Chapter04.Process Costing and Hybrid Product-Costing Systems
Systems Design: Job-Order Costing. Objectives Uses of product costs for different organizations. ...
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Transcript of Systems Design: Job-Order Costing. Objectives Uses of product costs for different organizations. ...
Systems Design: Systems Design: Job-Order CostingJob-Order Costing
Objectives Objectives
Uses of product costs for different organizations.Uses of product costs for different organizations.
Types of product costing systems.Types of product costing systems.
Distinguish between job order and process costing Distinguish between job order and process costing systems. systems.
Understanding the cost accumulation procedures Understanding the cost accumulation procedures utilized in job order costing.utilized in job order costing.
Product and Service CostingProduct and Service Costing
A product costing system accumulates the costs incurred A product costing system accumulates the costs incurred in a production process and assigns those costs to the in a production process and assigns those costs to the organization’s final products. organization’s final products.
Use in Financial accounting: Use in Financial accounting: Value inventory on the balance sheetValue inventory on the balance sheet Compute cost of goods sold expense on the income Compute cost of goods sold expense on the income
statement. statement.
Product and Service CostingProduct and Service Costing
Use in Managerial Accounting:Use in Managerial Accounting: Help managers with planning and decision making. Help managers with planning and decision making. Decisions about product prices, the mix of products to Decisions about product prices, the mix of products to
be produced and the quantity of the output to be be produced and the quantity of the output to be manufactured involves the usage of product costs. manufactured involves the usage of product costs.
Use in Cost management: Use in Cost management: For controlling or reducing production costs of a For controlling or reducing production costs of a
product. product.
Use in reporting to interested organizationsUse in reporting to interested organizations
Product and Service CostingProduct and Service Costing
Service firms and non profit organizations:Service firms and non profit organizations: Service firms do not have inventories. Service firms do not have inventories. Their costs involve costs that are incurred in producing the Their costs involve costs that are incurred in producing the
services which are provided. services which are provided. Costs are then used for planning, cost control and decision Costs are then used for planning, cost control and decision
making purposes. making purposes.
IntroductionIntroduction An enterprise seeks to profit by providing customers An enterprise seeks to profit by providing customers
with goods and services. with goods and services.
To realize this profit, it is necessary to make decisions To realize this profit, it is necessary to make decisions based upon appropriate and timely information based upon appropriate and timely information provided by the accounting reports.provided by the accounting reports.
So in order to fulfill the management needs, cost So in order to fulfill the management needs, cost accounting consists of basic three phases,1)cost accounting consists of basic three phases,1)cost determination and measurement, 2)cost planning and determination and measurement, 2)cost planning and control through budgets and standards 3)cost analysis control through budgets and standards 3)cost analysis for decision making purposes.for decision making purposes.
Cost systems: Actual or Cost systems: Actual or Standard.Standard.
Determination of a product’s cost is a basic Determination of a product’s cost is a basic objective of cost accounting and when the unit objective of cost accounting and when the unit cost is identified, the obvious question arises," cost is identified, the obvious question arises," how are these costs accumulated?how are these costs accumulated?
In actual costs systems, costs are collected as In actual costs systems, costs are collected as they occur but they are determined at the end of they occur but they are determined at the end of the manufacturing procedures.the manufacturing procedures.
Cost systems: Actual or Cost systems: Actual or
StandardStandard.. In standard cost system, unit cost are predetermined in In standard cost system, unit cost are predetermined in
advance of production. Costing of the products, advance of production. Costing of the products, operations and processes are done by using standards operations and processes are done by using standards for both quantity and dollar amount.for both quantity and dollar amount.
Difference between actual cost and standard cost gives Difference between actual cost and standard cost gives the variance. And management’s role is to overcome the variance. And management’s role is to overcome the unfavorable conditions from predetermined the unfavorable conditions from predetermined standards.standards.
Both actual cost system and standard cost system may Both actual cost system and standard cost system may be used in connection with either job order pr process be used in connection with either job order pr process costing.costing.
Types of Product Costing Types of Product Costing SystemsSystems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
Types of Product Costing Types of Product Costing SystemsSystems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Comparing Process and Job-Comparing Process and Job-Order CostingOrder Costing
Job-Order Process
Number of jobs worked Many Single Product
Cost accumulated byIndividual
Job Department
Average cost computed by Job Department
This table presents an overview of the differences between a job-order and process costing system. Notice that costs are accumulated by the job in a job-order system and by department in the process system. If you think of building a house, you can see how easy it is to accumulate costs for a particular house, even though you may be building more than one house at a time. If you think of mixing Coca-Cola, costs would naturally be accumulated by the department working on the current batch.
Example Example ::
Which of the following companies would be Which of the following companies would be likely to use job-order costing rather than likely to use job-order costing rather than process costing?process costing?
a. Scott Paper Company for Kleenex.a. Scott Paper Company for Kleenex.
b. Architects.b. Architects.
c. Heinz for ketchup.c. Heinz for ketchup.
d. Caterer for a wedding reception.d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.e. Builder of commercial fishing vessels.
Which of the following companies would be Which of the following companies would be likely to use job-order costing rather than likely to use job-order costing rather than process costing?process costing?
a. Scott Paper Company for Kleenex.a. Scott Paper Company for Kleenex.
b. Architects.b. Architects.
c. Heinz for ketchup.c. Heinz for ketchup.
d. Caterer for a wedding reception.d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.e. Builder of commercial fishing vessels.
Identify the documents Identify the documents used in a job-order costing used in a job-order costing
system.system.
Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge Charge direct direct
material and material and direct labor direct labor
costs to costs to each job as each job as
work is work is performed.performed.
Charge Charge direct direct
material and material and direct labor direct labor
costs to costs to each job as each job as
work is work is performed.performed.
Job-Order Costing – An Job-Order Costing – An OverviewOverview
Direct MaterialsDirect Materials
Direct LaborDirect Labor
In a job-order costing system, direct materials and direct labor are traced directly to each job as the work is preformed.
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Direct Manufacturing Direct Manufacturing CostsCosts
Direct MaterialsDirect Materials
Direct LaborDirect LaborJob No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Manufacturing Overhead
Manufacturing Overhead
Manufacturing overhead (including indirect materials and indirect labor) represents other manufacturing costs like the power used to run the machinery in the factory. Manufacturing overhead cannot be traced directly to specific jobs. Rather, it is allocated to jobs on the basis of a predetermined rate.
Job Order Cost sheetJob Order Cost sheet
The The job cost sheetjob cost sheet is used by the accounting is used by the accounting department to track the direct and indirect costs department to track the direct and indirect costs associated with a given job.associated with a given job.
We will look at a job cost sheet used by a We will look at a job cost sheet used by a hypothetical company called PearCo. The company hypothetical company called PearCo. The company has a job that calls for the construction of wooden has a job that calls for the construction of wooden cargo crates.cargo crates.
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
The Job Cost SheetThe Job Cost Sheet
Measuring Direct Materials Cost
Will E. Delite
Description for Direct material Cost
Once a sales order has been received and a production order issued, the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials. Here is the materials requisition form completed for job A - 143. The requisition is number X7 - 6890. The worker has requested twelve 2 x 4s, 12 feet long, and twenty 1 x 6s, 12 feet long. The unit cost of the lumber is shown in the unit cost column. The quantity requested is multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the store room will issue the number once the materials requisition form has been properly authorized.
Measuring Direct Materials Cost
Measuring Direct Labor CostsMeasuring Direct Labor Costs
Description For Direct Labor:
Here is the time ticket for an employee who Here is the time ticket for an employee who worked eight hours on job A – 143. The worked eight hours on job A – 143. The employee’s hourly pay rate is $11, so the total employee’s hourly pay rate is $11, so the total labor cost charged to the job will be $88. The labor cost charged to the job will be $88. The time ticket, number 36, serves as the major time ticket, number 36, serves as the major source document for labor costs charged to source document for labor costs charged to this job.this job.
Let’s look at the labor posting to the job cost Let’s look at the labor posting to the job cost sheet.sheet.
Job-Order Cost AccountingJob-Order Cost Accounting
Compute predetermined Compute predetermined overhead ratesoverhead rates
Compute predetermined Compute predetermined overhead rates and overhead rates and
explain why estimated explain why estimated overhead costs (rather overhead costs (rather than actual overhead than actual overhead costs) are used in the costs) are used in the
costing process.costing process.
Why Use an Allocation Base?Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as
direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign
manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as
direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign
manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
The predetermined overhead rate The predetermined overhead rate ((POHRPOHR)) used to apply overhead to jobs used to apply overhead to jobs is determined before the period begins.is determined before the period begins.
Manufacturing Overhead Manufacturing Overhead ApplicationApplication
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes
overhead.
Ideally, the allocation base is a cost driver that causes
overhead.
Using a predetermined rate makes it possible to Using a predetermined rate makes it possible to estimate total job costs sooner.estimate total job costs sooner.
Actual overhead for the period is not known until the Actual overhead for the period is not known until the end of the period, thus slowing down the ability to end of the period, thus slowing down the ability to estimate job costs during the period;estimate job costs during the period;
Actual overhead costs can fluctuate seasonally, thus Actual overhead costs can fluctuate seasonally, thus misleading decision makers; misleading decision makers;
It simplifies record keeping.It simplifies record keeping.
The Need for a POHRThe Need for a POHR
Actual amount of the allocation based upon the actual level of
activity.
Actual amount of the allocation based upon the actual level of
activity.
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Application of Manufacturing OverheadOverhead
Overhead applied = POHR × Actual activity
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
Overhead Application RateOverhead Application Rate
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Job-Order Cost AccountingJob-Order Cost Accounting
Job-Order Cost AccountingJob-Order Cost Accounting
Example:Example:
Job WR53 at NW Fab, Inc. required $200 of Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead at $15 per hour. Estimated total overhead for the year was $760,000 and estimated for the year was $760,000 and estimated direct labor hours were 20,000. What would direct labor hours were 20,000. What would be recorded as the cost of job WR53?be recorded as the cost of job WR53?
a. $200.a. $200.
b. $350.b. $350.
c. $380.c. $380.
d. $730.d. $730.
Job WR53 at NW Fab, Inc. required $200 of Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead at $15 per hour. Estimated total overhead for the year was $760,000 and estimated for the year was $760,000 and estimated direct labor hours were 20,000. What would direct labor hours were 20,000. What would be recorded as the cost of job WR53?be recorded as the cost of job WR53?
a. $200.a. $200.
b. $350.b. $350.
c. $380.c. $380.
d. $730.d. $730.
Example:Example:
Job WR53 at NW Fab, Inc. required $200 of Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the were 20,000. What would be recorded as the cost of job WR53?cost of job WR53?
a. $200.a. $200.
b. $350.b. $350.
c. $380.c. $380.
d. $730.d. $730.
Job WR53 at NW Fab, Inc. required $200 of Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the were 20,000. What would be recorded as the cost of job WR53?cost of job WR53?
a. $200.a. $200.
b. $350.b. $350.
c. $380.c. $380.
d. $730.d. $730.
Understand the flow of Understand the flow of costs in a job-order costing costs in a job-order costing
system and prepare system and prepare appropriate journal entries appropriate journal entries
to record costs.to record costs.
Cost Flows – Material Purchases Cost Flows – Material Purchases
Raw material purchases are recorded in anRaw material purchases are recorded in aninventory account. inventory account.
Cost Flows – Material UsageCost Flows – Material Usage Direct materials issued to a job increase Work in Direct materials issued to a job increase Work in
Process and decrease Raw Materials. Process and decrease Raw Materials.
Indirect materials used are charged to Manufacturing Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials. Overhead and also decrease Raw Materials.
The Recording of Labor CostsThe Recording of Labor Costs
The cost of direct labor incurred increases The cost of direct labor incurred increases Work in Process and the cost of indirect labor Work in Process and the cost of indirect labor
increases Manufacturing Overhead. increases Manufacturing Overhead.
Recording Actual Manufacturing Recording Actual Manufacturing OverheadOverhead
In addition to indirect materials and indirect In addition to indirect materials and indirect labor, other manufacturing overhead costs are labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead charged to the Manufacturing Overhead account as they are incurred. account as they are incurred.
Applying Manufacturing Applying Manufacturing OverheadOverhead
Work in Process is increased when Work in Process is increased when Manufacturing Overhead is applied to Manufacturing Overhead is applied to
jobs. jobs.
Accounting for Accounting for Nonmanufacturing CostNonmanufacturing Cost
Nonmanufacturing costs (period Nonmanufacturing costs (period expenses) are charged to expense as expenses) are charged to expense as
they are incurred. they are incurred.
Transferring Completed UnitsTransferring Completed Units
As jobs are completed, the Cost of As jobs are completed, the Cost of Goods Manufactured is transferred to Goods Manufactured is transferred to
Finished Goods from Work in Process. Finished Goods from Work in Process.
Transferring Units SoldTransferring Units Sold When finished goods are sold, two When finished goods are sold, two entries are required: (1) to record the entries are required: (1) to record the
sale, and (2) to record COGS and reduce sale, and (2) to record COGS and reduce Finished Goods. Finished Goods.
Compute underapplied or Compute underapplied or overapplied overhead cost overapplied overhead cost
and prepare the journal and prepare the journal entry to close the balance entry to close the balance
in Manufacturing in Manufacturing Overhead to the Overhead to the
appropriate accounts.appropriate accounts.
Problems of Overhead Problems of Overhead ApplicationApplication
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a
period is referred to as either underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Overapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead
rate is greater than the total amount of overhead actually incurred during the period.
Overapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead
rate is greater than the total amount of overhead actually incurred during the period.
Allocating Under- or Overapplied Allocating Under- or Overapplied Overhead Between AccountsOverhead Between Accounts
Amount Percent of
Total Allocation of $30,000
Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000
Total 680,000$ 100% 30,000$