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Cost Accumulation for Job-Shop and Batch Production Operations. Chapter 3. Product-costing systems. Operation costing. Process costing. Job order costing. Homogeneous units Relatively low unit value Not feasible to trace costs to individual units Accumulated by

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product costing systems
Product-costing systems

Operation

costing

Process

costing

Job order

costing

  • Homogeneous

units

  • Relatively low

unit value

  • Not feasible to

trace costs to

individual units

  • Accumulated by

process and

time period

  • Large batches

of similar units

  • Different

materials,

common

operations

  • Materials

accumulated by

job, conversion

costs by process

  • Distinct units or

batches

  • Relatively high

unit value

  • Ability to trace

direct costs

  • Often priced

differently

  • Accumulated

by job

job order costing
Job order costing
  • Useful for
    • Managing the costs of current jobs
    • Determining inventory costs
    • Providing data to predict future costs
    • Identifying likely profitable or unprofitable jobs
tracking costs
Tracking costs
  • Job cost sheets
    • Record costs of individual jobs
      • Materials
      • Labor
      • Overhead
    • Act as subsidiary ledger for work in process, finished goods inventories
tracking costs1
Tracking costs
  • Materials
    • Raw materials inventory includes both direct and indirect materials
      • Purchases of either are debited to raw materials
      • Direct materials charged to individual jobs (work in process inventory)
      • Indirect materials charged to overhead account
tracking costs2
Tracking costs
  • Material purchases

Raw materials inventory 4,000

Accounts payable 4,000

  • Material requisitions

Work in process inventory 3,650

Overhead 600

Raw materials inventory 4,250

tracking costs3
Tracking costs
  • Labor
    • Direct labor charged to individual jobs (work in process inventory)
    • Indirect labor charged to overhead account

Work in process inventory 2,750

Overhead (Incl. uncharged production labor) 1,050

Wages payable 3,800

tracking costs4
Tracking costs
  • Overhead
    • Accumulated in overhead account
      • No expenses (debit overhead)
      • Credits are unchanged
    • Charged to individual jobs (work in process inventory) based on a predetermined rate
      • Smoothes (normalizes) the erratic nature of overhead costs
tracking costs5
Tracking costs
  • Incurrence of overhead costs

Overhead 6,100

Cash 3,000

Prepaid rent 1,000

Accumulated depreciation 1,250 Accounts payable 850

  • Application of overhead to jobs

Work in process inventory 6,875

Overhead 6,875

tracking costs6
Tracking costs
  • Completion of jobs
    • Accumulated costs moved from work in process inventory to finished goods inventory

Finished goods inventory 11,975

Work in process inventory 11,975

tracking costs7
Tracking costs
  • Sale of jobs
    • Sale is recorded at selling price
    • Cost of job is transferred from finished goods inventory to cost of goods sold

Accounts receivable 9,000

Sales 9,000

Cost of goods sold 7,675

Finished goods inventory 7,675

using predetermined overhead rates
Using predetermined overhead rates
  • Advantages of using predetermined rates
    • Timeliness over accuracy
      • Cannot wait to determine actual overhead
      • Need to estimate job costs
    • Normalizes the amount applied to various jobs
      • Overhead does not occur evenly throughout the year
using predetermined overhead rates1
Using predetermined overhead rates
  • Setting the rate
    • Determine costs to be included
    • Estimate the amount of the costs
    • Select appropriate cost driver(s) (base)
      • Some measure that is highly correlated to the costs
    • Estimate the amount of the cost driver
      • Theoretical? Practical? Normal? Expected?
    • Calculate the rate
      • Estimated cost / estimated driver
using predetermined overhead rates2
Using predetermined overhead rates
  • Actual vs. applied overhead
    • Applied overhead seldom equals actual
      • Estimates of cost and/or driver are seldom accurate
    • If actual exceeds applied
      • Underapplied overhead
      • Jobs are under-costed
    • If applied exceeds actual
      • Overapplied overhead
      • Jobs are over-costed
using predetermined overhead rates3
Using predetermined overhead rates
  • Disposition of variance
    • Prorate to work in process, finished goods, cost of goods sold
      • All are either over- or under-costed as a result of the inaccurate predetermined rate
      • Prorate based on the relative ending balances of the three accounts
    • Close to cost of goods sold
      • That’s where all overhead eventually ends up
      • Appropriate if there is little or no work in process or finished goods
using predetermined overhead rates4
Using predetermined overhead rates
  • Disposition of the variance
    • Overhead is underapplied by $875
    • If prorated

Work in process inventory 236

Finished goods inventory 228

Cost of goods sold 411

Overhead 875

using predetermined overhead rates5
Using predetermined overhead rates
  • Disposition of the variance
    • If closed to cost of goods sold

Cost of goods sold 875

Overhead 875

    • In either method, closing the underapplied overhead increases the cost in the target accounts and closes the overhead account
actual normal and standard costing
Actual, normal and standard costing
  • Actual costing
    • Accumulates actual material, labor and overhead costs for jobs
      • Impractical
        • Must wait until actual overhead costs are known
        • Overhead may occur unevenly during the year
        • How to determine cost (and selling price) for jobs completed early in the year?
actual normal and standard costing1
Actual, normal and standard costing
  • Normal costing
    • Accumulates actual material and labor cost for jobs and allocates overhead based on a predetermined rate
      • Provides more timely information than actual costing
      • Less accurate
actual normal and standard costing2
Actual, normal and standard costing
  • Standard costing
    • Accumulates predetermined amounts for materials, labor and overhead
      • How much SHOULD be consumed?
      • Provides a control and evaluation mechanism
        • Compare standard amounts to actual amounts