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Job Costing. Product and service cost determination. Planning, Cost Control, and performance evaluation. Strategic and operational decision making. Product Costing.

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product costing

Product and servicecost determination

Planning,Cost Control,and performanceevaluation

Strategic andoperational decisionmaking

Product Costing

Product costing is the process of accumulating,classifying, and assigning direct materials,direct labor, and factory overhead to products or services.

product costing1
Product Costing

Process costing accumulates costs by process or department and then assigns them to a large number of nearly identical products.

Job costing accumulates and assigns costs to a specific job.

job costing1
Job Costing
  • Printing shops
  • Ship-builders
  • Custom furniture manufacturers
  • Contractors
  • Film-producing companies
  • Accounting and law firms
  • Advertising agencies
  • Medical clinics
process costing
Process Costing
  • Chemical plants
  • Food processors
  • Household appliancemanufacturers
  • Textile companies
  • Petroleum productsmanufacturers
  • Paper
  • Lumber and pulp mills
  • Glass factories
comparison of job and process costing
Comparison of Joband Process Costing
  • Costs are accumulated by process or department.
  • Mass production of homogeneous products or services.
  • Unit cost computed by dividing total process costs of the period by units produced or served.

Job Costing

Process Costing

  • Cost are accumulated by jobs.
  • Wide variety of products or services.
  • Unit cost computed by dividing total job costs by units produced or served at end of the job.
job costing2
Job Costing

Factory overhead(OH) is applied to each job using apredetermined rate.

Directmaterials

Traced directly to each job

THE JOB

Traced directly to each job

Direct labor

job costing3
Job Costing

Charge direct material costs to each job as the materials are used.

Direct Materials

Job No. 1

Direct Labor

Job No. 2

Factory Overhead

Job No. 3

job costing4
Job Costing

Direct Materials

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

Job No. 1

Direct Labor

Job No. 2

Factory Overhead

Job No. 3

job costing5
Job Costing

Direct Materials

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

Job No. 1

Direct Labor

Job No. 2

Factory Overhead

Job No. 3

job costing6
Job Costing

Direct Materials

Job No. 1

Special documents are used to track costs for each job.

Direct Labor

Job No. 2

Factory Overhead

Job No. 3

job costing7
Job Costing

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

Let’s investigate

slide14

Smith Job Shop

Job-Cost Sheet

Product RobotJob #351

Date Started June 6, 2001 Quantity 20

Date Completed July 15, 2001 Unit Cost $3.761

Direct Materials

Requisition

Dept. Date Number Quantity Unit Price Cost

A 6/6 A-4024 20 $75.00 $1,500

B 6/26 B-3105 15 26.67 400

C 7/2 C-5051 10 30.00 300

Total $2,200

Job Cost Sheet - Direct Materials

slide15

Smith Job Shop

Job-Cost Sheet

Product RobotJob #351

Date Started June 6, 2001 Quantity 20

Date Completed July 15, 2001 Unit Cost $3.761

A materials requisitionform is the source document used to authorize the use of materials on a job.

Direct Materials

Requisition

Dept. Date Number Quantity Unit Price Cost

A 6/6 A-4024 20 $75.00 $1,500

B 6/26 B-3105 15 26.67 400

C 7/2 C-5051 10 30.00 300

Total $2,200

Job Cost Sheet - Direct Materials

slide16

Job Cost Sheet - Direct Labor

Direct Labor

Dept. Date Hours Rate Ticket Amount

A 6/6 to A-1101 to

6/25 100 $10 A-1150 $1,000

B 6/26 to B-308 to

6/30 60 15 B-320 900

C 7/1 to C-500 to

7/15 140 12 C-515 1,680

Total $3,580

slide17

Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.

Job Cost Sheet - Direct Labor

Direct Labor

Dept. Date Hours Rate Ticket Amount

A 6/6 to A-1101 to

6/25 100 $10 A-1150 $1,000

B 6/26 to B-308 to

6/30 60 15 B-320 900

C 7/1 to C-500 to

7/15 140 12 C-515 1,680

Total $3,580

slide18

Job Cost Sheet - Factory Overhead

Factory Overhead

Machine Application

Dept. Hours Rate Amount

A 50 $10.00 $500

B 60 6.70 402

C 35 24.00 840

Total $1,742

Direct materials $2,200 Department A $3,000

Direct labor 3,580 Department B 1,702

Overhead 1,742 Department C 2,820

Total$7,522 Total $7,522

slide19

Job Cost Sheet - Factory Overhead

Applyfactory overheadto jobs using a predetermined overhead rate.

Factory Overhead

Machine Application

Dept. Hours Rate Amount

A 50 $10.00 $500

B 60 6.70 402

C 35 24.00 840

Total $1,742

Direct materials $2,200 Department A $3,000

Direct labor 3,580 Department B 1,702

Overhead 1,742 Department C 2,820

Total$7,522 Total $7,522

use of predetermined factory overhead
Use of PredeterminedFactory Overhead

Predetermined overhead rates are established using a four-step approach:

  • Determine the budgeted factory overhead costs for the period.
  • Select the appropriate cost driver(s).
  • Estimate the total amount of the chosen cost driver(s) for the period.
  • Compute the predetermined overhead rate by dividing the results of step 1 by the results of step 3.
use of predetermined factory overhead1

Budgeted factory overheadamount for the year

POHR =

Expected level of costdriver for the year

Use of PredeterminedFactory Overhead

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

1. direct labor hours

2. machine hours

3. number of set-ups

4. number of orders

5. manufacturing cycle time

use of predetermined factory overhead2

Budgeted factory overheadamount for the year

POHR =

Expected level of costdriver for the year

Based on estimates, and determined before the period begins

Actualamount of the allocation base, such as direct labor hours, incurred during the period

Use of PredeterminedFactory Overhead

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

Overhead applied = POHR × Actual activity

use of predetermined factory overhead3

$

Use of PredeterminedFactory Overhead

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.

overhead application example
Overhead Application Example

Champion, Inc. applies overhead based on machine hours. Total estimated overhead for the year is $640,000. Total estimated machine hours are 160,000.What is Champion’s predeterminedoverhead rate?

overhead application example1

Budgeted factory overheadamount for the year

POHR =

$640,000

Expected level of costdriver for the year

POHR =

160,000 machine hours (MH)

POHR = $4.00 per MH

Overhead Application Example

For each machine hour worked on a job, $4.00 of factory overhead will be applied to the job.

job costing document flow summary
Job CostingDocument Flow Summary

The materials requisition indicates the cost of direct materialsto charge tojobsand the cost of indirect materials to charge to overhead.

Direct materials

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Materials Ledger Cards

Materials Ledger Cards

Materials Ledger Cards

MaterialsRequisition

Factory Overhead Account

Indirect materials

job costing document flow summary1
Job CostingDocument Flow Summary

Direct Labor

Employee time tickets indicate the cost of direct laborto charge tojobsand the costof indirect labor to charge to overhead.

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Employee Time Ticket

Employee Time Ticket

Employee Time Ticket

Employee Time Ticket

Factory Overhead Account

Indirect Labor

job costing document flow summary2
Job CostingDocument Flow Summary

IndirectLabor

EmployeeTime Ticket

OtherActual OHCharges

Factory Overhead Account

AppliedOverhead

Job Cost Sheets

MaterialsRequisition

IndirectMaterials

slide29

Job Cost Flows

Let’s examine the cost flows in a job costing system. We will useT-accountsand start with materials.

slide30

Direct Materials

  • Direct Materials
  • Indirect Materials
  • Indirect Materials

Job Cost Flows

Materials Inventory

Work-in-ProcessInventory(Job Cost Sheet)

  • Material
  • Purchases

Factory Overhead

slide31

Job Cost Flows

Next let’s add labor costs and applied factory overhead to the job cost flows. Are you with me?

slide32

Direct Labor

  • Indirect Labor
  • Direct Labor
  • Overhead Applied
  • OverheadApplied to Work inProcess
  • Indirect Labor

Job Cost Flows

Work-in-ProcessInventory(Job Cost Sheet)

Accrued Payroll

  • Direct Materials

Factory Overhead

If actual and applied factory overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later.

  • Indirect Materials
slide33

Job Cost Flows

Now let’s complete the goods and sell them. Still with me?

slide34

Cost ofGoodsSold

  • Cost ofGoodsMfd.
  • Cost ofGoodsMfd.
  • Cost ofGoodsSold

Job Cost Flows

Finished GoodsInventory

Work-in-ProcessInventory(Job Cost Sheet)

  • Direct Materials
  • Direct Labor
  • Overhead Applied

Cost of Goods Sold

slide35

Job Cost Flows

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

underapplied and overapplied factory overhead
Underapplied and Overapplied Factory Overhead

Champion’s actual overhead for the year was $650,000 and a total of 170,000 machinehours were worked.

Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was appliedto all of Champion’s jobs during the year?

underapplied and overapplied factory overhead1

$640,000

POHR =

160,000 machine hours (MH)

POHR = $4.00 per MH

Underapplied and Overapplied Factory Overhead

Champion’s actual overhead for the year was $650,000 and a total of 170,000 machinehours were worked.

Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was appliedto all of Champion’s jobs during the year?

Remember:

underapplied and overapplied factory overhead2
Underapplied and Overapplied Factory Overhead

Champion’s actual overhead for the year was $650,000 and a total of 170,000 machinehours were worked.

Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was appliedto all of Champion’s jobs during the year?

SOLUTION

Applied Overhead = POHR × Actual Machine Hours

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

underapplied and overapplied factory overhead3
Underapplied and Overapplied Factory Overhead

Champion’s actual overhead for the year was $650,000 and a total of 170,000 machinehours were worked.

Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was appliedto all of Champion’s jobs during the year?

Champion has overappliedoverhead for the yearby $30,000. What willChampion do?

SOLUTION

Applied Overhead = POHR × Actual Machine Hours

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

underapplied and overapplied factory overhead4

$30,000may be allocatedto these accounts.

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

OR

Work inProcess

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

Champion’s Method

Underapplied and Overapplied Factory Overhead
underapplied and overapplied factory overhead5

$30,000

$30,000

AdjustedBalance

Underapplied and Overapplied Factory Overhead

Champion’sFactory Overhead

Champion’s Costof Goods Sold

Unadjusted Balance

Actualoverheadcosts

$650,000

OverheadAppliedto jobs

$680,000

$30,000 overapplied

underapplied and overapplied factory overhead7
Underapplied and Overapplied Factory Overhead

Tiger, Inc. had actual factory 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 factory overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.

underapplied and overapplied factory overhead8
Underapplied and Overapplied Factory Overhead

Tiger, Inc. had actual factory 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 factory 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

underapplied and overapplied factory overhead9
Underapplied and Overapplied Factory Overhead

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

a. True

b. False

underapplied and overapplied factory overhead10
Underapplied and Overapplied Factory Overhead

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

a. True

b. False

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

schedule of cost of goods manufactured and sold
Schedule of Cost of Goods Manufactured and Sold

Now, let’s look ata schedule ofcost of goodsmanufacturedand sold.

the contemporary manufacturing environment

Departmental

Rate

Activity

Based

Costing

Plantwide

Rate

The ContemporaryManufacturing Environment
the contemporary manufacturing environment1

A departmentalrate

provides more detailed cost

measures, particularly if

the departments perform

quite different activities.

The ContemporaryManufacturing Environment

A Plantwiderateis simple but may notprovide accurate overhead costassignemnt.

the contemporary manufacturing environment2
The ContemporaryManufacturing Environment

I need to know moreabout

activity-based costing before I

make my decision. It looks like

my decision will be based on a

careful cost-benefit analysis.

the contemporary manufacturing environment3
The ContemporaryManufacturing Environment

Activity Based

Costing

Departmental

Overhead

Rates

Level of Complexity

Plantwide

Overhead

Rate

Overhead Allocation

job costing typical accounting entries
Job Costing – TypicalAccounting Entries

Let’s look at summaryjournal entries for a job costing system. We’ll omit the numbers so that we can focus on accounts.

job costing typical accounting entries1
Job Costing – TypicalAccounting Entries

Material purchases are recorded in aninventory account.

job costing typical accounting entries2
Job Costing – TypicalAccounting Entries

Direct materials issued to a job increase Work-in- Process Inventory and decrease Materials Inventory. Indirect materials used on a job are charged to Factory Overhead and also decreaseMaterials Inventory.

job costing typical accounting entries3
Job Costing – TypicalAccounting Entries

The cost of direct labor incurred on a job increases Work-in-Process Inventory and the cost of indirect labor on a job increases Factory Overhead.

job costing typical accounting entries4
Job Costing – TypicalAccounting Entries

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

job costing typical accounting entries5
Job Costing – TypicalAccounting Entries

Work-in-Process Inventory is increasedwhen Factory Overhead isappliedto jobs.

job costing typical accounting entries6
Job Costing – TypicalAccounting Entries

As jobs are completed, the cost of goods manufactured is transferred to Finished Goods Inventory from Work-in-Process Inventory.

job costing typical accounting entries7
Job Costing – TypicalAccounting Entries

When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods Inventory.

job costing typical accounting entries8
Job Costing – TypicalAccounting Entries

Actual and Applied Factory Overhead are closed at the end of the period. The difference between actual and applied overhead is closed to Cost of Goods Sold.