3 Chapter Notes Cost Accumulation for Job-Shop and Batch Production Operations Learning Objectives -- This chapter has eight learning objectives. 1. Explain the difference in job-order, process, and operation costing systems. Explain how costs flow through the manufacturing accounts. Assign costs to production jobs or projects using a job-order costing system. Prepare accounting journal entries to record job costs. Use a predetermined overhead rate to assign indirect resource costs to production jobs. Explain how to measure production costs under actual, normal, and standard costing systems. Discuss the role of job-order costing in service organizations. Understand how companies manage long-term projects and their costs.
2. 3.
4. 5.
6.
7. 8.
Cost Accounting - Chapter 3 Notes
Page 1
1.
Organizations choose among costing systems by considering two things. First, ________________________________________ _____________________________________________ Second, _____________________________________ _____________________________________________ _____________________________________________ Answering these questions helps managers to choose from three different types of costing systems: _______ _____________________________________________ _____________________________________________ A. Job costing (or job-order costing) ____________________ _____________________________________________ _____________________________________________
1. Job costing helps managers ____________________ _____________________________________________ _____________________________________________ _____________________________________________
Cost Accounting - Chapter 3 Notes Page 2
2. Job costing provides data ____________________ _____________________________________________ _____________________________________________ 3. Job costing allows costs _______________________ _____________________________________________ _____________________________________________ 4. It facilitates ________________________________ _____________________________________________ _____________________________________________ 5. Job costing provides information _______________ _____________________________________________ _____________________________________________ 6. Throughput time is the _______________________ _____________________________________________ _____________________________________________ _____________________________________________
Cost Accounting - Chapter 3 Notes Page 3
_____________________________________________ _____________________________________________ _____________________________________________ B. Process costing characteristics: 1. treats _______________________________________ _______________________________________________ 2. is useful ______________________________________ _______________________________________________ _______________________________________________ _______________________________________________
3. Example: _____________________________________ _______________________________________________ _______________________________________________ _______________________________________________ C. Operation costing is a _____________________________ _______________________________________________
Cost Accounting - Chapter 3 Notes Page 4
1. Job order costing, _____________________________ _______________________________________________ 2. Process costing, _______________________________ ______________________________________________ Hybrid costing _____________________________________ _________________________________________________ _________________________________________________ _________________________________________________ _________________________________________________ _________________________________________________ Example: _________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ _________________________________________________ _________________________________________________
Cost Accounting - Chapter 3 Notes
Page 5
2.
The basic cost-flow model in accounting for inventory ____ ________________________________________________ A. _______________________________________________ _________________________________________________ 1. Costs in the beginning balance _________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ 2. Resources used, or transferred-in, ______________ __________________________________________ __________________________________________ 3. Transfers out _______________________________ __________________________________________ __________________________________________ __________________________________________
Cost Accounting - Chapter 3 Notes
Page 6
______________________________________ ____ __________________________________________ __________________________________________ 4. The ending balance __________________________ ________________________________________ __ __________________________________________ __________________________________________
__________________________________________ B. Because reporting of business activity occurs periodically, but completion of jobs generally does not occur at the end of a reporting period, _________________________ _______________ _______________________________ _______________________________________________ _______________________________________________ _______________________________________________
Cost Accounting - Chapter 3 Notes Page 7
_______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ 1. Work-in-Process inventory ____________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ 2. Finished-goods inventory _____________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________ __________________________________________
Cost Accounting - Chapter 3 Notes Page 8
3.
Tracing and assigning costs to jobs requires: __________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________
A. There are four methods for tracing and assigning costs to jobs. 1. Actual costing ___________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ 2. Normal costing __________________________________ _______________________________________________
Cost Accounting - Chapter 3 Notes Page 9
_______________________________________________ _______________________________________________ 3. Budget costing __________________________________ _______________________________________________ _______________________________________________ _______________________________________________ 4. Standard costing _________________________________ _______________________________________________ _______________________________________________ B. Predetermined cost-driver rates _________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________
Cost Accounting - Chapter 3 Notes
Page 10
Developing predetermined cost-driver rates requires a lot of estimation, described below. 1. For estimating cost-driver rates for higher-level activities, _______________________________________________ _______________________________________________ _______________________________________________ 2. Then the costs ___________________________________ _______________________________________________ _______________________________________________ _______________________________________________ 3. Next, cost-driver bases must be chosen. ______________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________
Cost Accounting - Chapter 3 Notes
Page 11
4. Finally, the predetermined cost-driver rate ____________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ C. Predetermined cost-driver rates are used to assign _______ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________
Cost Accounting - Chapter 3 Notes
Page 12
4.
Companies using job costing usually have many _____________
__________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ A. A job cost accounting system records _________________
_____________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________
Cost Accounting - Chapter 3 Notes
Page 13
1. The general ledger account, Work-in-Process inventory _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________
2. General ledger accounts are depicted in textbooks as "T" accounts ___________________________________________
_____________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________
Cost Accounting - Chapter 3 Notes
Page 14
_______________________________________________ _______________________________________________
A T-account for WIP inventory, for one job, is shown below.
JOB 598 BB $5,000 TI $ 500 $5,500 TO EB $0
BB is the __________________ __________________ TI is ________________________________________ TO is for ____________________________________ In this example, the job is completed, and costs are transferred to FGI.
Cost Accounting - Chapter 3 Notes
Page 15
3. The simplest job costing system used to assign higherlevel resource costs to jobs _________________________ ________________________________________________ 5. Job costs are summarized for three reasons. ___________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ 1. When jobs are completed, ____________________________ ________________________________________________ 2. When jobs are sold, __________________________________ ________________________________________________ 3. At month-end or year-end, a company's books are closed and financial statements are prepared. Since it is not likely that every job will be complete at the end of an accounting
Cost Accounting - Chapter 3 Notes
Page 16
period and every completed job will not have been sold, ___ ________________________________________________ ________________________________________________ ________________________________________________ 4. Adjustments must be made to the overhead account at the end of a period. Higher-level resource costs, ________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________
Cost Accounting - Chapter 3 Notes
Page 17
Actual costs are accumulated in the control and subsidiary ledgers by debiting these expense accounts. These higherlevel costs are assigned to jobs ______________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ A. The difference between the amount applied to jobs and the amount of actual overhead expense incurred is called _______________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________
Cost Accounting - Chapter 3 Notes
Page 18
_____________________________________________ _____________________________________________ _____________________________________________ B. Overhead costs can be over-applied to jobs, meaning that _________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ C. Since the overhead control account is an expense account, _____________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________
Cost Accounting - Chapter 3 Notes
Page 19
d.
The flow of overhead costs through the accounting system is as described below. Actual overhead costs are _______________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________
Cost Accounting - Chapter 3 Notes
Page 20
Some organizations set up separate accounts to reflect _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ E. the amounts of the variance are __________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ 6. Complex jobs that take a long time (months or even years) to complete are called projects. 1. Unlike some jobs, which may be completed before a customer is identified, projects _______________________
Cost Accounting - Chapter 3 Notes
Page 21
______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________ 2. There are two control issues for the manager of a project. They are related to control and management of project cost and to proper budgeting and use of project time. a. Project cost is _________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________
Cost Accounting - Chapter 3 Notes
Page 22
_____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ b. The manager must also see whether a project is on _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ C. Project scheduling can be depicted using a Gantt chart, _____________________________________________ _____________________________________________ _____________________________________________
Cost Accounting - Chapter 3 Notes
Page 23
_____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ 3. Job and project costs can, at times, ____________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ 7. Job costing systems _______________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________
Cost Accounting - Chapter 3 Notes
Page 24
8. Overhead variance ________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________
Cost Accounting - Chapter 3 Notes
Page 25
Problem 1 Chapter 3 JVC Company has three jobs outstanding. The company uses normal costing and the overhead rate which is based on machine hours amounts to $96 per machine hour based on a forecast of 4000 hours. Job A with a direct cost of $94,300 has used 1290 machine hours. Job B with a direct cost of $74,700 has used 1,760 machine hours. Job C with a direct cost of $87,470 has used 789 hours. Actual overhead amounted to $449,700. Job A is completed and sold for $276,500. Job B is completed and not yet delivered. Job C is still in process. Over/underapplied overhead is prorated to cost of sales and inventory accounts based on the amount of overhead charged to each job. Required: a) determine the amount of overhead applied, b) determine the over/underapplied overhead amount, c) prorate the overhead to the cost of sales and inventory accounts, d) prepare the necessary journal entries for the disposition of variance. Solution: a) Overhead applied: Job A
Job B
Job C
Cost Accounting - Chapter 3 Notes
Page 26
b) Amount of overhead applied:
Overhead is underapplied by this sum:
c) Proration to cost of sales and inventory accounts: Job A Job B Job C d) Journal entry: Cost of goods sold Finished goods inventory Work in process inventory Manufacturing overhead To account for underapplied overhead for the period.
Cost Accounting - Chapter 3 Notes
Page 27
Problem 2. Refer to problem 1 and prepare the necessary journal entries for same: Solution: Dr. Cr. To account for manufacturing overhead applied Dr. Cr. To account for completion and delivery of Job A Dr. Cr. To account for completion of Job B Dr. Cr. For manufacturing overhead costs incurred Dr. Cr. For manufacturing overhead applied Note that direct cost entries are assumed to have already been made. Also note that overhead applied could be charged to an account by that name and then offset against the actual manufacturing overhead account when disposing of over/underapplied overhead balance per item (d) above in problem 1.
Cost Accounting - Chapter 3 Notes
Page 28
Problem 3. Ryan Arman, the CFO, is considering an overhead application method for the firm. Actual overhead amounted to $347,100 for 8,900 machine hours whereas, the budget was based on 10,000 machine hours for a forecasted budget of 395,000. Other data for the year is provided in the following table: Item Direct cost of the job Related machine hours Job A $1,274,600 Actual = 2,650; Std. = 2,600 Job B $679,450 Actual = 1,745, Std. = 1,790 Job C $397,960 Actual = 3,175, Std. = 3,050 Job D $448,580 Actual = 1,330, Std. = 1,290 Required: Use the above data to determine the amount of overhead applied using a) actual costing, b) normal costing, and c) standard costing. D) prepare the necessary journal entries for the overhead amount applied. Solution: Actual overhead rate per hour: Standard overhead rate per hour:
Cost Accounting - Chapter 3 Notes
Page 29
Dr. Cr. Overhead applied under actual costing Dr. Cr. Overhead applied under normal costing Dr. Cr. Overhead applied under standard costing Note that over or underapplied overhead needs to be disposed of to cost of goods sold (if insignificant) or prorated to work in process, finished goods inventory, and cost of goods sold (if significant).
Cost Accounting - Chapter 3 Notes
Page 30
Problem 4. Arman Omid wants to prepare a projection for his activities for the month of March 2008 for a major job. He expects to secure the major job on March 3. The job will be immediately assigned to Saba to prepare all the technical detail. This is expected to take five days. The job will then be turned over to production who needs seven days to complete the job. After production, the work needs to be turned over to binders who need 10 days for binding. After the work is completed, it will need to be shipped to California which should take four days to get there. The contract is for $375,000 and is to be completed by March 31. For every day of delay, there will be a penalty of $5,000. If the delay is in excess of 15 days, all the down payment needs to be refunded. The job was turned over to Saba on March 4th and took him seven days to complete. It took production ten days, and the binders 15 days to do their part, and it took another five days for the completed work to reach the customer. Required: Prepare a Gantt chart to view the forecasted versus actual completion of the job and compute the amount of penalty if any. How could Omid protect himself in order not to have to pay penalties?
Cost Accounting - Chapter 3 Notes
Page 31