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Noreen Brewer Garrison Chapter 3

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					 Systems Design:
Job-Order Costing

    Chapter Three
3-2

       Learning Objective 1



         Distinguish between
       process costing and job-
      order costing and identify
      companies that would use
        each costing method.
3-3

      Types of Product Costing Systems


          Process            Job-order
          Costing             Costing


      A company produces many units of a single
       product.
      One unit of product is indistinguishable from
       other units of product.
      The identical nature of each unit of product enables
       assigning the same average cost per unit.
3-4

      Types of Product Costing Systems


           Process            Job-order
           Costing             Costing


      A company produces many units of a single
       product.
      Example companies:
     1.One unit of product is indistinguishable from
         Weyerhaeuser (paper manufacturing)
         Reynolds of product.
      2.other units Aluminum (refining aluminum ingots)
        Coca-Cola (mixing of each unit of product
      3.The identical nature and bottling beverages)enables
       assigning the same average cost per unit.
3-5

      Types of Product Costing Systems


          Process            Job-order
          Costing             Costing


      Many different products are produced each period.
      Products are manufactured to order.
      The unique nature of each order requires tracing or
       allocating costs to each job, and maintaining cost
       records for each job.
3-6

      Types of Product Costing Systems


           Process            Job-order
           Costing             Costing


      Many different products are produced each period.
      Example companies:
       Products are manufactured to order.
      1. Boeing (aircraft manufacturing)
     2.The unique nature of each order requires tracing or
         Bechtel International (large scale construction)
        allocating costs to each job, and maintaining cost
         Walt Disney Studios
      3.records for each job. (movie production)
3-7

 Comparing Process and Job-Order Costing


                            Job-Order       Process
 Number of jobs worked        Many
                            Individual   Single Product
 Cost accumulated by           Job        Department
 Average cost computed by      Job        Department
3-8

      Learning Objective 2




      Identify the documents
        used in a job-order
         costing system.
3-9

       Job-Order Costing – An Overview



                                       Charge
      Direct Materials
                         Job No. 1      direct
                                     material and
       Direct Labor                  direct labor
                         Job No. 2
                                       costs to
                                     each job as
      Manufacturing      Job No. 3
        Overhead                       work is
                                     performed.
3-10

        Job-Order Costing – An Overview

                                      Manufacturing
                                         Overhead,
       Direct Materials                   including
                          Job No. 1        indirect
                                      materials and
        Direct Labor                  indirect labor,
                          Job No. 2
                                       are allocated
       Manufacturing
                                          to all jobs
                          Job No. 3
         Overhead                        rather than
                                      directly traced
                                        to each job.
3-11

                   The Job Cost Sheet

                              PearCo Job Cost Sheet
       Job Number A - 143                Date Initiated 3-4-08
                                         Date Completed
       Department B3                     Units Completed
       Item Wooden cargo crate
        Direct Materials        Direct Labor   Manufacturing Overhead
       Req. No. Amount     Ticket Hours Amount Hours    Rate   Amount




                       Cost Summary                    Units Shipped
       Direct Materials                            Date Number Balance
       Direct Labor
       Manufacturing Overhead
       Total Cost
       Unit Product Cost
3-12

       Measuring Direct Materials Cost




                    Will E. Delite
3-13

       Measuring Direct Materials Cost

                              PearCo Job Cost Sheet
       Job Number   A - 143              Date Initiated 3-4-08
                                         Date Completed
       Department B3                     Units Completed
       Item Wooden cargo crate
        Direct Materials        Direct Labor   Manufacturing Overhead
       Req. No. Amount     Ticket Hours Amount Hours    Rate   Amount
       X7-6890 $ 116



                       Cost Summary                    Units Shipped
       Direct Materials                  $   116   Date Number Balance
       Direct Labor
       Manufacturing Overhead
       Total Cost
       Unit Product Cost
3-14

       Measuring Direct Labor Costs

                             PearCo Employee Time Ticket

       Time Ticket No.     36                      Date       3/5/2008
       Employee     I. M. Skilled                  Station    42

        Starting      Ending          Hours     Hourly
         Time          Time         Completed    Rate          Amount      Job No.
          0800         1600            8.00   $    11.00      $  88.00      A-143




         Totals                        8.00    $      11.00   $    88.00    A-143


       Supervisor    C. M. Workman
3-15

           Job-Order Cost Accounting

                              PearCo Job Cost Sheet
       Job Number A - 143                Date Initiated 3-4-08
                                         Date Completed
       Department B3                     Units Completed
       Item Wooden cargo crate
        Direct Materials        Direct Labor     Manufacturing Overhead
       Req. No. Amount     Ticket Hours Amount Hours      Rate   Amount
       X7-6890 $ 116         36       8     $ 88



                       Cost Summary                    Units Shipped
       Direct Materials                  $   116   Date Number Balance
       Direct Labor                      $    88
       Manufacturing Overhead
       Total Cost
       Unit Product Cost
3-16

       Learning Objective 3


       Compute predetermined
          overhead rates and
        explain why estimated
        overhead costs (rather
         than actual overhead
        costs) are used in the
           costing process.
3-17

               Why Use an Allocation Base?

        Manufacturing overhead is applied to jobs that
         are in process. An allocation base, such as
          direct labor hours, direct labor dollars, or
              machine hours, is used to assign
         manufacturing overhead to individual jobs.
       We use an allocation base because:
       1. It is impossible or difficult to trace overhead costs to particular jobs.
       2. Manufacturing overhead consists of many different items ranging
          from the grease used in machines to production manager’s salary.
       3. Many types of manufacturing overhead costs are fixed even though
          output fluctuates during the period.
3-18

 Application of Manufacturing Overhead

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

                           Estimated total manufacturing
                        overhead cost for the coming period
            POHR =
                             Estimated total units in the
                        allocation base for the coming period


       Ideally, the allocation base
       is a cost driver that causes
                 overhead.
3-19

 Application of Manufacturing Overhead


         Using a predetermined rate makes it
       possible to estimate total job costs sooner.

                          $



         Actual overhead for the period is not
           known until the end of the period.
3-20

 Application of Manufacturing Overhead

            Predetermined overhead rates are
          calculated using a three-step process.

                  Estimate the level of
                  production for the period.
             Estimate the total amount of the
          allocation base in the denominator that
        would be required for that level of production.
        Estimate the total manufacturing overhead
         cost in the numerator that would be incurred
       for the estimated amount of the allocation base.
3-21

 Application of Manufacturing Overhead

          The predetermined
        overhead rate(POHR) is
        based on estimates and
         determined before the
             period begins.


            Overhead applied = POHR × Actual activity

         Actual amount of the allocation is
       based upon the actual level of activity.
3-22

 Application of Manufacturing Overhead

                         Estimated total manufacturing
                      overhead cost for the coming period
           POHR =
                          Estimated total units in the
                     allocation base for the coming period


                                $640,000
           POHR =
                     160,000 direct labor hours (DLH)

                 POHR = $4.00 per DLH

       For each direct labor hour worked on a
       particular job, $4.00 of factory overhead
               will be applied to that job.
3-23

       Job-Order Cost Accounting
3-24

       Job-Order Cost Accounting
3-25

        Interpreting the Average Unit Cost



       The average unit cost should not be interpreted
       as the cost that would actually be incurred if an
               additional unit were produced.

       Fixed overhead would not change if another unit
          were produced, so the incremental cost of
          another unit is something less than $118.
3-26
3-27
3-28
3-29
3-30
3-31
             An Extended Example
             of Job-Order Costing



        Given this information, we will now
        track the flow of Rand Company’s
          raw materials, direct labor and
       overhead costs for April and prepare
       an income statement for the month.
3-32
                         An Extended Example
                         of Job-Order Costing

        Job Cost Sheet                    Job Cost Sheet                   Manufacturing Overhead
            Job A                             Job B                               Incurred

Beginning balance   $ 30,000      Beginning balance     $      -       Indirect materials   $   2,000
Direct materials      28,000      Direct materials          22,000




                                    Materials Requisition Form

                               Job A direct materials       $ 28,000
                               Job B direct materials         22,000
                               Indirect materials              2,000
                               Total                        $ 52,000
3-33
                         An Extended Example
                         of Job-Order Costing

        Job Cost Sheet                     Job Cost Sheet                  Manufacturing Overhead
            Job A                              Job B                              Incurred

Beginning balance   $ 30,000      Beginning balance    $       -       Indirect materials   $    2,000
Direct materials      28,000      Direct materials          22,000     Indirect labor           15,000
Direct labor          40,000      Direct labor              20,000




                                       Various Time Tickets

                               Job A direct labor           $ 40,000
                               Job B direct labor             20,000
                               Indirect labor                 15,000
                               Total                        $ 75,000
3-34
                         An Extended Example
                         of Job-Order Costing

        Job Cost Sheet                     Job Cost Sheet                        Manufacturing Overhead
            Job A                              Job B                                    Incurred

Beginning balance   $ 30,000       Beginning balance     $      -          Indirect materials    $    2,000
Direct materials      28,000       Direct materials          22,000        Indirect labor            15,000
Direct labor          40,000       Direct labor              20,000        General factory
                                                                              overhead               78,000




                                  Manufacturing Overhead Accounts

                         Factory utilities                            $ 21,000
                         Rent on factory equipment                      16,000
                         Factory property taxes                         13,000
                         Factory insurance                               7,000
                         Manufacturing depreciation                     18,000
                         Miscellaneous factory overhead costs            3,000
                         Total general factory overhead               $ 78,000
3-35

       Learning Objective 4




          Apply overhead
         costs to jobs using
          a predetermined
           overhead rate.
3-36
                   An Extended Example
                   of Job-Order Costing

Let’s assume the following:
• Rand’s predetermined overhead rate is $6 per machine hour.
• During April, 10,000 machine hours were worked on Job A.
• During April, 5,000 machine hours were worked on Job B.



                          Overhead Applied to Jobs

       Job A: $6 per machine hour × 10,000 machine hours =   $   60,000

       Job B: $6 per machine hour × 5,000 machine hours =        30,000

              Total overhead applied to jobs                 $   90,000
3-37
                           An Extended Example
                           of Job-Order Costing

        Job Cost Sheet                    Job Cost Sheet                Manufacturing Overhead
            Job A                             Job B                            Incurred

Beginning balance    $ 30,000     Beginning balance    $      -     Indirect materials    $    2,000
Direct materials        28,000    Direct materials         22,000   Indirect labor            15,000
Direct labor            40,000    Direct labor             20,000   General factory
Manufacturing overhead            Manufacturing overhead               overhead             78,000
   applied              60,000       applied               30,000   Total                 $ 95,000
Total                $ 158,000    Total                    72,000




                                 Overhead Applied to Jobs

         Job A: $6 per machine hour × 10,000 machine hours =                $    60,000

         Job B: $6 per machine hour × 5,000 machine hours =                      30,000

                   Total overhead applied to jobs                           $    90,000
3-38

       Learning Objective 5




       Determine underapplied
       or overapplied overhead.
3-39

 Underapplied or Overapplied Overhead

        The difference between the overhead cost applied to
        Work in Process and the actual overhead costs of a
           period is referred to as either underapplied or
                       overapplied overhead.

          Underapplied overhead           Overapplied overhead
        exists when the amount of       exists when the amount of
         overhead applied to jobs        overhead applied to jobs
        during the period using the     during the period using the
         predetermined overhead          predetermined overhead
         rate is less than the total   rate is greater than the total
       amount of overhead actually     amount of overhead actually
        incurred during the period.     incurred during the period.
3-41

 Disposition of Under- or Overapplied Overhead

        Rand’s Method

         $5,000 can be                     $5,000
        closed directly to            can be allocated
       cost of goods sold.           to these accounts.
                             OR
                                  Work in        Finished
                                  Process         Goods

           Cost of                       Cost of
          Goods Sold                    Goods Sold
3-42

 Disposition of Under- or Overapplied Overhead



                           We will always
                    assume that underapplied or
                 overapplied overhead is closed out
                       to Cost of Goods Sold.




       Overapplied overhead is           Underapplied overhead is
           deducted from                        added to
        Cost of Goods Sold.                Cost of Goods Sold.
3-43

       Learning Objective 6




       Use the direct method to
       determine cost of goods
                 sold.
3-44

        Prepare an Income Statement


  Let’s recall some key facts from the Rand Company example:

             Job A, which consisted of 1,000 gold
            medallions, was completed during April,
                but Job B was not completed.

           The unit product cost for each of the 1,000
             gold medallions included in Job A was
                 $158 ($158,000 ÷ 1,000 units).

           The overhead for April was underapplied
                         by $5,000.
3-45
       The Direct Method of Determining
              Cost of Goods Sold


           750 of the 1,000 gold medallions
          included in Job A were shipped to
            customers by the end of April.



       Cost of the medallions sold to customers

        750 units @ $158 per unit = $118,500
3-46
            The Direct Method of Determining
                   Cost of Goods Sold



       Unadjusted cost of goods sold   $   118,500

       Add: Underapplied overhead            5,000

       Cost of goods sold              $   123,500
3-47

        Learning Objective 7




       Use the indirect method to
        determine cost of goods
                  sold.
3-48
           The Indirect Method of Determining
                   Cost of Goods Sold
  Let’s recall some key facts from the Rand Company example:
       The beginning work in process inventory was $30,000—the
               beginning balance on Job A’s cost sheet.

       There was no beginning finished goods inventory on April 1.

    The total manufacturing costs charged to jobs in April was
   $200,000 (direct materials of $50,000, direct labor of $60,000
        and manufacturing overhead applied of $90,000).

         The ending work in process inventory is $72,000—the
                     accumulated cost of Job B.

         Manufacturing overhead was underapplied by $5,000.
3-49
          Computing Ending Finished
              Goods Inventory


          250 of the 1,000 gold medallions
         included in Job A were unsold and
         in ending finished goods inventory.



       Cost of the medallions in ending finished
                   goods inventory
        250 units @ $158 per unit = $39,500
3-50
               Computing Cost of
              Goods Manufactured


         Total manufacturing cost charged to jobs
       + Beginning work in process inventory
       – Ending work in process inventory
       = Cost of goods manufactured
3-51
               Computing Cost of
              Goods Manufactured


         Total manufacturing cost charged to jobs
       + Beginning work in process inventory
       – Ending work in process inventory
       = Cost of goods manufactured


                         $   200,000
                     +        30,000
                     –        72,000
                     = $     158,000
3-52

         Computing Cost of Goods

         Beginning finished goods inventory
       + Cost of goods manufactured
       – Ending finished goods inventory
       = Cost of goods sold (unadjusted)
3-53

           Computing Cost of Goods

           Beginning finished goods inventory
       + Cost of goods manufactured
       – Ending finished goods inventory
       = Cost of goods sold (unadjusted)


           $       -
       +       158,000
       –        39,500
                            Add $5,000 underapplied overhead to
       = $     118,500       obtain $123,500 cost of goods sold.
3-54

       Prepare an Income Statement



                To complete the income
            statement, let’s assume that
         Rand Company’s total sales revenue
       and selling and administrative expenses
             for April were $225,000 and
                 $87,000, respectively.
3-55

          Prepare an Income Statement


                           Rand Company
                         Income Statement
                   For the Month Ending April 30

       Sales                                       $   225,000
       Cost of goods sold                              123,500
       Gross margin                                    101,500
       Selling and administrative expenses              87,000
       Net operating income                        $    14,500
3-56

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             Which is more
       often use multiple         complex but . . .
         predetermined
        overhead rates,
                                it is more accurate
                                because it reflects
                                differences across
                                    departments.
3-57

       Job-Order Costing in Service Companies


           Job-order costing is used in many
          different types of service companies.
3-58

       The Use of Information Technology

         Technology plays an important part in many
       job-order cost systems. When combined with
           Electronic Data Interchange (EDI) or a
          web-based programming language called
          Extensible Markup Language (XML), bar
           coding eliminates the inefficiencies and
        inaccuracies associated with manual clerical
                         processes.
    The Predetermined
Overhead Rate and Capacity

         Appendix 3A
3-60

         Learning Objective 8



       Understand the implications of
         basing the predetermined
        overhead rate on activity at
          capacity rather than on
         estimated activity for the
           period (Appendix 3A).
3-61

  Predetermined Overhead Rate and Capacity


       Calculating predetermined overhead rates using
         an estimated, or budgeted amount of the
         allocation base has been criticized because:
       1. Basing the predetermined overhead rate upon
          budgeted activity results in product costs that
          fluctuate depending upon the activity level.
       2. Calculating predetermined rates based upon
          budgeted activity charges products for costs that
          they do not use.
3-62

        Capacity-Based Overhead Rates

       These criticisms can be overcome by using
       estimated total units in the allocation base at
            capacity in the denominator of the
        predetermined overhead rate calculation.


                Let’s look at the difference!
3-63

                    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?
3-64

                       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?
        Estimated      $100,000
                  =                = $2.50 per unit
         Method         40,000


        Capacity        $100,000
                   =               = $2.00 per unit
        Method           50,000

				
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