Product Costing: Job Order Costing

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Product CostingJob Order Costing
December 13 27, 2005

• Chapter 4
• Objectives
• Explain the types of costing systems
• Explain the strategic role of product costing
• Explain the flow of costs in a job costing system

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Product Costing

• Product Costing _________________________________
  ___________
• __________________________________________________
  _________
• __________________________________________________
  _________
• Several different product costing systems are
  available, including

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Product Costing System

• The choice of a particular system depends on
• ______________________________________
• Firms strategy and management information needs
• Costs and benefits of acquiring, designing,
  modifying, and operating a particular system

4
Strategic Role of Product Costing

• Effective management of manufacturing costs
  requires timely and accurate cost information
• Getting timely and accurate information requires
  that the firm choose a cost system that is a good
  match for its competitive strategy
• To provide meaningful information, a product
  costing system must keep up with the constantly
  changing manufacturing environment
• An important strategic issue for product costing
  involves the decisions the firm makes about the
  basis for allocating overhead costs

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Cost Accumulation MethodJob Costing vs Process
Costing

• A job costing system is _____
• __________________________
• __________________________
• __________________________
• Ex__________________

• A process costing system _____
• __________________________
• __________________________
• __________________________
• Ex__________________

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Big Picture Cost Flow

• JOB-ORDER COSTING

• PROCESS COSTING

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Cost Measurement Method
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Overhead Assignment Method

• ____________________________ allocate overhead to
  products or jobs using a volume-based cost driver
  (such as units produced)
• ____________________________ allocate factory
  overhead costs to products using cause-and-effect
  criteria with multiple cost drivers
• ABC systems use both volume-based and
  nonvolume-based cost drivers

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Intro to Job Costing System

• Job costing is a product costing system that
  ____________________ _____________________________
  ______________________ _
• ________________________ records and summarizes
  the costs of direct materials, direct labor, and
  factory overhead for a particular job as it goes
  through multiple activities or departments
• All costs are recorded on the sheet as materials
  and labor are added
• ________________________ is a source document
  that the production department supervisor uses to
  request materials for production
• ________________________ shows the time an
  employee worked on each job, the pay rate, and
  the total cost chargeable to each job
• All costs shown in the job cost sheet are
  recorded in the ____________ _____________________
  ____________________________________

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Job Costing Source Document
Figure 4.4 Material Requisition Form
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Job Costing Source Document
Figure 4.4 Time Ticket
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Flow of Costs
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Factory Overhead
Job No. 3
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Flow of Material Costs
Work-in-ProcessInventory(Job Cost Sheet)
Materials Inventory
Factory Overhead
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Flow of Labor Costs
Work-in-ProcessInventory(Job Cost Sheet)
Accrued Payroll
Factory Overhead
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Flow of Costs to Cost of Goods Sold
Finished GoodsInventory
Work-in-ProcessInventory(Job Cost Sheet)
Cost of Goods Sold
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Application of Factory Overhead

• To apply overhead cost to each job, normal
  costing requires a per product rate, which is
  often called a predetermined rate (since it is
  calculated at the beginning of the accounting
  period)
• The predetermined overhead rate (POHR) is an
  estimated factory overhead rate used to apply
  factory overhead cost to a specific job

• 4 steps to determine POHR
• ______________________________________________
• _________________________________________________
  ___
• _________________________________________________
  ___
• _________________________________________________
  ___

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Application of Factory Overhead
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins.
POHR
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Application of Factory Overhead
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins.
Budgeted factory overheadamount for the year
POHR
Expected level of costdriver for the year
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Ex Applying Factory Overhead Costs

• Bay Company total budgeted overhead for the year
  equals 200,000.
• Expected direct labor cost for all departments is
  200,000
• Job 11 incurs 9,000 of direct labor cost.
• Actual unit for Job 11 is 100 units
• What is the allocation rate?
• What is the manufacturing overhead cost allocated
  to this job?
• What is the manufacturing overhead cost per unit
  for this job?

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Factory Overhead Applied

• Factory overhead applied is the amount of
  overhead assigned to a specific job using a
  predetermined factory overhead rate
• Overapplied overhead _____________________________
  _________ ________________________________________
  __________________
• Underapplied overhead ____________________________
  _________ ________________________________________
  __________________

Ex Suppose that Bay Company incurred 222,000 of
actual manufacturing overhead during the year,
and that actual direct labor cost was 200,000 -
How much overhead was applied? - Did Bay Company
overapply or underapply factory overhead cost? By
how much?
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Disposition of Factory Overhead
EX Job Costing Illustration TFI Company

• Underapplied or overapplied overhead can be
  disposed of in 2 ways
• Adjust the Cost of Goods Sold account
• _________________________________________________
• Adjust the production costs of the period
• _________________________________________________
• _________________________________________________
• ______________________________________________
  ___

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Job Costing Example(adapted from Blocher et al.
2002)

• TFI has manufactured home and office furniture.
  This example considers simplified, fictitious
  data from production job X4J-14531 of TFI.
  Related transactions during January 2001 are
  summarized as follows
• Material inventory account has a 10,000 balance
  on Jan 1, 01. Additional material is purchased on
  account for 25,000 during January.
• WIP inventory account has a 5,000 beginning
  balance. During January, the company issued
  20,000 in direct materials to its production
  department for this job.
• TFI used 3,000 in indirect materials for this
  job.
• TFI incurred 70,000 in direct labor cost in this
  job.
• TFI also incurred 2,500 in indirect labor costs
  including the salaries of supervisors,
  inspectors, and material handlers.
• TFI incurred other factory overhead expenses for
  this job including utilities (1,000),
  depreciation on factory equipment (4,000), and
  insurance on factory equipment (500).

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Job Costing Example (cont)

• 7. TFI applied factory overhead on the basis of
  direct labor cost. Suppose that the firm
  estimated its total factory overhead for the year
  as 30,000,000, and direct labor cost as
  200,000,000. The actual direct labor cost for
  this job was 70,000.
• TFI has a 5,000 beginning balance in the
  finished goods inventory account. The company
  completed 80,000 worth of goods during January.
• TFI sold this furniture job which a total cost of
  70,000 in January.
• TFI marks up its production at 200 of cost.
• TFI had the following selling and administrative
  expenses in January as follows
• Advertising expenses 20,000
• Sales commissions 21,000
• Office salaries 30,000
• Depreciation-office equipment 2,000
• Other administrative expenses 7,000

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Job Costing in Service Industry

• Job costing in service industries uses recording
  procedures and accounts similar to those in
  manufacturing except for direct materials
  involved
• In service industries, the primary focus is on
  direct labor
• The overhead costs are usually applied to jobs
  based on direct labor-hours or dollars