Hilton • Maher • Selto

3Cost Accumulation for Job-Shop & Batch Production Operations

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

3-3

vs.Job Costing

Process Costing

Each job treated as a

separate unit of output. Costs are

allocated to each job.

Each job treated as a

separate unit of output. Costs are

allocated to each job.

All units processed are treated as the unit of output.

Costs are allocated to each unit.

All units processed are treated as the unit of output.

Costs are allocated to each unit.

Operation Costing is a hybrid.

Operation Costing is a hybrid.

Evaluating Major Types of Costing Systems

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The use of the model serves as a control that helps to ensure goals

and objectives are met.

The use of the model serves as a control that helps to ensure goals

and objectives are met.

The Basic Cost Flow Model

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Job Cost Record

A record of all production-

related resources used

today.

A record of all production-

related resources used

today.

The sum of all the costs in active jobs =

The sum of all the costs in active jobs =

Work-in-Process Inventory

Managing and Using Cost Flow Information

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Work-in-Process Inventory

Represents the cost of all the unfinished

(in-process) jobs.

Represents the cost of all the unfinished

(in-process) jobs.

As jobs are completed, the

costs are moved to . . .

As jobs are completed, the

costs are moved to . . .

Finished Goods

Inventory

Managing and Using Cost Flow Information

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Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory.

During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to

Finished Goods during the month. Also, during May, goods costing $60,000 were sold.

Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and

Finished Goods Inventory.

Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory.

During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to

Finished Goods during the month. Also, during May, goods costing $60,000 were sold.

Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and

Finished Goods Inventory.

Managing and Using Cost Flow Information - Example

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From Job Cost

Records

From Job Cost

Records

Cost of Goods Sold

Cost of Goods Sold

Managing and Using Cost Flow Information - Example

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Job-cost accounting systems record cost flows

systematically.

Job-cost accounting systems record cost flows

systematically.

Transactions are

journalized.

Info is posted to ledger accounts.

Basic Job-Cost Flows

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Accounts related to Jobs are posted to various Job WIP

accounts.

Accounts related to Jobs are posted to various Job WIP

accounts.

Basic Job-Cost Flows

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We can determine Direct Materials Cost and Direct

Labor Cost for a Job as we do the work.

We can determine Direct Materials Cost and Direct

Labor Cost for a Job as we do the work.

But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the

job using a Predetermined Cost-Driver Rate.

But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the

job using a Predetermined Cost-Driver Rate.

Assigning Overhead to Jobs

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Each time we assign overhead to a job, we Debit the Job and Credit the

Overhead Control account.

Each time we assign overhead to a job, we Debit the Job and Credit the

Overhead Control account.

Debit

.

.

Credit

Assigning Overhead to Jobs

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When overhead costs are actually incurred, Debit the Overhead

Control account and Credit the Accounts Payable (or Cash)

account.

When overhead costs are actually incurred, Debit the Overhead

Control account and Credit the Accounts Payable (or Cash)

account.

Credit

.

Debit

.

Assigning Overhead to Jobs

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The difference between actual

overhead for the period, and estimated

overhead for the period is called the

OVERHEAD VARIANCE.

The difference between actual

overhead for the period, and estimated

overhead for the period is called the

OVERHEAD VARIANCE.

Write off the immaterial

difference to COGS.

Write off the immaterial

difference to COGS.

Assigning Overhead to Jobs

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Simple Process Identify the items to be included as

indirect overhead costs. Estimate the costs for each of the

indirect overhead items. Select the cost-driver. Estimate the amount of the cost-

driver rate. Compute the predetermined

overhead rate.

Simple Process Identify the items to be included as

indirect overhead costs. Estimate the costs for each of the

indirect overhead items. Select the cost-driver. Estimate the amount of the cost-

driver rate. Compute the predetermined

overhead rate.

Use of Predetermined Overhead Rates

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Identify each indirect

overhead item for the

job.

Identify each indirect

overhead item for the

job.

Identify the cost-driver

rate for each base.

Identify the cost-driver

rate for each base.

Identify the cost for each

overhead item.

Identify the cost for each

overhead item.

××

Sum the cost-driver

amounts to determine total cost

allocated to the job.

Sum the cost-driver

amounts to determine total cost

allocated to the job.

Use of Predetermined Overhead Rates

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Use of Predetermined Overhead Rates - Example

Boss, Co. produces several jobs a year, and uses ABC to allocate costs to each job. The information related to Boss,

Co.’s General and Administrative spending is included in the table on the

next slide.

Compute the Predetermined Cost Overhead Rate for each indirect activity

identified in the table.

Boss, Co. produces several jobs a year, and uses ABC to allocate costs to each job. The information related to Boss,

Co.’s General and Administrative spending is included in the table on the

next slide.

Compute the Predetermined Cost Overhead Rate for each indirect activity

identified in the table.

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?

Use of Predetermined Overhead Rates - Example

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Use of Predetermined Overhead Rates - Example

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?

Job 6166 required 15 days and the services of 6 employees in 2,200 sq. ft. How much indirect overhead should be assigned to Job 6166?

Use of Predetermined Overhead Rates - Example

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Use of Predetermined Overhead Rates - Example

Job 6166 required 15 days and the services of 6 employees in 2,200 sq. ft. How much indirect overhead should be assigned to Job 6166?

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Three events can trigger the posting of info from the job

cost record to WIP- Summary:

1. Completion of a Job

2. Sale of a Job

3. End of an accounting period.

Three events can trigger the posting of info from the job

cost record to WIP- Summary:

1. Completion of a Job

2. Sale of a Job

3. End of an accounting period.

Recording Job-Order Costs

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Completion of Jobs

As stated earlier, costs then move from WIP to Finished Goods and then to COGS.

As stated earlier, costs then move from WIP to Finished Goods and then to COGS.

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Remember, the overhead

assigned to the job was an ESTIMATE.

Actual overhead may differ from

the estimate.

Remember, the overhead

assigned to the job was an ESTIMATE.

Actual overhead may differ from

the estimate.

The amounts transferred from WIP to Finished Goods include:

•Direct material

•Direct Labor

•Assigned Overhead

The amounts transferred from WIP to Finished Goods include:

•Direct material

•Direct Labor

•Assigned Overhead

If actual overhead differs from the estimated overhead that was used to compute the predetermined cost-driver rate, the

difference is usually posted to COGS

Overhead Adjustments

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The OVERHEAD VARIANCE is separated into

two components.

The OVERHEAD VARIANCE is separated into

two components.

Overhead Spending Variance (or Budget

Variance)

Overhead Activity Variance (or Volume

Variance)

Overhead Variance

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We compare the Actual

Overhead to Estimated

Overhead (also called Applied

Overhead)

We compare the Actual

Overhead to Estimated

Overhead (also called Applied

Overhead)

Actual > EstimatedOverhead is

UNDERAPPLIED

Actual < EstimatedOverhead is

OVERAPPLIED

Overhead Variance

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?? ??

Actual Costing vs. Standard Costing

Actual Actual Costing?Costing?Actual Actual

Costing?Costing?Standard Standard Costing?Costing?

Standard Standard Costing?Costing?

Direct costs are assigned to jobs as they are used.

Indirect Costs are assigned

when the actual amounts are

known.

Direct costs are assigned to jobs as they are used.

Indirect Costs are assigned

when the actual amounts are

known.

Direct costs are assigned to jobs as they are used.

Indirect Costs are assigned

using predetermined overhead rates.

Direct costs are assigned to jobs as they are used.

Indirect Costs are assigned

using predetermined overhead rates.

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The following conditions can lead to improper job costing:

Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Intentional misrepresentation in

contracts.

The following conditions can lead to improper job costing:

Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Intentional misrepresentation in

contracts.

Job Cost and Project Improprieties

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Work-in-Process can be a special

thing.

End of Chapter 3