Acc mgt noreen02 systems design job order costing
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This document discusses job-order costing and process costing systems. It defines the two systems, providing examples of companies that would typically use each. Job-order costing is used when many different products are produced to customer orders, requiring unique cost records for each job. Process costing is used when a company produces large quantities of a single product. The document also outlines the key documents used in a job-order costing system, such as job cost sheets, materials requisitions, and time tickets. It explains how predetermined overhead rates are used to apply manufacturing overhead costs and discusses the flow of costs through a job-order system using T-accounts.
Acc mgt noreen02 systems design job order costing
- 1. Chapter 2 © The McGraw-Hill Companies, Inc., 2007McGraw-Hill /Irwin Systems Design: Job-Order Costing
- 2. 2-2 Learning Objective To distinguish between process costing and job-order costing and identify companies that would use each costing method LO1
- 3. 2-3 Types of Product Costing Systems Process Costing Job-order Costing 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.
- 4. 2-4 Types of Product Costing Systems Process Costing Job-order Costing Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)
- 5. 2-5 Types of Product Costing Systems Process Costing Job-order Costing 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.
- 6. 2-6 Types of Product Costing Systems Process Costing Job-order Costing Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)
- 7. 2-7 Comparing Process and Job-Order Costing Job-Order Process Number of jobs worked Many Single Product Cost accumulated by Individual Job Department Average cost computed by Job Department
- 8. 2-8 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. 2-9 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. 2-10 Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Job-Order Costing Direct Materials Direct Labor
- 11. 2-11 Manufacturing Overhead, including indirect materials and indirect labor, are allocated to jobs rather than directly traced to each job. Job-Order Costing Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3Manufacturing Overhead
- 12. 2-12 Learning Objective To identify the documents used in a job-order costing system LO2
- 18. 2-18 Manufacturing Overhead Application 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: 1. It is impossible or difficult to trace overhead costs to particular jobs. 2. Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
- 19. 2-19 Learning Objective To compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process LO3
- 20. 2-20 Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until sometime after the period has ended. Manufacturing Overhead Application $
- 21. 2-21 Actual amount of the allocation based upon the actual level of activity. Based on estimates, and determined before the period begins. Manufacturing Overhead Application Overhead applied = POHR × Actual activity
- 22. 2-22 For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job. Manufacturing Overhead Application POHR = $4.00 per DLH $640,000 160,000 direct labor hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =
- 25. 2-25 Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.
- 26. 2-26 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. 2-27 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. Pred. ovhd. rate $760,000/20,000hours $38 Direct materials $200 Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 Total cost $730
- 28. 2-28 Let’s summarize the document flow in a job-order costing system. Job-Order Costing Document Flow Summary
- 29. 2-29 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.
- 30. 2-30 Job-Order Costing Document Flow Summary Job Cost Sheets Materials Requisition Manufacturing Overhead Account Direct materials Indirect materials Materials used may be either direct or indirect.
- 31. 2-31 Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account An employee’s time may be either direct or indirect. Direct Labor Indirect Labor
- 32. 2-32 Job-Order Costing Document Flow Summary Manufacturing Overhead Account Other Actual OH Charges Job Cost Sheets Applied Overhead Materials Requisition Employee Time Ticket Indirect Material Indirect Labor
- 33. 2-33 Learning Objective To prepare journal entries to record costs in a job-order costing system LO4
- 34. 2-34 Learning Objective To use T accounts to show the flow of costs in a job-order costing system LO7
- 35. 2-35 Job-Order System Cost Flows Let’s examine the transactions in T- account and journal entry form in a job- order costing system.
- 36. 2-36 Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) Actual Applied Direct Materials Direct Materials Indirect Materials Indirect Materials Summary of Cost Flows
- 37. 2-37 Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.
- 38. 2-38 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.
- 39. 2-39 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Direct Labor Indirect Labor Indirect Materials Actual Applied Indirect Labor Summary of Cost Flows
- 40. 2-40 Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.
- 41. 2-41 Mfg. Overhead Indirect Materials Actual Applied Indirect Labor Summary of Cost Flows Other Overhead In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are debited to the Manufacturing Overhead account.
- 42. 2-42 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.
- 43. 2-43 Learning Objective To apply overhead cost to Work in Process using a predetermined overhead rate LO5
- 44. 2-44 Mfg. Overhead Work in Process (Job Cost Sheet) Direct Materials Overhead Applied Overhead Applied to Work in Process Direct Labor Indirect Materials Actual Applied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Indirect Labor Summary of Manufacturing Overhead Cost Flows Other Overhead
- 45. 2-45 Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.
- 46. 2-46 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.
- 47. 2-47 Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
- 48. 2-48 Finished Goods Cost of Goods Mfd. Cost of Goods Mfd. Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Summary of Goods Manufactured Cost Flows
- 49. 2-49 Cost Flows – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.
- 50. 2-50 Learning Objective To prepare schedules of cost of goods manufactured and cost of goods sold LO6
- 51. 2-51 Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Mfd. Cost of Goods Sold Cost of Goods Sold Job-Order System Cost Flows
- 52. 2-52 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.
- 53. 2-53 Learning Objective To compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts LO8
- 54. 2-54 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.
- 55. 2-55 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.
- 56. 2-56 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. Actual 1,210,000 1,160,000 Applied Underapplied 50,000 Manufacturing Overhead Applied Overhead $4.00 × 290,000 hours = $1,160,000
- 57. 2-57 Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied Overhead applied to jobs $680,000 PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 $30,000
- 58. 2-58 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.
- 59. 2-59 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.
- 60. 2-60 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 complex but . . . May be more accurate because it reflects differences across departments.
- 61. 2-61 Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies.
- 62. 2-62 End of Chapter 2