-40


=Plantwide

overhead rateActual activity

level

$1.60

×

Formula:

Applied Overhead

31,000 direct labour hours

=

×

$49,600

Applied Overhead =

Applied Overhead

Actual direct labour hours for June:Machining 11,000 + Assembly 20,000 hours


Over or Underapplied Overhead?Over or Underapplied Overhead?

5-41

Applied OverheadActual Overhead -

$53,250 - $49,600

$3,650

Underapplied

Not enough overhead was applied to production


Unit Costs in the Job-Order SystemUnit Costs in the Job-Order System

• materials used on the job (direct materials)• labour worked on the job (direct labour)• applied overhead

5-42

Unit cost of a job is the total cost of:

Identify and set up the source documents used in

job-order costing



Job-Order Cost SheetJob-Order Cost Sheet

• Contains:– Job description– Cost of materials, labour, and overhead

• Jobs are named or numbered• Total of all unfinished job-order cost sheets

should equal the ending balance of the Work In Process account

5-44


Materials Requisition FormMaterials Requisition Form

• Provides information for assigning direct materials costs to jobs

• Useful for maintaining proper control over a firm’s inventory of direct materials

5-45


Job Time TicketsJob Time Tickets

• Employees fill out a time ticket that identifies:– His or her name– Wage rate– Hours worked on each job

• Cost accounting department posts cost of direct labour to individual jobs

5-46


Source Documents as Sources for Account BalancesSource Documents as Sources for Account Balances

5-47

Work in Process

Finished Goods

Cost of Goods Sold

Total of all job-order cost sheets for unfinished jobs

Total of all job-order cost sheets for finished but unsold jobs

Total of all job-order cost sheets for sold jobs

Describe the cost flows associated with

job-order costing



Accounting for MaterialsAccounting for Materials

5-49

• Purchases are added to Raw Materials Inventory account

• As they are used in production, direct materials are moved from Raw Materials to Work in Process

◦ Materials used in production are classified by job and recorded in job-order cost sheets

Raw Materials

Purchases Direct Materials used in production


Accounting for Direct Labour CostAccounting for Direct Labour Cost

5-50

• Time tickets indicate the amount of labour spent on each job

• Labour costs are added to job-order costs sheets

• Total of all direct labour from all jobs is recorded as a debit in the Work In Process account

Work In Process

Direct materials

Direct labour


Accounting for OverheadAccounting for Overhead

5-51

• Normal costing is used

• Actual overhead is not assigned directly to jobs

• Overhead is applied to each job using a predetermined rate Applied

Overhead

Work In Process

Direct Materials

Direct labour


Accounting for Actual Overhead CostsAccounting for Actual Overhead Costs

• Never enters Work in Process account• Costs are recorded as debits in

Manufacturing Overhead control account• At end of period, actual overhead is

reconciled with applied overhead

5-52


Accounting for Finished GoodsAccounting for Finished Goods

5-53

Costs of completed jobs are transferred from Work in Process to Finished Goods

Work in Process

Direct Materials

Direct labour

Applied Overhead

Finished Goods

Completed jobs

Completed jobs


Accounting for Actual Overhead CostsAccounting for Actual Overhead Costs

5-54

Once job is sold, it is added to cost of goods sold which is reported on income statement

Finished Goods

Completed jobs

Cost of Goods Sold

Sold jobsSold jobs


Cost of Goods Manufactured StatementCost of Goods Manufactured Statement

5-55

To ensure the accuracy in computing these costs, a cost of goods

manufactured statement is prepared


Accounting for Cost of Goods SoldAccounting for Cost of Goods Sold

• When jobs are sold: – finished goods inventory is decreased– costs of goods sold is increased

• The selling price is recognized by:– increasing (crediting) sales revenue – increasing (debiting) accounts receivable (or cash)

5-56


Normal and Adjusted Cost of Goods SoldNormal and Adjusted Cost of Goods Sold

5-57

Normal Cost of Goods Sold

Adjusted Cost of Goods Sold

Cost of Goods Sold before an adjustment for an overhead variance

Cost of Goods Sold after adjusting for an overhead variance



5-58

Job 78

At the beginning of June, Galway Company had two jobs in process:

Job 79

Direct materials

Direct labour

$1,000

Applied overhead

$ 800

600 1,000750

Balance, June 1 $2,350

1,250

$3,050

Information:

How to Prepare Brief Job-Order Cost Sheets


ExampleExample

• Calculate the overhead rate based on direct labour cost• Prepare a job-order cost sheet for the four jobs

– Show the balance as of June 1 as well as direct materials and direct labour added in June

– Apply overhead to the four jobs for the month of June, and show the ending balances

• Calculate the ending balances of Work in Process and Finished Goods and of June 30

• Calculate the Cost of Goods Sold for June

Required:

5-59


Calculating Overhead RateCalculating Overhead Rate

5-60



=

We were not given estimated overhead or estimated direct labour cost. So we will have to

work backwards to find the rate

We can compute the rate using the information from Job 78

Applied Overhead

×


Calculating Overhead RateCalculating Overhead Rate

5-61



=Applied

Overhead×

$750 =Predetermined overhead rate × $600

$750/$600 =Predetermined overhead rate

1.25 or 125% of direct labour cost


ExampleExample

5-62

Job 78

During June, two more jobs were started

The following direct materials and direct labour costs were added to the four jobs during the month of June:

Job 79

Direct materials

Direct labour

$500 $1,110

400 1,400

$900 $100

Job 80 Job 81

2,000 320

Information:


Job-Order Cost SheetsJob-Order Cost Sheets

5-63

Job 78 Job 79

Direct materials

Direct labour

$2,350 $3,050

400

$ 0 $ 0

Job 80 Job 81

2,000

Beg. Bal. June 1

500

Applied overhead 500

1,400

1,110 900 100

320

Direct labour x Overhead Rate

$400 x $1.25 Direct labour x Overhead Rate $1,400

x $1.25

1,750

Direct labour x Overhead Rate $2,000 x $1.25

2,500

Direct labour x Overhead Rate

$320 x $1.25

400


Job-Order Cost SheetsJob-Order Cost Sheets

5-64

Job 78 Job 79

Direct Materials

Direct labour

$2,350 $3,050

400

$ 0 $ 0

Job 80 Job 81

2,000

Beg. Bal. June 1

500

Applied Overhead 500

1,400

1,110 900 100

320

1,750 2,500 400

Total, June 30 $3,750 $7,310 $5,400 $820


Computing Ending BalancesComputing Ending Balances

5-65

At the end of June,

Jobs 78, 79 and 80 were completed

Only Job 81 was still in process at June 30

Work in Process = $820

Work in Process



5-66

Finished Goods

On June 1, the balance in Finished Goods was zero. Three jobs were finished during June (Jobs 78, 79 & 80)

Job 79 was sold and transferred out of Finished Goods

Finished goods, June 1

Job 78

Job 80

Finished goods, June 30

$ 0

3,750

5,400

$9,150



5-67

One job, Job 79, was sold during June

June 30 Balance = $7,310

Cost of Goods Sold


Accounting for Nonmanufacturing CostsAccounting for Nonmanufacturing Costs• Manufacturing costs are not the only costs

incurred by a firm• Selling and general administrative are period

costs• Period costs are shown on the Income

Statement

5-68

Chapter 5 Job Order Costing COPYRIGHT © 2012 Nelson Education Ltd.

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Transcript of Chapter 5 Job Order Costing COPYRIGHT © 2012 Nelson Education Ltd.