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Systems Design: Job-Order Costing

Systems Design: Job-Order Costing. Types of Product Costing Systems. 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.

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Systems Design: Job-Order Costing

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  1. Systems Design: Job-Order Costing

  2. Types of Product Costing Systems • 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. ProcessCosting Job-orderCosting

  3. Types of Product Costing Systems Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production) ProcessCosting Job-orderCosting

  4. Job-Order Costing 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

  5. Job-Order Costing 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

  6. 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: • 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 a production manager’s salary. • Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

  7. Learning Objective LO3 To compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process

  8. Manufacturing Overhead Application Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner. Actual overhead for the period is notknown until sometime after the period has ended. $

  9. Manufacturing Overhead Application Overhead applied = POHR × Actual activity Based on estimates, and determined before the period begins. Actual amount of the allocation based upon the actual level of activity.

  10. Manufacturing Overhead Application 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) 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.

  11. Summary of Cost Flows • Direct Materials • Direct Materials • Indirect Materials • Indirect Materials Raw Materials Work in Process(Job Cost Sheet) • Material Purchases Mfg. Overhead Actual Applied

  12. Cost Flows – Material Purchases Raw material purchases are recorded in aninventory account.

  13. 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.

  14. Summary of Cost Flows • Direct Labor • IndirectLabor Work in Process(Job Cost Sheet) Salaries and Wages Payable • Direct Labor • Direct Materials • IndirectLabor Mfg. Overhead Actual Applied • Indirect Materials

  15. Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

  16. Summary of Cost Flows In addition to indirect materials and indirect labor, other actual manufacturing overhead costs are debited to the Manufacturing Overhead account. Mfg. Overhead Actual Applied • Indirect Materials • IndirectLabor • OtherOverhead

  17. Summary of Manufacturing Overhead Cost Flows Work in Process(Job Cost Sheet) Mfg. Overhead Actual Applied • Direct Materials • Indirect Materials • OverheadApplied to Work inProcess • Direct Labor • IndirectLabor • Overhead Applied • OtherOverhead If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

  18. Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.

  19. Summary of Goods Manufactured Cost Flows Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied

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

  21. Learning Objective LO6 To prepare schedules of cost of goods manufactured and cost of goods sold

  22. Job-Order System Cost Flows • Cost ofGoodsSold • Cost ofGoodsSold Work in Process(Job Cost Sheet) Finished Goods • Cost ofGoodsMfd. • Direct Materials • Cost ofGoodsMfd. • Direct Labor • Overhead Applied Cost of Goods Sold

  23. 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.

  24. Disposition of Under- or Overapplied Overhead $30,000 $30,000 PearCo’sMfg. Overhead PearCo’s Costof Goods Sold Unadjusted Balance Actualoverhead costs $650,000 Overhead appliedto jobs $680,000 AdjustedBalance $30,000 overapplied

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