Job order process and hybrid cost systems
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Job-Order, Process, and Hybrid Cost Systems. Chapter 12. Job-Order Cost Systems. Process Costing. Job-Order Costing. Product costs are traced to individual inventory items. Products are manufactured to order. Cost records must be maintained for each distinct product or job.

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Job order process and hybrid cost systems

Job-Order, Process, and Hybrid Cost Systems

Chapter 12


Job order cost systems

Job-Order Cost Systems

ProcessCosting

Job-OrderCosting

  • Product costs are traced to individual inventory items.

  • Products are manufactured to order.

  • Cost records must be maintained for each distinct product or job.


Job order cost systems1

ProcessCosting

Job-OrderCosting

Job-Order Cost Systems

  • Typical job-order cost applications:

    • Special-order printing

    • Building construction

  • Also used in service industry

    • Hospitals

    • Law firms


Process cost systems

ProcessCosting

Job-OrderCosting

Process Cost Systems

  • Used for production of small, identical, low cost items.

  • Costs cannot be directly traced to each unit of product.

  • Costs are evenly distributed across total production by dividing total product cost by the number of units produced.


Process cost systems1

ProcessCosting

Job-OrderCosting

Process Cost Systems

Typical process cost applications:

  • Petrochemical refinery

  • Paint manufacturer

  • Paper mill


Hybrid costing

Hybrid Costing

Hybrid costing employs some aspectsof both job-order and process costing.

Job-orderHybrid Costing Process Costing (Products produced in batches)Costing

Material Costs Chargedto batches as injob-order costing.

Labour and overhead costs assigned to batches as in process costing.


Job order cost flow

Job-Order Cost Flow

Receive orders from customers

Begin production

Schedulejobs

Ordermaterials


Job order cost flow1

Job-Order Cost Flow

Manufacturingoverhead (OH)

Applied to eachjob using apredeterminedrate

Directmaterial

Traced directly to each job

THE JOB

Traced directly to each job

Direct labour


Job order cost flow2

Job-Order Cost Flow

Charge direct material and direct labour costs to each job as work is performed.

Direct Materials

Job No. 1

Direct Labour

Job No. 2

Manufacturing Overhead

Job No. 3


Job order cost flow3

Job-Order Cost Flow

Direct Materials

Apply overhead to each job using a predeter-mined rate.

Job No. 1

Direct Labour

Job No. 2

Manufacturing Overhead

Job No. 3


Documentation in a job order cost system

Documentation in a Job-OrderCost System

The primary document for tracking the costs associated with a given job is the job cost sheet.

Let’s investigate


Documentation in a job order cost system1

Documentation in a Job-OrderCost System


Documentation in a job order cost system2

Documentation in a Job-OrderCost System

Amaterials requisition form is used to authorize the use of materials on a job.

Let’s see one


Documentation in a job order cost system3

Documentation in a Job-OrderCost System

Will E. Delite


Documentation in a job order cost system4

Documentation in a Job-OrderCost System

Cost of material is charged to job A-143.

Type, quantity, and total cost of material charged to job A-143.

Will E. Delite


Documentation in a job order cost system5

Documentation in a Job-OrderCost System


Documentation in a job order cost system6

Documentation in a Job-OrderCost System

Workers usetime ticketsto record the time spent on each job.

Let’s see one


Documentation in a job order cost system7

Documentation in a Job-OrderCost System


Documentation in a job order cost system8

Documentation in a Job-OrderCost System


Documentation in a job order cost system9

Documentation in a Job-OrderCost System

Applymanufacturing overhead to jobs using apredetermined overhead rate of $4 per direct labour hour (DLH).

Let’s do it


Documentation in a job order cost system10

Documentation in a Job-OrderCost System


Job order process and hybrid cost systems

Documentation in a Job-OrderCost System

Let’s summarize the document flow we have been discussing in a job-order costing system.


Documentation in a job order cost system11

Documentation in a Job-OrderCost System

Materials usedmay be eitherdirect orindirect.

Job Cost Sheets

Direct materials

MaterialsRequisition

Manufacturing Overhead Account

Indirect materials


Documentation in a job order cost system12

An employee’stime may be eitherdirect or indirect.

Documentation in a Job-OrderCost System

Job Cost Sheets

Direct Labour

Employee Time Ticket

Manufacturing Overhead Account

Indirect Labour


Documentation in a job order cost system13

Documentation in a Job-OrderCost System

IndirectLabour

EmployeeTime Ticket

OtherActual OHCharges

Manufacturing Overhead Account

AppliedOverhead

Job Cost Sheets

MaterialsRequisition

IndirectMaterial


Job order process and hybrid cost systems

Job-Order Cost Flow

Let’s return to WoodCo and see what we will do if actual and applied overhead are not equal.


Job order cost flow4

Job-Order Cost Flow

WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labour hours.

How much total overhead was applied toWoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rateof $4.00 per direct labour hour.


Job order cost flow5

Job-Order Cost Flow

WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labour hours.

How much total overhead was applied toWoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rateof $4.00 per direct labour hour.

SOLUTION

Applied Overhead = POHR × Actual Direct Labour Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH =$680,000


Job order cost flow6

Job-Order Cost Flow

WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labour hours.

How much total overhead was applied toWoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rateof $4.00 per direct labour hour.

WoodCo hasoverappliedoverhead for the yearby $30,000. What willWoodCo do?

SOLUTION

Applied Overhead = POHR × Actual Direct Labour Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH =$680,000


Job order cost flow7

Job-Order Cost Flow

WoodCo’s Method

$30,000may be allocatedto these accounts.

$30,000 may beclosed directly to cost of goods sold.

OR

Work inProcess

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold


Job order cost flow8

Job-Order Cost Flow

WoodCo’sMfg. Overhead

WoodCo’s Costof Goods Sold

Unadjusted Balance

Actualoverheadcosts

$650,000

OverheadAppliedto jobs

$680,000

$30,000

$30,000

AdjustedBalance

$30,000 overapplied


Job order cost flow9

Job-Order Cost Flow

WoodCo’s Method


Job order cost flow10

Job-Order Cost Flow

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.


Job order cost flow11

Job-Order Cost Flow

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.

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000


Job order cost flow12

Job-Order Cost Flow

Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decreasecost of goods sold by $60,000.

a. True

b. False


Job order cost flow13

Job-Order Cost Flow

Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decreasecost of goods sold by $60,000.

a. True

b. False

If overhead is underapplied, cost of goods sold is understated. The adjustment willincreasecost of goods sold.


Job order process and hybrid cost systems

Process Costing

Let’s turn our attention to process cost systems.


Comparison of job order costing and process costing

Job-order costing

Costs accumulated by thejob.

Work in process has a job-cost sheet for each job.

Many unique, high costjobs.

Jobs built tocustomerorder.

Process costing

Costs accumulated by department or process.

Work in process has a production report for each batch of products.

A few identical,low costproducts.

Unitscontinuouslyproduced for inventory.

Comparison of Job-Order Costing and Process Costing


Differences between job order and process costing

Differences Between Job-Order and Process Costing

The work-in-process account consists of individual jobs in ajob-ordercost system.

Direct Material

FinishedGoods

Jobs

Direct Labour

ManufacturingOverhead

Cost of GoodsSold


Differences between job order and process costing1

Differences Between Job-Order and Process Costing

The work-in-process account consists of batches of productsin aprocess cost system.

Direct Material

FinishedGoods

Products

Direct Labour

ManufacturingOverhead

Cost of GoodsSold


Equivalent units a key concept

Equivalent Units: A Key Concept

  • Costs are accumulated for a period of timefor products in work-in-process inventory.

  • Products in work-in-process inventory at the beginning and end of the period are only partially complete.

  • Equivalent unitsis a concept expressing these partially completed products as a smaller number of fully completed products.


Equivalent units a key concept1

Equivalent Units: A Key Concept

Two one-half completed products are equivalent to one completed product.

+

=

So, 10,000 units 70 percent completeareequivalentto 7,000 complete units.


Equivalent units

Equivalent Units

For the current period, Jones started15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000


Equivalent units1

10,000 units + (5,000 units × .30) = 11,500 equivalent units

Equivalent Units

For the current period, Jones started15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000


Calculating and using equivalent units of production

Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent unit

Costs for the periodEquivalent units for the period

=


Job order process and hybrid cost systems

Equivalent Units

If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a.$1.84

b.$2.40

c.$2.76

d.$2.90


Job order process and hybrid cost systems

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Equivalent Units

If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a.$1.84

b.$2.40

c.$2.76

d.$2.90


Cost of production report

  • Computation of equivalent units.

  • Determination of cost per equivalent unit.

  • Allocation of total cost to goods transferred and ending WIP inventory.

Cost of Production Report

Cost of ProductionReport


Equivalent units of production weighted average method

Equivalent Units of Production –Weighted-Average Method

The weighted-average method . . .

  • Makes no distinction between work done in the prior period and work done in the current period.

  • Blends together units and costs from the prior period and the current period.

The FIFO method is a morecomplex method and israrely used in practice.


Cost of production report1

Cost of Production Report

At this point, we need to look at an example to illustrate the departmental cost of production report.


Process costing illustrated

Process Costing Illustrated

  • TigerCo makes toy tigers in three departments, Cutting, Stitching, and Stuffing.

  • TigerCo uses the weighted-average cost procedure.

  • Using the following information for the month of March, let’s prepare a cost of production report for the Cutting Department.


Process costing illustrated1

Process Costing Illustrated

Work in Process, March 1: 20,000 units, 30% complete.

Cost of March 1 Work in Process:$22,000

Units started into production in April:30,000 units

Units completed and transferred out in April40,000 units

Work in process, March 31: 10,000 units, 40% complete

Costs incurred during March

Materials$ 88,000Labour 44,000

Overhead 132,000

TigerCo March Cutting Department Information


Process costing illustrated2

Process Costing Illustrated

  • Computation of Equivalent Units for March

Beginning inventory % is not used in weighted-average method.

40% of 10,000 units


Production report example

Production Report Example

  • Determination of Cost per Equivalent Unit for March.


Production report example1

All costs accounted for

Production Report Example

  • Allocation of Costs


End of chapter 12

End of Chapter 12

I’m ready to processsome leisure time.


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