Systems Design: Job-Order Costing

1. Systems Design: Job-Order Costing Chapter 3

2. Types of Product Costing Systems • 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. ProcessCosting Job-orderCosting

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

4. Types of Product Costing Systems • 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. ProcessCosting Job-orderCosting

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

6. Comparing Process and Job-Order Costing

7. 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.

8. 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.

9. 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

10. Indirect Manufacturing Costs Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

11. The Job Cost Sheet PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-09 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

12. Measuring Direct Materials Cost Will E. Delite

13. Measuring Direct Materials Cost

14. Measuring Direct Labor Costs

15. Job-Order Cost Accounting

16. Why Use an Allocation Base? 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 production manager’s salary. • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

17. The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Manufacturing Overhead Application 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.

18. 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. The Need for a POHR

19. 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 =  ÷ 

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

21. Overhead Application Rate 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) 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.

22. Job-Order Cost Accounting

23. Job-Order Cost Accounting

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

25. 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.

26. 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.

27. Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.

28. Job-Order CostingDocument Flow Summary Direct materials Indirect materials Materialsused may beeither direct orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account

29. Job-Order CostingDocument Flow Summary Direct Labor Indirect Labor Anemployee’stime may be eitherdirect orindirect. Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account

30. Job-Order CostingDocument Flow Summary IndirectMaterial POHR rate used to apply overhead IndirectLabor MaterialsRequisition OtherActual OHCharges Manufacturing Overhead Account Job Cost Sheets EmployeeTime Ticket

31. The Purchase and Issue of Raw Materials • Direct Materials • Direct Materials • Indirect Materials • Indirect Materials Raw Materials Work in Process(Job Cost Sheet) • Material Purchases Mfg. Overhead Actual Applied

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

33. 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.

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

35. The Recording of Labor Costs The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

36. 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

37. Recording Actual Manufacturing Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

38. Applying Manufacturing Overhead • Overhead Applied • OverheadApplied to Work inProcess 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

39. Applying Manufacturing Overhead Work in Process is increased when Manufacturing Overhead is applied to jobs.

40. Accounting for Nonmanufacturing Cost Nonmanufacturing costs are 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.

41. Accounting for Nonmanufacturing Cost Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

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

43. Transferring Completed Units As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

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

45. Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record the Cost of Goods Sold.

46. Problems of Overhead Application The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead. Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the 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.

47. 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 Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

48. Overhead Application Example PearCo has overappliedoverhead for the yearby $30,000. What willPearCo do? 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. 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. Tiger’s manufacturing overhead is a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied. Quick Check 

50. 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. Tiger’s manufacturing overhead is a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied. Quick Check  Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000