Chapter 3

1. Chapter 3 System Design: Job Order Costing

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 LO 1

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 Example companies:1. St. Mary’s Cement (cement mixing)2. Petro-Canada (refining oil) 3. Coca-Cola (mixing and bottling beverages) LO 1

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 LO 1

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 Example companies:1. Bombardier (aircraft manufacturing)2. Bechtel International (large scale construction) 3. Hallmark (greeting card design and printing) LO 1

6. Comparing Process and Job-Order Costing LO 1

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. LO 1

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. LO 1

9. Job-Order Costing – An Overview Charge direct material and direct labour costs to each job as work is performed. Direct Materials Job No. 1 Direct Labour Job No. 2 Job No. 3 LO 2

10. Job-Order Costing – An Overview Manufacturing Overhead, including indirect materials and indirect labour, are allocated to all jobs rather than directly traced to each job. Direct Materials Job No. 1 Direct Labour Job No. 2 Manufacturing Overhead Job No. 3 LO 2

11. The Job Cost Sheet PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-11 Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labour Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units Shipped Direct Materials Date Number Balance Direct Labour Manufacturing Overhead Total Cost Unit Product Cost LO 2

12. Will E. Delite Measuring Direct Materials Cost LO 2

13. Measuring Direct Materials Cost LO 2

14. Measuring Direct Labour Costs LO 2

15. Job-Order Cost Accounting LO 2

16. Why Use an Allocation Base? An allocation base, such as direct labour hours, direct labour 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 the production manager’s salary. • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. LO 3

17. 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 LO 3

18. 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. LO 3

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 labour hours (DLH) Overhead Application Rate POHR = $4.00 per DLH For each direct labour hour worked on a particular job, $4.00 of factory overhead will be applied to that job. LO 3

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. LO 3

21. Job-Order Cost Accounting LO 3

22. Job-Order Cost Accounting LO 3

23. Job-Order Cost Accounting LO 3

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. LO 3

25. Quick Check  Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. LO 3

26. Quick Check  Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labour hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labour hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. LO 3

27. Let’s summarize the document flow in a job-order costing system. Job-Order CostingDocument Flow Summary LO 3

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. LO 3

29. Direct materials Indirect materials Job-Order CostingDocument Flow Summary Materials usedmay be eitherdirect orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account LO 3

30. Direct Labour Indirect Labour Job-Order CostingDocument Flow Summary An employee’stime may be eitherdirect or indirect. Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account LO 3

31. IndirectLabour AppliedOverhead IndirectMaterial Job-Order CostingDocument Flow Summary EmployeeTime Ticket OtherActual OHCharges Manufacturing Overhead Account Job Cost Sheets MaterialsRequisition LO 3

32. Job-Order Costing: The Flow of Costs The transactions (in T-account and journal entry form) that capture the flow of costs in a job-order costing system are illustrated on the following slides. LO 4

33. Direct Materials • Direct Materials • Indirect Materials • Indirect Materials The Purchase and Issue of Raw Materials Raw Materials Inventory Work in Process Inventory(Job Cost Sheet) • Material Purchases Mfg. Overhead Actual Applied LO 4

34. Cost Flows – Material Purchases Raw material purchases are recorded in aninventory account. LO 4

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. LO 4

36. Direct Labour • IndirectLabour • Direct Labour • IndirectLabour The Recording of Labour Costs Work in Process Inventory(Job Cost Sheet) Salaries and Wages Payable • Direct Materials Mfg. Overhead Actual Applied • Indirect Materials LO 4

37. The Recording of Labour Costs The cost of direct labour incurred increases Work in Process and the cost of indirect labour increases Manufacturing Overhead. LO 4

38. Recording Actual Manufacturing Overhead Work in Process Inventory(Job Cost Sheet) Salaries and Wages Payable • Direct Labour • Direct Materials • IndirectLabour • Direct Labour Mfg. Overhead Actual Applied • Indirect Materials • IndirectLabour • OtherOverhead LO 4

39. Recording Actual Manufacturing Overhead In addition to indirect materials and indirect labour, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. LO 4

40. Overhead Applied • OverheadApplied to Work inProcess Applying Manufacturing Overhead Work in Process Inventory(Job Cost Sheet) Salaries and Wages Payable • Direct Labour • Direct Materials • IndirectLabour • Direct Labour Mfg. Overhead Actual Applied • Indirect Materials If actual and applied manufacturing overheadare not equal, a year-end adjustment is required. • IndirectLabour • OtherOverhead LO 5

41. Applying Manufacturing Overhead Work in Process is increased when Manufacturing Overhead is applied to jobs. LO 5

42. Accounting for Non-Manufacturing Cost Non-manufacturing 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. LO 5

43. Accounting for Non-Manufacturing Cost Non-manufacturing costs (period expenses) are charged to expense as they are incurred. LO 5

44. Cost ofGoodsMfd. • Cost ofGoodsMfd. Transferring Completed Units Work in Process Inventory(Job Cost Sheet) Finished Goods Inventory • Direct Materials • Direct Labour • Overhead Applied LO 6

45. Transferring Completed Units As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process. LO 6

46. Cost ofGoodsSold • Cost ofGoodsSold Transferring Units Sold Work in Process Inventory(Job Cost Sheet) Finished Goods Inventory • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labour • Overhead Applied Cost of Goods Sold LO 6

47. Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods Inventory. LO 6

48. Complications 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. LO 7

49. Overhead Application Example PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labour 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 labour hour. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 LO 7

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 labour 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 labour hour. Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 LO 7