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Chapter 3. Systems Design: Job-Order Costing 2/16/04. Types of Costing Systems Used to Determine Product Costs. Process Costing. Job-order Costing. Chapter 4. Many different products are produced each period. Products are manufactured to order. Costs are traced or allocated to jobs.

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types of costing systems used to determine product costs
Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Chapter 4

  • Many different products are produced each period.
  • Products are manufactured to order.
  • Costs are traced or allocated to jobs.
  • Cost records must be maintained for each distinct product or job.
job order costing system
Job Order Costing System

ProcessCosting

Job-orderCosting

  • Typical job order cost applications:
    • Special-order printing
    • Building construction
  • Also used in the service industry
    • Hospitals
    • Law firms
process cost system
Process Cost System
  • Company produces many units of a single product for long periods
  • Examples: orange juice concentrate, paper, mixing and bottling beverages, gasoline.
  • Costs are accumulated by each department or operation in the process
  • Total costs are divided by the number of units produced to get unit product cost
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.

job order costing

Directmaterial

Traced directly to each job

Traced directly to each job

Direct labor

Job-Order Costing

Manufacturingoverhead (OH)

Applied to eachjob using apredeterminedrate

The Job

sequence of events in a job order costing system
Sequence of Events in a Job-Order Costing System

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

sequence of events in a job order costing system8
Sequence of Events in a Job-Order Costing System

Direct Materials

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

Job No. 1

Direct Labor

Job No. 2

Manufacturing Overhead

Job No. 3

job order cost accounting

Let’s investigate

Job-Order Cost Accounting

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

job order cost accounting10

PearCo Job Cost Sheet

Job Number A - 143

Date Initiated 3-4-01

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
job order cost accounting11

PearCo Job Cost Sheet

Job Number A - 143

Date Initiated 3-4-01

Date Completed

Department B3

Units Completed

A materials requisition form is used to authorize the use of materials on a job.

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

Let’s see one

Direct Labor

Manufacturing Overhead

Total Cost

Unit Product Cost

Job-Order Cost Accounting
materials requisition form13
Materials Requisition Form

Cost of material is charged to job A-143.

Type, quantity, and total cost of material charged to job A-143.

Will E. Delite

job order cost accounting18

Applymanufacturing overhead to jobs using apredetermined overhead rate of $4 per direct labor hour (DLH).

Let’s do it

Job-Order Cost Accounting
application of manufacturing overhead

Estimated total manufacturingoverhead cost for the coming period

POHR =

Estimated total units in theallocation base for the coming period

Application of Manufacturing Overhead

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

Ideally, the allocation base is a cost driver that causes overhead.

application of manufacturing overhead21

Overhead applied = POHR × Actual activity

Application of Manufacturing Overhead

Based onestimates, and determined before the period begins.

Actualamount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period.

application of manufacturing overhead22

Overhead applied = POHR × Actual activity

Recall the wooden crate example where:

Overhead applied = $4 per DLH × 8 DLH = $32

Application of Manufacturing Overhead
the need for a predetermined manufacturing overhead rate
The Need for a Predetermined Manufacturing Overhead Rate

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

PearCo applies overhead based on direct labor hours. Totalestimated overhead for the year is $640,000. Totalestimatedlabor cost is $1,400,000 and total estimated labor hours are 160,000.What is Pear Co.’s predetermined overhead rate per hour?

overhead application example25

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 Example

POHR = $4.00 per DLH

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

overhead application example26
Overhead Application Example

What amount of overhead willPearCo apply to Job X-32?

quick check28
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 check29
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 19,000. What would be recorded as the cost of job WR53?

a. $200.

b. $350.

c. $750.

d. $730.

allocation base
Allocation Base
  • A Cost Driver is a factor that directly causes overhead costs to be incurred
  • The Cost Driver must be common to all company products and services
  • Cost Drivers include machine-hours, direct labor, computer time, direct material cost, etc.
  • Selection of an appropriate Cost Driver is essential to proper overhead allocation
job order costing document flow summary32

Direct materials

Indirect materials

Job-Order CostingDocument Flow Summary

Materials usedmay be eitherdirect orindirect.

Job Cost Sheets

MaterialsRequisition

Manufacturing Overhead Account

job order costing document flow summary33

Direct Labor

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 summary34

IndirectLabor

AppliedOverhead

IndirectMaterial

Job-Order CostingDocument Flow Summary

EmployeeTime Ticket

OtherActual OHCharges

Manufacturing Overhead Account

Job Cost Sheets

MaterialsRequisition

job order system cost flows36
Job-Order System Cost Flows

Raw Materials

Work in Process(Job Cost Sheet)

  • Direct Materials
  • Material

Purchases

  • Direct Materials
  • Indirect Materials

Mfg. Overhead

Actual

Applied

  • Indirect Materials
job order system cost flows37
Job-Order System Cost Flows

Work in Process(Job Cost Sheet)

Salaries and Wages Payable

  • Direct Labor
  • Direct Materials
  • IndirectLabor
  • Direct Labor
  • Overhead Applied

Mfg. Overhead

Actual

Applied

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

  • Indirect Materials
  • OverheadApplied to Work inProcess
  • IndirectLabor, All Other
job order system cost flows38
Job-Order System Cost Flows

Work in Process(Job Cost Sheet)

Finished Goods

  • Cost ofGoodsMfd.
  • Cost ofGoodsSold
  • Direct Materials
  • Cost ofGoodsMfd.
  • Direct Labor
  • Overhead Applied

Cost of Goods Sold

  • Cost ofGoodsSold
overhead application example40

PearCo hasoverappliedoverhead for the yearby $30,000. What willPearCo do?

Overhead Application Example

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

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.

SOLUTION

Applied Overhead = POHR × Actual Direct Labor Hours

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

overapplied and underapplied manufacturing overhead

PearCo’s Method

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

Cost of Goods Sold

Overapplied and Underapplied Manufacturing Overhead

$30,000may be allocatedto these accounts.

OR

Work inProcess

FinishedGoods

Cost of Goods Sold

overapplied and underapplied manufacturing overhead42
Overapplied and Underapplied Manufacturing Overhead

PearCo’sMfg. Overhead

PearCo’s Costof Goods Sold

Unadjusted Balance

Actualoverheadcosts

$650,000

OverheadAppliedto jobs

$680,000

$30,000

$30,000

AdjustedBalance

$30,000 overapplied

quick check43
Quick Check 

What effect will the adjustment of over-applied overhead have on Pear Co’s cost of goods sold?

a. Cost of goods sold will increase.

b. Cost of goods sold will be unaffected.

c. Cost of goods sold will decrease.

quick check44
Quick Check 

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.

if over under significant allocate between accounts
If Over/Under significant,Allocate Between Accounts
  • Determine the amount of overhead applied to WIP, Finished Goods and COGS
  • Calculate the % of total Overhead applied to each account
  • Multiply the Over/Under amount times the %’s and allocate to each account
  • See example on page 115
quick check46
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