Job Order Costing
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Transcript of Job Order Costing
Acknowledgement
We are very thankful to our teacher Sir Faisal Majid for his great support and guidance in completing our report.
We have selected Johnson & Johnson Pakistan for our project on the Cost Accounting methods used in the company and the following persons to whom we met and got information regarding the topic.
Umer Sauod Chang
(Floor Manager Prod. Dept.)
Darus Salam
(Account Officer)
Table of Contents
Introduction of the Company
Johnson & Johnson Pakistan (Private) Limited is among the world's most comprehensive
and broadly based manufacturers of health care products. The company discovers,
manufactures and markets products for the consumer, pharmaceutical, medical devices
and diagnostics markets. It operates more than 230 businesses and employs
approximately 116,200 men and women in nearly 60 countries. Johnson & Johnson's
commitment to innovative health care products has resulted in consistent financial
performance. The Company has 76 consecutive years of sales increases; 25 consecutive
years of adjusted earnings increases; and 47 consecutive years of dividend increases.
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products
in the health care field in many countries of the world. Johnson & Johnson's primary
interest, both historically and currently, has been in products related to health and well-
being. Johnson &Johnson was organized in the State of New Jersey in 1886.Johnson &
Johnson is organized on the principles of decentralized management. The Executive
Committee of Johnson & Johnson is the principal management group responsible for the
operations of Johnson & Johnson. In addition, certain Executive Committee members
serve as Worldwide Chairmen of Group Operating Committees, which are comprised of
managers who represent key operations within the group, as well as management
expertise in other specialized functions. These Committees oversee and coordinate the
activities of domestic and international companies related to each of the Consumer,
Pharmaceutical and Professional segments of business. Operating management of each
company is headed by a Chairman, President, General Manager or Managing Director
who reports directly to, or through a line executive to, a Group Operating Committee. In
line with this policy of decentralization, each international subsidiary is, with some
exceptions, managed by citizens of the country where it is located.
The company is caring for the world, one person at a time... inspires and unites the
people of Johnson & Johnson. We embrace research and science - bringing innovative
ideas, products and services to advance the health and well-being of people. Employees
of the Johnson & Johnson Family of Companies work with partners in health care to
touch the lives of over a billion people every day, throughout the world. Our Family of
Companies comprises:
• The world’s premier consumer health company
•The world’s largest and most diverse medical devices and diagnostics company
•The world’s fourth-largest biologics company
• And the world’s eighth-largest pharmaceuticals company
Importance of Costing in the Company
For making decision by using cost accounting information cost accountant usually follow
some specific models. They use different decision model for different courses of action.
Management accountants work with manager by analyzing and presenting relevant data
to guide decisions. For example, if any organization wants to reduce its existing
manufacturing costs it must identify the alternatives then it will analyze the alternatives
by using only relevant data i.e., which can influence the decisions.
Factors regarding decision making using cost accounting information:
There are several factors that affect the decision making procedure of the managers. Some important factors are discussed here:
a. Relevant costs and relevant revenues:
Relevant costs are expected future costs and relevant revenues are expected future revenues that differ among the alternative courses of action being considered. Both relevant costs and relevant revenues must occur in future and they differ among the alternative courses of action. Focusing on the relevant data is especially helpful when all the information needed to prepare detailed income information is unavailable. Understanding which costs are relevant and which are irrelevant helps the decision maker concentrate on obtaining only the pertinent data and saves time.
b. Qualitative and quantitative relevant information:
Manager defines and weighs qualitative and quantitative information. Quantitative information are those which can be measured by the numerical number and qualitative information are those which cannot be measured by the number and off course manager will decide which one is measurable by the number and which one is not. Relevant cost analysis generally emphasis on quantitative factors but qualitative factors also have their own importance.
c. One time only special orders:
When factory has idle production capacity then manager must decide whether accepting or rejection special orders if special order has no long implications. Example: if any
company has capacity to produce 18000 units and currently producing 16000 units. The total cost (fixed-5 and variable-5) per unit is tk. 10. If they got an order to deliver 4000 units for tk.6 per unit they should accept it. But if they get the order of 5000 units they should not accept it because it crosses its relevant range. To make decision about special onetime order only relevant cost should be considered. A common term in decision making is incremental cost which means additional cost for producing every additional unit is also important in this regard.
d. Insourcing Vs. Outsourcing and Make Vs. Buy decision:
Outsourcing or Bye decision is purchasing goods and services from outside rather than producing in inside of the organization. Whether bye or make is sometimes influenced by qualitative factors. For example coca-cola company will never do outsourcing due to secrecy of the formula, know-how, and technology. In order to make decision if bye or make manager usually take into consideration about quality, dependability, material handling and set-up activity. And off course manager does cost benefit analysis based relevant cost information.
e. Focusing on grand total:
Manager will focus on grand total cost in making decision rather than unit cost. Sometimes unit cost could be misleading. If we want to make decision about make or buy, insourcing vs. outsourcing we need to consider total cost not unit cost.
f. Using constrained resources:
Under this condition, manager should select the product that yields the highest contribution margin per unit of the constraining or limiting resources.
Products of the Company
Skin Care Products
Baby Care Products
Pharmaceutical
Wound Care
Hair Care
Nutritionals
Costing Method of the Company
Company works following Batch Costing Method:
Batch costing is that form of specific order costing which applies where similar articles
are manufactured in batches either for sale or for use within the undertaking. Costs are
collected according to batch order number and total costs are divided by total numbers
in a batch to arrive at unit cost of each job. The method is applicable in aircraft, toy
making, printing industries, etc.
In Batch Costing, a lot of similar units which comprise the batch may be used as
a cost unit for ascertainment of cost. Separate Cost Sheet is maintained for each batch
by assigning a batch number. Cost per unit of product is determined by dividing the
total cost of a batch by the number of units of that batch.
johnson and johnson uses Batch costing system.
Features
• Batch Number Assignment
You use this function to assign a batch with a number that uniquely identifies it.
• Batch Specification
You use this function to describe each batch uniquely using characteristics and
characteristic values. You specify the permitted value range in the allocated material
master record.
Batch Status Management
You use this function to indicate whether a batch is usable or unusable. You set this
status:
– Manually in the batch master record or at goods receipt
– Automatically in the usage decision in quality management
Material 1 Material 2 Material 3
Date of Issue Sept 2, 2008 Sept 8, 2008 Sept 15, 2008
Requisition # 308 306 307
Quantity 1500 1500 1000
Rate per unit 200 220 240
Labor 1 Labor 2 Labor 3
Date of Incurred Spet 5, 20008 Sept 10, 2008 Sept 20, 2008
Time Card # 306 302 303
Number of hours 2500 2000 1500
Rate per hour 25 27 28
FOH 1 FOH 2 FOH 3
Date Spet 5, 20008 Sept 10, 2008 Sept 20, 2008
Labor Hour 25 27 28
Quantity 2500 2000 1500
Product costing in batch production
Job information
Direct Material Information
Direct Labor Information
Manufacturing Overhead Information
Job # Job # cs-100
Job description Baby Lotion
Date Started Sept 02, 2008
Date completed Sept 30, 2008
Number of units completed 1500
Application Rate 25 27 28
Other Information
Date of Shipment Sept 30, 2008
Units Shipped 1500
Sales price per unit 800
Marketing & Admin. Exp per unit 50
Material
Inventory Maintenance System:
Johnson & Johnson Company follows the Perpetual Inventory System.
PERPETUAL INVENTORY SYSTEM: under this system a complete and continuous record of movement of each inventory item is maintained.
Material Costing Method:
First –in, First Out (FIFO):
This method assumes that materials are used in the order in which they are received in stores. Hence, the price of the first lot is charged to all issues till the stock lasts. In other words, the issues are priced in the chronological order of receipts. As a result, closing stock will be valued at latest purchase price.To illustrate, let us take an example. A manufacturing company has recorded the following transactions of material A-320 oil, during the month of September, 2001.
Economic Order Quantity (EOQ)
The concept of Economic Order Quantity or EOQ has emerged out of this behaviour of carrying cost and ordering cost. EOQ is the quantity fixed at a point where total cost of ordering and the cost of carrying the inventory will be the minimum. EOQ may be arrived at by tabular method by preparing purchase order tables, showing the ordering cost, carrying cost and total cost of various sizes of purchase orders, or can be established by algebraic equation.
Labor Costing
Johnson & Johnson uses the Merrick’s Multiple Piece Rate System and labor paid bonuses considering their effectivity.
A wage incentive plan wherein increasingly higher unit pay rates are given to the worker as his productivity increases.
Example Of Multiple piece rate system:
Merrick’s multiple piece rate system, calculate the earnings of worker X, Y & Z from the following particulars:
Normal rate per hour – $. 2.70, Standard time per unit – 1/2 minute,
Output per day is as follows: Worker X – 195 units, Y – 225 units, Z – 300 units.
Working hours per day are 8.
Standard output per day of 8 hours = 30 units * 8 = 240 units
Percentage Efficiency of individual worker = (Actual Output/Standard Output)*100
X = (195/240)*100 = 81.25%
Y = (225/480)*100 = 93.75%
Z = (300/480)*100 = 125%
Piece rate applicable to individual worker:
X = Normal rate up to 831/3% efficiency =$ 0.09
Y = 110% of Normal rate between 831/3% & 100% efficiency = $ 0.099
Z = 130% of Normal rate above 100% efficiency = $ 0.117
Earnings of X = 195 units * $ 0.09 = $.17.55
Y = 225units * $ 0.099 = $. 22.275
Z = 300 units * $ 0.117 = $. 35.10
Factory Overhead Costing
Factory Overhead rate is predetermined by using labor hours.
Company uses Step Method for allocating Service Department cost to production departments.
Production ServiceA B Time Store Maintaince
Cost of Each Dept. 16000 10000 4000 5000 3000Cost Allocated By Time 16000 1200 -4000 800 400
0 5800Cost Allocated By Store 2780 2320 -5800 696
0 4096Cost Allocated By Maint. 2457.6 1638.4
Standard Costing
Standard costs are used as target costs (or basis for comparison with the actual costs), and are developed from historical data analysis or from time and motion studies. They almost always vary from actual costs, because every situation has its share of unpredictable factors. Also called normal cost
StandardMaterial InformationPurchased Quatity 50000Standard Quantity 42500Actual Quatity Used 45000Actual Price Per Unit 12Standard Price Per Unit 13
Labor InformationActual Hours Worked 15000Standard Hours Allowed 16250Standard Rate Per Hour 15Actual Rate Per Hour 12
Variance AnalysisDirect Material Price VarianceActual Price
12 600000Standard Price
13 650000Variance -50000 Favourable
Direct Material Quantity Variance
Actual Quantity Used Standard Price45000 13 585000
Standard Quality Standard Price42500 13 552500
Variance 32500 Un Favourable
Direct Labor rate VarianceActual Hours Worked Actual Rate
15000 12 180000Actual Hours Worked Standard Rate
15000 15 225000Variance -45000 Favourable
Direct Labor Efficiency VarianceActual Hour Worked Standard rate
15000 15 225000Standard Hours Allowed Standard rate
16250 15 243750Variance -18750 Favorable