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Chapter 17Job OrderCosting
Chapter 17 Learning Objectives
1. Distinguish between job order costing and process costing
2. Record materials and labor costs in a job order costing system
3. Record actual and allocated overhead costs in a job order costing system
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Chapter 17 Learning Objectives
4. Record the completion and sales of finished goods
5. Adjust for overallocated and underallocated overhead
6. Calculate job costs for a service company
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Learning Objective 1
Distinguish between job order costing and process costing
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HOW DO MANUFACTURING COMPANIES USE JOB ORDER AND PROCESS COSTING
SYSTEMS?
• Cost accounting systems measure, record, and report product costs.
• Knowing unit costs helps managers:– Determine which products to produce.– Set sales prices that will lead to profits.– Determine how many products to produce.– Compute cost of goods sold for the income
statement.– Compute the cost of inventory for the balance
sheet.
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Job Order Costing
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Unique products
Costs accumulated
by job
Job order
costing system
A job order costing system is an accounting system that accumulates costs by job.
A job is the production of a unique product or specialized service. It may be one unit or a batch of units.
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Process Costing
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Identical units
Costs accumulated by process
Process costing system
A process costing system is an accounting system that accumulates costs by process.
It is used when companies manufacture identical units.
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Learning Objective 2
Record materials and labor costs in a job order costing system
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HOW DO MATERIALS AND LABOR COSTS FLOW THROUGH THE JOB
ORDER COSTING SYSTEM?
Companies use a job cost record to document the product costs for each job.
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HOW DO MATERIALS AND LABOR COSTS FLOW THROUGH THE JOB
ORDER COSTING SYSTEM?
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Materials
• Purchasing materials:– Often stored for later usage
• Using materials in production:– Direct materials– Indirect materials
• Materials purchased and materials used in production are usually different amounts.
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Purchasing Materials
December 31, 2019 Balances:
Transaction 1—Materials Purchased: During 2020, Smart Touch Learning purchases raw materials of $367,000 on account.
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Purchasing Materials
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Using Materials
• A materials requisition is a request to transfer materials to the production floor.
Below is the materials requisition from when Smart Touch Learning starts Job 27 on January 14, 2020.
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When materials are received on the production floor, the direct materials are recorded on the job cost record.
Using Materials
Using MaterialsTransaction 2—Materials Used: In 2020, Smart Touch Learning uses direct materials costing $355,000 and indirect materials costing $17,000. The $17,000 of indirect materials are transferred from Raw Materials Inventory to Work-in-Process through the Manufacturing Overhead account.
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Labor
Most companies use electronic labor/time to track labor costs.
If a manual system is used, each employee completes a labor time record to track and assign direct labor to jobs.
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Labor
Transaction 3—Labor Costs Incurred: During 2020, Smart Touch Learning incurs total labor costs of $197,000, of which $169,000 is direct labor and $28,000 is indirect labor.
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Learning Objective 3
Record actual and allocated overhead costs in a job order costing system
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HOW DO OVERHEAD COSTS FLOW THROUGH THE JOB ORDER
COSTING SYSTEM?
Transactions 4–7—Actual Overhead Costs Incurred: In addition to indirect materials and indirect labor, other overhead costs are incurred:• Depreciation on manufacturing plant and equipment
of $20,000• Plant utilities of $7,000• Plant insurance of $6,000• Plant property taxes incurred but not yet paid of
$5,000
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HOW DO OVERHEAD COSTS FLOW THROUGH THE JOB ORDER
COSTING SYSTEM?
Before the Period—Calculating the Predetermined Overhead Allocation Rate
• Actual manufacturing overhead costs are not known until the end of the period.
• Managers use a predetermined overhead allocation rate to allocate costs to jobs before the end of the period.
• An allocation base links the overhead costs to jobs.
• The primary cost driver causes an increase or a decrease in the cost.
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Before the Period—Calculating the Predetermined Overhead Allocation Rate
• Common manufacturing company cost drivers are:
– Direct labor hours (for labor-intensive production environments)
– Direct labor cost (for labor-intensive production environments)
– Machine hours (for machine-intensive production environments)
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At the end of 2019, Smart Touch Learning estimated that total overhead costs for 2020 would be $68,000 and direct labor costs would total $170,000. Using this information, the predetermined overhead allocation rate is calculated as follows:
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Before the Period—Calculating the Predetermined Overhead Allocation Rate
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During the Period—Allocating Overhead
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• As jobs are completed in 2020, Smart Touch Learning will allocate overhead costs using the predetermined overhead allocation rate.
• The total direct labor cost for Job 27 is $1,250, and the predetermined overhead allocation rate is 40% of direct labor costs. Job 27 produced 15 tablets.
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During the Period—Allocating Overhead
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Transaction 8—Overhead Allocation: Smart Touch Learning’s total direct labor cost for 2020 is $169,000. Using an overhead allocation rate of 40%, Manufacturing Overhead is $67,600.
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During the Period—Allocating Overhead
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Learning Objective 4
Record the completion and sales of finished goods
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WHAT HAPPENS WHEN PRODUCTS ARE COMPLETED AND SOLD?
• After accumulating, assigning, and allocating the costs of direct materials, direct labor, and overhead to jobs, a company:– Accounts for the completion of jobs– Accounts for the sale of jobs– Adjusts Manufacturing Overhead at the end of
the period
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Transferring Costs to Finished Goods Inventory
Transaction 9—Jobs Completed: The $644,600 Cost of Goods Manufactured is the cost of all jobs Smart Touch Learning completed during 2020.
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Transferring Costs to Cost of Goods Sold
Transactions 10 and 11—Jobs Sold: During 2020, Smart Touch Learning sells jobs with a sales price of $1,200,000 and a cost of $584,600.
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Transferring Costs to Cost of Goods Sold
The T-accounts for Smart Touch Learning’s manufacturing costs now show:
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Learning Objective 5
Adjust for overallocated and underallocated overhead
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HOW IS THE MANUFACTURING OVERHEAD ACCOUNT ADJUSTED?
• Companies must adjust the Manufacturing Overhead account for any over- or underallocation of overhead.– Underallocated overhead occurs when actual
manufacturing overhead costs are more than allocated manufacturing overhead costs.
– Overallocated overhead costs occur when the actual manufacturing overhead costs are less than allocated manufacturing overhead costs.
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HOW IS THE MANUFACTURING OVERHEAD ACCOUNT ADJUSTED?
Transaction 12—Adjust Manufacturing Overhead:During the year, the Manufacturing Overhead account is debited for actual overhead costs incurred and credited for overhead costs allocated to jobs.
A credit to Manufacturing Overhead of $15,400 is needed to bring the account balance to zero.
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HOW IS THE MANUFACTURING OVERHEAD ACCOUNT ADJUSTED?
The T-accounts for Smart Touch Learning now show:
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HOW IS THE MANUFACTURING OVERHEAD ACCOUNT ADJUSTED?
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Summary of Journal Entries
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Summary of Journal Entries
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Summary of Journal Entries
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Summary of Journal Entries
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Cost of Goods Manufactured and Cost of Goods Sold
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Cost of Goods Manufactured and Cost of Goods Sold
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Learning Objective 6
Calculate job costs for a service company
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HOW DO SERVICE COMPANIES USE A JOB ORDER COSTING SYSTEM?
• Service companies do not have inventory or manufacturing costs.
• They trace direct labor to jobs.• They allocate overhead costs to jobs:
1. Computing the predetermined overhead allocation rate
2. Allocating indirect costs to jobs, using the predetermined overhead allocation rate
• They use the costing information to make pricing decisions.
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HOW DO SERVICE COMPANIES USE A JOB ORDER COSTING SYSTEM?
• Fox’s salary and benefits total $100,000 per year. Assuming a 40-hour workweek and 50 workweeks in each year, Fox has 2,000 available work hours per year. Fox’s hourly pay rate is as follows:
• The following indirect costs are estimated for 2018:
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HOW DO SERVICE COMPANIES USE A JOB ORDER COSTING SYSTEM?
• Direct labor hours are used as the allocation base. Walsh attorneys will work an estimated 10,000 direct labor hours in 2018.
• Step 1: Compute the predetermined overhead allocation rate.
• Step 2: Allocate indirect costs to jobs.
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HOW DO SERVICE COMPANIES USE A JOB ORDER COSTING SYSTEM?
• To summarize, the total costs assigned and allocated to Client 367 are as follows:
• The total hourly rate for the company is $80, which is $50 per hour for direct labor plus $30 per hour for indirect costs. If the firm desires a profit equal to 75% of the firm’s cost, then the price would be calculated as follows:
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