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Job-Order Costing: A Comparative Analysis of Systems

This PowerPoint presentation provides an overview of job-order costing and process costing systems, with examples and explanations of key concepts, such as job cost sheets and application of manufacturing overhead.

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Job-Order Costing: A Comparative Analysis of Systems

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  1. Chapter 2 Systems Design: Job-Order Costing PowerPoint Authors: Jon A. Booker, Ph.D., CPA, CIA Charles W. Caldwell, D.B.A., CMA Susan Coomer Galbreath, Ph.D., CPA

  2. 2-2 • A company produces many units of a single product. • One unit of product is indistinguishable from other units of product. • The identical nature of each unit of product enables assigning the same average cost per unit. Types of Product Costing Systems ProcessCosting Job-orderCosting

  3. 2-3 Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages) Types of Product Costing Systems ProcessCosting Job-orderCosting

  4. 2-4 • Many different products are produced each period. • Products are manufactured to order. • The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Types of Product Costing Systems ProcessCosting Job-orderCosting

  5. 2-5 Types of Product Costing Systems ProcessCosting Job-orderCosting Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

  6. 2-6 Comparing Process and Job-Order Costing

  7. 2-7 Job-Order Costing—An Overview 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. 2-8 Job-Order Costing—An Overview Manufacturing Overhead, including indirect materials and indirect labor, are allocated to jobs rather than directly traced to each job. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

  9. 2-9 Job Cost Sheet

  10. 2-10 Materials Requisition Form

  11. 2-11 Job Cost Sheet

  12. 2-12 Employee Time Ticket

  13. 2-13 Job Cost Sheet

  14. 2-14 Application of Manufacturing Overhead Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: • It is impossible or difficult to trace overhead costs to particular jobs. • Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary. • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

  15. 2-15 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 driver that causes overhead. Application of Manufacturing Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

  16. 2-16 Application of Manufacturing Overhead Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner. Actual overhead for the period is notknown until sometime after the period has ended. Actual overhead costs can fluctuate seasonally, thus misleading decision makers. It simplifies record keeping. $

  17. 2-17 Determining Predetermined Overhead Rates Predetermined overhead rates are calculated using a three-step process. Estimate total amount of the allocation base for the period. Estimate total manufacturing overhead costs.  Estimate the level of production for the period. POHR =  ÷ 

  18. 2-18 Overhead applied = POHR × Actual activity Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Actual amount of the allocation based upon the actual level of activity (this is called a normal costing system).

  19. 2-19 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) Application of Manufacturing Overhead POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.

  20. 2-20 Application of Manufacturing Overhead

  21. 2-21 Completing the Job Cost Sheet

  22. 2-22 Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if anadditional unit were produced.Fixed overhead would not change if another unitwere produced, so the incremental cost of another unit is something less than $118.

  23. 2-23 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.

  24. 2-24 Let’s summarize the document flow in a job-order costing system. Job-Order CostingDocument Flow Summary

  25. 2-25 Job-Order CostingDocument Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.

  26. 2-26 Direct materials Indirect materials Job-Order CostingDocument Flow Summary Materials usedmay be eitherdirect orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account

  27. 2-27 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

  28. 2-28 IndirectLabor AppliedOverhead IndirectMaterial Job-Order CostingDocument Flow Summary EmployeeTime Ticket OtherActual OHCharges Manufacturing Overhead Account Job Cost Sheets MaterialsRequisition

  29. 2-29 Let’s examine the transactions in T-account and journal entry forms in a job-order costing system. Job-Order Costing—The Flow of Costs

  30. 2-30 • Direct Materials • Direct Materials • Indirect Materials • Indirect Materials Summary of Cost Flows Raw Materials Work in Process(Job Cost Sheet) • Material Purchases Mfg. Overhead Actual Applied

  31. 2-31 Journal Entry – Material Purchases Raw material purchases are recorded in an inventory account.

  32. 2-32 Journal Entry – 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 decrease Raw Materials.

  33. 2-33 • Direct Labor • IndirectLabor Summary of Cost Flows Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor Mfg. Overhead Actual Applied • Indirect Materials

  34. 2-34 Journal Entry – Labor Costs The cost of direct labor incurred increases Work in Process and thecost of indirect labor increases Manufacturing Overhead.

  35. 2-35 Summary of Cost Flows In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are debited to the Manufacturing Overhead account. Mfg. Overhead Actual Applied • Indirect Materials • IndirectLabor • OtherOverhead

  36. 2-36 Journal Entry – Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead accountas they are incurred.

  37. 2-37 Summary of Manufacturing Overhead Cost Flows Work in Process(Job Cost Sheet) Mfg. Overhead Actual Applied • Direct Materials • Indirect Materials • OverheadApplied to Work inProcess • Direct Labor • IndirectLabor • Overhead Applied • OtherOverhead If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

  38. 2-38 Journal Entry – Overhead Applied Work in Process is increasedwhen Manufacturing Overheadis applied to jobs.

  39. 2-39 Income Statement Expense nonmanufacturing costs as incurred. Accounting for Nonmanufacturing Costs Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred.

  40. 2-40 Journal Entry – Accounting for Nonmanufacturing Costs Nonmanufacturing Cost Examples:1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

  41. 2-41 Summary of Goods Manufactured Cost Flows Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied

  42. 2-42 Journal Entry – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

  43. 2-43 Learning Objective 6 Prepare schedules of cost of goods manufactured and cost of goods sold.

  44. 2-44 • Cost ofGoodsSold • Cost ofGoodsSold Summary of Job-Order System Cost Flows Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied Cost of Goods Sold

  45. 2-45 Journal Entry – Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

  46. 2-46 Learning Objective 8 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

  47. 2-47 Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. Underapplied overheadexists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less thanthe 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.

  48. 2-48 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

  49. 2-49 PearCo has overappliedoverhead for the yearby $30,000. What willPearCo do? 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

  50. 2-50 Quick Check  Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. What is Tiger’s over- or underapplied overhead? a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.

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