Job Order and Process Costing - Home - Faculty

Job Order and Process Costing - Home - Faculty

Job Order and Process Costing Chapter 17 1 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objectives Distinguish between job order costing and process costing Record materials and labor in a job order costing system Track overhead in a job order costing system 2 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objectives Adjustment for under- or overallocated overhead

Calculate unit costs for a service company Allocate costs using a process costing systemweighted-average method (see Appendix 17A) 3 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1 Distinguish between job order costing and process costing 4 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost Accounting Systems Help management determine: cost of goods sold cost of good sold for each product

profitability of each business segment With that information the company can Prepare COGS and inventory valuations for the financial statements set selling prices that lead to profits cut or improve lagging product categories Companies track product costs using: Job order costing Process costing 5 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Order vs. Process Costing Job Order Costing For manufactured batches of unique products or specialized services Accounting firms Music studios

Building contractors Health-care providers Accumulates cost per batch or job More prevalent with servicebased companies and with ERP systems 6 Process Costing For companies that produce identical units through a series of processes Coca-Cola Surfboards Medical equipment Used by large producers of similar goods Accumulates cost of each process needed to complete the product Assigns costs to products

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Order vs. Process Costing Cost tracing is used to assign directly traceable costs Direct materials Direct labor Cost allocation Assigns indirect costs to the product Overhead costs Less precise technique 7 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. DISTINGUISHING BETWEEN JOB COSTING AND PROCESS COSTING Would the following companies use job order costing or process costing? a. A manufacturer of luxury yachts

__________________ Job order costing b. A law firm __________________ Job order costing c. A non-dairy whipped toping maker __________________ Process costing d. A custom home builder __________________ Job order costing e. A soft drink producer __________________ Process costing f. A saddle manufacture __________________ It depends 8 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Record materials and labor in a job order

costing system Emphasis: tracking each individual job 9 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Purchasing Materials Debit asset Materials inventory Subsidiary ledgers Direct, indirect Individual sku records Materials inventory 5,000 Journal Account Title Materials inventory Accounts payable Debit 5,000

Credit 5,000 Direct Materials inventory 3,000 Journal Account Title Direct materials inventory Indirect materials inventory Accounts payable Debit 3,000 2,000 Credit 5,000 Indirect Materials

Inventory 2,000 10 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Using Materials Direct materials debited to Work in process Indirect materials debited to Manufacturing overhead Materials inventory 5,000 140 110 Work in process DM 140 Manufacturing overhead 110

11 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Materials Requisition Used to request the transfer of materials to Work in process Assigns the cost of the direct material to a job (Job 16) Shows the company cost of the material requested 12 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Cost Record 13 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Labor

Debit Work in process inventory (for direct labor) Debit Manufacturing overhead (for indirect labor) Credit Wages payable (or cash) in both cases Wages payable 200 12,000 Work in process DM 140 DL 200 Manufacturing overhead 12,000 14 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Cost Record with Labor Added 15 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.

PRACTICE: ACCOUNTING FOR MATERIALS & LABOR Rite Packs manufactures backpacks. Its plant records include the following transactions: Purchases of canvas (on account) . . . . . . . . .. . . . . . . . . . . . . Materials requisitions: Canvas for job # 119.. . . . . . . . . . . . . . . . . . . . . . . . . . . Sewing machine oil, needles, thread, and bobbins . . . . . Labor costs recorded for job #119.......... Shop Supervisor salary recorded, payable 1st of next month $71,000 64,000 950 1,300 3,500 1. Journalize the entries to record these transactions. 2. Post these transactions to the appropriate accounts. 3. If the company had $34,000 of Materials inventory at the beginning of the period, what is the ending balance of Materials inventory? 16

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. 3 Track overhead in a job order costing system 17 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for using Manufacturing Overhead 18 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. MOH Application: Predetermined overhead rates MOH is applied to individual jobs using Predetermined overhead rates (POHR). What are these? Why do we use them? How do you do it?

When do we use them? Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. What is a predetermined overhead rate? A rate designed to apply expected overhead spending to production jobs according to their use of a specified input. How much overhead do we expect to use? $500,000 What inputs cause us to use those MOH resources? Labor, Materials, machine use, or Lets apply overhead costs to jobs based on their use of the selected input.

The Thetool toolthat thatlets letsus usdo dothis thisisis the thepredetermined predeterminedoverhead overhead rate rate(POHR) (POHR) Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Why use a predetermined manufacturing overhead rate? We do not know precisely how many overhead resources each product or job uses.

Actual overhead used during the period is not known until spending stops @ end of period. POHRs apply it to the product NOW. So, you can know right away if you are making, or losing, money on a particular job. $ Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Order Costing System: Costing Specific Jobs WIP WIP Direct DirectMaterials Materials Job JobNo.

No.11 Direct DirectLabor Labor Manufacturing Manufacturing Overhead Overhead Job JobNo. No.22 Job JobNo. No.33 Charge Charge direct direct material

material and and direct direct labor labor costs costs to to each each job job as as resources resources are are used. used. $12,000 $12,000 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Order Costing System:

Manufacturing Overhead Application WIP WIP Direct DirectMaterials Materials Job JobNo. No.11 Direct DirectLabor Labor Manufacturing Manufacturing Overhead Overhead $12,000 $12,000 Job JobNo.

No.22 Job JobNo. No.33 Option: Option: Apply Apply MOH MOH equally equally to to each each product. product. $4,000 $4,000 $4,000 $4,000

$4,000 $4,000 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Order Costing System: Manufacturing Overhead Application WIP WIP Direct DirectMaterials Materials Job JobNo. No.11 Direct DirectLabor Labor Manufacturing Manufacturing Overhead Overhead

$12,000 $12,000 Job JobNo. No.22 Job JobNo. No.33 Option: Option: Apply Apply MOH MOH to to each each job job based based on on

MOH MOH caused caused by by the the job. job. $2,000 $2,000 $4,000 $4,000 $6,000 $6,000 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Assigning Manufacturing Overhead to Jobs Step 1 Calculate overhead allocation rate Step 2 The application rate is multiplied by the actual quantity of allocation base used on the

job If the rate is based on direct labor hours Rate is multiplied by the direct labor hours used on each job Predetermined overhead rate 25(from Step 1) x Actual quantity of the overhead allocation base used by each job Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Assigning Manufacturing Overhead Debit Work in process inventory (for direct labor) Debit Manufacturing overhead (for indirect labor) Credit Wages payable (or cash) in both cases Wages payable 200 12,000 Manufacturing overhead

12,000 80 26 Work in process DM 140 DL 200 MOH 80 Budgeted MOH=$68,000 Budgeted DL=$170,000 Lets do it Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Overhead on Job Cost Record 27 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Calculate POHR Bob Co. Expects to expend $100,000 in manufacturing

overhead. They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use. Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Calculate POHR Bob Co. Expects to expend $100,000 in manufacturing overhead. They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use. POHR = $100,000 Total Manufacturing overhead 20,000 Direct Labor hours POHR = $5.0 per Direct Labor Hour For For each each Direct

Direct Labor Labor hour hour used used by by aa job, job, $5.00 $5.00 of of factory factory overhead overhead will will be be applied applied (added) (added) to to the the cost cost of of that that job. job. Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Exercise: Deep Thoughts What just happened to the cost of labor when we added $5.00 per hour to it? Would this have any effect on questions of how management should use labor versus other resources? Hint: Assume you are the product manager and you are measured on profitability of your product line. When is labor a good choice or a bad choice to apply overhead? Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Assignment of Overhead to Jobs This process is not perfect. We debit MOH when we incur costs. We credit MOH to assign costs based estimates At the end of the period, when a balance exists If allocated amount is less than actual overhead underallocated

If allocated amount is more than actual overhead overallocated 31 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. 4 Adjustment for under- or overallocated overhead 32 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Overapplied and Underapplied Manufacturing Overhead $5,400 may be allocated to these accounts based on weighted $ average in each account. $5,400 may be closed directly to

cost of goods sold. OR Work in Process Finished Goods Cost of Goods Sold 33 Cost of Goods Sold Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Identifying over/under allocation of MOH and closing to COGS S17-6

On the board! 34 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. 5 Calculate unit costs for a service company 35 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Service Companies: Direct Labor Have no inventories, no WIP account Take an average hourly employee rate, and multiply times hours tracked for a given job. Hourly rate to the employer x Total expected direct labor costs

Expected use Direct labor hours How do service firms trace direct labor to individual jobs? STEP 1: Compute the average hourly rate STEP 2: Allocate Direct labor costs to jobs by multiplying the hourly rate rate (Step 1) by the actual number of direct labor hours used by each job 36 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Service Companies: Indirect costs Have no inventories, so all costs are period costs For planning purposes, may treat all indirect costs similar to MOH in a manufacturing company. Predetermined indirect cost allocation rate x Total expected indirect costs Expected use of allocation base

Tracing indirect costs to service jobs: STEP 1: Compute the predetermined indirect cost allocation rate STEP 2: Allocate indirect costs to jobs by multiplying the predetermined indirect cost allocation rate (Step 1) by the actual quantity of the allocation base used by each job 37 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. S17-12&13: JOB ORDER COSTING IN A SERVICE COMPANY Roth Accounting pays Jaclyn Sawyer $104,400 per year. Sawyer works 1,800 hours per year. 1. What is the hourly cost of Sawyers work to Roth? $104,400 1,800 = $58 2. What direct labor cost would be traced to client 507 if Sawyer works 12 hours to prepare client 507s financial statements? $58 x 12 = $696 In total, Roths budgets 8,000 direct labor hours. Roths estimated total indirect costs are $240,000 1. What is Roths indirect cost allocation rate? $240,000 8,000 = $30

2. How much indirect costs will be allocated to client 507? $30 x 12 hours = $360 3. Calculate the total cost of job 507. 38 $696 + $360 = $1,056 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing cost flow review First an easy demonstration recap Moves faster if you help! Then, a group activity to plan production output and track production costs in a business simulation 39 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Product Cost flow transactions for P17-27A T accounts on the board Note key points and their place in the cost of

goods manufactured and cost of goods sold schedule. 40 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Fly?: Airplane accounting Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Budgeting for Production Raw Materials Work In Process Finished Goods Wages Payable Cos t of Goods Sold Budgeted

Partial Income Statement: $ Sales Revenue % 100% Less COGS Gross Margin Ending Partial Balance Sheet: Inventory: Manufacturing Overhead $ Raw Materials WIP Finished Goods Total Inventory

Assumptions: Sales price per plane: Direct Materials per Plane: Direct Labor per Plane: $ $ $ 400,000 100,000 75,000 Variable MOH costs per plane: $ Fixed MOH costs per period: $ Copyright 0 100,000

Predetermined Overhead Rate: Budgeted $MOH Budgeted Units of airplanes to build 2012 Pearson Education, Inc. Publishing = ___________ ____________ = as Prentice Hall. Reporting Actual Performance Raw Materials Work In Process Finished Goods Wages Payable Cost of Goods Sold Actual Partial Income Statement:

$ Sales Revenue % 100% Less COGS Gross Margin Ending Partial Balance Sheet: Inventory: Manufacturing Overhead $ Raw Materials WIP Finished Goods Total Inventory

Assumptions: Sales price per plane: Direct Materials per Plane: Direct Labor per Plane: $ $ $ 400,000 100,000 75,000 POHR in Dollars per plane Number of planes built MOH applied to WIP* $ Over/Under applied MOH Adjustment to COGS +/- Copyright 2012

Pearson Education, Inc. only Publishing as Prentice Hall. *Assume application to completed units. 0 Instructor Notes First round: buy fewer plans than built Plan for selling 4 planes each Encourage buying to build Customer buys 3 out of 4 planes Outcomes Overbuild: obsolescence, carrying costs Under build: Lost sales, lost market share Supplier shortfall: Broken promises How do producers build this uncertainty into their forecasting models?

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6 Allocate costs using a process costing system weighted-average method (see Appendix 17A) 45 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing Used where large quantities of similar products are produced Costs accumulated in each manufacturing process Company then assigns these costs to products passing through that process Even costs assigned to each product Sum of the costs applied to units produced to determine costs per unit 46

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Order Costing 47 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing 48 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing: Building Blocks Two cost categories: Direct materials Conversion costs Direct labor and manufacturing overhead combined Costs incurred to convert materials into finished products

Equivalent units Allow measurement of partially finished goods Express production in terms of fully completed units Materials may have different percentage completed than conversion costs 49 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Steps of Process Costing Summarize the flow of physical units Compute output in equivalent units Compute the cost per equivalent unit Assign costs to completed and ending inventory units 50 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. P17A-10: Process Costing Example

Units impacted by cost incurrences caused by these factors Approximat es the total number of Output + units made. Cool Spring endingEquivalent Unit - Bottling Department balance Month Ended February 28, 2013 qty.. Step 2: Equivalent Units Units accounted for: Completed and transferred out during February Ending work in process, Feb. 28 Total physical units accounted for

51 Transferred Direct Conversion WholeUnits In Materials Costs 152,000 23,000 175,000 152,000 23,000a 175,000 152,000 152,000 0b 16,100c 152,000 168,100 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.

P17A-10: Process Costing Example Cool Spring Equivalent Unit - Bottling Department Month Ended February 28, 2013 Calculates a per Transferred Direct Conversion Step 2: Equivalent Units WholeUnits In Materials Costs unit cost, based Total physical units accounted for 175,000 175,000Cost 152,000 168,100 incurrence on processes type to be

completed and assigned Cool Spring costs incurred Cost per Equivalent Unit - Bottling Department Month Ended February 28, 2013 Transferred In Step 3: Cost per Equivalent Unit Unit Costs: Direct Materials Conversion Costs Total Costs Beginning work in process, January 31 Costs added during February

1,700 $ 0 $ 1,030a 134,800 30,400 Total costs to account for $136,500 $30,400 $50,430

Total equivalent units 175,000 152,000 168,100 Cost per equivalent unit 52 $ $ 0.78 $ 0.20 49,400b

$ 0.30 $ 2,730 214,600 $217,330 $ 1.28 Tallies expenditures & divides by units incurring costs in Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Equivalent Unit - Bottling Department Month Ended February 28, 2013

P17A-10: Process Costing Example Transferred Direct Conversion WholeUnits In Materials Costs Step 2: Equivalent Units otal physical units accounted for Finalizes Output & WIP balance costs. 175,000 175,000 152,000 168,100

Cool Spring Cost elements of Cost per Equivalent Unit - Bottling Department output & WIP Month Ended February 28, 2013 Step 3: Cost per Equivalent Unit Unit Costs: Transferred In Cost per equivalent unit $ 0.78 Conversion balance Costs

Direct Materials $ 0.20 $ 0.30 Total Costs $ 1.28 Cool Spring Assignment of Costs - Bottling Department Month Ended February 28, 2013 Step 4: Assign costs

Transferred In Completed and transferred out during February 152,000 $0.78 = $118,560 Ending work in process, Feb 28 23,000 $0.78 = $17,940 Total costs accounted for 53 Direct Conversion Materials Cost

Total Costs 152,000 x $0.20 = $30,400 0x $0.20 = $0 $194,560 152,000 x $0.30 = $45,600 16,100 x $0.30 = $4,830 22,770 $217,330

Output and ending WIP summary. Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 Summary A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product. Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited. 60 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 Summary When direct labor costs are incurred on a job,

Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later. Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driverthat is, the item that drives manufacturing overhead costs up or down. 61 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 Summary Once the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits). The total actual manufacturing overhead costs

(debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits). 62 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 Summary At the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold. Service firms must also allocate overhead to jobs to determine each jobs real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs. 63 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of the Appendix As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they: accumulate costs as the product moves through production. assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process. 64 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Summary of the Appendix The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.

65 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. 66 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall. Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 67 Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall.

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