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Systems Design: Job-Order Costing. Learning Objective 1. Distinguish between process costing and job-order costing and identify companies that would use each costing method. Products are manufactured by orders. Many different products are produced each period.

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Systems design job order costing

Systems Design: Job-Order Costing


Learning objective 1

Learning Objective 1

Distinguish between process costing and job-order costing and identify companies that would use each costing method.


Types of product costing systems

  • Products are manufactured by orders.

  • Many different products are produced each period.

  • 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


Types of product costing systems1

  • 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. Boeing (aircraft manufacturing)2. Hyundai Construction (large scale construction)

3. CJ Entertainment (movie production)


Types of product costing systems2

  • 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


Types of product costing systems3

  • 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. Kleenex (napkin, toilet paper)2. Coca-Cola (mixing and bottling beverages)


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.


Learning objective 2

Learning Objective 2

Identify the documents used in a job-order costing system.


Job order costing an overview

Job-Order Costing – An Overview

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

Direct Materials

Job No. 1

Direct Labor

Job No. 2

Manufacturing Overhead

Job No. 3


Direct manufacturing costs

Direct Manufacturing Costs

Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.

Direct Materials

Job No. 1

Direct Labor

Job No. 2

Manufacturing Overhead

Job No. 3


The job cost sheet

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

The Job Cost Sheet


Measuring direct materials cost

Will E. Delite

Measuring Direct Materials Cost


Measuring direct materials cost1

Measuring Direct Materials Cost


Measuring direct labor costs

Measuring Direct Labor Costs


Job order cost accounting

Job-Order Cost Accounting


Learning objective 3

Learning Objective 3

Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.


Why use an allocation base

Why Use an Allocation Base?

  • Manufacturing overhead is applied/allocatedto jobs that are in process.

  • An allocation base (such as direct labor hours, direct labor dollars, or machine hours) is used to allocate manufacturing overhead to individual jobs.


Why use an allocation base1

Why Use an Allocation Base?

Why?

  • We use an allocation base because:

  • Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. And it is impossible or very difficult to trace these kinds of overhead costs to particular jobs.

  • Actual manufacturing overhead costs may not known when the job is completed. Using a predetermined rate makes it possible to estimatetotal job costs sooner.

  • Although output may fluctuate during the period, many types of manufacturing overhead costs (e.g., plant depreciation) are fixed.


Manufacturing overhead application

Estimated total manufacturingoverhead cost for the coming period

POHR =

Estimated total allocation 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.


Application of manufacturing overhead

Overhead applied = POHR × Actual activity

Application of Manufacturing Overhead

Based on estimates, and determined before the period begins.

Based upon the actual level of activity.


Overhead application rate

Estimated total manufacturingoverhead cost for the coming period

POHR =

Estimated total allocation 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.


Job order cost accounting1

Job-Order Cost Accounting


Job order cost accounting2

Job-Order Cost Accounting


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.


Journal entries may be skipped with a focus on t accounts

Journal Entries (may be skipped with a focus on T-accounts)

Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs. Use T-accounts to show the flow of costs in a job-order costing system.


Job order costing the flow of costs

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.


The purchase and issue of raw materials

  • Direct Materials

  • Direct Materials

  • Indirect Materials

  • Indirect Materials

The Purchase and Issue of Raw Materials

Raw Materials

Work in Process(Job Cost Sheet)

  • Material

    Purchases

Mfg. Overhead

Actual

Applied


Cost flows material purchases

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.


Cost flows material usage

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.


The recording of labor costs

  • Direct Labor

  • IndirectLabor

  • Direct Labor

  • IndirectLabor

The Recording of Labor Costs

Work in Process(Job Cost Sheet)

Salaries and Wages Payable

  • Direct Materials

Mfg. Overhead

Actual

Applied

  • Indirect Materials


The recording of labor costs1

The Recording of Labor Costs

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


Recording actual manufacturing overhead

Recording Actual Manufacturing Overhead

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


Recording actual manufacturing overhead1

Recording Actual Manufacturing Overhead

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


Learning objective 5

Learning Objective 5

Apply overhead cost to Work in Process using a predetermined overhead rate.


Applying manufacturing overhead

  • Overhead Applied

  • OverheadApplied to Work inProcess

Applying Manufacturing Overhead

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: will be discussed later.

  • IndirectLabor

  • OtherOverhead


Applying manufacturing overhead1

Applying Manufacturing Overhead

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


Accounting for nonmanufacturing cost

Accounting for Nonmanufacturing Cost

Non-manufacturing costs are not assigned to individual jobs; rather they are expensed in the period incurred.

Examples:1. Salary expense of employeeswho work in a marketing, selling,or administrative capacity.

2. Advertising expenses are expensedin the period incurred.


Accounting for nonmanufacturing cost1

Accounting for Nonmanufacturing Cost

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


Learning objective 6

Learning Objective 6

Prepare schedules of cost of goods manufactured and cost of goods sold.


Transferring completed units

  • Cost ofGoodsMfd.

  • Cost ofGoodsMfd.

Transferring Completed Units

Work in Process(Job Cost Sheet)

Finished Goods

  • Direct Materials

  • Direct Labor

  • Overhead Applied


Transferring completed units1

Transferring Completed Units

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


Transferring units sold

  • Cost ofGoodsSold

  • Cost ofGoodsSold

Transferring Units Sold

Work in Process(Job Cost Sheet)

Finished Goods

  • Cost ofGoodsMfd.

  • Direct Materials

  • Cost ofGoodsMfd.

  • Direct Labor

  • Overhead Applied

Cost of Goods Sold


Transferring units sold1

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.


Learning objective 8

Learning Objective 8

Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.


Problems of overhead application

Problems 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.


Overhead application example

Overhead Application Example

PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours actually 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 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 

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 

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

$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

$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

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

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


Allocating under or overapplied overhead between accounts2

Allocating Under- or Overapplied Overhead Between Accounts


Overapplied and underapplied manufacturing overhead summary

Overapplied and Underapplied Manufacturing Overhead - Summary

PearCo’s Method


Quick check6

Quick Check 

What effect will the adjustment of an over-applied 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 

What effect will the adjustment of an over-applied 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 . . .

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.


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