Chapter ACC221 3
Systems Design: Job-Order Costing
1
Objectives
1. Distinguish between process costing and job-order costing and identify companies that would use each costing method. 2. Identify the documents used in a job-order costing system. 3. Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process. 4. Apply overhead cost to Work in Process using a predetermined overhead rate.
2
Objectives
5. Understand the flow of costs in a job-order costing system and prepare journal entries to record costs. 6. Use T-accounts to show the flow of costs in a job-order costing system. 7. Compute under- or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing overhead to the appropriate accounts.
3
Objective 1
Distinguish between process costing and job-order costing and identify companies that would use each costing method.
4
Absorption Costing
Costing approach that provides for the absorption of all manufacturing costs, fixed and variable into units of production. Also known as full cost approach.
5
Reasons for Unit Product Costs
Value inventory and determine Cost of Goods Sold for financial statements. Make decisions regarding products.
6
Process Costing
Employed in those situations where manufacturing involves a single homogeneous product that is produced for long periods of time. Accumulate costs in a particular operation or department for an entire period, then divide this total by the number of units produced during the period. Total manufacturing costs/total units produced = Unit cost
7
Job-order costing
Used in those situations where many different products, jobs or batches of production are produced each period. Extensively used in service industries. Costs can be accumulated by job and in which distinct unit costs can be determined for each completed job. Involves dividing total costs of a job, by the units in the job. Certain problems of record keeping and cost assignment are involved in job-order costing that is not involved in process costing.
8
Difference Between Process Costing and Job-Order Costing
The way in which the averaging is used to determine the unit costs.
9
Objective 2
Identify the documents used in a joborder costing system.
10
Bill of Materials
A document that lists the type and quantity of each item of materials needed to complete a unit of product.
11
Materials Requisition Form
Used to draw raw materials from the store room. It is a detailed source document that specifies the type and quantity of materials to be drawn and identified which job should be charged. Serves as a means for controlling the flow of materials into the production process. Serves as the basis for accounting entries.
12
Job Cost Sheet
Prepared for each separate job that records the materials, labor and overhead costs charged to the job. Key part of the company's accounting records. Serves as a subsidiary ledger to the Work in Process account.
13
Time Tickets
Constitute an hour-by-hour summary of the activity completed during the day by an employee. Employee enters the job number on the time ticket and enters the number of hours spent on a particular task. The daily time tickets constitute the basic source documents used as the basis for labor cost entries into the accounting records.
14
Direct vs. Indirect Labor
Direct labor includes those charges that are directly traceable to the particular job in process. Indirect labor are those labor charges that cannot be traced directly to a particular job. Treated as manufacturing overhead.
15
Document Flow
Materials Requisition Form Job Direct labor Time Ticket Cost Sheet
Predetermined Overhead rates
16
Objective 3
Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
17
Assigning Overhead to Units of Product is difficult because:
1. Manufacturing overhead is an indirect cost to units or products. This means that it is either impossible or difficult to trace these costs to a particular product or job. Manufacturing overhead consists of many different items and includes both variable and fixed costs. Many firms find that even though output may fluctuate due to seasonal or other factors, manufacturing overhead costs tend to remain relatively constant, as a large portion of manufacturing overhead is usually fixed.
2. 3.
18
Allocation of Overhead
Allocation process that uses an allocation base that is common to all of the company's products must be selected. The process of assigning overhead costs to jobs. Allocation base a measure such as direct labor-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services. Allocation base that acts as a cost driver in the incurrence of overhead should be chosen.
19
Predetermined Overhead Rate
Estimated total manufacturing costs Estimated total units in base (DLH, MH, etc.) = Predetermined Overhead Rate
20
Reasons for Using Predetermined Overhead Rates.
Before the end of the accounting period, managers would like to know the accounting system's valuation of completed jobs. If actual overhead rates are computed frequently, seasonal factors in overhead costs or in the allocation base can produce fluctuations in the overhead rates, which serve no useful purpose and misleading. are The use of a predetermined overhead rate simplifies recordkeeping.
21
Cost Driver
A factor, such as machine-hours, beds occupied, computer time, flight hours, etc. that causes overhead costs. If a base is used to compute overhead rates that does not "drive" overhead costs, then the result will be inaccurate overhead rates and distorted product costs.
22
Timing of Application of Overhead
Can be done as job progresses or at the end of the job. If a job is not completed at year-end, overhead should be applied in order to value the work-in-process inventory.
23
Computation of Unit Costs
Totals for direct materials, direct labor and manufacturing overhead are transferred to the Cost Summary section of the job cost sheet and added together to obtain the total cost of the job. The total cost is divided by the number of units to obtain the unit cost. This is an average cost and should NOT be interpreted as the cost that would actually be incurred if another unit were produced. The completed job cost sheet is now ready to be transferred to finished goods. It will serve as the basis for valuing unsold units and cost of goods sold.
24
Objective 4
Apply overhead cost to Work in Process using a predetermined overhead rate.
25
Application of Overhead
Overhead rate is multiplied by actual cost driver. Cost driver may be direct labor cost, direct labor hours, machine hours etc. Work in process is debited, Manufacturing overhead is credited.
26
Objective 5
Understand the flow of costs in a joborder costing system and prepare journal entries to record costs.
27
Flow of Costs
Purchases of Raw Materials Raw Materials Inventory Direct Labor Cost of Goods Sold WIP Inventory Finished Goods Inventory
Overhead
28
Journal Entries
(1)Purchase of raw materials: Raw Materials Inventory Accounts Payable 60,000 60,000
(2)$52,000 materials requisitioned, $2,000 are indirect: Work-in-process Inventory Manufacturing Overhead Raw materials Inventory 50,000 2,000 52,000
29
Journal Entries
(3)Direct labor and indirect labor costs are incurred: Work in process Inventory Manufacturing Overhead Salaries and Wages Payable (4)Utilities of $21,000, Rent on equipment, $16,000 and Misc. Factory costs of $3,000 are incurred Manufacturing Overhead Accounts Payable. 40,000 40,000
30
60,000 15,000 75,000
Journal Entries
(5) $13,000 of property taxes are accrued and $7,000 of insurance expense expires Manufacturing Overhead Property Taxes Payable Prepaid Insurance (6) $18,000 of factory depreciation is recognized Manufacturing Overhead Accumulated Depreciation 18,000 18,000
31
20,000 13,000 7,000
Journal Entries
(7) Overhead is applied using a rate of $6 per machine hour. 15,000 machine hours are used. Work in Process Inventory Manufacturing Overhead (8) Office salaries of $30,000 are incurred. Salaries Expense Salaries and Wages Payable 30,000 30,000 90,000 90,000
32
Journal Entries
(9) Depreciation on office equipment of $7,000 is recognized Depreciation expense Accumulated Depreciation (10) Advertising of $42,000 and $8,000 other S& A expenses are incurred. Advertising Expense Other Selling and Administrative Exp. Accounts Payable 42,000 8,000 50,000
33
7,000 7,000
Journal Entries
(11) $158,000 worth of Work in Process is Completed Finished Goods Inventory Work in Process Inventory (12) Goods with a selling price of $225,000 are sold. Accounts Receivable Sales (13) The goods in entry 12 are costed at $118,500. Cost of Goods Sold Finished Goods Inventory 118,500 118,500
34
158,000 158,000
225,000 225,000
Journal Entries
(14) Close out of underapplied overhead of $5,000 to Cost of Goods Sold. Cost of Goods Sold Manufacturing Overhead 5,000 5,000
35
Journal Entries
All manufacturing overhead costs are recorded directly into the manufacturing overhead account. Manufacturing overhead is a control account. Manufacturing overhead costs are assigned to work in process inventory using a predetermined overhead rate. Manufacturing overhead operates as a clearing account. Nonmanufacturing costs do not enter the manufacturing overhead account. The are charged to the appropriate expense account.
36
Objective 6
Use T-accounts to show the flow of costs in a job-order costing system.
37
T-Accounts
Refer to Exhibit 3-10 on page 106 in your text.
38
Objective 7
Compute under- or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing overhead to the appropriate accounts.
39
Under- or Overapplied Overhead
Differences between actual overhead and applied overhead occur because of estimates in the predetermined overhead rate. If actual overhead is > applied overhead; overhead is underapplied. If applied overhead is > actual overhead; overhead is overapplied.
40
Disposition of Under- or Overapplied Overhead
Can be 1. Closed to cost of goods sold. 2. Allocated to WIP, Finished Goods and Cost of Goods Sold in proportion to the ending balances in these accounts.
41
Journal Entry for Underapplied Overhead
COGS 5,000 Manufacturing OH Or WIP 1,667 Finished Goods 833 COGS 2,500 Manufacturing OH 5,000
5,000
42
Journal Entry for Overapplied Overhead
Manufacturing OH 5,000 Cost of Goods Sold Or Manufacturing OH WIP Finished Goods COGS 5,000 1,667 833 2,500 5,000
43
Source for Presentation
Garrison, Noreen & Brewer, Managerial Accounting, McGraw-Hill Irwin, Eleventh Edition, 2006
44