Cost Accumulation for JobShop

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3

• Cost Accumulation for Job-Shop Batch Production
  Operations

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Evaluating Major Types of Product-Costing Systems
Job Costing
Process Costing
vs.
Distinct units of output. High value
units. Feasible to trace costs to individual
units.
Homogeneous units. Low value units. Not feasible
to trace costs to individual units.
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Evaluating Major Types of Product-Costing Systems
Job Costing
Process Costing
vs.
Each individual job treated as a separate unit of
output. Costs are traced or assigned to each job.
Costs are traced to the process and then divided
by units produced to obtain an averaged unit cost.
Operation Costing is a hybrid often used for
batches of similar products with different types
of materials.
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The Basic Cost Flow Model
The use of the model serves as a control that
helps to ensure goals and objectives are met.
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Managing and Using Cost Flow Information - Example
Boss, Co. began May with 1,000 of costs in
Work-in-Process (WIP) Inventory and 2,000 of
completed units in Finished Goods Inventory.
During May, Boss incurred 68,000 of production
costs. Goods costing 62,000 were sent to
Finished Goods during the month. Also, during
May, goods costing 60,000 were sold. Using the
Cost Flow Model, compute the ending inventory
amounts for WIP Inventory and Finished Goods
Inventory.
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Managing and Using Cost Flow Information - Example
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Managing and Using Cost Flow Information
Manufacturingoverhead (OH) Applied to eachjob
using apredeterminedrate
Directmaterial
Traced directly to each job
THE JOB
Traced directly to each job
Direct labor
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Managing and Using Cost Flow Information
The sum of all the costs in active jobs
(unfinished jobs)
A record of all production-related resources used
on individual jobs.
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Managing and Using Cost Flow Information
As individual jobs are completed, the costs are
moved to . . .
Represents the cost of all the unfinished
(in-process) jobs.
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Basic Job-Cost Flows
Job-cost accounting systems record cost flows
systematically.
Transactions are journalized.
Info is posted to ledger accounts.
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Basic Job-Cost Flows
Accounts related to Jobs are posted to various
Job WIP accounts.
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Assigning Overhead to Jobs
We can determine Direct Materials Cost and Direct
Labor Cost for a Job as we do the work.
But we wont know actual Overhead Cost until the
end of the accounting period, so we apply
overhead to the job using a Predetermined
Overhead Rate.
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Use of Predetermined Overhead Rates

• Identify the items to be included as indirect
  overhead costs.
• Estimate the costs for each of the indirect
  overhead items.
• Select the cost-driver.
• Estimate the amount of the cost-driver rate.
• Compute the predetermined overhead rate (POHR).
  ? ?

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Use of Predetermined Overhead Rates

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

Ideally, the allocation base is a cost driver
that causes overhead.
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Use of Predetermined Overhead Rates
Based on estimates, and determined before the
period begins.
Actual amount of the cost driver such as units
produced, direct labor hours, or machine hours.
Incurred during the period.
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Use of Predetermined Overhead Rates

• 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.

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Use of Predetermined Overhead Rates

• Glass Creations applies overhead based on
  direct labor hours. Total estimated overhead for
  the year is 360,000. Total estimated labor
  hours are 12,000.What is Glass Creations
  predetermined overhead rate per hour?

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Use of Predetermined Overhead Rates
POHR 30.00 per DLH
For each direct labor hour worked on a job,
30.00 of manufacturing overhead will be applied
to the job.
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Job-Order Cost Flows
Lets examine the cost flows in a job-order
costing system. We will use T-accounts and start
with materials.
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Job-Order Cost Flows
Raw Materials
Work in Process

• Direct Materials

• Direct Materials

• Material
• Purchases

• Indirect Materials

Mfg. Overhead
Actual
Applied

• Other Mfg. OH

• Indirect Materials

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Job-Order Cost Flows
Next lets add labor costs and applied
manufacturing overhead to the job-order cost
flows.
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Job-Order Cost Flows
Salaries and Wages Payable
Work in Process

• Direct Labor

• Direct Materials

• Direct Labor

• IndirectLabor

• Overhead Applied

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

• Other Mfg. OH

• OverheadApplied to Work inProcess

• Indirect Materials

• IndirectLabor

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Job-Order Cost Flows
Now lets complete the goods and sell them.
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Job-Order Cost Flows
Finished Goods
Work in Process

• Direct Materials

• Cost ofGoodsMfd.

• Cost ofGoodsMfd.

• Cost ofGoodsSold

• Direct Labor

• Overhead Applied

Cost of Goods Sold

• Cost ofGoodsSold

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Job-Order Costing Document Flow Summary
Lets summarize the document flow we have been
discussing in a job-order costing system.
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Job-Order Costing Document Flow Summary
Direct materials
Jobs
MaterialsRequisition
Manufacturing Overhead Account
Indirect materials
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Job-Order Costing Document Flow Summary
Direct Labor
Jobs
Employee Time Ticket
Manufacturing Overhead Account
Indirect Labor
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Job-Order Costing Document Flow Summary
Direct
Materials
Indirect
Work in Process
FactoryOverhead
Apply
Indirect
Direct
Labor
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Assigning Overhead to Jobs - Summary
.
.
Credit
When overhead costs are actually incurred, debit
the Manufacturing Overhead account and credit the
appropriate account.
Debit
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Assigning Overhead to Jobs - Summary
.
.
Credit
Each time we apply overhead to a job, we debit
the job and credit the Manufacturing Overhead
account.
Debit
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Assigning Overhead to Jobs - Summary
The difference between actual overhead for the
period, and applied overhead for the period is
called the OVERHEAD VARIANCE.
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Overhead Variance
Actual gt Applied Overhead is UNDERAPPLIED
We compare the Actual Overhead to Applied
Overhead)
Actual lt Applied Overhead is OVERAPPLIED
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Overhead Variance
Lets return to Glass Creations and and see what
we will do if actual and applied overhead are not
equal.
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Overhead Variance

• Assume Glass Creations actual overhead for the
  year was 370,000 for a total of 13,000 direct
  labor hours.
• How much total overhead was applied to jobs
  during the year? Use Glass Creations
  predetermined overhead rate of 30.00 per direct
  labor hour.

SOLUTION Applied Overhead POHR Actual
Direct Labor Hours Applied Overhead 30.00
per DLH 13,000 DLH 390,000
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Overhead Variance

• Assume Glass Creations actual overhead for the
  year was 370,000 for a total of 13,000 direct
  labor hours.
• How much total overhead was applied to jobs
  during the year? Use Glass Creations
  predetermined overhead rate of 30.00 per direct
  labor hour.

Overhead is overappliedfor the year by20,000.
What willGlass Creations do?
SOLUTION Applied Overhead POHR Actual
Direct Labor Hours Applied Overhead 30.00
per DLH 13,000 DLH 390,000
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Overhead Variance
Glass Creations Method
20,000may be allocatedto these accounts.
20,000 may beclosed directly to cost of goods
sold.
OR
Work inProcess
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
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Overhead Variance
Glass CreationsManuf. Overhead
Glass CreationsCost of Goods Sold
Unadjusted Balance
Actualoverheadcosts 370,000
OverheadAppliedto jobs 390,000
AdjustedBalance
20,000 overapplied
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Overhead Variance
Glass Creations Method
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Actual Costing, Normal Costing and Standard
Costing
Actual Costing?
Normal Costing?
Standard Costing?
Actual direct costs (material and labor) are
assigned to jobs as incurred. Actual
manufacturing overhead is assigned when the
actual amounts are known.
Actual direct costs (material and labor) are
assigned to jobs as incurred. Manufacturing
overhead is applied using predetermined overhead
rates.
Standard direct costs (material and labor) are
assigned to jobs as incurred. Manufacturing
overhead is applied using predeter-mined
(standard) overhead rates.
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Job-Order Costing andthe Value Chain
R D
Design
Supply
Production
Marketing
Distri- bution
Customer service
Value of products and services
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Job and Project Management
Complex jobs require scheduling and progress
evaluations.
Gantt chartsare used for scheduling major
activities.
Progress evaluationsuse comparisons of budgeted
and actual costs,and actual time versus estimated
time for the actual work completed.
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Job Cost and Project ImproprietiesAn Ethical
Issue

• The following conditions can lead to improper
  job costing
• Misstating the stage of completion.
• Charging costs to the wrong Job.
• Misrepresenting the cost of jobs.
• Cost misrepresentation in cost-plus contracts.

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Recording Job-Order Costs Typical Accounting
Entries
Lets look at summary journal entries for a
job-order costing system. Well omit the
numbers in order to focus on accounts.
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Cost Flows Material Purchases

• Raw material purchases are recorded in an
  inventory account.

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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.

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Cost Flows Labor

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

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Cost Flows Actual Overhead

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

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Cost Flows Overhead Applied

• Work in Process is increased when
  Manufacturing Overhead is applied to jobs.

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Cost Flows Cost of Goods Manufactured

• As jobs are completed, the cost of goods
  manufactured is transferred to Finished Goods
  from Work in Process.

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Cost Flows Sales

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

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Cost Flows Period Expenses

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

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End of Chapter 3