UNIKL M a - HO 4 - Job Order n Process Costing
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Handout 4 UNIVERSITY KUALA LUMPUR MASTER OF BUSINESS ADMINISTRATION: MANAGEMENT ACCOUNTING PROF. DR. SYED NOH SYED AHMAD, CA(M) MANAGEMENT ACCOUNTING HANDOUT 4 1 HO4
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COVERS TOPIC FOR MBA PROGRAMME
Transcript of UNIKL M a - HO 4 - Job Order n Process Costing
Handout 4
UNIVERSITY KUALA LUMPURMASTER OF BUSINESS
ADMINISTRATION:MANAGEMENT ACCOUNTING
PROF. DR. SYED NOH SYED AHMAD, CA(M)
MANAGEMENT ACCOUNTING
HANDOUT 4
1HO4
Handout 4
1. Explain the characteristics and purposes of cost accounting.
2. Describe the flow of costs in a job order costing system.
3. Differentiate between Job order and Process costing systems.
Study Objectives
Handout 4
Job Order Costing
Cost Accounting
Systems
Job Order Cost Flow
Job order cost systemProcess cost system
Accumulating manufacturing costsAssigning manufacturing costs to work in processAssigning costs to finished goodsAssigning costs to cost of goods soldSummary
Reporting Job Cost Data
Cost of goods manufactured scheduleIncome statement presentationUnder-or overapplied manufacturing overhead
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Cost Accounting Systems
There are two basic types of cost accounting systems:
Handout 4
Job Order Cost System
Costs are assigned to each job or batch of goods
Job: Making a movie by DisneyBatch: 225 wedding invitations for Mary
A job may be for a specific order or for inventory
A key feature:Each job or batch has its own distinguishing characteristics
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Job Order Cost System
The objective: to compute the cost per job
Measures costs for each job completed – not for set time periods
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Process Cost System
Used when a large volume of similar products are manufactured -
Cereal, Automobiles, Compact Discs, PaintProduction is continuousCosts are accumulated for a specific time period –
A week or a monthCosts are assigned to departments or processes for a set period of time
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Job Order Cost Flow
Accumulate the manufacturing costs incurred
Raw MaterialsFactory LaborManufacturing Overhead
Assign the accumulated costs to the work done
Two Major Steps in Flows of Costs
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Summary of Document Flows in a Job Order Cost System
Handout 4
UNIVERSITY KUALA LUMPURMASTER OF BUSINESS
ADMINISTRATION:MANAGEMENT ACCOUNTING
PROF. DR. SYED NOH SYED AHMAD, CA(M)
MANAGEMENT ACCOUNTING
HANDOUT 4
Handout 4
Study Objectives
1. Understand who uses process cost systems.2. Explain the similarities and differences
between job order and process cost systems.
3. Explain the flow of costs in a process cost system.
4. Compute equivalent units.
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Preview of Chapter
Process cost accounting focuses on the processes involved in mass-producing products that are identical or very similar in nature.
In contrast, job order cost accounting focuses on the individual job.
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Process Costing
Nature of Process Cost
Systems
Equivalent Units
UsesSimilarities and differencesProcess cost flowAssigning manufacturing costs
Weighted-average methodRefinementsProduction cost report
Comprehensive Example of
Process Costing
Physical unitsEquivalent units of productionUnit production costsCost reconciliation scheduleProduction cost reportCosting systems – Final comments
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Nature of Process Cost Systems
Use to apply costs to similar products that aremass produced in a continuous fashion
Examples include the production of Ice Cream,Cereal, Paint, and Soft Drinks
Once started, production continues until product is completed; processing is the same for theentire run
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Comparison of Products Produced Under Process and Job Order Cost Systems
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Job Order Cost and Process Cost Flow
Job Order Cost Systems
Costs are assigned to each job.
Products have unique characteristics.
Process Cost Systems
Costs are tracked through a series of connected manufacturing processes or departments.
Products are uniform or relatively homogeneous and produced in a large volume.
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Similarities and Differences in Cost Systems
Similarities
Both costing systems track the three manufacturing cost elements: direct materials, direct labor, and manufacturing overhead.
The accumulation of costs is the same in both systems.
Flow of costs are assigned to the same general ledger accounts in both costing systems.
However, the methods of assigning the costs differ significantly.
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Similarities and Differences in Cost Systems
Differences
The number of work in process accountsJob Order – uses only one work in
process accountProcess - uses multiple work in process
accounts
Documents used to track costsJob Order - charges to individual jobs
and summarizes on job cost sheets
Process – summarizes in production cost reports for each department
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Similarities and Differences in Cost Systems
Differences
The point at which costs are totaledJob Order – totaled when job is
completedProcess - totaled at end of period of
time
Unit cost computationJob Order – total cost per job divided
by units in jobProcess – total manufacturing costs
for the period divided by units produced during the period
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Major Differences Between Job Order and Process Cost Systems
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Process Cost Flows Illustrated
Example – Tyler Company
Maker of automatic can openers
Manufacturing consists of two processes:Machining – raw materials are shaped,
honed, and drilledAssembly – parts assembled and
packaged
Materials, labor, and manufacturing overhead added in both departments
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Process Cost Flows Illustrated
Example – Tyler Company
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Equivalent Units
Example – XYZ CollegeCompute the cost of instruction at XYZ College per full-time equivalent student based on the following information:
Total cost of instruction is $9,000,000.There are 900 full-time students and 1,000 part-
time students.Part-time students take 60% of the classes of a
regular student.
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Equivalent Units Example - Continued
Cost of instructionper full-time equivalent student
equals
Total cost of instruction
divided byNumber of full-time equivalent (FTE) students
$9,000,000 / 1,500 FTE students = $6,000
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Equivalent Units of Production
Measures the work done during a period, expressed in fully completed units
Used to determine the cost per unit of the completed product
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Equivalent Units – Weighted Average Method
Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process
Most widely used method
Beginning work in process not part of computation of equivalent units
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Equivalent Units – RefinementsWeighted Average Method
ExampleThe Kellogg Company uses 3 departments (Mixing, Baking, and Freezing/Packaging) to produce waffles. Information for the Mixing Department is:
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Equivalent Units – RefinementsWeighted Average Method
Example - Continued Mixing Department Raw Materials information:
All ingredients (materials) are added at the beginning of the mixing process
All units, regardless of degree of completion, are 100% complete as to materials
Mixing Department Conversion Cost information:Conversion costs refers to the sum of labor costs
and overhead costs.The beginning work in process is 70% complete with
respect to conversion costs and those in ending work in process are 60% complete.
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Equivalent Units – RefinementsWeighted Average Method
Example - Continued Computation of Mixing Department’s Equivalent Units
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Equivalent Units
Refined Equivalent Units of Production Formula
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Production Cost Report
Key document used to understand activities.Prepared for each department and shows:
Production quantityCost data
Four steps in preparation:Step 1: Compute physical unit flowStep 2: Compute equivalent units of productionStep 3: Compute unit production costsStep 4: Prepare a cost reconciliation schedule
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Comprehensive Example of Process Costing Basic Information
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Comprehensive Example - Continued
Step 1: Compute Physical Unit Flow.Physical units actual units to be accounted for during a period, regardless of work performed
Total units to be accounted for units started (or transferred) into production during the period + units in production at beginning of period
Total units accounted forunits transferred out during period +
units in production at end of period
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Comprehensive Example - Continued
Step 1: Compute Physical Unit Flow -continued
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Comprehensive Example - Continued Step 2: Compute Equivalent Units of
ProductionMeasure of a department’s productivityTwo computations required:
one for materials and one for conversion costs
Beginning work in process ignored
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Comprehensive Example Continued
Step 3: Compute Unit Production CostsCosts expressed in terms of equivalent units of productionWhen equivalent units of production are different for materials and for conversion costs, three unit costs are computed:
Materials
Conversion
Total Manufacturing
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Comprehensive Example - Continued
Step 3: Compute Unit Production Cost - continued
Total Materials Cost Computation:
The Computation of Unit Materials Costs:
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Comprehensive Example Continued
Step 3: Compute Unit Production Cost - continued
Conversion Cost Computation:
The Computation of Unit Conversion Costs:
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Comprehensive Example - Continued
Step 3: Compute Unit Production Cost – continued
Total Manufacturing Cost Per Unit
The computation of unit total manufacturing cost:
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Comprehensive Example - Continued Step 4: Prepare Cost Reconciliation Schedule
Costs Charged to Mixing Department:
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Costing Systems – Final Comments
Companies often use a combination of a process cost and a job order cost systemA job order system provides detailed information related to the cost of the product - however, often an expensive system due to the accounting costs involvedWhen deciding which system to use or whether to use a combination of systems, a company must weigh“the costs of implementing the system against the benefits from the additional information provided”
