Systems Design: Job-Order Costing 2/16/04

1. Chapter 3 Systems Design: Job-Order Costing2/16/04

2. 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.

3. 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

4. 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

5. 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.

6. 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

7. 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

8. 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

9. Let’s investigate Job-Order Cost Accounting The primary document for tracking the costs associated with a given job is the job cost sheet.

10. 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

11. 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

12. Will E. Delite Materials Requisition Form

13. 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

14. Job-Order Cost Accounting

15. Workers use time tickets to record the time spent on each job. Let’s see one Job-Order Cost Accounting

16. Employee Time Ticket

17. Job-Order Cost Accounting

18. Applymanufacturing overhead to jobs using apredetermined overhead rate of $4 per direct labor hour (DLH). Let’s do it Job-Order Cost Accounting

19. Job-Order Cost Accounting

20. 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.

21. 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.

22. Overhead applied = POHR × Actual activity Recall the wooden crate example where: Overhead applied = $4 per DLH × 8 DLH = $32 Application of Manufacturing Overhead

23. 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. $

24. 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?

25. 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.

26. Overhead Application Example What amount of overhead willPearCo apply to Job X-32?

27. Overhead Application Example

28. 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.

29. 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.

30. 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

31. Let’s summarize the document flow in a job-order costing system. Job-Order CostingDocument Flow Summary

32. Direct materials Indirect materials Job-Order CostingDocument Flow Summary Materials usedmay be eitherdirect orindirect. Job Cost Sheets MaterialsRequisition Manufacturing Overhead Account

33. 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

34. IndirectLabor AppliedOverhead IndirectMaterial Job-Order CostingDocument Flow Summary EmployeeTime Ticket OtherActual OHCharges Manufacturing Overhead Account Job Cost Sheets MaterialsRequisition

35. Let’s examine the cost flows in a job-order costing system.. Job-Order System Cost Flows

36. 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

37. 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

38. 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

39. Let’s return to PearCo and see what we will do if actual and applied overhead are not equal. Job-Order System Cost Flows

40. 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

41. 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

42. 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

43. 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.

44. 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.

45. 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

46. 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

47. End of Chapter 3