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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
3Cost Accumulation for Job-Shop & Batch Production Operations
3-2
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
vs.Job Costing
Process Costing
Distinct units of output.
High value units.
Feasible to trace costs to
individual units.
Distinct units of output.
High value units.
Feasible to trace costs to
individual units.
Homogeneous units.
Low value units.
Not feasible to trace costs to
individual units.
Homogeneous units.
Low value units.
Not feasible to trace costs to
individual units.
Evaluating Major Types of Product-Costing Systems
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
vs.Job Costing
Process Costing
Each individual job treated as a
separate unit of output. Costs are traced or
assigned to each job.
Each individual job treated as a
separate unit of output. Costs are traced or
assigned to each job.
Costs are traced to the process and
then divided by units produced
to obtain an averaged unit
cost.
Costs are traced to the process and
then divided by units produced
to obtain an averaged unit
cost.
Operation Costing is a hybrid often used
for batches of similar products
with different types of materials.
Operation Costing is a hybrid often used
for batches of similar products
with different types of materials.
Evaluating Major Types of Product-Costing Systems
3-4
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
The use of the model serves as a control that helps to ensure goals
and objectives are met.
The use of the model serves as a control that helps to ensure goals
and objectives are met.
The Basic Cost Flow Model
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory.
During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to
Finished Goods during the month. Also, during May, goods costing $60,000 were sold.
Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and
Finished Goods Inventory.
Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory.
During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to
Finished Goods during the month. Also, during May, goods costing $60,000 were sold.
Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and
Finished Goods Inventory.
Managing and Using Cost Flow Information - Example
3-6
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
From Job Cost
Records
From Job Cost
Records
Cost of Goods Sold
Cost of Goods Sold
Managing and Using Cost Flow Information - Example
3-7
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
THE JOB
Directmaterial
Direct labor
Traced directly to each job
Traced directly
to each job
Manufacturingoverhead (OH)
Applied to eachjob using a
predeterminedrate
Managing and Using Cost Flow Information
3-8
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Job Cost Record
A record of all production-
related resources used
on individual jobs.
A record of all production-
related resources used
on individual jobs.
The sum of all the costs in active jobs
(unfinished jobs) =
The sum of all the costs in active jobs
(unfinished jobs) =
Work-in-Process Inventory
Managing and Using Cost Flow Information
3-9
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Work-in-Process Inventory
Represents the cost of all the unfinished
(in-process) jobs.
Represents the cost of all the unfinished
(in-process) jobs.
As individual jobs are
completed, the costs are
moved to . . .
As individual jobs are
completed, the costs are
moved to . . .
Finished Goods
Inventory
Managing and Using Cost Flow Information
3-10
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Job-cost accounting systems record cost flows
systematically.
Job-cost accounting systems record cost flows
systematically.
Transactions are
journalized.
Info is posted to ledger accounts.
Basic Job-Cost Flows
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Accounts related to Jobs are posted to various Job WIP
accounts.
Accounts related to Jobs are posted to various Job WIP
accounts.
Basic Job-Cost Flows
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
We can determine Direct Materials Cost and Direct
Labor Cost for a Job as we do the work.
We can determine Direct Materials Cost and Direct
Labor Cost for a Job as we do the work.
But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the
job using a Predetermined Overhead Rate.
But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the
job using a Predetermined Overhead Rate.
Assigning Overhead to Jobs
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Identify the items to be included as indirect overhead costs.
Estimate the costs for each of the indirect overhead items.
Select the cost-driver. Estimate the amount of the cost-driver
rate. Compute the predetermined overhead rate
(POHR). ÷
Identify the items to be included as indirect overhead costs.
Estimate the costs for each of the indirect overhead items.
Select the cost-driver. Estimate the amount of the cost-driver
rate. Compute the predetermined overhead rate
(POHR). ÷
Use of Predetermined Overhead Rates
3-14
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Budgeted total manufacturingoverhead cost for the coming year
Budgeted total units in theallocation base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to jobs is
determined before the period begins.
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.
Use of Predetermined Overhead Rates
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Overhead applied = POHR × Actual activity
Actual amount of the cost driver such as units produced, direct labor hours, or machine hours.
Incurred during the period.
Based on estimates, and determined before the
period begins.
Use of Predetermined Overhead Rates
3-16
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
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.
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.
$$
Use of Predetermined Overhead Rates
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor
hours are 12,000.
What is Glass Creations’ predetermined overhead rate per hour?
Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor
hours are 12,000.
What is Glass Creations’ predetermined overhead rate per hour?
Use of Predetermined Overhead Rates
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
For each direct labor hour worked on a job, $30.00 of manufacturing overhead
will be applied to the job.
POHR = $30.00 per DLH
$360,000
12,000 direct labor hours (DLH)POHR =
Budgeted total manufacturingoverhead cost for the coming period
Budgeted total units in theallocation base for the coming period
POHR =
Use of Predetermined Overhead Rates
3-19
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Let’s examine the cost flows in a job-order costing system. We will use T-accounts
and start with materials.
Job-Order Cost Flows
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Raw MaterialsMaterial
PurchasesDirect
Materials
Direct Materials
Mfg. Overhead
Indirect Materials
Work in Process
Indirect Materials
Actual Applied
Job-Order Cost Flows
Other Mfg. OH
3-21
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Next let’s add labor costs and applied
manufacturing overhead to the job-
order cost flows.
Job-Order Cost Flows
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Direct Labor
Mfg. Overhead
Salaries and Wages Payable Work in Process
Direct
Materials
OverheadApplied to
Work inProcessIndirect
Labor
Direct Labor
Overhead Applied
IndirectLabor
Actual AppliedIf 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.
Job-Order Cost Flows
Indirect Materials
Other Mfg. OH
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Now let’s complete the
goods and sell them.
Job-Order Cost Flows
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Cost ofGoodsMfd.
Finished Goods
Cost ofGoodsSold
Cost ofGoodsMfd.
Cost of Goods Sold
Cost ofGoodsSold
Work in ProcessDirect
MaterialsDirect
LaborOverhead
Applied
Job-Order Cost Flows
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Let’s summarize the document flow we have
been discussing in a job-order
costing system.
Job-Order Costing Document Flow Summary
3-26
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Jobs
MaterialsRequisition
Direct materials
Indirect materials
Manufacturing Overhead Account
Materials usedmay be either
direct orindirect.
Job-Order Costing Document Flow Summary
3-27
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Jobs
Employee Time Ticket
Manufacturing Overhead Account
Direct Labor
Indirect Labor
An employee’stime may be eitherdirect or indirect.
Job-Order Costing Document Flow Summary
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Job-Order Costing Document Flow Summary
Work in Process
Cost of GoodsSold
Labor
Materials
Ind
irec
tIn
dir
ect
FinishedGoods
FactoryOverhead
Direct
Direct
Apply
3-29
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the
appropriate account.
When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the
appropriate account.
Debit
.
Credit
.
Assigning Overhead to Jobs - Summary
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account.
Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account.
Debit
.
.
Credit
Assigning Overhead to Jobs - Summary
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
The difference between actual
overhead for the period, and applied
overhead for the period is called the
OVERHEAD VARIANCE.
The difference between actual
overhead for the period, and applied
overhead for the period is called the
OVERHEAD VARIANCE.
Assigning Overhead to Jobs - Summary
3-32
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
We compare the Actual
Overhead to Applied
Overhead)
We compare the Actual
Overhead to Applied
Overhead)
Actual > AppliedOverhead is
UNDERAPPLIED
Actual < AppliedOverhead is
OVERAPPLIED
Overhead Variance
3-33
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Let’s return to Glass Creations and and see
what we will do if actual and applied overhead are
not equal.
Overhead Variance
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor
hours.
How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour.
Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor
hours.
How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour.
Overhead Variance
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor
hours.
How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour.
Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor
hours.
How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour.
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
Overhead is overappliedfor the year by
$20,000. What willGlass Creations do?
Overhead Variance
3-36
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Work inProcess
FinishedGoods
Cost of Goods Sold
$20,000may be allocated
to these accounts.
$20,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
Glass Creations’ Method
OR
Overhead Variance
3-37
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Glass Creations’Manuf. Overhead
Actualoverhead
costs
$370,000$20,000
overapplied
Glass Creations’Cost of Goods Sold
Unadjusted Balance
AdjustedBalance
$20,000
$20,000
OverheadAppliedto jobs
$390,000
Overhead Variance
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
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
Glass Creations’ Method
Overhead Variance
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Actual Costing, Normal Costing and Standard Costing
Actual Actual Costing?Costing?Actual Actual
Costing?Costing?Normal Normal
Costing?Costing?Normal Normal
Costing?Costing?
Actual direct costs (material and labor)
are assigned to jobs as incurred.
Actual manufacturing
overhead is assigned when the actual amounts are
known.
Actual direct costs (material and labor)
are assigned to jobs as incurred.
Actual manufacturing
overhead is assigned when the actual amounts are
known.
Actual direct costs (material and labor)
are assigned to jobs as incurred.
Manufacturing overhead is applied
using predetermined overhead rates.
Actual direct costs (material and labor)
are assigned to jobs as incurred.
Manufacturing overhead is applied
using predetermined overhead rates.
Standard Standard Costing?Costing?
Standard Standard Costing?Costing?
Standard direct costs (material and labor) are assigned to jobs as incurred.
Manufacturing overhead is applied
using predeter-mined (standard) overhead rates.
Standard direct costs (material and labor) are assigned to jobs as incurred.
Manufacturing overhead is applied
using predeter-mined (standard) overhead rates.
3-40
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Job-Order Costing andthe Value Chain
R & D Design Supply Production Marketing Distri- bution
Customer service
Value ofproducts
andservices
Value ofproducts
andservices
Job-order costing emphasizes production in the value chain.We must remember that the other components are also
important contributors to profitability.
3-41
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Job and Project Management
Complex jobs require scheduling and progress evaluations.
Complex jobs require scheduling and progress evaluations.
Gantt chartsare used for
scheduling major activities.
Progress evaluationsuse comparisons of budgeted and actual costs,and actual time versus estimated time
for the actual work completed.
3-42
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
The following conditions can lead to improper job costing:
Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Cost misrepresentation in “cost-
plus” contracts.
The following conditions can lead to improper job costing:
Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Cost misrepresentation in “cost-
plus” contracts.
Job Cost and Project Improprieties:An Ethical Issue
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Recording Job-Order Costs – Typical Accounting Entries
Let’s look at summary journal entries for a job-order costing system.
We’ll omit the numbers in order to focus on
accounts.
3-44
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Raw material purchases are recorded in an inventory account.
Cost Flows – Material Purchases
3-45
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
Cost Flows – Material Usage
3-46
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
The cost of direct labor incurred increases Work in Process and the cost of indirect labor
increases Manufacturing Overhead.
Cost Flows – Labor
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
In addition to indirect materials and indirect labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead account as they are incurred.
Cost Flows – Actual Overhead
3-48
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Work in Process is increased when Manufacturing Overhead is applied to jobs.
Cost Flows – Overhead Applied
3-49
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
As jobs are completed, the cost of goods manufactured is transferred to Finished
Goods from Work in Process.
Cost Flows – Cost of Goods Manufactured
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
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.
Cost Flows – Sales
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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
Cost Flows – Period Expenses
3-52
The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin
End of Chapter 3