Job-Order Costing
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Transcript of Job-Order Costing
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2015 by McGraw-Hill Education. All rights reserved.
Job-Order CostingChapter 3
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Job-Order Costing: An Overview
Job-order costing systems are Job-order costing systems are used when:used when:
1.1.Many different products are produced each Many different products are produced each period.period.
2.2.Products are manufactured to order.Products are manufactured to order.
3.3.The unique nature of each order requires The unique nature of each order requires tracing or allocating costs to each job, and tracing or allocating costs to each job, and maintaining cost records for each job.maintaining cost records for each job.
Job-order costing systems are Job-order costing systems are used when:used when:
1.1.Many different products are produced each Many different products are produced each period.period.
2.2.Products are manufactured to order.Products are manufactured to order.
3.3.The unique nature of each order requires The unique nature of each order requires tracing or allocating costs to each job, and tracing or allocating costs to each job, and maintaining cost records for each job.maintaining cost records for each job.
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Job-Order Costing: An Overview
Examples of companies thatExamples of companies thatwould use job-order costing include:would use job-order costing include:1.1.Boeing (aircraft manufacturing)Boeing (aircraft manufacturing)2.2.Bechtel International (large scale construction)Bechtel International (large scale construction)3.3.Walt Disney Studios (movie production)Walt Disney Studios (movie production)
Examples of companies thatExamples of companies thatwould use job-order costing include:would use job-order costing include:1.1.Boeing (aircraft manufacturing)Boeing (aircraft manufacturing)2.2.Bechtel International (large scale construction)Bechtel International (large scale construction)3.3.Walt Disney Studios (movie production)Walt Disney Studios (movie production)
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Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge direct
material and direct labor
costs to each job as work
is performed.
Charge direct
material and direct labor
costs to each job as work
is performed.
Job-Order Costing – An Example
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Direct Costs
3-5
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, , are allocated are allocated
to all jobs to all jobs rather than rather than
directly traced directly traced to each job.to each job.
Job-Order Costing – An Example
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
Direct Costs
Indirect Costs
3-6
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-14Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
The Job Cost Sheet
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Measuring Direct Materials Cost
Will E. Delite
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Measuring Direct Materials Cost
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Measuring Direct Labor Costs
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Job-Order Cost Accounting
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Learning Objective 1
Compute a predetermined overhead
rate.
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Why Use an Allocation Base?
An allocation base, such as direct labor hours, An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to direct labor dollars, or machine hours, is used to
assign manufacturing overhead to individual jobs.assign manufacturing overhead to individual jobs.
An allocation base, such as direct labor hours, An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to direct labor dollars, or machine hours, is used to
assign manufacturing overhead to individual jobs.assign manufacturing overhead to individual jobs.
We use an allocation base because:
a.It is impossible or difficult to trace overhead costs to particular jobs.
b.Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
c.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
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The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Manufacturing Overhead Application
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Predetermined overhead rates that rely upon estimated data are often used because:
1.Actual overhead for the period is notknown until the end of the period, thus inhibiting the ability to estimate job costs during the period.
2.Actual overhead costs can fluctuate seasonally, thus misleading decision makers.
The Need for a POHR
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Computing Predetermined Overhead RatesThe predetermined overhead rate is computed before the period begins using a four-step process.1.Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. 2.Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base.3.Use the following equation to estimate the total amount of manufacturing overhead:
4.Compute the predetermined overhead rate.
Y = a + bXWhere, Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base.
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Learning Objective 2
Apply overhead cost to jobs using a
predetermined overhead rate.
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Overhead Application Rate
POHR = $4.00 per direct labor-hour
$640,000 estimated total manufacturing overhead
160,000 estimated direct labor hours (DLH)POHR =
PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period’s estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor hour.
Y = a + bXY = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)Y = $200,000 + $440,000Y = $640,000
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Job-Order Cost Accounting
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Learning Objective 3
Compute the total cost and average cost per
unit of a job.
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Learning Objectives 4 and 5
Learning Objective 4 is to understand the flow of costs in
the job-order costing system and prepare appropriate journal
entries to record costs.
Learning Objective 5 is to use T-accounts to show the flow of
costs in a job-order costing system.
3-23
Key Definitions1. Raw materials include any materials that go
into the final product.2. Work in process consists of units of production
that are only partially complete and will require further work before they are ready for sale to customers.
3. Finished goods consist of completed units of product that have not been sold to customers.
4. Cost of goods manufactured include the manufacturing costs associated with the goods that were finished during the period,
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Flow of Costs: A Conceptual Overview
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
Period CostsSelling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw MaterialsRaw Materials
3-25
Job-Order Costing: The Flow of Costs
The transactions (in T-account and journal
entry form) that capture the flow of costs in a
job-order costing system are illustrated on
the following slides.
3-26
Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
The Purchase and Issue of Raw Materials: T-Account Form
3-27
Cost Flows – Material Purchases
On October 1, Smith Corporation had $5,000 in raw materials on hand. During the month, the company purchased $45,000 in raw materials.
Raw Materials 45,000 Accounts Payable 45,000
(1)
3-28
Issue of Direct and Indirect Materials On October 3, Smith had $43,000 in raw materials
requisitioned from the storeroom for use in production. These raw materials included $40,000 of direct and $3,000 of indirect materials.
Work in Process 40,000 Manufacturing Overhead 3,000 Raw Materials 43,000
(2)
3-29
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
The Recording of Labor Costs
3-30
The Recording of Labor Costs
During the month the employee time tickets included $35,000 of direct labor and $12,000 for indirect labor.
Work in Process 35,000 Manufacturing Overhead 12,000 Salaries and Wages Payable 47,000
(3)
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Recording Actual Manufacturing Overhead Costs
OtherOverhead
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Recording Actual Manufacturing Overhead CostsDuring the month the company incurred the following actual overhead costs:1. Utilities (heat, water, and power) $1,7002. Depreciation of factory equipment $2,9003. Property taxes payable on factory $1,000
Manufacturing Overhead 5,600 Utilities Payable 1,700 Accumulated Depreciation 2,900 Property Taxes Payable 1,000
(4)
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Applying Manufacturing Overhead
OtherOverhead
Overhead Applied
OverheadApplied to
Work inProcess
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
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Applying Manufacturing Overhead
Smith uses a predetermined overhead rate of $3.50 per machine-hour. During the month, 5,000 machine-hours were worked on jobs.
Work in Process 17,500 Manufacturing Overhead 17,500 (5,000 machine hours × $3.50 = $17,500)
(5)
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Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the
period incurred.
Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees
who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees
who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.
2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
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Accounting for Nonmanufacturing Cost During the month, Smith incurred but has not
paid sales salaries of $2,000, and advertising expense of $750.
Salaries Expense 2,000 Advertising Expense 750 Salaries Payable 2,000 Accounts Payable 750
(6)
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Finished GoodsWork in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoods
Manufactured
Cost ofGoods
Manufactured
Transferring Completed Units
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Transferring Completed Units
During the period, Smith completed jobs with a total cost of $27,000.
Finished Goods 27,000 Work in Process 27,000
(9)
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Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost ofGoodsSold
Cost ofGoodsSold
Transferring Units Sold
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Transferring Units SoldSmith sold the $27,000 in Finished Goods
Inventory to customers for $43,500 on account.
Accounts Receivable 43,500 Sales 43,500
Cost of Goods Sold 27,000 Finished Goods 27,000
(10)
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Learning Objective 6
Prepare schedules of cost of goods
manufactured and cost of goods sold and an
income statement.
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Schedule of Cost of Goods Manufactured: Key Concepts
This schedule contains three types of costs, namely direct materials, direct labor, and manufacturing overhead.
It calculates the cost of raw material and direct labor used in
production and the amount of manufacturing overhead applied to production.
It calculates the manufacturing
costs associated with goods that were finished
during the period.
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Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials materials inventory
+ Raw materials purchased
= Raw materials
available for use in production
– Ending raw materials inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed into
the production process, they arecalled direct materials.
As items are removed from raw materials inventory and placed into
the production process, they arecalled direct materials.
Product Cost Flows
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Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials materials inventory + Direct labor
+ Raw materials + Mfg. overhead applied purchased = Total manufacturing
= Raw materials costs
available for use in production
– Ending raw materials inventory
= Raw materials used
in production
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Product Cost Flows
3-45
Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the in production period
– Ending raw materials inventory
= Raw materials used
in production
Product Cost Flows
All manufacturing costs added to production during the period are
added to the beginning balance of work in process.
All manufacturing costs added to production during the period are
added to the beginning balance of work in process.
3-46
Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the in production period
– Ending raw materials – Ending work in inventory process inventory
= Raw materials used = Cost of goods
in production manufactured
Product Cost Flows
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
3-47
Product Cost Flows
3-48
Learning Objective 7
Compute underapplied or overapplied overhead
cost and prepare the journal entry to close the
balance in Manufacturing Overhead
to the appropriate accounts.
3-49
Underapplied and Overapplied Overhead―A Closer Look
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a
period is referred to as either underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours direct labor hours
worked on jobs.worked on jobs.How much total overhead was applied to PearCo’s How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct predetermined overhead rate of $4.00 per direct
labor hour. labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-51
PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours direct labor hours
worked on jobs.worked on jobs.How much total overhead was applied to PearCo’s How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct predetermined overhead rate of $4.00 per direct
labor hour. labor hour.
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Overhead Application Example
3-52
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.
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.
Quick Check
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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.
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.
Quick Check
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
3-54
Disposition of Under- or Overapplied Overhead
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
Cost of Goods Sold
PearCo’s Method
Work inProcessWork inProcess
FinishedGoods
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
$30,000may be allocated
to these accounts.
OROROROR
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Disposition of Under- or Overapplied Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
Overhead appliedto jobs
$680,000
3-56
Allocating Under- or OverappliedOverhead Between Accounts
Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
Amount Work in process 68,000$ Finished Goods 204,000 Cost of Goods Sold 408,000 Total 680,000$
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Allocating Under- or OverappliedOverhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
We would complete the following allocation of $30,000 overapplied overhead:
10% × $30,00010% × $30,000$68,000 ÷ $680,000$68,000 ÷ $680,000
3-58
Allocating Under- or OverappliedOverhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
Manufacturing Overhead 30,000 Work in Process Invenory 3,000 Finished Goods Inventory 9,000 Cost of Goods Sold 18,000
3-59
Overapplied and Underapplied Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’s Method
More accurate but more complex to compute.More accurate but more complex to compute.
3-60
May be more complex May be more complex but . . .but . . .
May be more complex May be more complex but . . .but . . .
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide
overhead rate.overhead rate.
To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide
overhead rate.overhead rate.
Large companies Large companies often use multiple often use multiple
predetermined predetermined overhead rates.overhead rates.
Large companies Large companies often use multiple often use multiple
predetermined predetermined overhead rates.overhead rates.
May be more accurate because May be more accurate because it reflects differences across it reflects differences across
departments.departments.
May be more accurate because May be more accurate because it reflects differences across it reflects differences across
departments.departments.
3-61
Job-Order Costing in Service Companies
Job-order costing is used in many different types Job-order costing is used in many different types of service companies. For example, law firms, of service companies. For example, law firms,
accounting firms, and medical treatment.accounting firms, and medical treatment.
Job-order costing is used in many different types Job-order costing is used in many different types of service companies. For example, law firms, of service companies. For example, law firms,
accounting firms, and medical treatment.accounting firms, and medical treatment.
3-62
End of Chapter 3