Job-Order Costing Chapter 2

1. Introduction to Managerial Accounting, Brewer, Garrison,Noreen Power Points from website - adapted by Cynthia Fortin, CPA, CMA Job-Order CostingChapter 2 http://highered.mheducation.com/sites/0078025419/student_view0/chapter2/index.html

2. Basic Costing Systems • JobCosting • Distinct products or service • Products manufactured to order • Cost traced or allocated to jobs • Cost records maintained for each job

3. Basic Costing Systems • Process Costing • Many units of a single, homogeneous product flow evenly through a continuous production process. • One unit of product is indistinguishable from any other unit of product. • Each unit of product is assigned the same average cost.

4. Job Costing Applications • Manufacturing sector • Building construction • Aircraft industry • Semi-conductor • Service industry • Law firms • Accounting firms • Advertising agencies

5. Examples of job costing and process costing in 3 types of sector

6. Cost assignment process 1. Identify the cost object(s) 2. Identify direct costs (DM, DL) 3. Select cost-allocation bases to allocate indirect costs 4. Identify the indirect costs associated with each cost-allocation base 5. Compute the predetermined overhead rate 6. Compute the indirect costs allocated 7. Add direct and indirect costs

7. Robinson Company Small pulp machine

8. Robinson Company • Job: to make a small pulp machine that will have a price tag of $15,000. • Direct materials costs for the job: $4,606. • Direct manufacturing labour costs: $1,579. • Cost Allocation base is direct labour hours, estimated direct manufacturing labour hours are 27,000. • Estimated indirect costs are $1,215,000. • Hours to make the machine: 88 hours.

9. Job-costing steps 1. Pulp machine 2. DM + DL $4,606+$1,579= $ 6,185 3. 27,000 labor hours 4. Overhead $1,215,000 5. $1,215,000/27,000 = $45 per hour 6. $45 * 88 hours = $ 3,960 7. Total cost of job $10,145

10. Job Cost Record

11. Materials (A) and Labor (B) source documents

12. Why Use an Allocation Base? To assign manufacturing overhead to individual jobs. • Types of allocation bases • Direct labor hours • Direct labor dollars • Direct machine-hours

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

14. The Need for a POHR Actual overhead costs can fluctuate seasonally, thus misleading decision makers. Actual overhead for the period is not known until the end of the period.

15. 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 $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.

16. 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.

17. Key Definitions • Raw materialsinclude any materials that go into the final product. • Work in processconsists of units of production that are only partially complete and will require further work before they are ready for sale to customers. • Finished goodsconsist of completed units of product that have not been sold to customers. • Cost of goods manufacturedinclude the manufacturing costs associated with the goods that were finished during the period.

18. Typical Manufacturing Flow To the customer Materials stockroom Shipping Manufacturing Assembly line Receiving Finished goods stockroom

19. Typical Accounting Flow To the customer Direct Materials Inventory Sales & Cost of Goods sold Work in Process (Direct Labour, Materials & Overhead Accounts Payable Finished goods inventory

20. Material Purchases Raw Materials Direct Labor Work in Process ManufacturingOverhead Cost of GoodsSold FinishedGoods Period Costs Selling andAdministrative Selling andAdministrative Flow of Costs: A Conceptual Overview Income StatementExpenses Balance Sheet Costs Inventories

21. Journal entries • Raw materials purchase $89,000 • Raw Materials 89,000 • Accounts Payable 89,000 2. Materials sent to manufacturing plant floor: direct materials $81,000, and indirect materials, $4,000 Work-in-Process 81,000 Manufacturing Overhead 4,000 Materials 85,000

22. Direct Materials • Direct Materials • Indirect Materials • Indirect Materials The Purchase and Issue of Raw Materials: T-Account Form Raw Materials Work in Process(Job Cost Sheet) • Material Purchases Mfg. Overhead Actual Applied

23. Journal entries 3.Manufacturing labor wages liability incurred, direct ($39,000) and indirect ($15,000). Work-in-Process 39,000 Manufacturing Overhead 15,000 Wages Payable 54,000 4. Payment of total manufacturing payroll for the month, $54,000. Wages Payable 54,000 Cash 54,000

24. Direct Labor • IndirectLabor • Direct Labor • IndirectLabor Labor Costs Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Materials Mfg. Overhead Actual Applied • Indirect Materials

25. 5. Additional overhead $75,000 consists of salaries: $44,000; payables: $11,000; insurance expired: $2,000; and depreciation on equipment: $18,000. MANUFACTURING Overhead 75,000 Salaries Payable 44,000 Accounts Payable 11,000 Accumulated Depreciation 18,000 Prepaid Insurance 2,000 6. Allocate Overhead to products Work-in-Process Control 80,000 Manufacturing Overhead 80,000

26. Recording Actual Manufacturing Overhead Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor • Direct Labor Mfg. Overhead Actual Applied • Indirect Materials • IndirectLabor • OtherOverhead

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

28. 7. Completion and transfer to finished goods of 12 individual jobs: $188,000. Finished Goods 188,000 Work-in-Process 188,000 8. Sales, all on accounts, are $270,000 Accounts Receivable 270,000 Sales 270,000

29. Cost ofGoodsMfd. • Cost ofGoodsMfd. Transferring Completed Units Work in Process(Job Cost Sheet ) Finished Goods • Direct Materials • Direct Labor • Overhead Applied

30. 9. Advertising $10,000 Customer service salaries: $15,000 Marketing and Admin salaries $35,000 Marketing, Advertising and Admin Expense 45,000 Customer service 15,000 Salaries Payable Control 50,000 Accounts Payable Control 10,000 10. Cost of Goods Sold: $180,000 Cost of Goods Sold 180,000 Finished Goods 180,000

31. Cost ofGoodsSold • Cost ofGoodsSold Transferring Units Sold Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied Cost of Goods Sold

32. Accounting for Nonmanufacturing Cost Not assigned to individual jobs, rather they are expensed in the period incurred. Examples:1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

33. Cost of good manufactured and sold statement

34. Underapplied and Overapplied Overhead―A Closer Look Underapplied overhead is when the balance is debit. Mfg. Overhead Overapplied overhead is when the balance is credit. Actual Applied • Indirect Materials • OverheadApplied to Work inProcess • IndirectLabor • OtherOverhead xxx

35. Overhead Application Example PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor-hours worked on jobs. 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. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor-Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

36. Overhead Application Example Manufacturing Overhead Actual Applied $650,000 $680,000 $ 30,000 The balance is a credit, therefore MO was overapplied by $30,000.

37. $30,000 $30,000 What happens to the balance?Disposition of Under- or Overapplied Overhead PearCo’sMfg. Overhead PearCo’s Costof Goods Sold Unadjusted Balance Actualoverhead costs $650,000 Overhead appliedto jobs $680,000 AdjustedBalance $30,000 overapplied

38. 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.

39. 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. Because it decreases cost, therefore increasing net income.

40. May be more complex but . . . Multiple Predetermined Overhead Rates To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates. May be more accurate because it reflects differences across departments.