Chapter 3
Download
1 / 79

Chapter 3 Anup Kumar Saha - PowerPoint PPT Presentation


  • 176 Views
  • Uploaded on

Chapter 3 Anup Kumar Saha. Systems Design: Job-Order Costing. Chapter Three. A company produces many units of a single product. One unit of product is indistinguishable from other units of product.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Chapter 3 Anup Kumar Saha' - tacey


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Chapter 3

Anup Kumar Saha


Chapter three

Systems Design: Job-Order Costing

Chapter Three


Types of product costing systems

Types of Product Costing Systems

ProcessCosting

Job-orderCosting


Types of product costing systems1

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)


Types of product costing systems2

Types of Product Costing Systems

ProcessCosting

Job-orderCosting


Types of product costing systems3

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)



Quick check
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.


Quick check1
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.


Direct manufacturing costs
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


Direct manufacturing costs1
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


Job order cost accounting

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


Materials requisition form

Will E. Delite

Materials Requisition Form





Why use an allocation base
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.


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.

Manufacturing Overhead Application

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


The need for a pohr
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.

$


Application of manufacturing overhead

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.


Overhead application rate

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.




Interpreting the average unit cost
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.


Quick check2
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.


Quick check3
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.


Job order costing document flow summary

Let’s summarize the document flow in a job-order costing system.

Job-Order CostingDocument Flow Summary


Job order costing document flow summary1
Job-Order Costing system.Document Flow Summary

A sales order is the basis of issuing a production order.

A production order initiates work on a job.


Job order costing document flow summary2

Direct materials system.

Indirect materials

Job-Order CostingDocument Flow Summary

Materials usedmay be eitherdirect orindirect.

Job Cost Sheets

MaterialsRequisition

Manufacturing Overhead Account


Job order costing document flow summary3

Direct Labor system.

Indirect Labor

Job-Order CostingDocument Flow Summary

An employee’stime may be eitherdirect or indirect.

Job Cost Sheets

Employee Time Ticket

Manufacturing Overhead Account


Job order costing document flow summary4

Indirect system.Labor

AppliedOverhead

IndirectMaterial

Job-Order CostingDocument Flow Summary

EmployeeTime Ticket

OtherActual OHCharges

Manufacturing Overhead Account

Job Cost Sheets

MaterialsRequisition


Job order system cost flows

Let’s examine the cost flows in a job-order costing system.

Job-Order System Cost Flows


Job order system cost flows1

  • 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


Cost flows material purchases
Cost Flows – Material Purchases system.

Raw material purchases are recorded in aninventory account.


Cost flows material usage
Cost Flows – Material Usage system.

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.


Job order system cost flows2

  • 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


Cost flows labor
Cost Flows – Labor system.

The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.


Job order system cost flows3
Job-Order System Cost Flows system.

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


Cost flows actual overhead
Cost Flows – Actual Overhead system.

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


Job order system cost flows4

  • 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


Cost flows overhead applied
Cost Flows – Overhead Applied system.

Work in Process is increased when Manufacturing Overhead is applied to jobs.


Nonmanufacturing cost flows
Nonmanufacturing Cost Flows system.

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.


Nonmanufacturing cost flows1
Nonmanufacturing Cost Flows system.

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


Job order system cost flows5

  • Cost ofGoodsMfd.

Job-Order System Cost Flows

Work in Process(Job Cost Sheet)

Finished Goods

  • Direct Materials

  • Direct Labor

  • Overhead Applied


Cost flows cost of goods manufactured
Cost Flows – Cost of Goods Manufactured system.

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


Job order system cost flows6

  • 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


Cost flows sales
Cost Flows – Sales system.

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


Defining under and overapplied overhead
Defining Under- and Overapplied Overhead system.

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.


Overhead application example
Overhead Application Example system.

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


Overhead application example1

PearCo has system.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


Quick check4
Quick Check system.

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.


Quick check5
Quick Check system.

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


Disposition of under or overapplied overhead

PearCo’s Method system.

$30,000may be allocatedto these accounts.

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

Work inProcess

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

Disposition of Under- or Overapplied Overhead

OR


Disposition of under or overapplied overhead1

$30,000 system.

$30,000

Disposition of Under- or Overapplied Overhead

PearCo’sMfg. Overhead

PearCo’s Costof Goods Sold

Unadjusted Balance

Actualoverhead costs

$650,000

Overhead appliedto jobs

$680,000

AdjustedBalance

$30,000 overapplied


Allocating under or overapplied overhead between accounts
Allocating Under- or Overapplied Overhead Between Accounts system.

Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:


Allocating under or overapplied overhead between accounts1
Allocating Under- or Overapplied Overhead Between Accounts system.

We would complete the following allocation of $30,000 overapplied overhead:




Quick check6
Quick Check Summary

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.


Quick check7
Quick Check Summary

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.


Multiple predetermined overhead rates

May be more complex but . . . Summary

May be more accurate because it reflects differences across departments.

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.


Job order costing in service companies
Job-Order Costing in Service Companies Summary

Job-order costing is used in many difference types of service companies.


The use of information technology
The Use of Information Technology Summary

Technology plays an important part in many job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.


Appendix 3a
Appendix 3a Summary

The Predetermined Overhead Rate & Capacity


Predetermined overhead rate and capacity
Predetermined Overhead Rate and Capacity Summary

  • Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because:

  • Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level.

  • Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.


Capacity based overhead rates
Capacity-Based Overhead Rates Summary

Criticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation.

Let’s look at the difference!


An example
An Example Summary

Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?


An example1

Traditional SummaryMethod

$100,000

40,000

=

= $2.50 per unit

Capacity Method

$100,000

50,000

=

= $2.00 per unit

An Example

Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?


Quick check8
Quick Check Summary

Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.


Quick check9
Quick Check Summary

Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.


Quick check10
Quick Check Summary

Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.


Quick check11
Quick Check Summary

Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.


Quick check12
Quick Check Summary

When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?

a. The predetermined overhead rate goes up when activity goes down.

b. The predetermined overhead rate stays the same; it is not affected by changes in activity.

c. The predetermined overhead rate goes down when activity goes down.


Quick check13
Quick Check Summary

When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?

a. The predetermined overhead rate goes up when activity goes down.

b. The predetermined overhead rate stays the same; it is not affected by changes in activity.

c. The predetermined overhead rate goes down when activity goes down.


Quick check14
Quick Check Summary

When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?

a.The predetermined overhead rate goes up when activity goes down.

b.The predetermined overhead rate stays the same; it is not affected by changes in activity.

c.The predetermined overhead rate goes down when activity goes down.


Quick check15
Quick Check Summary

When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?

a.The predetermined overhead rate goes up when activity goes down.

b.The predetermined overhead rate stays the same; it is not affected by changes in activity.

c.The predetermined overhead rate goes down when activity goes down.





ad