Job Order Costin 1

7/27/2019 Job Order Costin 1

http://slidepdf.com/reader/full/job-order-costin-1 1/46



Objectives

Uses of product costs for different organizations.

Types of product costing systems.

Distinguish between job order and process costingsystems.

Understanding the cost accumulation proceduresutilized in job order costing.



Product and Service Costing

A product costing system accumulates the costs incurredin a production process and assigns those costs to theorganization’s final products.

Use in Financial accounting:

Value inventory on the balance sheet

Compute cost of goods sold expense on the income

statement.




Use in Managerial Accounting:

Help managers with planning and decision making.

Decisions about product prices, the mix of products tobe produced and the quantity of the output to bemanufactured involves the usage of product costs.

Use in Cost management:

For controlling or reducing production costs of aproduct.

Use in reporting to interested organizations




Service firms and non profit organizations:

Service firms do not have inventories.

Their costs involve costs that are incurred in producing the

services which are provided. Costs are then used for planning, cost control and

decision making purposes.



Introduction

An enterprise seeks to profit by providing customerswith goods and services.

To realize this profit, it is necessary to make decisions

based upon appropriate and timely informationprovided by the accounting reports.

So in order to fulfill the management needs, cost

accounting consists of basic three phases,1)costdetermination and measurement, 2)cost planning andcontrol through budgets and standards 3)cost analysisfor decision making purposes.



Cost systems: Actual or

Standard.

Determination of a product’s cost is a basicobjective of cost accounting and when the unitcost is identified, the obvious question arises,"how are these costs accumulated?

In actual costs systems, costs are collected asthey occur but they are determined at the end of the manufacturing procedures.



Cost systems: Actual or

Standard.

In standard cost system, unit cost are predetermined inadvance of production. Costing of the products,operations and processes are done by using standardsfor both quantity and dollar amount.

Difference between actual cost and standard cost givesthe variance. And management’s role is to overcomethe unfavorable conditions from predeterminedstandards.

Both actual cost system and standard cost system maybe used in connection with either job order pr processcosting.



Types of Product Costing

SystemsProcessCosting

Job-order Costing

A company produces many units of a singleproduct.

One unit of product is indistinguishable fromother units of product.

The identical nature of each unit of product enablesassigning the same average cost per unit.



Types of Product Costing

SystemsProcessCosting

Job-order Costing

Many different products are produced each period.

Products are manufactured to order.

The unique nature of each order requires tracing or allocating costs to each job, and maintaining costrecords for each job.



Comparing Process and Job-

Order CostingJob-Order Process

Number of jobs worked Many Single Product

Cost accumulated by

Job Department

Average cost computed by Job Department

This table presents an overview of the differences between a job-order and process costing system. Notice that costs areaccumulated by the job in a job-order system and by departmentin the process system. If you think of building a house, you cansee how easy it is to accumulate costs for a particular house,even though you may be building more than one house at a time.If you think of mixing Coca-Cola, costs would naturally be

accumulated by the department working on the current batch.



Example :

Which of the following companies would be

likely to use job-order costing rather than

process costing? a. Scott Paper Company for Kleenex.

b. Architects.

c. Heinz for ketchup.

d. Caterer for a wedding reception.

e. Builder of commercial fishing vessels.



Identify the documentsused in a job-order costing

system.



ManufacturingOverhead

Job No. 1

Job No. 2

Job No. 3

Chargedirect

material anddirect labor

costs toeach job as

work isperformed.

Job-Order Costing – An

Overview

Direct Materials

Direct Labor

In a job-order costing system, direct materials and direct labor are

traced directly to each job as the work is preformed.



ManufacturingOverhead,

includingindirect

materials andindirect labor ,

are allocatedto all jobs

rather thandirectly traced

to each job.

Direct Manufacturing

Costs

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Job No. 3

ManufacturingOverhead

Manufacturing overhead (including indirect materials and indirect labor)represents other manufacturing costs like the power used to run themachinery in the factory. Manufacturing overhead cannot be traceddirectly to specific jobs. Rather, it is allocated to jobs on the basis of a

predetermined rate.



Job Order Cost sheet

The job cos t sheet is used by the accountingdepartment to track the direct and indirect costsassociated with a given job.

We will look at a job cost sheet used by ahypothetical company called PearCo. The companyhas a job that calls for the construction of woodencargo crates.



PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-05

Date Completed Department B3 Units Completed Item Wooden cargo crate Direct Materials Direct Labor Manufacturing Overhead

Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped Direct Materials Date Number Balance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

The Job Cost Sheet



Measuring Direct Materials Cost

Will E. Delite



Description for Direct material

Cost

Once a sales order has been received and aproduction order issued, the Production Departmentprepares a materials requisition form to specify thetype, quantity, and total cost of materials. Here is the

materials requisition form completed for job A - 143.The requisition is number X7 - 6890. The worker hasrequested twelve 2 x 4s, 12 feet long, and twenty 1 x6s, 12 feet long. The unit cost of the lumber is shown inthe unit cost column. The quantity requested is

multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the store room willissue the number once the materials requisition formhas been properly authorized.



Measuring Direct Materials Cost



Measuring Direct Labor Costs



Description For Direct Labor:

Here is the time ticket for an employee whoworked eight hours on job A – 143. Theemployee’s hourly pay rate is $11, so the total

labor cost charged to the job will be $88. Thetime ticket, number 36, serves as the major source document for labor costs charged tothis job.

Let’s look at the labor posting to the job costsheet.



Job-Order Cost Accounting



Compute predetermined

overhead rates

Compute predetermined

overhead rates andexplain why estimatedoverhead costs (rather

than actual overheadcosts) are used in thecosting process.



Why Use an Allocation Base?

Manufacturing overhead is applied to jobs thatare in process. An allocation base, such asdirect labor hours, direct labor dollars, or

machine hours, is used to assignmanufacturing overhead to individual jobs.We use an allocation base because:

1. It is impossible or difficult to trace overhead costs toparticular jobs.

2. Manufacturing overhead consists of many different itemsranging from the grease used in machines to productionmanager’s salary.

3. Many types of manufacturing overhead costs are fixed even

though output fluctuates during the period.



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

jobs is determined before the periodbegins.

Manufacturing Overhead

Application

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in the

allocation base for the coming period

POHR =

Ideally, the allocation baseis a cost driver that causes

overhead.



Using a predetermined rate makes it possible toestimate total job costs sooner.

Actual overhead for the period is not known until the

end of the period, thus slowing down the ability toestimate job costs during the period;

Actual overhead costs can fluctuate seasonally, thus

misleading decision makers;

It simplifies record keeping.

The Need for a POHR



Actual amount of the allocationbased upon the actual level of

activity.

Based on estimates , anddetermined before the

period begins.

Application of Manufacturing

Overhead

Overhead applied = POHR × Actual activity



For each direct labor hour worked on aparticular job, $4.00 of factory overhead

will be applied to that job.

Overhead Application Rate

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 =









Example:

Job WR53 at NW Fab, Inc. required $200

of direct materials and 10 direct labor hours at $15 per hour. Estimated totaloverhead for the year was $760,000 and

estimated direct labor hours were 20,000.What would be recorded as the cost of

job WR53?

a. $200.b. $350.

c. $380.

d. $730.



Example:

Job WR53 at NW Fab, Inc. required

$200 of direct materials and 10 directlabor hours at $15 per hour. Estimatedtotal overhead for the year was

$760,000 and estimated direct labor hours were 20,000. What would berecorded as the cost of job WR53?

a. $200.

b. $350.

c. $380.

d. $730.

Pred. ovhd. rate $760,000/20,000hours $38

Direct materials $200

Direct labor $15 x 10 hours $150

Manufacturing overhe $38 x 10 hours $380

Total cost $730



Understand the flow of costs in a job-order

costing system andprepare appropriate

journal entries to record

costs.



Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.



Cost Flows – Material Usage

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.



The Recording of Labor Costs

The cost of direct labor incurred increasesWork in Process and the cost of indirect labor

increases Manufacturing Overhead.



Recording Actual Manufacturing

Overhead

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

charged to the Manufacturing Overheadaccount as they are incurred.



Applying Manufacturing

Overhead

Work in Process is increased whenManufacturing Overhead is applied to

jobs.



Accounting for

Nonmanufacturing Cost

Nonmanufacturing costs (periodexpenses) are charged to expense as

they are incurred.



Transferring Completed Units

As jobs are completed, the Cost of Goods Manufactured is transferred to

Finished Goods from Work in Process.



Transferring Units SoldWhen finished goods are sold, two

entries are required: (1) to record thesale, and (2) to record COGS and reduce

Finished Goods.



Compute underapplied or overapplied overhead cost

and prepare the journalentry to close the balance

in Manufacturing

Overhead to theappropriate accounts.



Problems of Overhead

Application

The difference between the overhead cost applied toWork in Process and the actual overhead costs of aperiod is referred to as either underapplied or

overapplied overhead.

Underapplied overhead exists when the amount of overhead applied to jobs

during the period using the

predetermined overheadrate is less than the total

amount of overhead actuallyincurred during the period.

Overapplied overhead exists when the amount of overhead applied to jobs

during the period using the

predetermined overheadrate is greater than the totalamount of overhead actuallyincurred during the period.



Allocating Under- or Overapplied

Overhead Between Accounts

AmountPercent of

TotalAllocationof $30,000

Work in process 68,000$ 10% 3,000$

Finished Goods 204,000 30% 9,000

Cost of Goods Sold 408,000 60% 18,000

Total 680,000$ 100% 30,000$

Documents

Job Order Costin 1