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					ACCG304 Lecture 8:

Job Costing
Lecture Objective
Upon completing this lecture, students should be able to understand Job Costing procedures and their application to production in those situations where manufacturing is undertaken to satisfy the specific requirements of individual customer orders.

Lecture Outline 8.1 8.2 8.3 8.4
Job Costing Procedures. Job Cost Accounting Cycle. Journal Entries in a Job Costing System. Calculation and Treatment of Under or Overapplied Overhead.

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Lecture 8 – Job Costing

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8.1 Job Costing Procedures
Job Costing may be defined as a method of costing production whereby costs are accumulated for a specific production order that move through the production process as a continuously identifiable unit. That is, although the raw materials used for a particular job may change in form or condition or shape, the job can nevertheless be identified from the raw material stage to the completed stage. Job Costing is characterised by the production of goods to meet the unique specifications of the customer order. Industries that utilise job costing procedures include: • • • Building Shipbuilding Commercial printing

and any other production activity which lends itself to the costing of individual customer orders. In Job Costing, each job is treated as a COST CENTRE in the sense that costs associated with its manufacture are assigned to the job. The cost information on each job is recorded on a JOB COST SHEET which is the basic document used for the accumulation of product costs for each individual job. The JOB COST SHEET or JOB CARD, fulfil the functions of a subsidiary ledger supporting the WORK IN PROCESS account which is prepared periodically from information contained in the Job Cost Cards.

8.2 Job Cost Accounting Cycle:
INPUTS PROCESSING OUTPUTS

Materials

INDIRECT

DIRECT

Factory Overhead
INDIRECT

Work in Progress

Finished Goods

Cost of Goods Sold

DIRECT

Labour

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The costs of DIRECT MATERIAL, DIRECT LABOUR and FACTORY OVERHEAD for each job are accumulated on records titled JOB CARDS – with a separate JOB CARD being prepared for each individual job that will be identified with individual production orders. Costs will be collected and recorded on the job cards from the following sources:
COST ELEMENT Direct MATERIAL PROCEDURES Source documents used to substantiate the issue of raw materials is the MATERIAL REQUISITION form. Each REQUISITION form shows : • Job Number • Quantity & description of materials issued. Each requisition is costed on a regular periodic basis, and the total material costs for each job are recorded on the JOB CARDS. Direct LABOUR The TIME TICKETS which is kept for each employee, covers work done between the starting and finishing times of each day. These time tickets will disclose the amount of time an employee spends on a particular job during the day, (as well as the amount of time classified as indirect labour, eg. idle time, that is hours that cannot be identified with a particular job, and therefore will be charged to factory overhead). These time tickets will be costed and summarised, and the cost of direct labour will be charged to individual jobs via the JOB CARDS. Factory OVERHEAD A predetermined overhead rate is used for applying overhead to individual jobs. This rate may be based on direct labour hours, machine hours or some other appropriate activity measure determined in advance of production.

In summary, JOB COSTING accumulates the ACTUAL costs of: DIRECT MATERIAL Dr Cr Work In Process Stores Control

DIRECT LABOUR Dr Cr Work In Process Accrued Payroll

And utilises a PREDETERMINED factory overhead rate to allocate indirect product costs via: Dr Cr Work In Process Applied Factory Overhead.

The total of the elements of production costs are recorded in aggregate form in the WORK IN PROCESS (Control) account, with details of individual jobs being recorded on JOB CARDS.

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Lecture 8 – Job Costing

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8.3 Journal Entries in a Job Costing System.
The accounting entries necessary to record cost incurrence and cost distribution follow the flow of physical production as displayed above and may be summarised as follows: Purchase of material ( Purchase invoice ) Dr Raw Materials Control Cr Accounts Payable Issue of material ( Material requisition ) Dr Work in Process ( Direct Material ) Dr Factory Overhead ( Indirect material ) Cr Raw Material Control Incurrence of Labour Cost as time is worked ( Time Sheets ) Dr Work in Process ( Direct ) Dr Factory Overhead Control ( Indirect ) Cr Accrued Payroll Payment of Factory Payroll Dr Accured Payroll Cr Cash Cr Group Tax payable Cr Other Deductions

Incurrence of Factory Overhead ( Purchase/Charge ) Dr Factory Overhead Control Cr Cash/Accounts Payable/Provisions/Accruals Transfer of actual indirect cost to the Applied Account Dr Factory Overhead Applied Cr Factory Overhead Control Factory Overhead applied ( recovery rate ) Dr Work in Progress Cr Factory Overhead Applied Completed Production ( Production Report ) Dr Finished goods Cr Work in Progress Sales ( Sales Invoices ) Dr Cost of Goods Sold ( cost of the sale ) Cr Finished Goods Dr Accounts Receivable ( invoice price ) Cr Sales

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8.4 Calculation and Treatment of Under or Overapplied Overhead
Actual overhead will in almost all cases differ from the overhead applied due to estimation errors when calculating the pre-determined overhead application rate. Underapplied Overhead Overhead applied is less than actual overhead costs.

Overapplied Overhead -

Overhead applied is greater than actual overhead costs.

The accounting methods to be used for the disposition of under and overapplied overhead is to write the entire amount off to Cost of Goods Sold, as shown below.
The applied overhead is usually closed off to the Factory Overhead Control account, via the following journal entry: Debit Credit Applied Factory Overhead Factory Overhead Control

Different accounting treatments can be used for the disposition of under/overapplied overhead. The first method is to charge the total underapplied or overapplied overhead as an adjustment to the cost of Goods Sold as follows: Debit Credit Cost of goods Sold Factory Overhead Control

To close and charge underapplied overhead to cost of goods sold. If overhead would have been overapplied, it would instead be credited to cost of goods sold. Debit Credit Factory Overhead Control Cost of goods Sold

To close and charge overapplied overhead to cost of goods sold.

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Lecture 8 – Job Costing

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Lecture Demonstration Problem:
Condor Fabrications Pty. Ltd. manufactures to customer specifications. On the 31st March there were two incomplete jobs in the factory. Job cards as at 31st March are summarised as follows : Job 31. $ 720 306 252 $1,278 Job 32. $ 830 408 336 $1,574

Direct material Direct labour Factory overhead Total

Direct and indirect labour is charged at the rate of $8.50 per hour and factory overhead is applied at the rate of $7.00 per DLH. As at 31st March finished goods inventories showed job 30 in stock at a completed cost of $1,850. During April 4 new jobs were started; the production costs were as follows : Material issued from stores: Job 31 ...... Job 32 ...... Job 33 ...... Job 34 ...... Job 35 ...... Job 36 ...... Indirect .......... Material returned to stores: From Job 33 ...... From Job 35 ...... Labour hours recorded: Job 31 ......... Job 32 ......... Job 33 ......... Job 34 ......... Job 35 ......... Job 36 ......... Indirect ..........

$ 86 243 624 390 400 200 280

$ 50 100

46 hrs. 30 hrs. 104 hrs. 38 hrs. 46 hrs. 36 hrs. 24 hrs.

Jobs invoiced and delivered (April): Job 30 .... $ 2400 Job 31 .... 2850 Job 32 .... 3000 Job 35 .... 1400 At the end of April finished goods stores showed Job 34 was still in the finished goods storeroom awaiting delivery to the customer.. During the month the company incurred other factory overhead costs of $2200 and selling and administration expenses of $1850.

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Required : For the month of April, prepare : (a) (b) (c) (d) (e) a Job cost summary, Journal entries covering transactions for the month. a statement of cost of goods manufactured, a statement of cost of goods sold, an income statement for the month showing any under or over applied overhead.

JOB CARDS

Job #

Job #

Job #

Job #

Job #

Job #

Total

Direct Materials Work in Process @ Start Current Usage

Direct Labour Work in Process @ Start Current Usage

Factory Overhead Work in Process @ Start Current Usage

Total Cost

Current Status Work In Process Finished Goods Cost of Goods Sold

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Lecture 8 – Job Costing

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Journal Entries

Details

Debit

Credit

Details

Debit

Credit

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Manufacturing Statement
Direct Materials – Usage Direct Labour Applied Factory Overhead Current Manufacturing Cost Add: Work In Process @ Start Total Manufacturing Cost Incurred Less: Work in Process @ End Cost of Goods Manufactured

Cost of Goods Sold Summary
Opening Stock – Finished Goods Add: Cost of Goods Manufactured Cost of Goods Available for Sale Less: Closing Stock Finished Goods UNADJUSTED Cost of Goods Sold

+/- Under / Over Applied Overhead
COST OF GOODS SOLD

INCOME STATEMENT
Sales Less Cost of Goods Sold Gross Profit Less Expenses

Net Profit


				
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