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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Product Costing and CostAccumulation in a BatchProduction Environment
Chapter 3Chapter 3
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Product and Service CostingProduct and Service Costing
FinancialAccounting
Product costs areused to valueinventory and tocompute cost of
goods sold.
ManagerialAccounting and
Cost Management
Product costs areused for planning,
control, directing, andmanagement decision
making.
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
L
earningObjective2
L
earningObjective2
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Flow of Costs in Manufacturing FirmFlow of Costs in Manufacturing FirmFlow of Costs in Manufacturing FirmFlow of Costs in Manufacturing Firm
Direct material cost Product cost transferred
Direct labor costManufacturing overhead when product is finished
Expense closed into
Income Summary at endof accounting period
Work-in-Process Inventory Finished Goods Inventory
Cost of Goods Sold Income Summary
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
L
earningObjective3
L
earningObjective3
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Used for production of large,unique, high-cost items.
Built to order rather than massproduced.
Many costs can be directly tracedto each job.
Types of ProductTypes of Product--CostingCosting
SystemsSystems
Types of ProductTypes of Product--CostingCosting
SystemsSystemsProcessCosting
Job-OrderCosting
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Job-shop operations
Products manufactured in very
low volumes or one at a time. Batch-production operations
Multiple products in batches ofrelatively small quantity.
Types of ProductTypes of Product--CostingCosting
SystemsSystems
Types of ProductTypes of Product--CostingCosting
SystemsSystemsProcessCosting
Job-OrderCosting
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Typical job-order cost applications:
Special-order printing
Building construction Also used in service industry
Hospitals
Law firms
Types of ProductTypes of Product--CostingCosting
SystemsSystems
Types of ProductTypes of Product--CostingCosting
SystemsSystemsProcessCosting
Job-OrderCosting
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ProcessCosting
Job-OrderCosting
Used for production of small,identical, low cost items.
Mass produced in automatedcontinuous production process.
Costs cannot be directly traced toeach unit of product.
Types of ProductTypes of Product--CostingCosting
SystemsSystems
Types of ProductTypes of Product--CostingCosting
SystemsSystems
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The primarydocument for
tracking the costsassociated with agiven job is thejob-
cost record.
Lets investigate
Accumulating Costs in aAccumulating Costs in aJobJob--Order Costing SystemOrder Costing SystemAccumulating Costs in aAccumulating Costs in aJobJob--Order Costing SystemOrder Costing System
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JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost AccountingJob Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boatsNov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit Price
Cost Item
Total direct material
Amount
Cost Summary
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boatsNov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit Price
Cost Item
Total direct material
Amount
Cost Summary
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost Accounting
Lets see one
A materials requisitionform is used to
authorize the use of
materials on a job.
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Materials Requisition FormMaterials Requisition FormMaterials Requisition FormMaterials Requisition Form
Requisition No. 352 Date 1/28/x1
ob Number to Be Charged 621 Dept. Painting
Department Supervisor imothy Williams
Item Quantity Unit Cost Amount
White enamel paint 8 galons $14.00 $112
Clear lacquer 2 gallons 11.00 22
Authorized
Signature Timothy Williams
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JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost AccountingJob Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Date Quantity Cost
Date Cost Balance
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Total cost
Unit cost
Total direct labor
Total manufacturing overhead
Cost Item
Total direct material
Amount
Cost Summary
$18,000
80 deluxe alum. fishing boatsNov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit Price
803 $2.50
Direct Labor
Requisition Number Unit Price
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
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Job Numb
F
D
ip
ionD
d Nov.
,
D
Compl
d
Numb
ofUni
Compl
d
D
Qu
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i
Cost
11/1 7,
sq ft $18,
D
te Qu
ntity Cost
D
te Qu
ntity Cost
D
te CostB
l
n
e
JOB CO
T R
CORD
Di ect
teri
l
Requisition Number Unit
rice
$2.
Direct L
bor
Requisition Number Unit rice
80 delu
e
lum. fishing boatsNov. 22, 20x1
Manufacturing Overhead
Requisition Number Unit
rice
803
Cost Item
Total direct material
Amount
Cost
ummary
$18,000Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Shipping Summary
UnitsShipped
UnitsRemaining
in Inventory
JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost Accounting
Accumulatedirect labor
costs bymeans of a
work record,such as a timeticket, for each
employee.
Lets see one
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Employee Time TicketEmployee Time TicketEmployee Time TicketEmployee Time Ticket
Employee Ron Br ley Date 12/19/x1
Employee Number 12 Department Painting
Shop cleanup
J122
11:30
1:00
11:30
12:00
5:00
Time Started Time Stopped Job Number8:00 A267
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JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost AccountingJob Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Variousdates 600 $12,000
Date Quantity Cost
Date Cost Balance
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
$2.50
Direct Labor
Requisition Number Unit Price
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803
Cost Item
Total direct material
Amount
Cost Summary
$18,000Total direct labor
Total manufacturing overhead
12,000
Total cost
Unit cost
Shipping Summary
Units Shipped
Units Remaining
in Inventory
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Job Nu
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Amount
Co#
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5
! 8,000Total direct labor
Totalmanufacturing overhead
!(
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Total co#
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Unit co#
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Shipping Summar3
Unit#
Shipped
Unit#
Remaining
in Inventor3
JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost Accounting
Apply manufacturing overhead to jobs using apredetermined overhead rate based on direct
labor hours (DLH).Lets do it
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Variousdates 600 $12,000
Date Quantity Cost
11/30 2,000 $18,000
Date Cost Balance
Shipping Summary
Units Shipped
Units Remaining
in Inventory
Total cost
Unit cost
Total direct labor
Total manufacturing overhead
12,000
18,000
Cost Item
Total direct material
Amount
Cost Summary
$18,000
Machine hours $9.00
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803 $2.50
Direct Labor
Requisition Number Unit Price
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost Accounting
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Variousdates 600 $12,000
Date Quantity Cost
11/30 2,000 $18,000
Date Cost Balance
11/30 $12,000
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
$2.50
Direct Labor
Requisition Number Unit Price
Machine hours $9.00
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803
Cost Item
Total direct material
Amount
Cost Summary
$18,000Total direct labor
Total manufacturing overhead
12,000
18,000
Total cost $48,000
Unit cost $600
Shipping Summary
Units Shipped
Units Remaining
in Inventory
60 20
JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost Accounting
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Job Number F16 DescriptionDate Started Nov. 1, 20x1 Date Completed
Number of Units Completed 80
Date Quantity Cost
11/1 7,200 sq ft $18,000
Date Quantity Cost
Variousdates 600 $12,000
Date Quantity Cost
11/30 2,000 $18,000
Date Cost Balance
11/30 $12,000
JOB-COST RECORD
Direct Material
Requisition Number Unit Price
$2.50
Direct Labor
Requisition Number Unit Price
Machine hours $9.00
80 deluxe alum. fishing boatsNov. 22, 20x1
Various time cards $20
Manufacturing Overhead
Requisition Number Unit Price
803
Cost Item
Total direct material
Amount
Cost Summary
$18,000Total direct labor
Total manufacturing overhead
12,000
18,000
Total cost $48,000
Unit cost $600
Shipping Summary
Units Shipped
Units Remaining
in Inventory
60 20
JobJob--Order Cost AccountingOrder Cost AccountingJobJob--Order Cost AccountingOrder Cost Accounting
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
4
LearningObjective
4
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Overhead is applied to jobs using a predeterminedoverhead rate (POHR) based on estimates made at
the beginning of the accounting period.
Manufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead Costs
POHR =Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR Actual activity
Based on estimates, anddetermined before the
period begins
Actual amount of the allocationbase, such as direct labor hours,
incurred during the period
1
2
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Overhead is applied to jobs using apredetermined overhead rate (POHR) based on
estimates made at the beginning of theaccounting period.
Manufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead CostsManufacturing Overhead Costs
POHR =Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR Actual activity
Recall the wooden crate example where:
Overhead applied = $4 per DLH DLH = $32
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
5
LearningObjective
5
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JobJob--Order CostingOrder CostingDocument Flow SummaryDocument Flow Summary
JobJob--Order CostingOrder CostingDocument Flow SummaryDocument Flow Summary
ProductionOrder forJob
The materialsrequisition indicates
the cost ofdirectmaterial
to charge tojobs
and the cost ofindirect materialindirect material tocharge to overhead.
MaterialRequisition
The production orderfor the job authorizes
the start of theproduction process.
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Employee timetickets indicate
the cost ofdirect laborto charge to
jobs
and the costofindirect laborindirect laborto charge tooverhead.
JobJob--Order CostingOrder CostingDocument Flow SummaryDocument Flow Summary
JobJob--Order CostingOrder CostingDocument Flow SummaryDocument Flow Summary
Indirect LaborTime Records
Direct LaborTime Records
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JobJob--Order CostingOrder CostingDocument Flow SummaryDocument Flow Summary
JobJob--Order CostingOrder CostingDocument Flow SummaryDocument Flow Summary
Cost Driver (orActivity Base)
X PredeterminedOverhead Rate
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Lets examine thecost flows in a
job-order costingsystem. We willuse T-accountsand start with
materials.
Job-Order System Cost FlowsJob-Order System Cost Flows
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Raw MaterialsMaterial
PurchasesDirectMaterial
DirectMaterial
Mfg. Overhead
IndirectMaterial
Job-Order System Cost FlowsJob-Order System Cost Flows
IndirectMaterial
Work in Process(Job-Cost Record)
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Next lets addlaborcosts and
appliedmanufacturing
overhead to thejob-order costflows. Are you
with me?
Job-Order System Cost FlowsJob-Order System Cost Flows
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DirectLabor
Mfg. Overhead
Job-Order System Cost FlowsJob-Order System Cost Flows
IndirectMaterial
DirectMaterial
IndirectLabor
DirectLabor
IndirectLabor
Wages Payable Work in Process(Job-Cost Record)
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DirectLabor
Mfg. Overhead
IndirectMaterial
DirectMaterial
OverheadApplied to
Work inProcess
If actual and applied
manufacturing overhead arenot equal, a year-end
adjustment is required. Wewill look at the procedure to
accomplish this later.
IndirectLabor
DirectLabor
Overhead
Applied
IndirectLabor
Wages Payable Work in Process(Job-Cost Record)
Job-Order System Cost FlowsJob-Order System Cost Flows
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Now letscomplete the
goods and sell
them. Still withme?
Job-Order System Cost FlowsJob-Order System Cost Flows
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Cost ofGoods
Mfd.
Finished Goods
Cost ofGoodsSold
Cost ofGoods
Mfd.
Cost of Goods Sold
Cost ofGoods
Sold
Job-Order System Cost FlowsJob-Order System Cost Flows
DirectMaterial
DirectLaborOverhea
dApplied
Work in Process(Job-Cost Record)
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Lets return toRoseCo and seewhat we will do if
actual andapplied overhead
are not equal.
Job-Order System Cost FlowsJob-Order System Cost Flows
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Overhead Application ExampleOverhead Application ExampleOverhead Application ExampleOverhead Application Example
Actual Overhead costs for the year: $650,000
Actual direct labor hours worked for the year: 170,000
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Overhead Application ExampleOverhead Application ExampleOverhead Application ExampleOverhead Application Example
Actual Overhead costs for the year: $650,000
Actual direct labor hours worked for the year: 170,000
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $6 0,000
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Overapplied and UnderappliedOverapplied and UnderappliedManufacturing OverheadManufacturing Overhead
Overapplied and UnderappliedOverapplied and UnderappliedManufacturing OverheadManufacturing Overhead
Work in
Process
Finished
Goods
Cost ofGoods Sold
$30,000may be allocated
to these accounts.
$30,000 may beclosed directly to
cost of goods sold.
Cost ofGoods Sold
RoseCos Method
OR
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Overapplied and UnderappliedOverapplied and Underapplied
Manufacturing OverheadManufacturing Overhead
Overapplied and UnderappliedOverapplied and Underapplied
Manufacturing OverheadManufacturing Overhead
Actualoverhead
costs
$650,000
$30,000overapplied
UnadjustedBalance
$30,000
$30,000
AdjustedBalance
OverheadAppliedto jobs
$6 0,000
RoseCosMfg. Overhead
for the year
RoseCos Costof Goods Sold
for the year
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
6
LearningObjective
6
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Actual and Normal CostingActual and Normal CostingActual and Normal CostingActual and Normal Costing
Actual direct materialand direct labor
combined withactual overhead.
Actual direct materialand direct labor
combined withpredetermined overhead.
Using a predetermined rate makes itUsing a predetermined rate makes it
possible topossible to estimateestimate total job costs sooner.total job costs sooner.
Actual overhead for the period is notActual overhead for the period is notknown until the end of the period.known until the end of the period.
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Plantwide Overhead RatePlantwide Overhead Rate
Companies tend to use direct labordirect laboras the overhead allocation base.
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Departmental Overhead RatesDepartmental Overhead Rates
A two-stage process isnecessary because different
departments may havedifferent cost drivers.
Finishing DepartmentFinishing Department
Shipping DepartmentShipping Department
Painting DepartmentPainting Department
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
7
LearningObjective
7
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TwoTwo--Stage Cost AllocationStage Cost AllocationTwoTwo--Stage Cost AllocationStage Cost Allocation
Cost pools
Stage One:Costs assignedto pools
ndirectLabor
ndirectMaterials
OtherOverhead
Department1
Department2
Department3
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Departmental Overhead RatesDepartmental Overhead Rates
Department1
Department2
Department3
Products
Cost pools
DirectLabor
Hours
MachineHours
RawMaterials
Cost
Stage One:Stage One:Costs assignedCosts assignedto poolsto pools
Stage Two:
Costs appliedto products
Departmental Allocation Bases
ndirectMaterials
OtherOverhead
ndirectLabor
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
8
LearningObjective
8
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JobJob--Order Costing inOrder Costing inNonmanufacturing OrganizationsNonmanufacturing Organizations
JobJob--Order Costing inOrder Costing inNonmanufacturing OrganizationsNonmanufacturing Organizations
Contracts
Missions
Programs
Cases
THEJOB
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
9
LearningObjective
9
Th C t f A ti it B dTh C t f A ti it B d
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The Concept of Activity-BasedCosting (ABC)
The Concept of Activity-BasedCosting (ABC)
One of the mostdifficult tasks in
computingaccurate unit costslies in determining
the proper amountof overhead cost toassign to each job.
Assigningoverhead is
sure difficult.I agree!
Th C t f A ti itTh C t f A ti it B dB dTh C t f A ti itTh C t f A ti it B dB d
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The Concept of ActivityThe Concept of Activity--BasedBasedCosting (ABC)Costing (ABC)
The Concept of ActivityThe Concept of Activity--BasedBasedCosting (ABC)Costing (ABC)
Overhead Allocation
PlantwideOverhead
Rate
DepartmentalOverhead
Rates
Activity-BasedCosting
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