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CHAPTER 15
Job Order Costing & Analysis
Cost Accounting Systems
determine the costs associated with products (or services).
• ________ Cost System (this chapter)–used for unique or custom ordered
products• ________ Cost System (next
chapter)– is used for mass produced items
Job-Order Costing• ____ or job lots are used as the
means of collecting costs.–Used for production of large, unique,
or high-cost items.
– Built to order rather than mass produced.
– Many costs can be directly traced to each job
– Jobs are easily distinguished from one another
• Examples: professional services, printing, construction, custom furniture, jumbo jet airplanes, hospitals, law firms…
Events in Job Costing
Receive order from customers
Predict cost to
complete job
Negotiate a sales price and decide
whether to pursue the job.
Schedule the job
Uses of Cost Information
• We can use the job costs to help with the following types of activities.– pricing the job– controlling cost– budgeting
Job Order Cost Flows
• You must understand the ____ of costs through the accounting system
• Remember the elements of cost of products from the previous chapter
• You can use T-Accounts and/or journal entries to understand the flow.
Cost Flows in Job Costing
Goods in
ProcessCost of GoodsSold
Labor
Materials
Ind
irect
Ind
irect
FinishedGoodsFactory
Overhead
Direct
Direct
Allocate
Factory (direct) Labor• This account is used to account for all
wages paid to workers within the _______.
• We debit Factory Labor as labor costs are incurred and recognized – What’s the credit?
• We determine what portion of this is ______ labor and which represents ______ labor– Direct labor goes into ______________
• Why?– Indirect labor goes into ____________
• Why?
Factory Overhead (OH)
• We use the ________ account for two reasons:
• We debit it as the overhead items are incurred and recognized in the accounting system.
• We credit it as we apply (______) overhead to individual jobs– WIP $X– OH $X
Applying OH to Jobs
• How do we know how much overhead to apply to the various jobs in process?
• We determine an application base and a rate to use in applying the OH.
• ? = ?_____________ (POHR) ?
• where the activity level is usually some measure of direct labor hours, direct labor cost or machine hours (i.e. the ________)
Under or Over Applied Overhead
• _____________ = OH rate * actual activity (POHR) for the period
• At the end of the year, the OH account may have a debit or a credit balance– amount incurred during the year did not
equal the amount applied to individual jobs
– In other words, our estimates aren’t perfect!
• We will close out this account at the end of the year to _____.
Why allocate OH instead of using actual?
• Reasons for using a predetermined OH rate– Overhead is not incurred _______
throughout the year– Actual overhead rate might _____ from
month to month– Predetermined rates make estimating job
costs ________– Actual overhead is _______ until after it has
been incurred (i.e. at the end of the year)
Predetermined Factory Overhead Rates
Activity base examples
Estimated totalfactory overhead costs
Estimated activity base
Predeterminedfactory overhead rate
=
1. Direct labor hours 2. Direct labor dollars 3. Machine hours 4. Direct materials 5. Other
Predetermined Factory Overhead Rates
Estimated totalfactory overhead costs
Estimated activity basePredetermined
factory overhead rate=
$50,000 estimatedfactory overhead costs
10,000 estimateddirect labor hours
=$5 per directlabor hour
Predetermined Factory Overhead Rates
Estimated totalfactory overhead costs
Estimated activity basePredetermined
factory overhead rate=
$50,000 estimatedfactory overhead costs
10,000 estimateddirect labor hours
=$5 per directlabor hour
For each direct labor hour worked, factory overhead applied is $5.
Job 71 350 x $5 = $1,750Job 72 500 x $5 = $2,500
Direct FactoryLabor OverheadHours Applied
Recording Factory Overhead
Factory Overhead
ACTUALBased on
actual costs incurred
ACTUALBased on
actual costs incurred
$4,400
Recording Factory Overhead
Factory Overhead
ACTUALBased on
actual costs incurred
ACTUALBased on
actual costs incurred
$4,400
APPLIEDBased on
estimated rate($5 x 850 hrs)
APPLIEDBased on
estimated rate($5 x 850 hrs)
$4,250
What account is charged
(debited)?
What account is charged
(debited)?
Is factory overhead overapplied or underapplied?
Is factory overhead overapplied or underapplied?
Recording Factory Overhead
Factory Overhead
ACTUALBased on
actual costs incurred
ACTUALBased on
actual costs incurred
$4,400
APPLIEDBased on
estimated rate($5 x 850 hrs)
APPLIEDBased on
estimated rate($5 x 850 hrs)
$4,250
BALANCEUnderapplied
BALANCEUnderapplied
$150
Work in Process is charged
(debited).
How would this balance be closed at year end?
How would this balance be closed at year end?
Recording Factory Overhead
Factory Overhead
ACTUALBased on
actual costs incurred
ACTUALBased on
actual costs incurred
$4,400
APPLIEDBased on
estimated rate($5 x 850 hrs)
APPLIEDBased on
estimated rate($5 x 850 hrs)
$4,250
BALANCEUnderapplied
BALANCEUnderapplied
$150
An immaterial balance is closed to Cost of Goods Sold at year end.
An immaterial balance is closed to Cost of Goods Sold at year end.
Work in Process is charged
(debited).
Job Cost Sheets
• A __________ is prepared for each and every job undertaken. The job sheet is used to keep track of all the costs applied to that job– direct materials, direct labor, OH
• When a job is complete, we – decrease ___ inventory and – increase __ inventory by the cost of the job
that is done. • When jobs are sold, we transfer the
costs to ____
Purpose of Job Cost Information and Sheets
• Job Cost sheets are maintained to aid in the following:–Tracking the cost of ____________–Transferring costs from ___ to __ to
____–Serving as a subsidiary ledger of
information for WIP and FG.• Any time you make an entry to
WIP, then you should also enter information on the related job cost tickets.
Reporting of Cost Data
• The balance sheet will contain the _____ _______ of the various inventory accounts.
• The income statement will show the COGM and the COGS as described in the previous chapter, with one exception.
COGM = WIP, beg + (DM used + DL + actual OH) + overapplied overhead (or – underapplied overhead) - WIP, end.
Cost of Good Sold
• ____________is still equal to:
FG inventory, beg+ COGM= Goods Available for Sale- FG inventory, end= Cost of Goods Sold
Review the Flow of Costs
• 1. Purchase raw materials• 2. Incur factory wages • 3. Incur overhead• 4. Raw materials used• 5. Factor labor is applied to jobs• 6. Overhead is applied to jobs• 7. Completed jobs are recognized• 8. Cost of goods sold is recognized.
Raw Materials
MaterialPurchase
s
DirectMateria
l
DirectMaterial
Goods in Process
Factory Overhead
ActualOverhea
dCosts
Indirect
Material
P3
Summary of Cost Flows
Dr Cr
Dr Cr Dr Cr
Incurred DirectMaterial
Actual Applied factory factoryoverhead overhead
=/
an adjustment is needed.
When
Goods in ProcessFactory Payroll
Factory Overhead
DirectLabor
DirectLabor
Indirect
Labor
ActualOverhea
dCosts
Overhead
Overhead
Applied to Work
inProcess
P4
Summary of Cost Flows
DirectMaterialDirectLabor
Overhead
Cost of
GoodsMfd.
Cost of
GoodsMfd.
Cost of
GoodsSold
Cost of
GoodsSold
Goods in Process Finished Goods
Cost of Goods Sold
P4
Summary of Cost Flows