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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 14 - 1
Job-Costing and
Process-Costing Systems
Chapter 14
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Learning Objective 1
Distinguish between job-order
costing and process costing.
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Distinction Between Job-Order
Costing and Process Costing
Job-order costing allocates coststo products that are identified by
individual units or batches.
Process costing averages costsover large numbers of nearly
identical products.
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Job-Order Costing Basic Records
Job-cost record
Materials requisitions
Labor time cards
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Date Started: 1/7/03 Job Number: 963Date Completed: 1/14/03 Units completed: 12Cost Date Ref. Quantity Amount Summary
Direct Materials:
6 Bars 1/7 N41 24 120.00Casings 1/9 K56 12 340.00 460.00Direct Labor:Drill 1/8 7Z4 7.0 105.00
1/9 7Z5 5.5 82.50
Grind 1/13 9Z2 4.0 80.00 267.50Overhead:Applied 1/14 9.0 mach. hrs. 180.00 180.00Total cost 907.50Unit cost 75.625
Job-Cost Record
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Learning Objective 2
Prepare summary journal
entries for the typical
transactions of a
job-costing system.
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General Flow of Costs:
Enriquez Machine Parts Company
Beginningdirect materials
inventory $110,000
Purchases
$1,900,000+
= EndingInventory$120,000
Direct materialsused$1,890,000
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General Flow of Costs:
Enriquez Machine Parts Company
BeginningWIP
inventory $0
Direct materialsused
$1,890,000+
Direct laborand overhead$765,000
+
= Endinginventory$155,000
Cost of goodsmanufactured$2,500,000
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General Flow of Costs:
Enriquez Machine Parts Company
Beginningfinished goods
inventory $12,000
Cost of goodsavailable forsale $2,512,000
Cost of goodsmanufactured
$2,500,000+ =
= Endinginventory$32,000
Cost ofgoods sold$2,480,000
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110,000
1,900,0002,010,000
Materials Inventory
Materials Cost
Materials Inventory 1,900,000Accounts Payable 1,900,000
To record purchase of direct materials
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Materials Cost
1,890,000
WIP Inventory
110,000
1,900,0002,010,000
Materials Inventory
1,890,000
Work-in-Process Inventory 1,890,000Materials Inventory 1,890,000
To record usage of direct materials
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Actual Overhead Costs
Factory Department OverheadControl 392,000
Various Accounts 392,000To record actual factory overhead incurred
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Labor and Overhead Costs
Work-in-Process Inventory 390,000Accrued Payroll 390,000
To record actual labor costs incurred
Work-in-Process Inventory 375,000
Factory DepartmentOverhead Control 375,000To record overhead applied
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Actual and Applied Overhead
Actual overhead = $392,000
Applied overhead = $375,000
$392,000 $375,000 = $17,000 underapplied
Cost of Goods Sold 17,000Factory DepartmentOverhead Control 17,000
To dispose of underapplied overhead
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How to Apply Factory Overhead
to Products
Enriquez Machine Parts Companysbudgeted manufacturing overhead for
the assembly department is $103,200.
Budgeted direct labor cost is $206,400.
$103,200 $206,400 = 50%
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How to Apply Factory Overhead
to Products
Suppose that at the end of the yearEnriquez has incurred $190,000
of direct-labor cost in assembly.
How much overhead was
applied to assembly?
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Learning Objective 3
Use an activity-based costing
system in a job-order
environment.
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Activity-Based Costing in a
Job-Order Environment
Costs in an activity center
Nonvalueadded
Key activities must be identified.
Valueadded
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Learning Objective 4
Show how service
organizations
use job costing.
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Product Costing in Service and
Nonprofit Organizations
Service and nonprofit organizationscall their product a program
or a class of service.
In service industries, each
customer order is a different job.
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Budgets and Control of
Engagements
$6,500,000 $2,500,000 = 260%
Revenue $10,000,000
Direct labor 2,500,000Contribution to overhead
and operating income 7,500,000Overhead (all other costs) 6,500,000Operating income $ 1,000,000
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Accuracy of Costs of Engagements
Projectedcost Price
Direct labor $ 50,000 $ 75,000
Applied overhead @ 260% 130,000 195,000Total costs excluding travel $180,000 $270,000Travel costs 14,000 14,000Total projected costs $194,000 $284,000
Suppose that this accounting firms policy for pricing
is 150% of total professional costs plus travel costs.
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Learning Objective 5
Explain the basic ideas
underlying process costingand how they differ from
job costing.
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Process Costing Basics
Process costing is more efficientfor companies that produce, in a
continuous process, large quantitiesof homogenous product.
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Process Costing Compared With
Job Costing
Direct materialsDirect labor
Indirect resource cost
Job 101Job 100
Finishedgoods
Cost ofgoods sold
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Process Costing Compared With
Job Costing
Finishedgoods
Cost ofgoods sold
Direct materialsDirect labor
Indirect resource cost
AssemblyProcess A Process B
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Process Costing Compared With
Job Costing
The journal entries for process-costingsystems are similar to those
for the job-order system.
there is more than one singlework-in-process account.
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Learning Objective 6
Compute output in termsof equivalent units.
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Five Key Steps
Step 1: Summarize the flow of physical units.
Step 2: Calculate output in terms of equivalent units.
Step 3: Summarize the total costs to account for.
Step 4: Calculate unit costs.
Step 5: Apply costs to units completed andto units in ending work in process.
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Physical Units and
Equivalent Units
Started and completed 20,000 20,000 20,000Ending WIP 5,000 5,000 1,250Units accounted for 25,000
Work done to date 25,000 21,250
(Step 1)Physical
units
(Step 2)Equivalent units
Direct
materials Conversion
100% 25%
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Learning Objective 7
Compute costs and prepare
journal entries for theprincipal transactions
in a process-costing system.
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Calculation of Product Costs
What is the cost of a completed unit?
(Step 3) Costs to account for $112,500 $70,000 $42,500
(Step 4) Equivalent units 25,000 21,250= Unit costs $ 2.80 $ 2.00
Directmaterials
ConversioncostsTotals
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Production Cost Report
Units completed and transferred out:
20,000 units @ 44.80 $ 96,000Units in ending inventory:Materials: 5,000 2.80 14,000Conversion: 1,250 2.00 2,500Total costs $112,500
(Step 5) Application of costs
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Journal Entries
Work-in-Process Forming 70,000Direct-materials Inventory 70,000
Materials added to production during the month
Work-in-Process Forming 10,625
Accrued Payroll 10,625Direct labor during the month
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Journal Entries
Work-in-Process Forming 31,875Factory Overhead 31,875
Factory overhead applied during the month
Work-in-Process Finishing 96,000
Work-in-Process Forming 96,000Costs of goods completed and transferredduring the month from forming to assembly
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Learning Objectives 8
Demonstrate how the presence
of beginning inventories
affects the computation
of unit costs under the
weighted-average method
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Weighted-Average Method
Example
Beginning WIP:5,000 units
100% materials25% conversion costs
Ending WIP:7,000 units
100% materials60% conversion costs
Month ended May 31:Forming Department
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Weighted-Average Method
Example
Beginning WIP 5,000Started in May 26,000Units to accounted for 31,000Completed and
transferred out 24,000 24,000 34,000Ending WIP 7,000 7,000 4,200Units accounted for 31,000 31,000 28,200
(Step 1)Physical
units
(Step 2)Equivalent units
Direct
materials Conversion
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Weighted-Average Method
Example
(Step 3) Beginning WIP $ 16,500 $14,000 $ 2,500
Costs added 138,820 82,100 56,720Costs to account for $155,320 $96,100 $59,220
(Step 4) Equivalent units 31,000 28,200= Unit costs $ 3.10 $ 2.10
Directmaterials
ConversioncostsTotals
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Weighted-Average Method
Example
Units completed and transferred out:
24,000 units @ $5.20 $124,800Units in ending inventory:Materials: 7,000 3.10 21,700Conversion: 4,200 2.10 8,820Total costs $155,320
(Step 5) Application of costs
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FIFO Method Example
Beginning WIP 5,000Started in May 26,000Units to accounted for 31,000Completed and
transferred out 24,000 24,000 24,000Ending WIP 7,000 7,000 4,200
Units accounted for 31,000Work done to date 31,000 28,200Less: Beginning WIP 5,000 1,250Equivalent units 26,000 26,950
(Step 1)Physicalunits
(Step 2)Equivalent units
Direct
materials Conversion
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FIFO Method Example
(Step 3) Beginning WIP $ 16,500 (work done before May)
Costs added 138,820 $82,100 $56,720Costs to account for $155,320
(Step 4) Equivalent units 26,000 26,950= Unit costs $3.1577 $2.1046
Directmaterials
ConversioncostsTotals
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FIFO Method Example
Units in ending inventory:
Materials: 7,000 3.1577 $ 22,104Conversion: 4,200 2.1046 8,839Total WIP (7,000 units) $ 30,943Completed and transferred out
(24,000 units), $155,320 $30,943 124,377Total costs accounted for $155,320
(Step 5) Application of costs
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Transferred-in Costs in
Process Costing
The costs transferred from
another department are similarto direct material added atthe beginning of processing.
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Learning Objective 9
Use backflush costing witha JIT production system.
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Process Costing in a JIT System
In just-in-time production systems, inventoryof work in process is typically small compared
to the costs of goods produced and sold.
The cost of tracking work in processexceeds the benefits for many companies.
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Backflush Costing
What is backflush costing?
It is an accounting system that
applies costs to products onlywhen the production is complete.
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Principles of Backflush Costing
Backflush costing has onlytwo categories of costs:
Materials Conversion
There is no work in process account.
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Backflush Costing Example
Speaker Technology, Inc., recentlyintroduced backflush costing and JIT.
Model AX27 Standard material cost: $14Standard conversion cost: $21
Actual production for the month: 400 unitsActual materials purchased: $5,600Actual conversion costs: $8,400
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Backflush Costing Example
Materials Inventory 5,600
Accounts Payable or Cash 5,600To record material purchases
Conversion Costs 8,400Accrued Wages 8,400To record conversion costs incurred
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Backflush Costing Example
Finished Goods Inventory 14,000Material Inventory 5,600
Conversion Costs 8,400To record costs of completed production
Cost of Goods Sold 14,000Finished Goods Inventory 14,000To record costs of 400 units sold
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Backflush Costing Example
Cost of Goods Sold 14,000Material Inventory 5,600Conversion Costs 8,400
Cost of Goods Sold 200Conversion Costs 200
To recognize underapplied conversion costs
The Finished Goods Account can be eliminated.
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End of Chapter 14
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