Chapter 3 Systems Design

Chapter 3 Systems Design - Chapter 3 Systems Design:...

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Job-Order Process Number of jobs worked Many Single Product Cost accumulated by Job Department Average cost computed by Job Department Chapter 3 – Systems Design: Job-Order Costing Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach to calculating product costs known as job- order costing. Process and Job-Order Costing Process Costing A process costing system is best used by companies that produce many units of a single product and when one unit of output is indistinguishable from any other unit of output. Because the units of output are identical, the company will probably use an average cost system to determine product cost. An example of a company that may consider a process costing system is Weyerhaeuser, a manufacturer of paper products. When we think of paper manufacturing, we generally think about continuous production of a single roll of paper that may eventually be cut into sizes needed by customers. Other companies that would benefit from process costing are Reynolds Aluminum and Coca-Cola. Certainly the desire of all three of these companies is to make each unit of output consistent with the quality standards established. Coca-Cola bottled in California should taste identical to the same product bottled in New York City. Job-Order Costing A company would use a job order costing system when many different products are produced each period. The products are usually manufactured to customers’ specifications and are unique in nature. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Companies that may benefit from using job order costing systems include Boeing, Bechtel International, and Walt Disney Studios. Boeing is an aircraft manufacturer. Bechtel is perhaps the largest international construction company. The company works on huge projects that are unique to customer needs. Walt Disney Studios produces movies. Job-Order Costing – An Overview
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In a job-order costing system, direct materials and direct labor are traced directly to each job as the work is preformed. Manufacturing overhead (including indirect materials and indirect labor) represents other manufacturing costs (i.e., like the power used to run the machinery in the factory). Manufacturing overhead cannot be traced directly to specific jobs. Rather, it is allocated to jobs on the basis of a predetermined rate. The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a given job. A job number uniquely identifies each job. Direct material, direct labor and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account. We will look at a job cost sheet used by a hypothetical company called
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This note was uploaded on 10/25/2010 for the course MGT 11B taught by Professor Hancock during the Spring '07 term at UC Davis.

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Chapter 3 Systems Design - Chapter 3 Systems Design:...

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