Systems Design: Job-Order Costing

1. Chapter 3 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. Quick Check  Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

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

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

7. 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

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

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

10. 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 Product Cost Job-Order Cost Accounting

11. 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 Product Cost Job-Order Cost Accounting

12. Will E. Delite Materials Requisition Form

13. Materials Requisition Form Cost of material is charged to job A-143. Type, quantity, and total cost of material charged to job A-143. Will E. Delite

14. Job-Order Cost Accounting

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

16. Employee Time Ticket

17. Job-Order Cost Accounting

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

19. Job-Order Cost Accounting

20. 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) used to apply overhead to jobs is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead.

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

22. Overhead applied = POHR × Actual activity Recall the wooden crate example where: Overhead applied = $4 per DLH × 8 DLH = $32 Application of Manufacturing Overhead

23. The Need for a Predetermined Manufacturing Overhead Rate Using a predetermined rate makes itpossible to estimate total job costs sooner. Actual overhead for the period is notknown until the end of the period. $

24. 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?

25. 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 to the job.

26. Overhead Application Example What amount of overhead willPearCo apply to Job X-32?

27. Overhead Application Example

28. Overhead Application Example

29. Quick Check  If the number of wooden crates in the order on the previous page is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo? a. Total spending would probably change by less than $105. b. Total spending would probably change by about $105. c. Total spending would probably change by more than $105. Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.

30. Quick Check  Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.

31. Quick Check  Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $750. d. $730.

32. Quick Check  If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected? a. The predetermined overhead rate will likely increase. b. The predetermined overhead rate would be unaffected. c. The predetermined overhead rate will likely decrease.

33. Quick Check  If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected? a. Product costs will likely increase. b. Product costs would be unaffected. c. Product costs will likely decrease.

34. Quick Check  If selling prices increase, what will happen to unit sales volume? a. Unit sales volume will likely increase. b. Unit sales volume would be unaffected. c. Unit sales volume will likely decrease.

35. Let’s summarize the document flow in a job-order costing system. Job-Order CostingDocument Flow Summary

36. Direct materials Indirect materials Job-Order CostingDocument Flow Summary Materials usedmay be eitherdirect orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account

37. Direct Labor Indirect Labor Job-Order CostingDocument Flow Summary An employee’stime may be eitherdirect or indirect. Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account

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

39. Let’s examine the cost flows in a job-order costing system.. Job-Order System Cost Flows

40. Job-Order System Cost Flows Raw Materials Work in Process(Job Cost Sheet) • Direct Materials • Material Purchases • Direct Materials • Indirect Materials Mfg. Overhead Actual Applied • Indirect Materials

41. Next let’s addlabor costs andapplied manufacturing overhead. Job-Order System Cost Flows

42. Job-Order System Cost Flows Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor • Overhead Applied Mfg. Overhead Actual Applied If actual and applied manufacturing overheadare not equal, a year-end adjustment is required. • Indirect Materials • OverheadApplied to Work inProcess • IndirectLabor

43. Now let’s complete the goods and sell them. Still with me? Job-Order System Cost Flows

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

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

46. PearCo hasoverappliedoverhead for the yearby $30,000. What willPearCo do? 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

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

48. Overapplied and Underapplied Manufacturing Overhead PearCo’sMfg. Overhead PearCo’s Costof Goods Sold Unadjusted Balance Actualoverheadcosts $650,000 OverheadAppliedto jobs $680,000 $30,000 $30,000 AdjustedBalance $30,000 overapplied

49. Quick Check  What effect will the overapplied overhead have on PearCo’s cost of goods sold? a. Cost of goods sold will increase. b. Cost of goods sold will be unaffected. c. Cost of goods sold will decrease.

50. Quick Check  What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.