Chapter 3 Anup Kumar Saha

1. Chapter 3 Anup Kumar Saha

2. Systems Design: Job-Order Costing Chapter Three

3. 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

4. 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 Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)

5. 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

6. 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 Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

7. Comparing Process and Job-Order Costing

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. 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.

10. Direct Manufacturing Costs 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

11. Direct Manufacturing Costs 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

12. PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-05 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

13. Will E. Delite Materials Requisition Form

14. Job-Order Cost Accounting

15. Employee Time Ticket

16. Job-Order Cost Accounting

17. 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.

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

19. The Need for a POHR 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. $

20. 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.

21. 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 Rate 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 were produced.Fixed overhead would not change if another unitwere produced, so the incremental cost of another unit may be somewhat 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. Let’s summarize the document flow in a job-order costing system. Job-Order CostingDocument Flow Summary

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

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

30. 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

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

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

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

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

35. 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.

36. Direct Labor • IndirectLabor • Direct Labor • IndirectLabor Job-Order System Cost Flows Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Materials Mfg. Overhead Actual Applied • Indirect Materials

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

38. Job-Order System Cost Flows 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

39. Cost Flows – Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

40. Overhead Applied • OverheadApplied to Work inProcess Job-Order System Cost Flows 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

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

42. Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples:1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

43. Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

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

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

46. Cost ofGoodsSold • Cost ofGoodsSold 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

47. Cost Flows – Sales When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

48. 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 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.

49. 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. 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