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The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin

3Cost Accumulation for Job-Shop & Batch Production Operations

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vs.Job Costing

Process Costing

Distinct units of output.

High value units.

Feasible to trace costs to

individual units.

Distinct units of output.

High value units.

Feasible to trace costs to

individual units.

Homogeneous units.

Low value units.

Not feasible to trace costs to

individual units.

Homogeneous units.

Low value units.

Not feasible to trace costs to

individual units.

Evaluating Major Types of Product-Costing Systems

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vs.Job Costing

Process Costing

Each individual job treated as a

separate unit of output. Costs are traced or

assigned to each job.

Each individual job treated as a

separate unit of output. Costs are traced or

assigned to each job.

Costs are traced to the process and

then divided by units produced

to obtain an averaged unit

cost.

Costs are traced to the process and

then divided by units produced

to obtain an averaged unit

cost.

Operation Costing is a hybrid often used

for batches of similar products

with different types of materials.

Operation Costing is a hybrid often used

for batches of similar products

with different types of materials.

Evaluating Major Types of Product-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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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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THE JOB

Directmaterial

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate

Managing and Using Cost Flow Information

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Job Cost Record

A record of all production-

related resources used

on individual jobs.

A record of all production-

related resources used

on individual jobs.

The sum of all the costs in active jobs

(unfinished jobs) =

The sum of all the costs in active jobs

(unfinished jobs) =

Work-in-Process Inventory


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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 individual jobs are

completed, the costs are

moved to . . .

As individual jobs are

completed, the costs are

moved to . . .

Finished Goods

Inventory


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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 Overhead 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 Overhead Rate.

Assigning Overhead to Jobs

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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

(POHR). ÷

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

(POHR). ÷

Use of Predetermined Overhead Rates

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Budgeted total manufacturingoverhead cost for the coming year

Budgeted total units in theallocation base for the coming period

POHR =

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

determined before the period begins.

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

determined before the period begins.

Ideally, the allocation base is a cost driver that causes overhead.


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Overhead applied = POHR × Actual activity

Actual amount of the cost driver such as units produced, direct labor hours, or machine hours.

Incurred during the period.

Based on estimates, and determined before the

period begins.


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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.

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.

$$


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Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor

hours are 12,000.

What is Glass Creations’ predetermined overhead rate per hour?

Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor

hours are 12,000.

What is Glass Creations’ predetermined overhead rate per hour?


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For each direct labor hour worked on a job, $30.00 of manufacturing overhead

will be applied to the job.

POHR = $30.00 per DLH

$360,000

12,000 direct labor hours (DLH)POHR =

Budgeted total manufacturingoverhead cost for the coming period

Budgeted total units in theallocation base for the coming period

POHR =


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Let’s examine the cost flows in a job-order costing system. We will use T-accounts

and start with materials.

Job-Order Cost Flows

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Raw MaterialsMaterial

PurchasesDirect

Materials

Direct Materials

Mfg. Overhead

Indirect Materials

Work in Process

Indirect Materials

Actual Applied


Other Mfg. OH

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Next let’s add labor costs and applied

manufacturing overhead to the job-

order cost flows.


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Direct Labor

Mfg. Overhead

Salaries and Wages Payable Work in Process

Direct

Materials

OverheadApplied to

Work inProcessIndirect

Labor

Direct Labor

Overhead Applied

IndirectLabor

Actual AppliedIf 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.


Indirect Materials

Other Mfg. OH

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Now let’s complete the

goods and sell them.


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Cost ofGoodsMfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoodsMfd.

Cost of Goods Sold

Cost ofGoodsSold

Work in ProcessDirect

MaterialsDirect

LaborOverhead

Applied


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Let’s summarize the document flow we have

been discussing in a job-order

costing system.

Job-Order Costing Document Flow Summary

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Jobs

MaterialsRequisition

Direct materials

Indirect materials

Manufacturing Overhead Account

Materials usedmay be either

direct orindirect.


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Jobs

Employee Time Ticket

Manufacturing Overhead Account

Direct Labor

Indirect Labor

An employee’stime may be eitherdirect or indirect.


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Work in Process

Cost of GoodsSold

Labor

Materials

Ind

irec

tIn

dir

ect

FinishedGoods

FactoryOverhead

Direct

Direct

Apply

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When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the

appropriate account.

When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the

appropriate account.

Debit

.

Credit

.

Assigning Overhead to Jobs - Summary

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Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account.

Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account.

Debit

.

.

Credit


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The difference between actual

overhead for the period, and applied

overhead for the period is called the

OVERHEAD VARIANCE.

The difference between actual

overhead for the period, and applied

overhead for the period is called the

OVERHEAD VARIANCE.


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We compare the Actual

Overhead to Applied

Overhead)

We compare the Actual

Overhead to Applied

Overhead)

Actual > AppliedOverhead is

UNDERAPPLIED

Actual < AppliedOverhead is

OVERAPPLIED

Overhead Variance

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Let’s return to Glass Creations and and see

what we will do if actual and applied overhead are

not equal.

Overhead Variance

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SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000



Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor

hours.

How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour.


hours.


Overhead Variance

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hours.



hours.






Overhead is overappliedfor the year by

$20,000. What willGlass Creations do?

Overhead Variance

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Work inProcess

FinishedGoods

Cost of Goods Sold

$20,000may be allocated

to these accounts.

$20,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

Glass Creations’ Method

OR

Overhead Variance

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Glass Creations’Manuf. Overhead

Actualoverhead

costs

$370,000$20,000

overapplied

Glass Creations’Cost of Goods Sold

Unadjusted Balance

AdjustedBalance

$20,000

$20,000

OverheadAppliedto jobs

$390,000

Overhead Variance

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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

Glass Creations’ Method

Overhead Variance

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Actual Costing, Normal Costing and Standard Costing

Actual Actual Costing?Costing?Actual Actual

Costing?Costing?Normal Normal

Costing?Costing?Normal Normal

Costing?Costing?

Actual direct costs (material and labor)

are assigned to jobs as incurred.

Actual manufacturing

overhead is assigned when the actual amounts are

known.



Actual manufacturing

overhead is assigned when the actual amounts are

known.



Manufacturing overhead is applied

using predetermined overhead rates.




using predetermined overhead rates.

Standard Standard Costing?Costing?

Standard Standard Costing?Costing?

Standard direct costs (material and labor) are assigned to jobs as incurred.


using predeter-mined (standard) overhead rates.

Standard direct costs (material and labor) are assigned to jobs as incurred.


using predeter-mined (standard) overhead rates.

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Job-Order Costing andthe Value Chain

R & D Design Supply Production Marketing Distri- bution

Customer service

Value ofproducts

andservices

Value ofproducts

andservices

Job-order costing emphasizes production in the value chain.We must remember that the other components are also

important contributors to profitability.

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Job and Project Management

Complex jobs require scheduling and progress evaluations.

Complex jobs require scheduling and progress evaluations.

Gantt chartsare used for

scheduling major activities.

Progress evaluationsuse comparisons of budgeted and actual costs,and actual time versus estimated time

for the actual work completed.

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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. Cost misrepresentation in “cost-

plus” 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. Cost misrepresentation in “cost-

plus” contracts.

Job Cost and Project Improprieties:An Ethical Issue

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Recording Job-Order Costs – Typical Accounting Entries

Let’s look at summary journal entries for a job-order costing system.

We’ll omit the numbers in order to focus on

accounts.

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Raw material purchases are recorded in an inventory account.

Cost Flows – Material Purchases

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Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.

Cost Flows – Material Usage

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The cost of direct labor incurred increases Work in Process and the cost of indirect labor

increases Manufacturing Overhead.

Cost Flows – Labor

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In addition to indirect materials and indirect labor, other manufacturing overhead costs are

charged to the Manufacturing Overhead account as they are incurred.

Cost Flows – Actual Overhead

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Work in Process is increased when Manufacturing Overhead is applied to jobs.

Cost Flows – Overhead Applied

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As jobs are completed, the cost of goods manufactured is transferred to Finished

Goods from Work in Process.

Cost Flows – Cost of Goods Manufactured

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When finished goods are sold, two entries are required: (1) to record the sale; and (2) to

record Cost of Goods Sold and reduce Finished Goods.

Cost Flows – Sales

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Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

Cost Flows – Period Expenses

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End of Chapter 3

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