Systems Design: Job-Order costing

1. Chapter3 Systems Design:Job-Order costing

2. Types of Costing Systems Used to Determine Product Costs ProcessCosting Job-orderCosting Chapter 4 • Many different products are produced each period. • Products are manufactured to order. • Cost are traced or allocated to jobs. • Cost records must be maintained for each distinct product or job.

3. Types of Costing Systems Used to Determine Product Costs ProcessCosting Job-orderCosting • Typical job order cost applications: • Special-order printing • Building construction • Also used in the service industry • Hospitals • Law firms

4. THE JOB Job-Order Costing Manufacturingoverhead (OH) Applied to eachjob using apredeterminedrate Directmaterial Traced directly to each job Traced directly to each job Direct labor

5. Sequence of Events in a Job-Order Costing System Receive orders from customers Begin production Schedulejobs Ordermaterials

6. Sequence of Events in a Job-Order Costing System Charge direct material and direct labor costs to each job as work is performed. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

7. Sequence of Events in a Job-Order Costing System Direct Materials Job No. 1 Apply overhead to each job using a predetermined rate. Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

8. Job-Order Cost Accounting The primary document for tracking the costs associated with a given job is thejob cost sheet. Let’s investigate

9. PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-01 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units Shipped Direct Materials Date Number Balance Direct Labor Manufacturing Overhead Total Cost Unit Cost Job-Order Cost Accounting

10. PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-01 Date Completed Department B3 Units Completed A materials requisition form is used to authorize the use of materials on a job. Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units Shipped Direct Materials Date Number Balance Let’s see one Direct Labor Manufacturing Overhead Total Cost Unit Cost Job-Order Cost Accounting

11. Materials Requisition Form Will E. Delite

12. Job-Order Cost Accounting

13. Workers use time tickets to record the time spent on each job. Let’s see one Job-Order Cost Accounting

14. Employee Time Ticket

15. Job-Order Cost Accounting

16. Applymanufacturing overhead to jobs using apredetermined overhead rate of $4 per direct labor hour (DLH). Let’s do it Job-Order Cost Accounting

17. Job-Order Cost Accounting

18. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period Application of Manufacturing Overhead The predetermined overhead rate (POHR) is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead.

19. Overhead applied = POHR × Actual activity Application of Manufacturing Overhead Based onestimates, and determined before the period begins. Actualamount of thecost driversuch as units produced, direct labor hours, or machine hours. incurred during the period.

20. The Need for a Predetermined Manufacturing Overhead Rate Using a predetermined rate makes itpossible toaccount fortotal job costs sooner, since actual overheadfor the period is notknown until the end of the period. $

21. Overhead Application Example PearCo applies overhead based on direct labor hours. Totalestimated overhead for the year is $640,000. Totalestimatedlabor cost is $1,400,000 and total estimated labor hours are 160,000.What is PearCo’s predetermined overhead rate per hour?

22. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total units in theallocation base for the coming period $640,000 POHR = 160,000 direct labor hours (DLH) Overhead Application Example POHR = $4.00 per DLH For each direct labor hour worked on a job, $4.00 of factory overhead will be applied (charged) to the job.

23. Job-Order CostingDocument Flow Summary IndirectLabor EmployeeTime Ticket OtherActual OHCharges Manufacturing Overhead Account AppliedOverhead Job Cost Sheets MaterialsRequisition IndirectMaterial

24. Job-Order System Cost Flows Work in Process(Job Cost Sheet) Finished Goods • Direct Materials • Cost ofGoodsMfd. • Cost ofGoodsMfd. • Cost ofGoodsSold • Direct Labor • Overhead Applied Cost of Goods Sold • Cost ofGoodsSold

25. Job-Order System Cost Flows Let’s return to PearCo and see what we do when actual and applied overhead are not equal.

26. Overhead Application Example PearCo’s actual overhead for the year was $650,000, and there were actually 170,000 direct labor hours. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.

27. Overhead Application Example PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH =$680,000

28. Overapplied and Underapplied Manufacturing Overhead PearCo’s Method $30,000may be allocatedto these accounts. $30,000 may beclosed directly to cost of goods sold. OR Work inProcess FinishedGoods Cost of Goods Sold Cost of Goods Sold

29. Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

30. Overhead Application Question 1 Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.

31. Overhead Application Question 2 Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decreasecost of goods sold by $60,000. a. True b. False

32. Job-Order Costing – Typical Accounting Entries Let’s look atsummaryjournal entries for a job-order costing system. We’ll omit the numbers so that we can focus on accounts.

33. Cost Flows – Material Purchases Raw material purchases are recorded in aninventory account.

34. Cost Flows – Material Usage Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.

35. Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

36. Cost Flows – Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are chargedto theManufacturing Overhead account as they are incurred.

37. Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.

38. Cost Flows – Period Expenses Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

39. Cost Flows – Cost of Goods Manufactured As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process.

40. Cost Flows – Sales When finished goods are sold, two separate entries are required: (1) to record the sale at the selling price; and (2) to record Cost of Goods Sold and reduce Finished Goods by the Cost of Goods Manufactured.