Job Costing - Download as PowerPoint by 3VS5zGSN

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									Job Vs Process Costing
    Dr. Clive Vlieland-Boddy
             Cost Systems
• There are two basic systems used by
  manufacturers to assign costs to their
  products:
  – Process costing
  – Job Order costing
          Process Costing
• A process costing
  system is a product
  costing system
  used by entities
  that produce large
  quantities of
  homogeneous
  goods.
             Process Costing
• Used by companies that produce large
  numbers of identical units
  – Breakfast cereal
  – Paper mills
  – Oil refining
  – Soft drinks producers
Job-Order Costing
         • A job-order costing
           system is a product
           costing system used
           by entities that make
           (perform) relatively
           small quantities or
           distinct batches of
           identifiable, unique
           products (services).
          Job Order Costing
• Used for production of large, unique, high-
  cost items
• Built to order rather than mass produced
  – Building Construction
  – Law firms
  – Plane Manufacturers
  – Ship Building
        Events in Job Order
          Manufacturing
  Receive                       Begin
orders from                  production.
customers.




        Schedule     Order
          jobs.     materials.
Job Order Manufacturing Activities

                 Direct
Materials
  Indirect




             Allocate
 Factory                   Work in   Finished
Overhead                  Progress    Goods
  Indirect




                                     Cost of
                Direct
 Labor                               Goods
                                      Sold
Relating Product Costs to Jobs
  Job Order Cost Documents
The primary document for tracking the
  costs associated with a given job is
          the job cost sheet.
            Job Cost Sheet
• Allocates the following to a job:
  – Direct Materials consumed
  – Direct Labour (Hours x Labour Rate)
  – Overheads (Hours x Overhead Rate)
                        Job Cost Sheet
                                 Job Cost Record
Job No. Job123
Customer Name and Address Big Traders Inc
Job Description     New Factory
        Date Promised               Date Started         Date Completed
              Direct Materials      Direct Labor      Overhead Costs Applied
                                 Time
           Requisi-             Ticket
  Date     tion No.    Amount     No.       Amount   Date    Rate     Amount




                                                       Overall Cost Summary
                                                             Materials
                                                             Labor
                                                             Overhead
Totals                                                 Total Job Cost
           Computerisation
• Job sheets are very much a thing of the
  past.
• Most companies enter data directly into
  the computer.
• Time and materials are input direct from
  the raw data.
• Overheads are automatically charged
  based on an established rate.
        Direct Materials Input
Direct materials used on a job can be:
• Directly allocated from a purchase order.
• Requisitioned from stores.
• Transferred from another job
This will charge to the job, the cost of direct
  materials consumed.
           Labour Data Input
This is usually entered directly into the
  computer from charging the employees time
  to that job.
• Shows the employee who has worked.
• Allocates the time to a job or several jobs
  that have actually been worked.
• Is then costed and charged to the job record.
               Overheads
• The overheads are budgeted. Those costs
  are divided by the budget level of activity
  normally labour hours. (Can be units of
  production, machine hours or even a % of
  material consumed)
• Example: If overheads for an accounting firm
  were €500,000 and it had a total of 10,000
  chargeable hours, it would have an overhead
  rate of €50 per hour.
             Job Costs Inputs
  Direct
 Materials                       Material
Consumed

                   Labour        Labour
 Direct             Rate
 Labour
 Hours
                  Overhead      Overhead
                    Rate
                                    =

                                Total Cost
Job-Order Costing Summary
Relation Between the Costs of
 Jobs and the Flow of Costs
    Example – Exercise - Question
•   Delta Manufacturing Company expects annual
    manufacturing overhead to be €800,000. The
    company also expects 50,000 direct labor hours
    costing €1,600,000 and machine run time of
    25,000 hours.

   Calculate overhead allocation rates based on
    direct labor hours, direct labor cost, and machine
    time.
Example - Exercise - Solution
Direct Labor Hours
   – €800,000 / 50,000 DLH
          = €16.00 per Direct Labor Hour

Direct Labor Cost
   – €800,000 / €1,600,000 DLC
          = €0.50 per euro of Direct Labor

Machine Time
  – €800,000 / 25,000 Machine Hours
        = €32.00 per Machine Hour
   Job-Order Costing for Service
           Companies
Same process may be utilized by service
 companies

Examples
  – Hospitals
  – Repair Shops
  – Consulting Firms
Merchandising & Manufacturing
Merchandising and Manufacturing
             Firms
        Financial Reporting
• Distinguish between manufacturing, job,
  service and merchandising operations.
        Operating Cycles

              Sell
            Products

  Make        Job           Collect
a Product                    Cash
            Company

Buy Raw          Incurs
Materials       Operating
& labour         Costs
    Operating Cycles

             Sell
           Services

 Service               Collect
Company                 Cash
            Incurs
           Operating
            Costs
           Operating Cycles

                 Sell
               Products


  Buy       Merchandising     Collect
Products                       Cash
              Company
                  Incurs
                 Operating
                  Costs
            Operating Cycles

                  Sell
                Products

  Make       Manufacturing       Collect
Products                          Cash
              Company

Buy Raw               Incurs
Materials            Operating
& Labour              Costs
Flow of Product Costs in Accounts
         Job Costing COGS
• Represents the Labour, Materials and
  applied overheads to each job.
• The matching concept requires that all
  jobs sold are taken to COGS.
• Those not yet sold are held in inventories
  as WIP.
Job Costing COGS
       Manufacturing COGS
• Represents the materials, labour and
  overheads consumed by goods produced
  and sold.
• The matching concept requires that all
  items sold are taken to COGS.
• Those not yet sold are held in inventories
  as raw materials. WIP and finished goods.
       Manufacturing COGS

Cost of Goods Manufactured
        Merchandising COGS
• Retailer & Wholesalers have no production
  costs. They simply buy and sell.
• Their COGS represents the Opening
  Inventories Plus Purchases, Less Closing
  Inventories.
Allocating Overheads to Jobs
    Allocating Overhead to Jobs
Overhead Allocation Rates
  – Overhead Allocation Rate = Overhead Cost
                            Allocation Base


Overhead Allocation Base Alternatives
  – Direct labor hours
  – Direct labor cost
  – Machine hours
  – Direct material cost
  Allocating Overhead to Jobs
Pre-determined Overhead Rates
  – Utilize estimates rather than actual costs and
    quantities
  – Estimated total overhead cost__
     Estimated level of allocation base
  – Allows decisions to be made based on
    budgeted amounts
                     Example
    Lollah Manufacturing Company expects annual
    manufacturing overhead to be $800,000. The
    company also expects 50,000 direct labor
    hours costing $1,600,000 and machine run
    time of 25,000 hours.

   Calculate overhead allocation rates based on
    direct labor hours, direct labor cost, and
    machine time.
                 Solution
Direct Labor Hours
   – $800,000 / 50,000 DLH
          = $16.00 per Direct Labor Hour
Direct Labor Cost
   – $800,000 / $1,600,000 DLC
         = $0.50 per dollar of Direct Labor
Machine Time
   – $800,000 / 25,000 Machine Hours
         = $32.00 per Machine Hour
    Job-Order Costing for Service
            Companies
Same process may be utilized by service
 companies

Examples
  – Hospitals
  – Repair Shops
  – Consulting Firms
  Modern Manufacturing Practices
• Just-in-Time Production (JIT)
• Computer-Controlled Manufacturing
• Total Quality Management (TQM)


We will return to these later
JIT or Just-in-Case?
    Why Estimate an Overhead
             Rate?
Overhead rates are estimated because
 product costs need to be known for pricing
 purposes before production is completed.
Using annual estimates smoothes out
 fluctuations in overhead costs so customers
 are treated more consistently in pricing
 products.
Overview of Job Costing
  Let’s use some examples to
  sharpen our understanding.
Job Costing Vs Process Costing
In each of the following situations, determine
whether job costing or process costing would be
more appropriate.

a)   A CPA firm                 Job costing
b)   An oil refinery            Process costing
c)   A custom furniture         Job costing
     manufacturer
d)   A tire manufacturer        Process costing
e)   A textbook publisher       Job costing
f)   A pharmaceutical company   Process costing
g)   An advertising agency      Job costing
h)   An apparel manufacturing   Job costing (some process)
     plant
     Job costing Vs process costing

                                          Process costing
i)   A flour mill
j)   A paint manufacturer                 Process costing
k)   A medical care facility              Job costing
l)   A landscaping company                Job costing
m)   A cola-drink-concentrate producer    Process costing
n)   A movie studio                       Job costing
o)   A law firm                           Job costing
p)   A commercial aircraft manufacturer   Job costing
q)   A management consulting firm         Job costing
r)   A breakfast-cereal company           Process costing
s)   A catering service                   Job costing
t)   A paper mill
                                          Process costing
u)   An auto repair shop
                                          Job costing
Bye for now!      I’m ready for
                some leisure time.




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