COST Chapter 4 - Job Order Costing Production Environment:...

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Unformatted text preview: Job Order Costing Production Environment: Customized products – production occurs Customized when customer places order (i.e., construction) construction) Batch products – production occurs in Batch batches of homogeneous products batches Homogeneous products – production likely Homogeneous occurs on a continuous basis (chemicals, commodity goods, food products, beverages) beverages) Production Environment: Customized Products Job production Homogeneous Products Process manufacturing Job Cost or Process Cost Environment? Pepsico Process Cray Computer Corp. Job Boeing Co. Job Starbucks Corp. Process Job Cost or Process Cost Environment? Revlon Consumer Products Corp. Process Chris Craft Boat Co. Job Goodyear Tire and Rubber Co. Process Anheuser-Busch Inc. Process Direct materials Traced directly to each job (using materials requisitions) OH is applied to each job using a predetermined overhead rate (PDR). THE JOB Traced directly to each job (using time tickets) Direct labor Job Production Environment: The job is often submitted as a bid to the The customer and if won, the production is scheduled. – Costs are accumulated on a unique “job cost Costs sheet” for each product. sheet” – Total cost is determined when the job is Total completed based on the accumulation of costs on the job cost sheet. costs Sample Job Cost Sheet ChampCo Job Cost Record Job Number: 110 Date started: May 2 Description: Custom drilling equipment Customer: Will E. Buyit Date finished: May 9 Mfg. Overhead Date Cost May 9 $ 1,200 Direct Materials Direct Labor Date Req. No. Cost Date Emp. No. Cost May 2 110-1 $ 1,000 May 2-4 45 $ 360 May 5 110-2 2,300 May 7-9 58 240 Total Job Costs Direct Materials Direct Labor Manufacturing Overhead Total Cost Actual Est. Diff. $ 3,300 $3,500 $ 200 600 500 (100) 1,200 1,000 (200) $ 5,100 $ 5,000 $ (100) Job Production Environment: These job cost sheets used to be These prepared manually for each job but technology had led to integrated information systems that track each job and its inputs. – Bar-code and scanning technology have been Bar-code invaluable to the automation of job production systems. systems. Difficult to find production efficiencies in Difficult job-production environment because of lack of economies of scale. lack Basic Job­Cost Flows Job-cost accounting systems record cost flows systematically. Transactions are journalized. Info is posted to ledger accounts. Basic Job­Cost Flows Not charged to inventory Journal Entries All Product Costs are accumulated in the All Work-in-Process account Work-in-Process – Direct Materials used – Direct Labor incurred – Factory Overhead allocated, absorbed or Factory applied applied Actual Indirect Costs (overhead) are accumulated in the Manufacturing Overhead Control account Overhead Assume that on May 2, materials are requisitioned for three jobs. Each job cost card would record the dollar amount of the materials to be used for that job. For example, if $1,000 of the materials are for Job #110: Direct Materials Job No. x 0 $1 ,00 Direct Labor Job No. 110 Job No. y Manufacturing Overhead Charge direct material costs to each job as the materials are used. A materials requisition form is the source document used to authorize the use of materials on a job. Job Number: 110 Date started: May 2 Description: Custom drilling equipment Customer: Will E. Buyit Date finished: May 9 Mfg. Overhead Date Cost May 9 $1,200 Direct Materials Direct Labor Date Req. No. Cost Date Emp. No. Cost May 2 110-1 $1,000 May 2-4 45 $ 360 May 5 110-2 2,300 May 7-9 58 240 Total Job Costs Direct Materials Direct Labor Manufacturing Overhead Total Cost Actual $3,300 600 1,200 $5,100 Est. $3,500 500 1,000 $5,000 Diff. $ 200 (100) (200) $ (100) Job Cost Flows Materials Inventory •Material •Direct Purchases Materials •Indirect Materials Work in Process (Job Cost Record) •Direct Materials Mfg. Overhead Control •Indirect Materials Accts. Payable Material Purchases Journal Entries Purchase of Materials on credit: – Materials Materials Accounts Payable XX XX XX XX Requisition of Direct and Indirect Materials (OH) Requisition into production: into – Work-in-Process Work-in-Process Manufacturing Overhead Control Manufacturing Control Materials X Y Z Assume that on May 4, time tickets are turned in for each job. Each job cost card would record the dollar amount of the direct labor used on that job. For example, if $360 in DL was used for Job #110: Direct Materials Job No. x Direct Labor $360 Job No. 110 Job No. y Manufacturing Overhead Charge direct labor costs to each job as the work is performed. Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. ChampCo Job Cost Record Job Number: 110 Date started: May 2 Description: Custom drilling equipment Customer: Will E. Buyit Date finished: May 9 Mfg. Overhead Date Cost May 9 $ 1,200 Direct Materials Direct Labor Date Req. No. Cost Date Emp. No. Cost May 2 110-1 $ 1,000 May 2-4 45 $ 360 May 5 110-2 2,300 May 7-9 58 240 Total Job Costs Direct Materials Direct Labor Manufacturing Overhead Total Cost Actual $ 3,300 600 1,200 $ 5,100 Est. $3,500 500 1,000 $ 5,000 Diff. $ 200 (100) (200) $ (100) Job Cost Flows Wages Payable •Direct Labor •Indirect Labor Work in Process (Job Cost Record) •Direct Materials •Direct Labor Mfg. Overhead Control •Indirect Materials •Indirect Labor Journal Entries Incurred Direct and Indirect (OH) Labor Incurred Wages Wages – Work-in-Process Work-in-Process X Manufacturing Overhead Control Manufacturing Control Wages Payable Y Z Overhead Spending and Application Actual Direct Materials Cost and Direct Labor Cost are easily applied to Job as work is performed. However, actual Overhead Cost is not known until the end of the accounting period, so overhead is applied to the job using Predetermined Overhead Rates. Normal Costing Normal Costing Predetermined overhead rates “normalize” the Predetermined the application of manufacturing overhead to jobs. application – same amount of overhead to jobs during the year Normal Costing – Actual costs of direct labor + costs – Actual costs of direct materials + – Manufacturing overhead applied using predetermined Manufacturing rates Overhead Rates Predetermined Determined in advance - usually once a Determined year year – Products costs would be misleading if monthly Products variations were reflected in costs variations – Provides more prompt information – Less effort than calculating monthly Assume overhead is applied at a predetermined rate of $20 per direct labor hour worked, and that 60 hours of direct labor was worked on job # 110. Direct Materials Job No. x Direct Labor $1200 Manufacturing Overhead Job No. y Job No.110 Apply overhead to each job using a predetermined rate. Apply manufacturing overhead to jobs using a predetermined overhead rate. ChampCo Job Cost Record Job Number: 110 Date started: May 2 Description: Custom drilling equipment Customer: Will E. Buyit Date finished: May 9 Mfg. Overhead Date Cost May 9 $ 1,200 Direct Materials Direct Labor Date Req. No. Cost Date Emp. No. Cost May 2 110-1 $ 1,000 May 2-4 45 $ 360 May 5 110-2 2,300 May 7-9 58 240 Total Job Costs Direct Materials Direct Labor Manufacturing Overhead Total Cost Actual $ 3,300 600 1,200 $ 5,100 Est. $3,500 500 1,000 $ 5,000 Diff. $ 200 (100) (200) $ (100) Recording Overhead Spending Manufacturing Overhead Control . . Debit Credit When overhead costs are actually incurred, Debit the Overhead (OH Control) account and Credit the Accounts Payable (or Cash or other) accounts. Job Costing Document Flow Summary Employee Time Ticket Indirect Labor Other Actual OH Charges Manufacturing Overhead Applied Overhead Job Cost Records Materials Requisition Indirect Materials Sometimes two accounts are used: Mfg. Overhead Control (with only Dr. entries to record bills) and Mfg. Overhead Applied (with only Cr. entries to record OH applied) Job Cost Flows Work in Process (Job Cost Records) •Direct Materials •Direct Labor •Overhead Applied Sometimes one account is used: Manufacturing Overhead Control (with DR Entries to record bills and Cr Entries to record OH applied) Overhead Control •Indirect Materials •Indirect Labor •Other OH •Overhead Applied to Work in Process Journal Entries, continued Incurring or recording of various actual Indirect Costs: – Manufacturing Overhead Control Manufacturing Control X Salaries Payable Accounts Payable X Accumulated Depreciation Prepaid Expenses X X X Journal Entries, continued Allocation or application of Indirect Costs Allocation (overhead) to the Work-in-Process account is based on a predetermined overhead rate based – Work-in-Process Work-in-Process Manufacturing Overhead Allocated Allocated (or Manufacturing OH Applied or Manufacturing OH Absorbed) Manufacturing X X Note: actual overhead costs are never posted directly into Note: never Work-in-Process Work-in-Process Actual vs. Absorbed Overhead Actual overhead - share of actual utilities, depreciation, actual supervisor’s salary, etc. Allocated/applied overhead - overhead rate X actual volume Difference must be accounted for Accounting for Overhead Actual costs will almost never equal budgeted Actual costs. Accordingly, an imbalance exists costs. Using the two overhead accounts Using – If Overhead Control > Overhead Allocated, this is If called Underallocated Overhead Underallocated – If Overhead Control < Overhead Allocated, this is If called Overallocated Overhead Overallocated Using one overhead account – Debit balance is called Underallocated Overhead Debit Underallocated – Credit balance is called Overallocated Overhead Credit Overallocated Overhead Overhead Application Example Overhead Application Example ChampCo’s actual overhead for the actual year was $650,000 and a total of 170,000 machine hours were worked. 170,000 If ChampCo’s predetermined overhead If rate was $4.00 per machine hour, how much overhead was applied to all of applied ChampCo’s jobs during the year? Overhead Application Example ChampCo’s actual overhead for the year was $650,000 and actual a total of 170,000 machine total hours were worked. SOLUTION Applied Overhead = PDR × Actual Machine Hours Applied Overhead = $4.00 per MH × 170,000 MH = $680,000 ChampCo has overapplied overhead for the year by $30,000. Accounting for Overhead This difference will be eliminated in the This end-of-period adjusting entry process, using one of three possible methods using The choice of method should be based on The such issues as materiality, consistency, and industry practice and Three Methods for Adjusting the Over/ Underapplied Overhead Adjusted Allocation Rate Approach – all allocations are recalculated with the actual, exact allocation rate exact Proration Approach – the difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their relative sizes (0r the overhead in the accounts) (0r Write-Off Approach – the difference is simply written off to Cost of Goods Sold written Over Applied and Under Applied Manufacturing Overhead $30,000 may be allocated to these accounts. $30,000 may be assigned directly to cost of goods sold. OR Work in Process Finished Goods Cost of Goods Sold Cost of Goods Sold Adjust to CGS ChampCo’s Cost of Goods Sold Unadjusted Balance ChampCo’s Mfg. Overhead Actual Overhead overhead Applied costs to jobs $650,000 $30,000 $30,000 Adjusted Balance $680,000 Prorated overhead variances. If the overhead variance is prorated to work in process, finished goods, and cost of goods sold, it is prorated according to the amount of overhead contained in those accounts for the period. Assume that, at the end of the year, ChampCo has the following overhead in the unadjusted account balances: COGS: $50,000 F/G Inv: $35,000 WIP Inv: $15,000 Account Cost of Goods Sold Finished Goods W ork in Process Total Amount of Manufacturing Overhead in Account $ 50,000 35,000 15,000 $ 100,000 Allocation Fraction 50/100 35/100 15/100 100/100 × × Overhead Variance 30,000 = 30,000 = Prorated Variance 10,500 4,500 $ 30,000 × $ 30,000 = $ 15,000 After the adjustment, ChampCo would report: COGS: F/G Inv: WIP Inv: $50,000 - $15,000 = $35,000 $35,000 - $10,500 = $24,500 $15,000 - $ 4,500 = $10,500 Seven­step Job Costing 1. 2. 3. 4. Identify the Job to be costed Identify the Direct Costs of the Job Select the Cost-Allocation base(s) to use Select for allocating Indirect Costs to the Job for Match Indirect Costs to their respective Match Cost-Allocation base(s) Cost-Allocation Seven­step Job Costing 1. Calculate an Overhead Allocation Rate: • Estimated OH Costs ÷ Estimated OH Estimated Allocation Base Allocation 1. Allocate Overhead Costs to the Job: • OH Allocation Rate x Actual Base Activity For the OH Job Job 1. Compute Total Job Costs by adding all Compute direct and indirect costs together direct COST E4­20 Question 1: Compute the budgeted Question overhead rate for each department: overhead Budgeted manufacturing overhead divided by allocation base: Mach ining overhead Assembly overhe ad: $ 1,800 ,000 = $ 36 per machine- hour 50 ,0 00 $ 3,600 ,000 = 1 80% of direct manuf. labor costs $ 2,000,0 00 Part 2: Compute Overhead allocated to Job 494: Machining department, 2,000 hours × $ 36 Assembly department, 180% × $ 15,000 Total manufactu ring overhead allocated to Job 494 $ 72,000 27,000 $ 99,000 Part 3 At the end of 2009, actual overhead was At $2,100,000 in Machining and $3,700,000 in Assembly. Assume that 55,000 actual machine hours were used in Machining and that the actual direct labor costs in Assembly were $2,200,000. Compute the over- or underallocated overhead for each department. department. Part 3 Actual manufacturing overhead Manufacturing overhead allocated, 55,000 × $ 36 180% × $ 2,200,000 Underallocated (Overallocated) Machining $ 2,100,000 1 ,980,000 — $ 1 20,000 Assembly $ 3 ,700,000 — 3 ,960,000 $ ( 260,000 ) COST E4­25 Part 1: Prepare journal entries to record the Part transactions for 2008 including an entry to close out over- or underallocated overhead to cost of goods sold. Purchases of direct materials (net) on credit Dr. Direct Materials Control Cr. Accounts Payable Cr. 124,000 124,000 124,000 Source documents: Purchase invoice, Source receiving report receiving Requisition materials into WIP: Materials used = Beginning Raw Materials Materials Inventory + Purchases – Ending Raw Materials Inventory Materials = $9,000 + $124,000 - $11,000 = $122,000 Requisition materials into WIP: Dr. Work in Process 122,000 Cr. Direct Materials Control 122,000 Source documents: Materials requisition Source records, job cost sheets records, Record labor cost: Dr. Work in Process Dr. Dr. Overhead Control Cr. Salaries Payable 80,000 80,000 54,500 134,500 Source documents: Timecards, Job cost Source sheets sheets Record Actual Overhead Dr. Overhead Control 129,500 Cr. Accumulated Depreciation 30,000 Cr. Salaries Payable 20,000 Cr. Accounts Payable 9,500 9,500 Cr. Rent Payable 70,000 Source Documents: Depreciation schedule, Source Record Applied Overhead Predetermined Overhead Rate = $2.50 per direct Predetermined labor dollar labor Actual Direct labor dollars = $80,000 Amount of overhead to be applied: $2.50 x Amount $80,000 = $200,000 $200,000 Dr. Work in Process 200,000 Cr. Overhead Control 200,000 Source Documents: Time cards, job cost sheets COST E4­30 Calculate the overhead allocation rate: Driver: Direct Labor Cost Budgeted Overhead: $100,000 Budgeted DL Cost: $200,000 PDR = $100,000/$200,000 = $0.50 per PDR Direct Labor dollar or 50% of DL$ Direct Compute the Amount of Under­ or Overallocated Overhead Applied Overhead: PDR = 50% of DL$ Actual DL$ = $220,000 Overhead applied = $220,000 x 50% = Overhead $110,000 $110,000 Actual Overhead Costs = $106,000 Variance = $4,000 Overapplied Account for Variance Write off to COGS 2. Prorate based on ending balances in Prorate each of three accounts each 3. Prorate based on amount of overhead in Prorate each of three accounts each 1. Direct Write Off Dr. Overhead Control 4,000 Cr. Cost of Goods Sold 4,000 New balance of COGS = $556,000 New $556,000 ($560,000 debit balance less $4,000 credit adjustment) adjustment) Prorate based on total balances Account Work in Process Finished Goods Cost of Goods Sold Total Account Balance (Before Proration) $ 50,000 5.88% 0.0588 × $4,000 = $ 235 240,000 28.24% 0.2824 × $4,000 = 1,130 560,000 ( 65.88% 0.6588 × $4,000 = 2,635 $850,000 1100.0% $4,000 Proration of $4,000 Overallocated Manufacturing Overhead Account Balance (After Proration) $ 49,765 238,870 557,365 $846,000 Prorate based on overhead balances Account Work in Process Finished Goods Cost of Goods Sold Total Account Balance (Before Proration) $ 10,000 9.09% 0.0909 × $4,000 = $ 364 30,000 27.27% 0.2727 × $4,000 = 1,091 70,000 ( 63.64% 0.6364 × $4,000 = 2,545 $110,000 1100.0% $4,000 Proration of $4,000 Overallocated Manufacturing Overhead Account Balance (After Proration) $ 49,636 238,909 557,455 $846,000 Which Method is Preferable? Last method was most theoretically Last correct but if COGS is large relative to WIP and Finished Goods, and the variance is immaterial, the direct write-off method is justifiable. method Process Costing Environment: In continuous manufacturing environment, In unit costs are not tracked separately (difficult to define “a unit”). – Instead production costs are accumulated Instead over a period of time (usually a month) and costs are determined by “amount” or “volume” produced. Process Costing Environment: The difficulty in this environment is determining The the value of work-in-process at the accounting period cutoff point. – Managers need to estimate the percentage of Managers completion at each stage in the production process, and these percentages are used to assign a value to work-in-process inventory. work-in-process The manager also needs to make assumption The regarding when materials, labor and overhead enter into the production process. enter Process Costing Environment: Materials are often assumed to be added when Materials the process is started, with labor and overhead being applied uniformly until completion. However, most large process costing firms will refine these assumptions to arrive at more accurate inventory costs. accurate Further, cost flow assumptions (i.e., FIFO, LIFO, Further, average cost) must be chosen and applied to the process due to changing prices of input costs. process Batch Production Environment: A hybrid of the job cost and process cost hybrid environments. Costs are accumulated at the batch level (instead of the job level). – However, some processes within production However, operations may necessarily be accounted for as if it is a process environment. as ...
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