Costing system

© 2010 The McGraw-Hill Companies, Inc.

Systems Design: Job-Order Costing

Chapter 3

McGraw-Hill/Irwin Slide 2

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.






ProcessCosting

Job-orderCosting







Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)



ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.







ProcessCosting

Job-orderCosting









Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)


Comparing Process and Job-Order Costing

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated byIndividual

Job Department

Average cost computed by Job Department


Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Charge direct

material and direct labor

costs to each job as

work is performed.

Job-Order Costing – An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor


Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Indirect Manufacturing Costs

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead



PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-09Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

The Job Cost Sheet


Measuring Direct Materials Cost

Will E. Delite


Measuring Direct Materials Cost


Measuring Direct Labor Costs


Job-Order Cost Accounting


Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to

individual jobs.individual jobs.

Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to

individual jobs.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.


The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before

the period begins.

Manufacturing Overhead Application


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.

The Need for a POHR


Determining Predetermined Overhead RatesPredetermined overhead rates are calculated

using a three-step process.

Estimate the level of

production for the period.

Estimate the level of

production for the period.

Estimate total amount of the allocation base

for the period.

Estimate total amount of the allocation base

for the period.

Estimate total manufacturing

overhead costs.

Estimate total manufacturing

overhead costs.

POHR = ÷


Actual amount of allocation is based upon the actual level of

activity (normal costing system).

Actual amount of allocation is based upon the actual level of

activity (normal costing system).

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity


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

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

Overhead Application Rate

POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =


Interpreting the Average Unit Cost

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit was produced.

Fixed overhead would not change if another unitwas produced, so the incremental cost of another unit is something less than $118.

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit was produced.

Fixed overhead would not change if another unitwas produced, so the incremental cost of another unit is something less than $118.


Job-Order Costing: The Flow of Costs

The transactions (in T-account and journal

entry form) that capture the flow of costs in a

job-order costing system are illustrated on

the following slides.


Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)

Actual Applied

Direct Materials Direct

Materials

Indirect Materials

Indirect Materials

The Purchase and Issue of Raw Materials


Mfg. Overhead

Salaries and Wages Payable


Direct

MaterialsDirect Labor

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs


Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Recording Actual Manufacturing Overhead

OtherOverhead


Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Applying Manufacturing Overhead

OtherOverhead

Overhead Applied

OverheadApplied to

Work inProcess

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.


Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the

period incurred.

Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees

who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.

2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.

Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees

who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.

2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.


Finished GoodsWork in Process(Job Cost Sheet)

Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Transferring Completed Units


Finished Goods

Cost of Goods Sold


Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost ofGoodsSold

Transferring Units Sold


Problems of Overhead Application

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 exists when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Underapplied overhead exists when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Overapplied overheadOverapplied 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 rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

Overapplied overheadOverapplied 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 rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.


PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours worked on direct labor hours worked on

jobs.jobs.

How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. overhead rate of $4.00 per direct labor hour.

Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000


PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours worked on direct labor hours worked on

jobs.jobs.

How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. overhead rate of $4.00 per direct labor hour.

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Overhead Application Example


Disposition of Under- or Overapplied Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

Cost of Goods Sold

PearCo’s Method

Work inProcessWork inProcess

FinishedGoods

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

$30,000may be allocated

to these accounts.

OROROROR


Overapplied and Underapplied Manufacturing Overhead - Summary

Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process

(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process

(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

PearCo’s Method

More accurate but more complex to compute.More accurate but more complex to compute.


May be more complex May be more complex but . . .but . . .

May be more complex May be more complex but . . .but . . .

Multiple Predetermined Overhead Rates

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.


Job-Order Costing in Service Companies

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

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

Costing system

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