Systems Design: JobOrder Costing

1
Chapter 3

• Systems Design Job-Order Costing

2
Product Costing Recap

• Process of assigning costs to products/services
• Way cost product can impact Net Income and
  Management Decisions
• Purpose of managerial costing provide cost data
  to help managers plan, control, direct, and make
  decisions
• Absorption costing-all manufacturing costs (FC
  VC are assigned to units of product)

3
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
4
Process Costing

• Accumulate costs in an operation or department
  for the entire period and then divide by the of
  units produced
• Assign the same cost to every unit
• Unit Cost Total Manufactured cost
• Total units produced

5
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
6
Job-Order Costing

• Used extensively in service industry
• Unit cost Allocated costs per job
• Units for job

7
Comparing Process and Job-Order Costing
8
Quiz

• Which of the following companies would be
  likely to use job-order costing rather than
  process costing? You can select more than 1.
• a. Scott Paper Company for Kleenex.
• b. Architects.
• c. Heinz for ketchup.
• d. Caterer for a wedding reception.
• e. Builder of commercial fishing vessels.

9
Quiz Solution

• 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.

10
Comparing Process and Job-Order Costing

• Issue gets more complex when company sells many
  products/services
• Different products have different costs
• Job order costing requires more effort than
  process costing
• Ch 3 focuses on Job-Order Costing

11
Direct Manufacturing Costs
Charge direct material and direct labour costs
to each job as work is performed.
Direct Materials
Job No. 1
Direct Labour
Job No. 2
Manufacturing Overhead
Job No. 3
12
Direct Manufacturing Costs
Manufacturing Overhead, including indirect
materials and indirect labour, are allocated to
jobs rather than directly traced to each job.
Direct Materials
Job No. 1
Direct Labour
Job No. 2
Manufacturing Overhead
Job No. 3
13
Job-Order Costing

• When a standard order comes in
• A bill of materials is used
• Documents the type and quantity of each material
  used to complete a unit
• Production Order is issued when there is an
  agreement concerning quantity, price, and
  shipment date for the order

14
Job-Order Costing

• Materials Requisition form issued
• Specified type and quantity of materials to be
  drawn from store room
• Identified job to which costs of materials are to
  be charged
• Acts as a means for controlling the flow of
  material into production and for making the
  journal entries
• Store room clerk will not release materials
  without proper signature

15
Materials Requisition Form
16
Job-Order Costing

• Job Cost Sheet
• After materials issued, recorded on Job Cost
  Sheet
• Accounting department prepares
• Kept for separate jobs to record material,
  labour, and overhead
• Acts as a subsidiary ledger to WIP account
• Detailed records for job will add up to WIP
  balance

17
Job-Order Cost Accounting
18
Job-Order Costing

• Direct Labour
• Traced to a particular job
• If cant be directly traced then overhead
  (maintenance, supervision, and clean-up)
• Workers use timecards to record timespent on each
  job
• Hour-by-hour summary of activities throughout the
  day
• If not assigned to job record indirect labour and
  amount of time
• End of day accounting department enters DL onto
  job costing sheets

19
Employee Time Ticket
20
Job-Order Cost Accounting
21
Allocation Base

• Need to allocate overhead
• Select allocation base that is common to all
  products

22
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that
are in process. An allocation base, such as
direct labour hours, direct labour dollars, or
machine hours, is used to assign manufacturing
overhead to individual jobs.

• We use an allocation base because
• It is impossible or difficult to trace overhead
  costs to particular jobs.
• Manufacturing overhead consists of many different
  items ranging from the grease used in machines to
  production managers salary.
• Many types of manufacturing overhead costs are
  fixed even though output fluctuates during the
  period.

23
The Need for Predetermined Rate

• Need to know valuation of completed jobs before
  year end
• If overhead rates completed frequently, seasonal
  factors will cause fluctuations in overhead rates
  (can be misleading)
• Using POHR simplifies recordkeeping

24
Manufacturing Overhead Application

• The predetermined overhead rate (POHR) used to
  apply overhead to jobs is determined before the
  period begins.

25
The Need for a POHR

• Using a predetermined rate makes itpossible to
  estimate total job costs sooner.
• Actual overhead for the period is notknown until
  the end of the period.

26
The Need for a POHR

• Based on estimates as opposed to actual figures
• Why?
• Because before period begins

27
Application of Manufacturing Overhead
Based on estimates, and determined before the
period begins.
Actual amount of the allocation based upon the
actual level of activity.
28
Job-Order Cost Accounting
29
Average Unit Cost

• Add up costs to find the unit price by dividing
  by the of units
• Ready to be transferred to FG inventory account
  (value of goods if unsold at year end)

30
Interpreting the Average Unit Cost
The average unit cost should not be
interpreted as the costs that would actually be
incurred if anadditional unit were
produced.Fixed overhead would not change if
another unitwere produced, so the incremental
cost of another unit may be somewhat less than
118.
31
Quiz

• Job WR53 at NW Fab, Inc. required 200 of
  direct materials and 10 direct labour hours at
  15 per hour. Estimated total overhead for the
  year was 760,000 and estimated direct labour
  hours were 20,000. What would be recorded as the
  cost of job WR53?
• a. 200.
• b. 350.
• c. 380.
• d. 730.

32
Quiz Solution

• Job WR53 at NW Fab, Inc. required 200 of
  direct materials and 10 direct labour hours at
  15 per hour. Estimated total overhead for the
  year was 760,000 and estimated direct labour
  hours were 20,000. What would be recorded as the
  cost of job WR53?
• a. 200.
• b. 350.
• c. 380.
• d. 730.

33
Job-Order CostingDocument Flow Summary
A sales order is the basis of issuing a
production order.
A production order initiates work on a job.
34
Job-Order CostingDocument Flow Summary
Materials usedmay be eitherdirect orindirect.
Job Cost Sheets
MaterialsRequisition
Manufacturing Overhead Account
35
Job-Order CostingDocument Flow Summary
An employeestime may be eitherdirect or
indirect
Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
36
Job-Order CostingDocument Flow Summary
EmployeeTime Ticket
OtherActual OHCharges
Job Cost Sheets
Manufacturing Overhead Account
MaterialsRequisition
37
Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Raw Materials

• Material
• Purchases

Mfg. Overhead
Actual
Applied
38
Cost Flows Material Purchases

• The company buys 5,000 worth of materials.
• What is the journal entry?

39
Cost Flows Material Purchases

• Raw material purchases are recorded in
  aninventory account.

40
Cost Flows Material Purchases

• The company issues 3,000 of raw materials into
  production. 2,000 of which is direct materials
  and 1,000 is indirect materials.
• What is the journal entry?

41
Cost Flows Material Usage

• Direct materials issued to a job increase Work
  in Process and decrease Raw Materials. Indirect
  materials used are charged to Manufacturing
  Overhead and also decrease Raw Materials.

42
Job-Order System Cost Flows
Salaries and Wages Payable
Work in Process(Job Cost Sheet)

• Direct Materials

Mfg. Overhead
Actual
Applied

• Indirect Materials

43
Cost Flows Labour

• The factory workers will be paid 20,000 next
  week. 15,000 of which is direct labour and
  5,000 is indirect labour.
• What is the journal entry?

44
Cost Flows Labour

• The cost of direct labour incurred increases
  Work in Process and the cost of indirect labour
  increases Manufacturing Overhead.

45
Job-Order System Cost Flows
Salaries and Wages Payable

• Direct Labour

• IndirectLabour

Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual
Applied

• Indirect Materials

• Direct Materials

• IndirectLabour

• Direct Labour

• OtherOverhead

46
Cost Flows Actual Overhead

• Depreciation on factory machines amounted to
  10,000.
• Insurance which had been prepaid, resulted in
  5,000 being used up.
• A property tax bill for 4,000 was received.
• A hydro bill for 2,000 was received.
• What is the journal entry?

47
Cost Flows Actual Overhead

• In addition to indirect materials and indirect
  labour, other manufacturing overhead costs are
  charged to the Manufacturing Overhead account as
  they are incurred.

48
Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Salaries and Wages Payable

• Direct Labour

• Direct Materials

• IndirectLabour

• Direct Labour

Mfg. Overhead
Actual
Applied

• Indirect Materials

If actual and applied manufacturing overheadare
not equal, a year-end adjustment is required.

• IndirectLabour

• OtherOverhead

49
Cost Flows Overhead Applied

• The estimated total manufacturing overhead for
  the year is 150,000
• The machine hours for the year are estimated at
  100,000
• The actual machine hours used was 120,000
• What is the journal entry?

50
Cost Flows Overhead Applied

• Pre-determined overhead150,000/100,000
  1.50/machine hour
• Apply 1.50/machine hour x 120,000 machine hours
  180,000

51
Cost Flows Overhead Applied

• Work in Process is increased when
  Manufacturing Overhead is applied to jobs.
• Actual MOH is DR into account but amount ends up
  in WIP is the applied amount based on POHR

52
Nonmanufacturing Cost Flows
Nonmanufacturing costs are not assigned to
individual jobs, rather they are expensed in the
period incurred (not put into MOH)
Examples1. Salary expense of employees that
work in a marketing, selling, or administrative
capacity. 2. Advertising expenses are
expensed in the period incurred.
53
Nonmanufacturing Cost Flows

• Total salary costs accrued for admin staff,
  accounting staff, and marketing staff are 15,000
• A 2,000 bill was received for a TV ad
• What is the journal entry?

54
Nonmanufacturing Cost Flows

• Nonmanufacturing costs (period expenses) are
  charged to expense as they are incurred.

55
Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Finished Goods

• Direct Materials

• Direct Labour

• Overhead Applied

56
Cost Flows Cost of Goods Manufactured

• The order has been completed. The costs to
  manufacture the products are 25,000.
• What is the journal entry?

57
Cost Flows Cost of Goods Manufactured

• As jobs are completed, the Cost of Goods
  Manufactured is transferred to Finished Goods
  from Work in Process.

58
Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Finished Goods

• Direct Materials

• Cost ofGoodsMfd.

• Cost ofGoodsMfd.

• Direct Labour

• Overhead Applied

Cost of Goods Sold
59
Cost Flows Sales

• The costs manufactured at a cost of 25,000 have
  been sold for 35,000.
• What is the journal entry?

60
Cost Flows Sales

• When finished goods are sold, two entries are
  required (1) to record the sale, and (2) to
  record COGS and reduce Finished Goods.

61
Defining Under- and Overapplied Overhead
The difference between the overhead cost applied
to Work in Process and the actual overhead costs
of a period is termed either underapplied or
overapplied overhead. At the end of the period,
need to determine what to so with the difference
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.
62
Reasons for the Difference

• OH is normally made up of fixed costs
• Costs do not actually grow based on the cost
  driver
• OH spending may or may not be under control

63
Quiz

• 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.

64
Quiz Solution

• 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.

Overhead Applied 4.00 per hour 290,000
hours 1,160,000 Underapplied Overhead
1,210,000 - 1,160,000 50,000
65
Disposition of Under- or Overapplied OH

• Close out to COGS
• Allocate between WIP, FG, and COGS in proportion
  to OH applied during current period
• Most accurate because assigns OH costs to where
  they would have gone in 1st place had there been
  no errors in estimating OH
• Carryfoward to next period

66
Overapplied and Underapplied Manufacturing
Overhead - Summary
67
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.
68
Multiple Predetermined Overhead Rates

• Rate for each production department
• Cost-benefit
• Cheaper to use plant-wide rate but separate rates
  are more informative (management can make better
  decisions)

69
Job-Order Costing in Service Companies
Job-order costing is used in many different types
of service companies.
Each client is a job
70
Deficiencies in Quality

• Result in scrap, rework, delays in production,
  extra inventory, warranty claims, and poor
  customer relations
• Want to charge defects to all production and not
  job
• DR MOH XXX
• CR WIP Inventory XXX

71
Deficiencies in Quality

• Recovery from scrap
• DR Cash XXX
• CR MOH XXX
• Need to determine if deficiency is a cost of
  product or job
• Normal cost of all production (OH)
• Cost of a specific situation surrounding a job

72
Predetermined Overhead Rate and Capacity

• Calculating predetermined overhead rates using an
  estimated, or budgeted amount of the allocation
  base has been criticized because
• Basing the predetermined overhead rate upon
  budgeted activity results in product costs that
  fluctuate depending upon the activity level.
• If budgeted output falls OH costs per unit will
  increase
• Managers may be tempted to increase prices as
  demand decreases

73
Predetermined Overhead Rate and Capacity

• 2. Calculating predetermined rates based upon
  budgeted activity charges products for costs that
  they do not use.

74
Capacity-Based Overhead Rates

• Overcome criticisms by using total overhead based
  on capacity
• Charging each unit only for the capacity cost
  that is used and not for any costs that arent
  being used
• MOH cost Total MOH at Capacity
• Total units in allocation based at Capacity
• Results in underapplied OH
• Idle capacity should be disclosed on I/S as a
  period expense
• More visible to managers

75
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?
76
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?
77
Quiz

• Crest Winery in Woodinville leases an automatic
  corking machine for 500,000 per year. If run at
  full capacity, it can cork 400,000 cases of wine
  per year. The company estimates 250,000 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. 1.25 per case.
• b. 1.60 per case.
• c. 2.00 per case.

78
Quiz Solution

• Crest Winery in Woodinville leases an automatic
  corking machine for 500,000 per year. If run at
  full capacity, it can cork 400,000 cases of wine
  per year. The company estimates 250,000 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. 1.25 per case.
• b. 1.60 per case.
• c. 2.00 per case.

79
Quiz

• Crest Winery in Woodinville leases an automatic
  corking machine for 500,000 per year. If run at
  full capacity, it can cork 400,000 cases of wine
  per year. The company estimates 250,000 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. 1.25 per case.
• b. 1.60 per case.
• c. 2.00 per case.

80
Quiz Solution

• Crest Winery in Woodinville leases an automatic
  corking machine for 500,000 per year. If run at
  full capacity, it can cork 400,000 cases of wine
  per year. The company estimates 250,000 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. 1.25 per case.
• b. 1.60 per case.
• c. 2.00 per case.

81
Quiz

• 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.

82
Quiz Solution

• 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.

83
Quiz

• 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.

84
Quiz Solution

• 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.