A&MIS 212 – Session 4

A&MIS 212 – Session 4 William F. Bentz January 10, 2002 Fisher College of Business W. F. Bentz

Thursday’ Agenda • Chapter 2, Exercise 3 • Chapter 2, Problem 13 • Introduce Job-Order Costing Systems W. F. Bentz

Produc-tion Market-ing Distri-bution ConsumerService R&D Design Meanings of Product Cost Inventoriable product costs Reimbursable government contract costs Decision-relevant costs W. F. Bentz

Work in Process Finished Goods Inventory Cost of Goods Sold Inventory System Payroll System Indirect Costs Assigned The Flow of Costs W. F. Bentz

Cost Assignment • Tracing – direct costs can be traced to cost objects • Ability to trace with acceptable accuracy, validity, and cost • Cost-effective to trace costs • Costallocation is the process of assigning costs to cost objects when the costs cannot be traced cost-effectively. W. F. Bentz

Job-Costing Job costing, also called job-order costing, is one system used to determine product costs. Job-costing systems are designed to cost single units or projects, or one or more batches of very similar units. W. F. Bentz

Job-Costing Applications Job-costing is suited to: • Ship building • Construction projects • Software development projects • Creative productions (e.g., movies) • Consulting projects W. F. Bentz

Costing Jobs--Materials • When materials and component parts are taken out of inventory and put into process, the costs of those materials are traced to the job in which they are used. The total cost of all materials used during a period is debited to Work-in-Process. The amount of that debit must equal the total of the material costs charged to all the individual jobs during that period. W. F. Bentz

Costing Jobs--Labor • When the total cost of labor is determined each period, that cost is either traced to specific jobs or charged to indirect cost. Workers and their supervisors must have a system for keeping tract of who worked on what jobs. W. F. Bentz

Costing Jobs—Indirect Costs • Indirect costs are applied to individual jobs based on predetermined (budgeted) overhead (indirect manufacturing cost) rates (PORs). In the least complex systems, there will be one POR. In more complex processes, there may be several cost drivers involved, with a corresponding POR for each cost driver. W. F. Bentz

Examples of indirect costs • Product development costs • Depreciation of factory buildings and equipment • Salaried and wages for indirect labor • Property taxes on factory real estate (land & buildings) • Indirect materials & supplies W. F. Bentz

To cost a specific job • Trace the direct costs to each job • For each job record the amount of the driver activity for each POR • Multiply the POR times the amount of activity for each cost driver • Add the cost components to compute the total cost (inventory value) of each job W. F. Bentz

Inventory System Payroll System Work in Process Finished Goods Inventory Cost of Goods Sold Indirect Costs Incurred Indirect Costs Allocated Adjustment The Flow of Costs W. F. Bentz

Inventory values • The cost of any job is the cumulative amount of the costs charged to that job in the current and previous periods. The cost accumulates until the job is completed. The costs incurred for long-term construction contracts, for example, would be accumulated using a job-cost system. W. F. Bentz

Updating the costs of jobs • Direct materials would likely be accounted for using a perpetual inventory system • Direct labor costs would be updated every time a payroll is computed and at the end of every accounting period. • Indirect costs are charged to jobs at the end of every accounting period prior to completion and when they are finished. W. F. Bentz

Refinements • One can keep track of categories of cost within a job. For example, a large construction company I once worked for kept track of the cost of; (1) concrete floors, (2) walls & piers, (3) electrical systems, (4) roofing, and (5) mechanical systems. The company used this information to price bids and to select subcontractors on the basis of costs. W. F. Bentz

Problem Areas • A major consideration in the quality of the direct cost information lies in the tracing of costs to jobs. A potential problem occurs when workers are involved in several jobs each morning or afternoon and do not keep accurate time records. W. F. Bentz

Challenges • The greatest potential for misleading results rests with the application of overhead to individual jobs. The use of multiple cost drivers when appropriate, and the careful separation of overhead costs into cost pools associated with each cost driver used, are key to the determination of job costs. W. F. Bentz

W. F. Bentz

A&MIS 212 – Session 4