Systems Design: Job-Order costing Chapter 3. © The McGraw-Hill Companies, Inc., 2000...

Systems Design:Job-Order costing

Chapter

3

© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill

Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Many different products are produced each period.

Products are manufactured to order.

Cost are traced or allocated to jobs.

Cost records must be maintained for each distinct product or job.

Chapter 4


Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Typical job order cost applications: Special-order printing Building construction

Also used in the service industry Hospitals Law firms


Job-Order Costing

THE JOB

Directmaterial

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate


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.

Sequence of Events in a Job-Order Costing System

Direct MaterialsDirect Materials

Direct LaborDirect Labor


Apply overhead to

each job using a

predeter-mined rate.

Apply overhead to

each job using a

predeter-mined rate.

Sequence of Events in a Job-Order Costing System

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead



Job-Order Cost Accounting

The primary document for

tracking the costs associated with a

given job is the job cost sheet.

Let’s investigate


PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-01Date 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 Cost




PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-01Date 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 Cost

Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.


Materials Requisition Form

Will E. Delite


Materials Requisition Form

Will E. Delite

Type, quantity, and total cost of material charged to job A-143.

Cost of material is charged to job A-143.


Job-Order CostingDocument Flow Summary

Job Cost Sheets

MaterialsRequisition

Direct materials

Indirect materials

Manufacturing Overhead Account

Materials usedmay be either

direct orindirect.



Workers use time tickets to record the time spent on each

job.

Let’s see one


Employee Time Ticket



Job Cost Sheets

Employee Time Ticket


Direct Labor

Indirect Labor

An employee’stime may be eitherdirect or indirect.



Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct

labor hour (DLH).Let’s do it


Estimated total manufacturingoverhead cost for the coming period

Estimated 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.

Application of Manufacturing Overhead

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



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.



Recall the wooden crate example where:

Overhead applied = $4 per DLH × 8 DLH = $32

Overhead applied = POHR × Actual activity



EmployeeTime Ticket

Job Cost Sheets

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

AppliedOverhead



The Need for a Predetermined Manufacturing Overhead Rate

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.

$$


PearCo applies overhead based on direct labor hours. Total estimated overhead

for the year is $640,000. Total estimated labor cost is $1,400,000 and total

estimated labor hours are 160,000.

What is PearCo’s predetermined overhead rate per hour?

Overhead Application Example


For each direct labor hour worked on a job, $4.00 of factory overhead will be

applied to the job.


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 =



What amount of overhead willPearCo apply to Job X-32?


Let’s examine the cost flows in a

job-order costing system. We will use T-accounts and start with

materials.

Job-Order System Cost Flows


Raw MaterialsMaterial

Purchases

Direct Materials

Direct Materials

Mfg. Overhead

Indirect Materials

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)

Indirect Materials

Actual Applied


Next let’s add labor costs and

applied manufacturing overhead to the job-order cost flows. Are you

with me?




Direct Labor

Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)

Direct

Materials

OverheadApplied to

Work inProcess

IndirectLabor

Others

Direct Labor

Overhead Applied

IndirectLabor

Indirect Materials

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.


Now let’s complete the

goods and sell them. Still with

me?



Cost ofGoodsMfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoodsMfd.

Cost of Goods Sold

Cost ofGoodsSold

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)

Direct

MaterialsDirect Labor

Overhead Applied


Let’s return to PearCo and see

what we will do if actual and

applied overhead are not equal.




PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours.

How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined

overhead rate of $4.00 per direct labor hour.



SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

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



overhead rate of $4.00 per direct labor hour.


SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

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



overhead rate of $4.00 per direct labor hour,


PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?


Work inProcess

FinishedGoods

Cost of Goods Sold

$30,000may be allocated

to these accounts.

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

Overapplied and Underapplied Manufacturing Overhead

PearCo’s Method

OR


Overapplied and Underapplied Manufacturing Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000


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


Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.

Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.

Overhead Application Question 1


Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.

a. True

b. False

Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.

a. True

b. False

Overhead Application Question 2


Let’s look at summary journal entries for a job-

order costing system. We’ll omit

the numbers so that we can focus

on accounts.

Job-Order Costing – Typical Accounting Entries


Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.


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


Cost Flows – Labor

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

Manufacturing Overhead.


Cost Flows – Actual Overhead

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 – Overhead Applied

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


Cost Flows – Period Expenses

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


Cost Flows – Cost of Goods Manufactured

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

from Work in Process.


Cost Flows – Sales

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.


End of Chapter 3

Systems Design: Job-Order costing Chapter 3. © The McGraw-Hill Companies, Inc., 2000...

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