Systems%20Design:%20Job-Order%20costing

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Systems DesignJob-Order costing
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Types of Costing Systems Used to Determine
Product Costs
ProcessCosting
Job-orderCosting
Chapter 4

• Many different products are produced each
  period.
• Products are manufactured to order.
• Cost are traced or allocated to jobs.
• Cost records must be maintained for each
  distinct product or job.

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Types of Costing Systems Used to Determine
Product Costs
ProcessCosting
Job-orderCosting

• Typical job order cost applications
• Special-order printing
• Building construction
• Also used in the service industry
• Hospitals
• Law firms

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Job-Order Costing
Manufacturingoverhead (OH) Applied to eachjob
using apredeterminedrate
Directmaterial
Traced directly to each job
Traced directly to each job
Direct labor
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Sequence of Events in a Job-Order Costing System
Charge direct material and direct labor costs to
each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Sequence of Events in a Job-Order Costing System
Direct Materials
Apply overhead to each job using a predeter-mined
rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Job-Order Cost Accounting

• The primary document for tracking the costs
  associated with a given job is the job cost sheet.

Lets investigate
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Materials Requisition Form
Will E. Delite
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Materials Requisition Form
Cost of material is charged to job A-143.
Type, quantity, and total cost of material
charged to job A-143.
Will E. Delite
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Job-Order Cost Accounting
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Direct materials
MaterialsRequisition
Manufacturing Overhead Account
Indirect materials
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Job-Order Cost Accounting
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Employee Time Ticket
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Job-Order Cost Accounting
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Direct Labor
Employee Time Ticket
Manufacturing Overhead Account
Indirect Labor
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Application of Manufacturing Overhead

• 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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Application of Manufacturing Overhead
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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Application of Manufacturing Overhead
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Job-Order CostingDocument Flow Summary
IndirectLabor
EmployeeTime Ticket
OtherActual OHCharges
Manufacturing Overhead Account
AppliedOverhead
Job Cost Sheets
MaterialsRequisition
IndirectMaterial
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The Need for a Predetermined Manufacturing
Overhead Rate

• 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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Overhead Application Example

• PearCo applies overhead based on direct labor
  hours. Total estimated overhead for the year is
  640,000. Total estimated labor cost is
  1,400,000 and total estimated labor hours are
  160,000.What is PearCos predetermined overhead
  rate per hour?

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Overhead Application Example
POHR 4.00 per DLH
For each direct labor hour worked on a job, 4.00
of factory overhead will be applied to the job.
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Overhead Application Example
What amount of overhead willPearCo apply to Job
X-32?
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Overhead Application Example
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Job-Order System 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 System Cost Flows
Work in Process(Job Cost Sheet)
Raw Materials

• Direct Materials

• Direct Materials

• Material
• Purchases

• Indirect Materials

Mfg. Overhead
Actual
Applied

• Indirect Materials

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Job-Order System Cost Flows
Next lets add labor costs and applied
manufacturing overhead to the job-order cost
flows. Are you with me?
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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Salaries and Wages Payable

• 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.

• OverheadApplied to Work inProcess

• Indirect Materials

• IndirectLabor
• Others

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Job-Order System Cost Flows
Now lets complete the goods and sell them.
Still with me?
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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Finished Goods

• Direct Materials

• Cost ofGoodsMfd.

• Cost ofGoodsMfd.

• Cost ofGoodsSold

• Direct Labor

• Overhead Applied

Cost of Goods Sold

• Cost ofGoodsSold

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Job-Order System Cost Flows
Lets return to PearCo and see what we will do if
actual and applied overhead are not equal.
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Overhead Application Example

• PearCos actual overhead for the year was
  650,000 for a total of 170,000 direct labor
  hours.
• How much total overhead was applied to PearCos
  jobs during the year? Use PearCos predetermined
  overhead rate of 4.00 per direct labor hour.

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Overhead Application Example

• PearCos actual overhead for the year was
  650,000 for a total of 170,000 direct labor
  hours.
• How much total overhead was applied to PearCos
  jobs during the year? Use PearCos predetermined
  overhead rate of 4.00 per direct labor hour.

SOLUTION Applied Overhead POHR Actual
Direct Labor Hours Applied Overhead 4.00 per
DLH 170,000 DLH 680,000
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Overhead Application Example

• PearCos actual overhead for the year was
  650,000 for a total of 170,000 direct labor
  hours.
• How much total overhead was applied to PearCos
  jobs during the year? Use PearCos predetermined
  overhead rate of 4.00 per direct labor hour,

PearCo has overappliedoverhead for the yearby
30,000. What willPearCo do?
SOLUTION Applied Overhead POHR Actual
Direct Labor Hours Applied Overhead 4.00 per
DLH 170,000 DLH 680,000
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Overapplied and Underapplied Manufacturing
Overhead
PearCos Method
30,000may be allocatedto these accounts.
30,000 may beclosed directly to cost of goods
sold.
OR
Work inProcess
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
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Overapplied and Underapplied Manufacturing
Overhead
PearCosMfg. Overhead
PearCos Costof Goods Sold
Unadjusted Balance
Actualoverheadcosts 650,000
OverheadAppliedto jobs 680,000
30,000
30,000
AdjustedBalance
30,000 overapplied
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Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCos Method
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Overhead Application Question 1

• 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.

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Overhead Application Question 2

• Assume that Tigers overhead was 60,000
  underapplied. This amount would result in an
  adjustment that would decrease cost of goods sold
  by 60,000.
• a. True
• b. False

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Job-Order Costing Typical Accounting Entries
Lets look at summary journal entries for a
job-order costing system. Well omit the
numbers so that we can focus on accounts.
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Cost Flows Material Purchases

• Raw material purchases are recorded in
  aninventory 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 Period Expenses

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

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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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End of Chapter 3