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3-3 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical job order cost applications: Special-order printing Building construction Also used in the service industry Hospitals Law firms Typical job order cost applications: Special-order printing Building construction Also used in the service industry Hospitals Law firms
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Job-Order CostingChapter 04
3-2
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 5
3-3
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
3-4
Quick Check 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.
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Job-Order CostingManufacturingoverhead (OH)
Allocated (Applied) to eachjob using a
predeterminedrateTraced directly to each job
Traced directly
to each job
The Job
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Sequence of Events in a Job-Order Costing System
Receive orders from customers
Schedulejobs
Begin production
Ordermaterials
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Manufacturing Overhead
Job No. 1
Job No. 2
Job No. 3
Charge direct
material and direct labor
costs to each job as work
is performed.
Sequence of Events in a Job-Order Costing System
Direct Materials
Direct Labor
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Allocate overhead to
each job using a
predeter-mined rate.
Sequence of Events in a Job-Order Costing System
Direct Materials
Direct Labor
Job No. 1
Job No. 2
Job No. 3Manufacturing Overhead
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Job-Order Cost Accounting
The primary document for
tracking the costs associated with a
given job is the job cost sheet.
Let’s investigate
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Job-Order Cost Accounting
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)Direct
Materials Direct Materials
Indirect Materials
Indirect Materials
Actual Applied
Job-Order System Cost Flows
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct Materials
Overhead Allocated
OverheadAllocated to
Work inProcess
Direct Labor
Direct Labor
IndirectLabor
IndirectLabor
Indirect Materials
Actual Applied
Job-Order System Cost Flows
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Finished GoodsCost ofGoodsMfd.
Cost ofGoodsMfd.
Cost of Goods Sold
Work in Process(Job Cost Sheet)Direct
Materials
Direct Labor
Overhead Applied
Cost ofGoodsSold
Cost ofGoodsSold
Job-Order System Cost Flows
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The Allocation of CostsThe Allocation of Costs
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Actual Versus Normal Costing
Actual Overhead Costs
Unit Cost
Actual Costing
Actual direct labor costActual direct materials costs
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Actual Versus Normal Costing
Actual direct labor costActual direct materials costs Amount of
activity required by the unit X predetermined rate
Unit Cost
Normal Costing
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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.
The Need for a Predetermined Manufacturing Overhead Rate
$
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Assignment of Overhead Costs in a Normal Costing SystemAt the beginning of the fiscal year:
Estimate the total costs of manufacturing overhead for the period.
Choose a relevant activity or cost base, and estimate the amount of that activity or cost base.
Calculate the overhead allocation rate by dividing the estimate of total manufacturing overhead costs by the estimated amount of the activity or cost base.
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Overhead allocation rate=
Estimated total overhead costs
Estimated total activity base
Assignment of Overhead Costs in a Normal Costing System
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Assignment of Overhead Costs in a Normal Costing System
At the end of each accounting period:
Determine the actual amount of the activity base used during the period.
Multiply that amount by the overhead allocation rate.
Allocated overhead costs = actual activity base x overhead allocation rate
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Example•Take Tours applies overhead based on direct
labor hours. Total estimated overhead for the year 2013 is VND 5 billions. Total estimated direct labor hours in this period is 50,000.
•What is Take Tour’s overhead allocation rate?•Tour #1105 Hải Phòng - Huế from Nov. 25,
2013 to Nov. 30, 2013 required 100 direct labor hours. How much of overhead will be allocated for Tour #1105 ?
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Job-Order System Cost Flows
What we will do if actual and allocated overhead
are not equal?
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Work inProcess
FinishedGoods
Cost of Goods Sold
The over(under)allocated amountmay be allocated
to these accounts.
Overallocated and Underallocated Manufacturing Overhead
The over(under)allocated amount may be closed directly to
cost of goods sold.
Cost of Goods Sold
OR
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Example (cont’d)•Take Tour’s actual overhead for the year
was VND 5.5 billions and its applied overhead for all jobs for the year is VND5.2 billions. How much of overhead was over(under)allocated?
•The balance at Dec. 31, 2013 of Work-in-Process Account is VND0.5 billions and Cost of goods sold Account is VND49.5 billions. Make journal entries for the over(under)allocated overhead.
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Quick Check Job WR53 at NW Fab, Inc. required
$200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53?a. $200. b. $350.c. $750.d. $730.
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Quick Check If overhead contains fixed costs, what
will happen to the overhead allocation rate if lower unit sales volume is expected?a. The overhead allocation rate will likely
increase.b. The overhead allocation rate would be
unaffected.c. The overhead allocation rate will likely
decrease.
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Overallocated and Underallocated Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERALLOCATED INCREASE INCREASECost of Goods Sold Work in Process
(Allocated OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERALLOCATED DECREASE DECREASECost of Goods Sold Work in Process
(Allocated OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
Take Tours’ Method
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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and an overhead allocation 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 overallocated.b. $50,000 underallocated.c. $60,000 overallocated.d. $60,000 underallocated.
Quick Check
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End of Chapter 04