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Title: Systems Design: Job-Order Costing


1
Systems Design Job-Order Costing
  • Chapter 3

2
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
3
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Example companies1. Weyerhaeuser (paper
manufacturing)2. Reynolds Aluminum (refining
aluminum ingots) 3. Coca-Cola (mixing and
bottling beverages)
4
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
5
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Example companies1. Boeing (aircraft
manufacturing)2. Bechtel International (large
scale construction) 3. Walt Disney Studios (movie
production)
6
Comparing Process and Job-Order Costing
7
Quick Check ?
  • Which of the following companies would be
    likely to use job-order costing rather than
    process costing?
  • a. Scott Paper Company for Kleenex.
  • b. Architects.
  • c. Heinz for ketchup.
  • d. Caterer for a wedding reception.
  • e. Builder of commercial fishing vessels.

8
Quick Check ?
  • Which of the following companies would be
    likely to use job-order costing rather than
    process costing?
  • a. Scott Paper Company for Kleenex.
  • b. Architects.
  • c. Heinz for ketchup.
  • d. Caterer for a wedding reception.
  • e. Builder of commercial fishing vessels.

9
Job-Order Costing An Overview
Charge direct material and direct labor costs to
each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
10
Indirect Manufacturing Costs
Manufacturing Overhead, including indirect
materials and indirect labor, are allocated to
all jobs rather than directly traced to each job.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
11
The Job Cost Sheet
12
Measuring Direct Materials Cost
13
Measuring Direct Materials Cost
14
Measuring Direct Labor Costs
15
Job-Order Cost Accounting
16
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that
are in process. An allocation base, such as
direct labor hours, direct labor dollars, or
machine hours, is used to assign manufacturing
overhead to individual jobs.
  • We use an allocation base because
  • It is impossible or difficult to trace overhead
    costs to particular jobs.
  • Manufacturing overhead consists of many different
    items ranging from the grease used in machines to
    production managers salary.
  • Many types of manufacturing overhead costs are
    fixed even though output fluctuates during the
    period.

17
Manufacturing Overhead Application
  • The predetermined overhead rate (POHR) used to
    apply overhead to jobs is determined before the
    period begins.

18
The Need for a POHR
  • 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.

19
Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated using
a three-step process.
? Estimate the level of production for the period.
?Estimate total amount of the allocation base
for the period.
?Estimate total manufacturing overhead costs.
POHR ? ?
20
Application of Manufacturing Overhead
Based on estimates, and determined before the
period begins.
Actual amount of allocation is based upon the
actual level of activity (normal costing system).
21
Overhead Application Rate
POHR 4.00 per DLH
For each direct labor hour worked on a particular
job, 4.00 of factory overhead will be applied to
that job.
22
Job-Order Cost Accounting
23
Job-Order Cost Accounting
24
Interpreting the Average Unit Cost
The average unit cost should not be
interpreted as the costs that would actually be
incurred if anadditional unit was
produced.Fixed overhead would not change if
another unitwas produced, so the incremental
cost of another unit is something less than 118.
25
Quick Check ?
Job WR53 at NW Fab, Inc. required 200 of
direct materials and 10 direct labor hours at 15
per hour. Estimated total overhead for the year
was 760,000 and estimated direct labor hours
were 20,000. What would be recorded as the cost
of job WR53? a. 200. b. 350. c. 380. d. 730.
26
Quick Check ?
Job WR53 at NW Fab, Inc. required 200 of
direct materials and 10 direct labor hours at 15
per hour. Estimated total overhead for the year
was 760,000 and estimated direct labor hours
were 20,000. What would be recorded as the cost
of job WR53? a. 200. b. 350. c. 380. d. 730.
27
Job-Order Costing Document Flow Summary
A sales order is the basis of issuing a
production order.
A production order initiates work on a job.
28
Job-Order CostingDocument Flow Summary
Materialsused may beeither direct orindirect.
Job Cost Sheets
MaterialsRequisition
Manufacturing Overhead Account
29
Job-Order CostingDocument Flow Summary
Anemployeestime may be eitherdirect
orindirect.
Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
30
Job-Order CostingDocument Flow Summary
MaterialsRequisition
Manufacturing Overhead Account
OtherActual OHCharges
Job Cost Sheets
EmployeeTime Ticket
31
The Purchase and Issue of Raw Materials
Raw Materials
Work in Process(Job Cost Sheet)
  • Material
  • Purchases

Mfg. Overhead
Actual
Applied
32
Cost Flows Material Purchases
  • Raw material purchases are recorded in
    aninventory account.

33
Cost Flows Material Usage
  • 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.

34
The Recording of Labor Costs
Work in Process(Job Cost Sheet)
Salaries and Wages Payable
  • Direct Materials

Mfg. Overhead
Actual
Applied
  • Indirect Materials

35
The Recording of Labor Costs
  • The cost of direct labor incurred increases
    Work in Process and the cost of indirect labor
    increases Manufacturing Overhead.

36
Recording Actual Manufacturing Overhead
Work in Process(Job Cost Sheet)
Salaries and Wages Payable
  • Direct Labor
  • Direct Materials
  • IndirectLabor
  • Direct Labor

Mfg. Overhead
Actual
Applied
  • Indirect Materials
  • IndirectLabor
  • OtherOverhead

37
Recording Actual Manufacturing Overhead
  • In addition to indirect materials and indirect
    labor, other manufacturing overhead costs are
    charged to the Manufacturing Overhead account as
    they are incurred.

38
Applying Manufacturing Overhead
Work in Process(Job Cost Sheet)
Salaries and Wages Payable
  • Direct Labor
  • Direct Materials
  • IndirectLabor
  • Direct Labor

Mfg. Overhead
Actual
Applied
  • Indirect Materials

If actual and applied manufacturing overheadare
not equal, a year-end adjustment is required.
  • IndirectLabor
  • OtherOverhead

39
Applying Manufacturing Overhead
  • Work in Process is increased when
    Manufacturing Overhead is applied to jobs.

40
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to
individual jobs, rather they are expensed in the
period incurred.
Examples1. Salary expense of employees who
work in a marketing, selling, or administrative
capacity. 2. Advertising expenses are
expensed in the period incurred.
41
Accounting for Nonmanufacturing Cost
  • Nonmanufacturing costs (period expenses) are
    charged to expense as they are incurred.

42
Transferring Completed Units
Work in Process(Job Cost Sheet )
Finished Goods
  • Direct Materials
  • Direct Labor
  • Overhead Applied

43
Transferring Completed Units
  • As jobs are completed, the Cost of Goods
    Manufactured is transferred to Finished Goods
    from Work in Process.

44
Transferring Units Sold
Work in Process(Job Cost Sheet)
Finished Goods
  • Cost ofGoodsMfd.
  • Direct Materials
  • Cost ofGoodsMfd.
  • Direct Labor
  • Overhead Applied

Cost of Goods Sold
45
Transferring Units Sold
  • When finished goods are sold, two entries are
    required (1) to record the sale, and (2) to
    record the Cost of Goods Sold.

46
Problems of Overhead Application
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.
Overapplied overhead exists when the amount of
overhead applied to jobs during the period using
the predetermined overhead rate is greater than
the total amount of overhead actually incurred
during the period.
47
Overhead Application Example
  • PearCos actual overhead for the year was
    650,000 with a total of 170,000 direct labor
    hours worked on jobs.
  • How much total overhead was applied to PearCos
    jobs during the year? Use PearCos predetermined
    overhead rate of 4.00 per direct labor hour.

Overhead Applied During the Period Applied
Overhead POHR Actual Direct Labor
Hours Applied Overhead 4.00 per DLH
170,000 DLH 680,000
48
Overhead Application Example
PearCos actual overhead for the year was
650,000 with a total of 170,000 direct labor
hours worked on jobs. How much total overhead was
applied to PearCos jobs during the year? Use
PearCos predetermined overhead rate of 4.00 per
direct labor hour.
Overhead Applied During the Period Applied
Overhead POHR Actual Direct Labor
Hours Applied Overhead 4.00 per DLH
170,000 DLH 680,000
49
Quick Check ?
  • 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.
    Tigers manufacturing overhead is
  • a. 50,000 overapplied.b. 50,000
    underapplied.c. 60,000 overapplied.d.
    60,000 underapplied.

50
Quick Check ?
  • 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.
    Tigers manufacturing overhead is
  • a. 50,000 overapplied.b. 50,000
    underapplied.c. 60,000 overapplied.d.
    60,000 underapplied.

Overhead Applied 4.00 per hour 290,000
hours 1,160,000 Underapplied Overhead
1,210,000 - 1,160,000 50,000
51
Disposition of Under- or Overapplied Overhead
OR
52
Disposition of Under- or Overapplied Overhead
PearCosMfg. Overhead
PearCos Costof Goods Sold
Actualoverhead costs 650,000
Unadjusted Balance
Overhead appliedto jobs 680,000
AdjustedBalance
30,000 overapplied
53
Allocating Under- or Overapplied Overhead Between
Accounts
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below
54
Allocating Under- or Overapplied Overhead Between
Accounts
We would complete the following allocation of
30,000 overapplied overhead
10 30,000
55
Allocating Under- or Overapplied Overhead Between
Accounts
56
Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCos Method
More accurate but more complex to compute.
57
Quick Check ?
  • What effect will the overapplied overhead have
    on PearCos net operating income?
  • a. Net operating income will increase.
  • b. Net operating income will be unaffected.
  • c. Net operating income will decrease.

58
Quick Check ?
  • What effect will the overapplied overhead have
    on PearCos net operating income?
  • a. Net operating income will increase.
  • b. Net operating income will be unaffected.
  • c. Net operating income will decrease.

59
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a
single predetermined overhead rate called a
plantwide overhead rate.
Large companies often use multiple predetermined
overhead rates.
May be more accurate because it reflects
differences across departments.
60
Job-Order Costing in Service Companies
Job-order costing is used in many different types
of service companies.
61
The Use of Information Technology
Technology plays an important part in
manyjob-order cost systems. When combined with
Electronic Data Interchange (EDI) or a web-based
programming language called Extensible Markup
Language (XML), bar coding eliminates the
inefficiencies and inaccuracies associated with
manual clerical processes.
62
The Predetermined Overhead Rate and Capacity
  • Appendix 3A

63
Predetermined Overhead Rate and Capacity
  • Calculating predetermined overhead rates using an
    estimated, or budgeted amount of the allocation
    base has been criticized because
  • Basing the predetermined overhead rate upon
    budgeted activity results in product costs that
    fluctuate depending upon the activity level.
  • Calculating predetermined rates based upon
    budgeted activity charges products for costs that
    they do not use.

64
Capacity-Based Overhead Rates
Criticisms can be overcome by using estimated
total units in the allocation base at capacity in
the denominator of the predetermined overhead
rate calculation.
Lets look at the difference!
65
An Example
Equipment is leased for 100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year. What is the
predetermined overhead rate?
66
An Example
Equipment is leased for 100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year.
67
Quick Check ?
  • Crest Winery in Woodinville leases an automatic
    corking machine for 100,000 per year. At full
    capacity, it can cork 50,000 cases of wine per
    year. The company estimates 40,000 cases of wine
    will be produced and sold next year. What is the
    predetermined overhead rate based on the
    estimated number of cases of wine?
  • a. 2.00 per case.
  • b. 2.50 per case.
  • c. 4.00 per case.

68
Quick Check ?
Crest Winery in Woodinville leases an automatic
corking machine for 100,000 per year. At full
capacity, it can cork 50,000 cases of wine per
year. The company estimates 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate based on the
estimated number of cases of wine? a. 2.00 per
case. b. 2.50 per case. c. 4.00 per case.
69
Quick Check ?
  • Crest Winery in Woodinville leases an automatic
    corking machine for 100,000 per year. At full
    capacity, it can cork 50,000 cases of wine per
    year. The company estimates 40,000 cases of wine
    will be produced and sold next year. What is the
    predetermined overhead rate based on the number
    of cases of wine at capacity?
  • a. 2.00 per case.
  • b. 2.50 per case.
  • c. 4.00 per case.

70
Quick Check ?
Crest Winery in Woodinville leases an automatic
corking machine for 100,000 per year. At full
capacity, it can cork 50,000 cases of wine per
year. The company estimates 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate based on the number
of cases of wine at capacity? a. 2.00 per
case. b. 2.50 per case. c. 4.00 per case.
71
Quick Check ?
  • When capacity is used in the denominator of the
    predetermined rate, what happens to the
    predetermined overhead rate as estimated activity
    decreases?
  • a. The predetermined overhead rate goes up when
    activity goes down.
  • b. The predetermined overhead rate stays the same
    because it is not affected by changes in
    activity.
  • c. The predetermined overhead rate goes down when
    activity goes down.

72
Quick Check ?
When capacity is used in the denominator of the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases? a. The predetermined overhead rate
goes up when activity goes down. b. The
predetermined overhead rate stays the same
because it is not affected by changes in
activity. c. The predetermined overhead rate goes
down when activity goes down.
73
Quick Check ?
  • When estimated activity is used in the
    denominator of the predetermined rate, what
    happens to the predetermined overhead rate as
    estimated activity decreases?
  • a. The predetermined overhead rate goes up when
    activity goes down.
  • b. The predetermined overhead rate stays the same
    because it is not affected by changes in
    activity.
  • c. The predetermined overhead rate goes down when
    activity goes down.

74
Quick Check ?
When estimated activity is used in the
denominator of the predetermined rate, what
happens to the predetermined overhead rate as
estimated activity decreases? a. The
predetermined overhead rate goes up when activity
goes down. b. The predetermined overhead rate
stays the same because it is not affected by
changes in activity. c. The predetermined
overhead rate goes down when activity goes down.
75
Income Statement Preparation Capacity
76
Income Statement Preparation Traditional
77
Assign 3pg. 122 E3-10, pg. 123 E3-12,pg.
124 E3-14,pg. 215 E5-1 (due 10/15)
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