3
Systems Chapter Design: Job-Order Costing
Suggested Homework: E3-1 thru E3-9, E3-12 thru E3-14
Types of Product Costing Systems
Process Costing Job-order Costing
A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.
Types of Product Costing Systems
Process Costing Job-order Costing
Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Comparing Process and Job-Order Costing
Job-Order Number of jobs worked Cost accumulated by Average cost computed by Many Individual Job Job Process Single Product Department Department
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.
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 Job No. 3
Manufacturing Overhead
Job-Order Costing An Overview
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 Job No. 3
Manufacturing Overhead
The Job Cost Sheet
PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount Date Initiated 3-4-08 Date Completed Units Completed
Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
Units Shipped Date Number Balance
Measuring Direct Materials Cost
PearCo Materials Requisition Form Requisition No. X7 - 6890 Job No. A - 143 Department B3 Description 2 x 4, 12 feet 1 x 6, 12 feet Quantity 12 20 Date 3-4-08
$
Unit Cost Total Cost 3.00 $ 36.00 4.00 80.00 $ 116.00
Authorized Signature
Will E. Delite
Measuring Direct Materials Cost
PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-08 Date Completed Units Completed
Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount X7-6890 $ 116
Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
$
116
Units Shipped Date Number Balance
Measuring Direct Labor Costs
PearCo Employee Time Ticket Time Ticket No. Employee Starting Time 0800 36 Date Station 3/5/2008 42 I. M. Skilled Ending Time 1600
Hours Hourly Completed Rate Amount 8.00 $ 11.00 $ 88.00
Job No. A-143
Totals
8.00
$
11.00 $
88.00
A-143
SupervisorC. M. Workman
Job-Order Cost Accounting
PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount X7-6890 $ 116 Date Initiated 3-4-08 Date Completed Units Completed
Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount 36 8 $ 88
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
$ $
116 88
Units Shipped Date Number Balance
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: 2. It is impossible or difficult to trace overhead costs to particular jobs. 3. Manufacturing overhead consists of many different items ranging from the grease used in machines to production managers salary. 4. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
Application of Manufacturing Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
POHR =
Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period
Ideally, the allocation base is a cost driver that causes overhead.
Application of Manufacturing Overhead Using a predetermined rate makes it possible to estimate total job costs sooner.
$
Actual overhead for the period is not known until the end of the period.
Application of Manufacturing Overhead
Predetermined overhead rates are calculated using a three-step process.
Estimate the level of
production for the period.
Estimate the total amount of the
allocation base in the denominator that would be required for that level of production. Estimate the total manufacturing overhead cost in the numerator that would be incurred for the estimated amount of the allocation base.
Application of Manufacturing Overhead
The predetermined overhead rate(POHR) is based on estimates and determined before the period begins.
Overhead applied = POHR Actual activity
Actual amount of the allocation is based upon the actual level of activity.
Application of Manufacturing Overhead
Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period $640,000 160,000 direct labor hours (DLH)
POHR =
POHR =
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.
Job-Order Cost Accounting
PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Date Initiated 3-4-08 Date Completed 3-5-08 Units Completed 2
Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116 36 8 $ 88 8 $ 4$ 32
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
$ $ $
116 88 32
Units Shipped Date Number Balance
Job-Order Cost Accounting
PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Date Initiated 3-4-08 Date Completed 3-5-08 Units Completed 2
Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount X7-6890 $ 116 36 8 $ 88 8 $ 4$ 32
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
$ $ $ $ $
116 88 32 236 118
Units Shipped Date Number Balance
Interpreting the Average Unit Cost
The average unit cost should not be interpreted as the cost that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit is something less than $118.
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.
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.
Job-Order Costing Document Flow Summary
Materials used may be either direct or indirect. Direct materials Materials Requisition Indirect materials Manufacturing Overhead Account Job Cost Sheets
Job-Order Costing Document Flow Summary
An employees time may be either direct or indirect. Direct Labor Job Cost Sheets
Employee Time Ticket Indirect Labor Manufacturing Overhead Account
Job-Order Costing Document Flow Summary
Employee Time Ticket Other Actual Overhead Charges Materials Requisition Indirect Labor
Manufacturing Applied Overhead Overhead Account
Job Cost Sheets
Indirect Material
An Extended Example of Job-Order Costing
Rand Company produces gold and silver commemorative medallions. At the beginning of April, Rand company had no finished goods inventory and one job (Job A) in process, a special minting of 1,000 gold medallions commemorating the invention of motion pictures. Manufacturing costs incurred to date on Job A total $30,000. Job A will be completed in April and Job B, an order for 10,000 sliver medallions commemorating the fall of the Berlin Wall, will be started in April and finished in a subsequent month.
An Extended Example of Job-Order Costing
Given this information, we will now track the flow of Rand Companys raw materials, direct labor and overhead costs for April and prepare an income statement for the month.
An Extended Example of Job-Order Costing
Job Cost Sheet Job A Beginning balance Direct materials $ 30,000 28,000 Job Cost Sheet Job B Beginning balance Direct materials $ 22,000 Manufacturing Overhead Incurred Indirect materials $ 2,000
Materials Requisition Form Job A direct materials Job B direct materials Indirect materials Total $ 28,000 22,000 2,000 $ 52,000
An Extended Example of Job-Order Costing
Job Cost Sheet Job A Beginning balance Direct materials Direct labor $ 30,000 28,000 40,000 Job Cost Sheet Job B Beginning balance Direct materials Direct labor $ 22,000 20,000 Manufacturing Overhead Incurred Indirect materials Indirect labor $ 2,000 15,000
Various Time Tickets Job A direct labor Job B direct labor Indirect labor Total $ 40,000 20,000 15,000 $ 75,000
An Extended Example of Job-Order Costing
Job Cost Sheet Job A Beginning balance Direct materials Direct labor $ 30,000 28,000 40,000 Job Cost Sheet Job B Beginning balance Direct materials Direct labor $ 22,000 20,000 Manufacturing Overhead Incurred Indirect materials Indirect labor General factory overhead $ 2,000 15,000 78,000
Manufacturing Overhead Accounts Factory utilities Rent on factory equipment Factory property taxes Factory insurance Manufacturing depreciation Miscellaneous factory overhead costs Total general factory overhead $ 21,000 16,000 13,000 7,000 18,000 3,000 $ 78,000
An Extended Example of Job-Order Costing
Lets assume the following: Rands overhead predetermined rate is $6 per machine hour. During April, 10,000 machine hours were worked on Job A. During April, 5,000 machine hours were worked on Job B.
Overhead Applied to Jobs Job A: $6 per machine hour 10,000 machine hours = Job B: $6 per machine hour 5,000 machine hours = Total overhead applied to jobs $ $ 60,000 30,000 90,000
An Extended Example of Job-Order Costing
Job Cost Sheet Job A Beginning balance $ 30,000 Direct materials 28,000 Direct labor 40,000 Manufacturing overhead applied 60,000 Total $ 158,000 Job Cost Sheet Job B Beginning balance $ Direct materials Direct labor Manufacturing overhead applied Total 22,000 20,000 30,000 72,000
Manufacturing Overhead Incurred Indirect materials Indirect labor General factory overhead Total $ 2,000 15,000
78,000 $ 95,000
Overhead Applied to Jobs Job A: $6 per machine hour 10,000 machine hours = Job B: $6 per machine hour 5,000 machine hours = Total overhead applied to jobs $ $ 60,000 30,000 90,000
Underapplied or Overapplied Overhead
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.
Underapplied or Overapplied Overhead
Recall the following facts for Rand Company:
Actual manufacturing overhead Manufacturing overhead applied Underapplied manufacturing overhead $ $ 95,000 90,000 5,000
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.
Disposition of Under- or Overapplied Overhead
Rands Method
$5,000 can be closed directly to cost of goods sold.
$5,000 can be allocated to these accounts.
OR
Work in Process Cost of Goods Sold Finished Goods
Cost of Goods Sold
Disposition of Under- or Overapplied Overhead
We will always assume that underapplied or overapplied overhead is closed out to Cost of Goods Sold.
Overapplied overhead is deducted from Cost of Goods Sold.
Underapplied overhead Is added to Cost of Goods Sold.
Quick Check
What effect will the underapplied overhead have on Rands net operating income?
a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.
Prepare an Income Statement
Lets recall some key facts from the Rand Company example: Job A, which consisted of 1,000 gold medallions, was completed during April, but Job B was not completed. The unit product cost for each of the 1,000 gold medallions included in Job A was $158 ($158,000 1,000 units). The overhead for April was underapplied by $5,000.
The Direct Method of Determining Cost of Goods Sold
750 of the 1,000 gold medallions included in Job A were shipped to customers by the end of April.
Cost of the medallions sold to customers 750 units @ $158 per unit = $118,500
The Indirect Method of Determining Cost of Goods Sold
Lets recall some key facts from the Rand Company example: The beginning work in process inventory was $30,000the beginning balance on Job As cost sheet. There was no beginning finished goods inventory on April 1. The total manufacturing costs charged to jobs in April was $200,000 (direct materials of $50,000, direct labor of $60,000 and manufacturing overhead applied of $90,000). The ending work in process inventory is $72,000the accumulated cost of Job B. Manufacturing overhead was underapplied by $5,000.
Computing Ending Finished Goods Inventory
250 of the 1,000 gold medallions included in Job A were unsold and in ending finished goods inventory.
Cost of the medallions in ending finished goods inventory 250 units @ $158 per unit = $39,500
Computing Cost of Goods Manufactured
Total manufacturing cost charged to jobs + Beginning work in process inventory Ending work in process inventory = Cost of goods manufactured
Computing Cost of Goods Manufactured
Total manufacturing cost charged to jobs + Beginning work in process inventory Ending work in process inventory = Cost of goods manufactured
$ + =$
200,000 30,000 72,000 158,000
Computing Cost of Goods
Beginning finished goods inventory + Cost of goods manufactured Ending finished goods inventory = Cost of goods sold (unadjusted)
Computing Cost of Goods
Beginning finished goods inventory + Cost of goods manufactured Ending finished goods inventory = Cost of goods sold (unadjusted)
$ + =$
158,000 39,500 118,500
Add $5,000 underapplied overhead to obtain $123,500 cost of goods sold.
Prepare an Income Statement
To complete the income statement, lets assume that Rand Companys total sales revenue and selling and administrative expenses for April were $225,000 and $87,000, respectively.
Prepare an Income Statement
Rand Company Income Statement For the Month Ending April 30 Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income $ 225,000 123,500 101,500 87,000 14,500
$
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,
Which is more complex but . . .
it is more accurate because it reflects differences across departments.
Job-Order Costing in Service Companies
Job-order costing is used in many different types of service companies.
The Use of Information Technology
Technology plays an important part in many job-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.
The Predetermined Overhead Rate and Capacity
Appendix 3A
Predetermined Overhead Rate and Capacity
Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because:
2. Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. 3. Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.
Capacity-Based Overhead Rates
These 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!
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?
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?
Estimated = Method Capacity Method $100,000 40,000 $100,000 50,000 = $2.50 per unit
=
= $2.00 per unit
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run 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.
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run 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.
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; it is not affected by changes in activity. c. The predetermined overhead rate goes down when activity goes down.
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; it is not affected by changes in activity. c.The predetermined overhead rate goes down when activity goes down.
Income Statement Preparation (Capacity Method)
Actual volume Selling price Variable production cost Fixed manufacturing overhead Capacity Predetermined overhead rate Fixed selling and admin. expense Revenue Cost of goods sold Gross margin Cost of idle capacity Selling and admin. expense Net operating income 40,000 $40.00 $24.00 $100,000 50,000 $2.00 $500,000 $ 1,600,000 1,040,000 560,000 20,000 500,000 $ 40,000 cases per case per case per year cases per case per year
Income Statement Preparation (Capacity Method)
Actual volume Selling price Variable production cost Fixed manufacturing overhead Capacity Predetermined overhead rate Fixed selling and admin. expense Revenue Cost of goods sold Gross margin Cost of idle capacity Selling and admin. expense Net operating income 40,000 $40.00 $24.00 $100,000 40,000 $2.50 $500,000 $ 1,600,000 1,060,000 540,000 500,000 $ 40,000 cases per case per case per year cases per case per year