Job Order Costing3

8/4/2019 Job Order Costing3

1/41

JOB-ORDER COSTING


2/41

OBJECTIVES

Problem Statement

Define Job Costing vs. Process Costing

Understand cost flows in Job Costing

Apply OH rates to WIP Prepare COGM and COGS


3/41

PROBLEM STATEMENT

Bharat Company uses Job Order Costing

Estimates for computing Predetermined OverheadRate:


4/41

TYPESOF COSTING SYSTEMS USEDTODETERMINE PRODUCT COSTS

ProcessCosting

Job-orderCosting

Many different products

Manufactured to order.

Cost are tracked to a job.

Each job has a cost record.


5/41

TYPESOF COSTING SYSTEMS USEDTODETERMINE PRODUCT COSTS

ProcessCosting

Job-orderCosting

Typical job order cost applications:

Special-order printing

Building construction Also used in the service industry

Hospitals

Law firms


6/41

JOB-ORDER COSTING

Directmaterial

Directlabor

Manufacturing

overhead (OH)Applied to each

job using apredetermined

rate

The Job


7/41

SEQUENCEOF EVENTSINA JOB-ORDERCOSTING SYSTEM

Receive orders fromcustomers

Schedulejobs

Begin production

Ordermaterials


8/41

ManufacturingOverhead

Job No. 1

Job No. 2

Job No. 3

Chargedirect

material anddirect labor

costs to eachjob as workis performed.


Direct Materials

Direct Labor


9/41

Apply

overhead toeach jobusing a

predeter-mined rate.


Direct Materials

Direct Labor

Job No. 1

Job No. 2

Job No. 3ManufacturingOverhead


10/41

Bharat Company Job Cost Sheet

Job Number A - 143 Date Initiated 13-08-10

Date Completed

Department B3 Units Completed

Item

Direct Materials Direct Labor Manufacturing OverheadReq. 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

JOB-ORDER COST ACCOUNTING


11/41

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

APPLICATIONOF MANUFACTURING OVERHEAD

The predetermined overhead rate (POHR) used toapply overhead to jobs is determined before the

period begins.

Ideally, the allocation base isa cost driver that causes

overhead.


12/41

Actualamount of the allocationbase such as units produced,direct labor hours, or machine

hours incurred during the period.

Based onestimates, anddetermined before the

period begins.

APPLICATIONOF MANUFACTURING OVERHEAD

Overhead applied = POHR Actual activity


13/41

THE NEEDFORA PREDETERMINEDMANUFACTURING 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.

$


14/41

OVERHEAD APPLICATION EXAMPLE

BharatCo applies overhead based on direct laborhours. Totalestimated overhead for the year is

$640,000. Totalestimatedlabor cost is $1,400,000 andtotal estimated labor hours are 160,000.

What is BharatCos predetermined overhead rate perhour?


15/41

OVERHEAD APPLICATION EXAMPLE

POHR = 1.65

237,000

144,000POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =


16/41

Lets summarize

the document flowin a job-order

costing system.

JOB-ORDER COSTINGDOCUMENT FLOW SUMMARY


17/41


Job CostSheets

MaterialsRequisition

ManufacturingOverhead Account

Directmaterials

Indirectmaterials

Materials usedmay be either

direct orindirect.


18/41


Job CostSheets

Employee Time Ticket


An employeestime may be eitherdirect or indirect.

Direct Labor

Indirect Labor


19/41



OtherActual OHCharges

Job CostSheets

Applied

Overhead

MaterialsRequisition

EmployeeTime Ticket

Indirect

Material

Indirect

Labor


20/41

JOB-ORDER SYSTEM COST FLOWS

Lets examine the

cost flows in a job-order costing

system..


21/41

Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)Direct

MaterialsDirect

Materials

IndirectMaterials

Indirect

Materials

Actual Applied



22/41


Next lets addlaborcosts andapplied

manufacturing

overhead.


23/41

Mfg. Overhead

Salaries andWages Payable

Work in Process(Job Cost Sheet)DirectMaterials

OverheadApplied

OverheadApplied to Work

inProcess

DirectLabor

DirectLabor

IndirectLabor

IndirectLabor

IndirectMaterials

Actual Applied

If actual and appliedmanufacturing overheadare not equal, a year-endadjustment is required.



24/41


Now lets complete

the goods and sellthem.


25/41

Finished Goods

Cost ofGoodsMfd.

Cost ofGoods

Mfd.

Cost of Goods Sold

Work in Process(Job Cost Sheet)DirectMaterials

DirectLabor

OverheadApplied

Cost ofGoodsSold

Cost ofGoodsSold



26/41


Lets return to BharatCoand see what we will do

if actual and applied

overhead are not equal.


27/41

OVERHEAD APPLICATION

BharatCos actual overhead for the year was Rs.236,000.

How much total overhead was applied to BharatCos jobsduring the year? Use BharatCos predetermined

overhead rate of $4.00 per direct labor hour.

SOLUTION

Applied Overhead = POHR Actual Direct Labor Hours

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

BharatCo hasoverappliedoverhead for the yearby $30,000. What will

BharatCo do?


28/41

Work inProcess

FinishedGoods

Cost ofGoods Sold

$30,000may be allocated

to these accounts.

OVERAPPLIEDAND UNDERAPPLIEDMANUFACTURING OVERHEAD

$30,000 may beclosed directly to

cost of goods sold.

Cost ofGoods Sold

BharatCos Method

OR


29/41

OVERAPPLIEDAND UNDERAPPLIEDMANUFACTURING OVERHEAD

BharatCos

Mfg. OverheadActual

overheadcosts

$650,000

$30,000overapplied

BharatCos Cost

of Goods SoldUnadjusted

Balance

$30,000

$30,000

AdjustedBalance

OverheadApplied

to jobs

$680,000


30/41

QUICK CHECK

What effect will the underapplied overhead have onBharatCos cost of goods sold (after adjustment)?

a. Cost of goods sold will increase.

b. Cost of goods sold will be unaffected.c. Cost of goods sold will decrease.


31/41

QUICK CHECK

What effect will the underapplied overhead have onBharatCos net operating income (afteradjustments)?

a. Net operating income will increase.

b. Net operating income will be unaffected.

c. Net operating income will decrease.


32/41

OVERAPPLIEDAND UNDERAPPLIEDMANUFACTURING OVERHEAD - SUMMARY

Alternative 1 Alternative 2

If Manufacturing Close to Cost

Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process

(Applied OH is less Finished Goods

than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process

(Applied OH is greater Finished Goods

than actual OH) Cost of Goods Sold

BharatCos Method


33/41

JOB-ORDER COSTING TYPICALACCOUNTING ENTRIES

Lets look atsummaryjournalentries for a job-

order costingsystem.


34/41

COST FLOWS MATERIAL PURCHASES

Raw material purchases are recorded in aninventory account.


35/41

COST FLOWS MATERIAL USAGE

Direct materials issued to a job increase Work inProcess and decrease Raw Materials. Indirectmaterials used are charged to ManufacturingOverhead and also decrease Raw Materials.


36/41

COST FLOWS LABOR

The cost of direct labor incurred increases Workin Process and the cost of indirect labor

increases Manufacturing Overhead.


37/41

COST FLOWS ACTUAL OVERHEAD

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

charged to the Manufacturing Overheadaccount as they are incurred.


38/41

COST FLOWS OVERHEAD APPLIED

Work in Process is increased when ManufacturingOverhead is applied to jobs.


39/41

COST FLOWS PERIOD EXPENSES

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


40/41

COST FLOWS COSTOF GOODSMANUFACTURED

As jobs are completed, the Cost of GoodsManufactured is transferred to Finished Goods from

Work in Process.


41/41

COST FLOWS SALES

When finished goods are sold, two entries arerequired: (1) to record the sale; & (2) to record

COGS and reduce Finished Goods.

Documents

Job Order Costing3