Chapter 2 job order costing and modern manufacturing practices
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Chapter 2 Job-Order Costing and Modern Manufacturing Practices. Presentation Outline. Job-Order vs. Process Costing Cost Classifications in Manufacturing Companies Costs Flows in Manufacturing Companies Job-Order Costing System Allocating Manufacturing Overhead to Jobs

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Chapter 2 Job-Order Costing and Modern Manufacturing Practices

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Chapter 2 job order costing and modern manufacturing practices

Chapter 2Job-Order Costing and Modern Manufacturing Practices


Presentation outline

Presentation Outline

  • Job-Order vs. Process Costing

  • Cost Classifications in Manufacturing Companies

  • Costs Flows in Manufacturing Companies

  • Job-Order Costing System

  • Allocating Manufacturing Overhead to Jobs

  • Modern Manufacturing Practices


I job order vs process costing

I. Job-Order vs. Process Costing

  • Job-Order Costing

  • Process Costing


A job order costing

A. Job-Order Costing

A job-order costing system is a product costing system used by entities that make (perform) relatively small quantities or distinct batches of identifiable, unique products (services).


B process costing

B. Process Costing

A process costing system is a product costing system used by entities that produce large quantities of homogeneous goods.


Ii cost classifications in manufacturing companies

II. Cost Classifications in Manufacturing Companies

A. Manufacturing Costs

B. Nonmanufacturing Costs


Manufacturing costs also called product costs

Manufacturing Costs(Also called Product Costs)

Direct Materials

Materials that can

physically and

conveniently traced

to a product.

Manufacturing

Overhead

All manufacturing

costs other than

direct materials

and direct labor.

Direct Labor

Labor that can

physically and

conveniently traced

to a product.

Conversion

Costs

Prime Costs


B nonmanufacturing costs also called period costs

B. Nonmanufacturing Costs (Also Called Period Costs)

Administrative Costs

All costs of general

administration of the

company as a whole.

Marketing or Selling Costs

All costs necessary to secure

orders and get the finished

product or service into

the hands of the

customer


Iii cost flows in manufacturing companies

III. Cost Flows in Manufacturing Companies

  • Three Inventory Accounts

  • The Schedule of Cost of Goods Manufactured

  • The Cost of Goods Sold Calculation

  • Overview of Product Cost Flows

  • Overview of Period Cost Flows


A three inventory accounts

A. Three Inventory Accounts

  • Raw materials inventory – cost of materials on hand that are used to produce a company’s products.

  • Work in process inventory – cost of goods that are only partially completed.

  • Finished goods inventory – cost of all items that are complete and ready to sell.

    (Sell Illustration 2-4 on page 37)


B the schedule of cost of goods manufactured

B. The Schedule of Cost of Goods Manufactured

+

Beginning Work in Process Inventory

Plus: current manufacturing costs:

+

Direct materials

Beginning raw materials inventory

+ Purchases of raw materials

+

Direct labor

= Raw materials available for use

- Ending raw materials inventory

Manufacturing Overhead

+

= Raw materials used in production

Total Work in Process Inventory

=

-

Ending Work in Process Inventory

=

Cost of Goods Manufactured


C the cost of goods sold calculation

Merchandising Company

Beginning merchandise

inventory

+ Purchases

------------------------------

= Goods available for sale

- Ending merchandise

inventory

------------------------------

= Cost of Goods Sold

Manufacturing Company

Beginning finished goods

inventory

+ Cost of goods

manufactured

------------------------------

= Goods available for sale

- Ending finished goods

inventory

------------------------------

= Cost of Goods Sold

C. The Cost of Goods Sold Calculation

(See Illustration 2-6 on page 40)


D overview of product cost flows

D. Overview of Product Cost Flows

Balance Sheet

Income Statement

Raw Material

Purchases

Raw

Materials

Inventory

Indirect

Materials

Direct Materials

Manufacturing

Overhead

Work in

Process

Inventory

Cost of Goods Manufactured

Indirect Labor

Direct Labor

Labor

Finished

Goods

Inventory

Cost of Goods

Sold


E overview of period cost flows

E. Overview of Period Cost Flows

Balance Sheet

Income Statement

Selling

Expenses

Selling

Expenses

Prepaid

Expenses

General &

Administrative

Expenses

General &

Administrative

Expenses

Prepaid expenses does not include inventory.


Iv job order costing system

IV. Job-Order-Costing System

  • Materials Requisition Form

  • Materials Requisition Journal Entry

  • Employee Time Ticket

  • Labor Journal Entry

  • Manufacturing Overhead

  • Entry to Apply Manufacturing Overhead

  • Finished Goods and Cost of Goods Sold


A materials requisition form

A. Materials Requisition Form

A materials requisition form is used to request the release of materials from a company’s storage area. It shows the type, quantity, and cost of material, as well as the number of the job using the material. See Illustrations 2-11 and 2-10 on page 44.


B materials requisition journal entry

B. Materials Requisition Journal Entry

Work-in-Process Inventory xxx (Direct materials)

Manufacturing Overhead xxx (Indirect materials)

Raw Materials Inventory xxx


C employee time ticket

C. Employee Time Ticket

Time tickets keep track of employee time spent on jobs. (See Illustration 2-12 on page 97). If many workers are on a certain job, daily labor summaries may be posted to jobs instead of individual time tickets. (See Illustrations 2-13 on page 46 and 2-10 on page 44).


D labor journal entry

D. Labor Journal Entry

Work-in-Process Inventory xxx (Direct labor)

Manufacturing Overhead xxx (Indirect labor)

Salaries & Wages Payable xxx


E manufacturing overhead

E. Manufacturing Overhead

  • Actual manufacturing overhead costs are recorded as debits in a manufacturing overhead account.

  • Overhead is usually applied to job cost sheets using one or more predetermined overhead rates. Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual measure of the activity base (cost driver) associated with each job.

    (See 2 step process on pages 47-48)


F entry to apply manufacturing overhead

F. Entry to Apply Manufacturing Overhead

Overhead is applied at the end of the period or at the completion of production, whichever is earlier. The journal entry to apply overhead is as follows:

Work-in-Process Inventory xxx

Manufacturing Overhead xxx


G finished goods and cost of goods sold

G. Finished Goods and Cost of Goods Sold

  • When jobs are complete, Finished Goods is increased and Work in Process is reduced:

    Finished Goods Inventory xxx

    Work in Process Inventory xxx

  • When completed goods are sold, Cost of Goods Sold is increased and Finished Goods is reduced:

    Cost of Goods Sold xxx

    Finished Goods Inventory xxx


V allocating manufacturing overhead to jobs

V. Allocating Manufacturing Overhead to Jobs

  • Computing a Predetermined Overhead Rate

  • Allocation of Manufacturing Overhead

  • Why Estimate an Overhead Rate?

  • Overapplied and Underapplied Overhead


A computing a predetermined overhead rate

A. Computing a Predetermined Overhead Rate

Estimated Total Overhead Cost

Estimated Level of Allocation Base

=

Predetermined Overhead Rate

$320,000

40,000 direct labor hours

=

$8 per direct labor hour


B allocation or application of manufacturing overhead

B. Allocation (or Application) of Manufacturing Overhead

Predetermined Overhead Rate

x Actual Level of Allocation Base

---------------------------------------

Overhead Applied to Product

Manufacturing

Overhead (MOH)

Work in Process

Inventory

Actual MOH

Applied MOH

DM

DL

$8 x 27 hours = 216

AppliedMOH


C why estimate an overhead rate

C. Why Estimate an Overhead Rate?

  • Overhead rates are estimated because product costs need to be known for pricing purposes before production is completed.

  • Using annual estimates smoothes out fluctuations in overhead costs so customers are treated more consistently in pricing products.


D overapplied and underapplied overhead

D. Overapplied and Underapplied Overhead

Manufacturing Overhead (MOH)

  • Any balance in manufacturing overhead should technically be adjusted through work in process, finished goods, and cost of goods sold since the overhead flows through these accounts.

  • If the balance is immaterial, it is often adjusted through cost of goods sold only.

    (See Journal Entry Examples on Page 54)

Actual MOH

Applied MOH

Underapplied

Overapplied


Vi modern manufacturing practices

VI. Modern Manufacturing Practices

  • Just-In-Time Production

  • Computer-Controlled Manufacturing

  • Total Quality Management


Just in time jit production

Just-In-Time (JIT) Production

  • Suppliers deliver materials just before they are needed in the production process.

  • Production lines are synchronized to remove waiting time between lines.


B computer controlled manufacturing

B. Computer-Controlled Manufacturing

  • Decreasing labor costs are causing many companies to reconsider their overhead allocation bases.

  • In a highly mechanized companies where direct labor is a small part of total manufacturing costs, using labor as an allocation base is generally not appropriate.

  • When equipment is substituted for labor, fixed costs generally increase, and variable costs decrease.


C total quality management

C. Total Quality Management

Although there is no right way to implement total quality management (TQM), the following are usually stressed:

  • Listening to customer needs

  • Making products right the first time

  • Reducing defective products

  • Encouraging continuous improvement by workers


Summary

Summary

  • Job-Order vs. Process Costing

  • Manufacturing (DM, DL, MOH) and Nonmanufacturing (S&A) Costs

  • Cost flows in a Manufacturing Company

  • Manufacturing Overhead

  • JIT, Computer-Controlled Manufacturing, Total Quality Management


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