Chapter 02 ACCT

7/29/2019 Chapter 02 ACCT

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CHAPTER 2

Job-Order Costing for

Manufacturing

And

Service Companies


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Merchandising and Manufacturing

Firms


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Balance Sheet Presentation of Product

Costs

Raw Materials InventoryCost of materials on hand used to

produce a companys products

Work in Process InventoryInventory account for the cost of goods that are

only partially completed

Finished Goods InventoryAccount for the cost of allthe items complete and ready to sell


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Cost Classifications for Manufacturing

Firms

Manufacturing Costs Also known asproduct costs

All costs associated with the production of goods

Nonmanufacturing Costs

Also known asperiod costs

All costs not associated with the production ofgoods


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costs expensing

Only manufacturing (product) costs are added to the value ofinventory (just like purchases in a merchandising company).

These costs become expenses when inventory is sold = cost of

goods sold.

Nonmanufacturing (Period) costs are expensed in the period

they are incurred.

Example: depreciation of manufacturing equipment isincluded in manufacturing overhead but depreciation of office

furniture is depreciation expense of the period.


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Manufacturing Costs

Direct Material Cost

Cost of all materials directly traced to items produced

Direct Labor CostCost of labor directly traced to items produced

Manufacturing Overhead

Cost of manufacturing activities other than direct materials

and direct labor (see next slide)


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Common Manufacturing Overhead Costs


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Nonmanufacturing Costs

Selling Costs

All costs associated with securing and filing

customer orders

General and Administrative Costs

All costs associated with the firms general

management


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Which of the following is a product cost and so

would be included in the cost of inventory?

1 2 3 4

50%

0%0%

50%1. Office supplies for the

treasurers office.

2. Salaries of the mailroom

employees.

3. Insurance premiums for

factory building.

4. Sales commissions to the

companies sales agents.


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Flow of Product Costs in Accounts

cost of goods manufactured:

the cost of goods that theirmanufacturing was finishedand they were transferredfrom work-in-progress to

finished goods.


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Example: Glass factory

2010 results

a) What is the cost of goods manufactured?

b) What is net income for 2010?


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Cost of Goods Manufactured

Cost of Goods Manufactured includes allcosts of goods completed during theperiod.
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Cost of Goods Sold

Cost of Goods Sold:


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Cost of goods sold is always lower than cost of goods

manufactured?

1 2

100%

0%

1. True

2. False


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Job CostsDirect Materials

Requisition of raw materials for use on a specific job


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Job CostsDirect Labor

Cost of direct labor related to a particular job


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Example: Glass factory

T accounts

Show the flow of resources through the Taccounts:

Raw Material Inventory (assume beginning

balance was $500,000, purchases were$1,800,000, and ending balance was $300,000)

Manufacturing overhead

Work-in-progress inventory

Finished goods inventory

Cost of goods sold


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Costing

What is the cost per unit produced?

Why is it important?


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Types of Costing Systems

Job-order Costing SystemFor Companies who produce individual products

or batches of unique products Construction

Company. Cost is allocated to each individual jobsaccording to the resources that were specifically

used by it.

Process Costing System

Companies produce large quantities of identical

items


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Job-Order and Process Costing

Examples

Companies who use job order:

Cray Computer Corporation, Boeing Company, Chris

Craft Boat Company, construction, Legal Services, or

Repair Services tailored to client.

Companies who use process costing:Pepsico Incorporated, Starbucks Corporation, Revlon

Consumer Products Corporation, Goodyear Tire and

Rubber Company


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Consider an aluminum company (e.g. ALCOA) and a

company that builds space satellites (e.g. ASTRA). Which

costing systems are they likely to use?

1 2 3 4

0%

50%50%

0%

1. ALCOA: job costing;

ASTRA: job costing

2. ALCOA: job costing;

ASTRA: process costing

3. ALCOA: process costing;

ASTRA: job costing

4. ALCOA: process costing;

ASTRA: process costing


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Relation Between the Costs of Jobsand the Flow of Costs


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Relating Product Costs to Jobs

In a Job-Order Costing System, productcosts (materials, labor and overhead) arerelated to specific jobs.
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Job Cost Sheet

Direct Material Cost

Material requisition form

Direct Labor Cost

Time Tickets


???

InJob-Order Costing Systems the primary document is called aJob-Cost Sheet. It is used to accumulate product costs.
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Overhead allocation

While direct materials and direct laborcan be easily traced to jobs, overheadcosts are indirect and need to be

somehow allocated to jobs.


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Job Costs


Apply manufacturing overhead to jobs

Choose an allocation base e.g. direct labor hours or

direct labor cost

Calculate overhead allocation rate

Estimated overhead /Estimated quantity of the allocation base

Use rate to apply overhead to jobs based on actual

quantity of base used


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Job costing example

A boat factory makes custom boats. Factory workers consist of skilled supervisors(level 1 workers) and regular workers (level 2 workers).

Three jobs were worked on this month:

Job 1: 15 hours of labor (4 level 1, 11 level 2), $500 materials.

Job 2: 20 hours of labor (4 level 1, 16 level 2), $2,000 materials.Job 3: 7 hours of labor (2 level 1, 5 level 2), $1,000 materials.

Hourly wage: level 1 - $41, level 2 - $20.

Manufacturing overhead for the month: $2,100.

What is the cost of each job?


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Overhead Allocation Base

The overhead allocation base should be something

common to all jobs which is also related to overhead

costs

Alternative bases include:

1. Direct labor hours

2. Direct labor cost

3. Direct material cost.

Work out the previous example with different bases.


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Assume a company allocates overhead with labor hours as the allocation base.

A labor hour costs $10. The overhead allocation rate is $5 per labor hour.

Assume that a certain job already required 2 labor hours and $30 of materials

but now it seems it would need an additional labor hour to be finished (no

additional materials will be needed). By how much would that additional labor

hour increase the cost of the job?

1 2 3 4

25% 25%25%25%

1. $102. $20

3. $15

4. $40


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Assigning Costs to Jobs: A Summary


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Pricing and Evaluating with Job Order

Costing

The estimated (budgeted) cost for a job can be

used to determine a fair price.

The actual cost can be compared to theestimated cost for performance evaluation.


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Allocating Overhead to Jobsduring the year

Should we just wait until the end of theyear/period to figure out the overhead rate?


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Predetermined Overhead Allocation Rate

At the beginning of the period the companyestimates its overhead costs for the period, and

estimates its use of the overhead base.

This is used to calculate the above pre-detrminedoverhead rate.

During the year, overhead is applied to jobs

according to units of the base used.


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Allocating Overhead to Jobs

Actual overhead costs are accumulated in amanufacturing overhead control account by

debiting or charging this account for overhead

Overhead is applied by creditingmanufacturing overhead and debiting work in

process inventory


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Job costing example

Take again the boat company example we used before, but assume that at thebeginning of the month the company estimated overhead at $2,400 and laborhours at 40 hours (the details of the jobs are presented again for convenience):

Job 1: 15 hours of labor (4 level 1, 11 level 2), $500 materials.

Job 2: 20 hours of labor (4 level 1, 16 level 2), $2,000 materials.

Job 3: 7 hours of labor (2 level 1, 5 level 2), $1,000 materials.

Hourly wage: level 1 - $41, level 2 - $20.

Manufacturing overhead for the month: $2,100.

What would be the cost of each job?

How much overhead was allocated/applied to jobs?


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Job costing example

Show the T-account flow of the previous example

assuming all 3 jobs started, ended, and were sold on

the same month.


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Comparing actual overhead costs to applied

overhead

What if

Applied overhead Actual overhead?

Under-applied Overhead

Actual overhead cost is greater than applied overhead

Over-applied Overhead

Actual overhead cost is less than applied overhead


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Accounting for under or over applied

overhead

If the amount is relatively small it is treated as

an adjustment to cost of goods sold

If the amount large then it should be allocated

between cost of goods sold, work in processand finished goods inventories

If the amount is large then consider revising

the rate and/or the base


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If the overhead costs account has a debit balance at

the end of the period (before closing it to COGS)

that means that overhead was:

1 2

50%50%

1. Over-applied

2. Under-applied


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Activity-Based Costing (ABC) and Multiple

Overhead Rates

ABC is a method of assigning overhead based on a

number of different allocation bases (rather than just

one). ABC groups overhead costs into Cost Pools and

selects a base for each pool.

We discuss the ABC method later in chapter 6


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Job-Order Costing for Service

Companies

Job order costing may be ideal for servicecompanies

Examples

Hospitals

Repair Shops

Consulting Firms

Accounting and legal services Painters, carpenters etc.


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Job-Order Costing for Service

Companies: example

LePlatt & Associates is an accounting firm. It employs 50 professionals who work

directly with clients. The average expected total compensation per professional for

the year is $115,000. Each professional works for clients to their maximum of

1,600 billable hours. All professional salaries are traced to individual client service

summaries. All costs other than professional salaries are included in a single

indirect cost pool (professional support). The indirect costs are assigned to service

summaries using professional hours as the allocation base. The expected amount of

indirect costs for the year is $5,000,000.

Required

a. Compute the budgeted indirect cost rate per hour of professional service.b. LaPlatt & Associates is bidding on tax and audit services for a potential client

that are expected to require 100 hours of professional service time. Calculate the

estimated cost of the work using average professional wage rates and basing

indirect costs on estimated service time.


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Modern Manufacturing Practices

Just-in-Time Production (JIT) Supply chain management results in little or no inventory. Inventory

accounting becomes less important.

Example- Dell Computer Company

Computer-Controlled Manufacturing Automation

More of the costs are indirect. Direct labor becomes less important.

Total Quality Management (TQM)

Costs of inspection and other indirect costs of maintaining qualitybecome more important.

Trade off costs of controlling quality against costs of defective units.


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JIT or Just-in-Case?

Maintaining a large inventory is costly(financing, storage, and insurance costs)

JIT avoids this by relying on supply chain to

provide parts and materials on short notice. But if the supply chain is disrupted because of

natural disasters,political events, or businessproblems then production may have to shutdown causing loss of sales and customers.

Chapter 02 ACCT

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