Managerial Accounting, Chapter 3 by Crosson, Needles

Chapter 3

Costing Systems:

Job Order Costing

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Product Cost Information and the Management Process

• Objective 1– Discuss the role that information about costs plays

in the management process, and explain why unit cost is important.


Planning

• Manufacturing Companies– Develop budgets

– Establish product prices

– Plan production volumes

• Service Organizations– Develop budgets

– Establish prices

– Set sales goals

– Determine human resource needs


Performing

• In manufacturing companies, managers make decisions about:– Whether to drop a product line– Adding a production shift– Outsourcing manufacture of a subassembly– Bidding on a special order– Negotiating a selling price


Performing (cont’d)

In service organizations, managers make decisions about:– Bidding on jobs– Dropping a current service– Outsourcing a task– Adding staff– Negotiating a price


EvaluatingManufacturing Companies

– To determine the source of a quality problem, managers study

• The design

• Materials purchasing

• Manufacturing processes

– Once the problem is identified, changes can be made to ensure the product’s quality.

Service Organizations

– To determine the source of increased operating costs, managers may break the unit cost of a service into its components.

– This will help determine where costs can be cut or how the service can be performed more efficiently.


Communicating Manufacturing Companies

– Use product unit costs to determine inventory balances for the company’s balance sheet and the cost of goods sold for its income statement

Service Organizations

– Use unit costs of services to determine cost of sales for the income statement

Managers in both environments prepare performance evaluation reports:

Compare actual unit costs and targeted costs, as well as actual and targeted nonfinancial measures of performance

Analyze the data in the performance evaluation reports to determine whether they are achieving cost goals for their products or services


Stop & Review

Q. How do managers in a manufacturing company use cost information in the planning stage of the management process?

A. Managers use cost information to develop budgets, establish product prices, and plan production volumes.


Job Order Versus Process Costing

• Objective 2– Distinguish between the two basic types of product

costing systems, and identify the information that each provides.


Product Costing System

Set of procedures used to account for an organization’s product costs

Provides timely and accurate unit cost information for:

Pricing Cost planning and control Inventory valuation Financial statement preparation


Two Basic Types of Product Costing Systems

Job Order Costing

Used by companies that make unique or special-order products

Process Costing

Used by companies that produce large amounts of similar products or liquid

products or that have long, continuous production runs

of identical products


Job Order Costing System

The costs of direct materials, direct labor, and overhead are traced to and assigned to a specific job order or batch

of products.

Uses a single Work in Process Inventory account

Costs are traced using a subsidiary ledger of job order cost cards.


Job Order Cost Card

A document on which all costs incurred in the production of a

particular job order are recorded

These costs are used to measure the cost of each completed unit.


Process Costing System

• A process costing system uses several Work in Process Inventory accounts—one for each process, department, or work cell

• Costs of direct materials, direct labor, and overhead are first traced to processes, departments, or work cells.

• Costs are then assigned to the products manufactured by these processes, departments, or work cells during a specific period.


Characteristics of Job Order Costing and Process Costing Systems


Job Order Versus Process Costing

• Few production processes are a perfect match for either system.– The typical product costing system is a hybrid of

both job order costing and process costing.


Stop & Review

Q. What are the main differences between a job order costing system and a process costing system?

A. Job order costing system

• Used by companies that produce large, unique, or special-order items

• Uses a single Work in Process Inventory account

Process costing system

• Used by companies that produce large amounts of similar products or liquid products that have long, continuous production runs

• Uses several Work in Process Inventory accounts


Job Order Costing in a Manufacturing Company

• Objective 3– Explain the cost flow in a manufacturer’s job order

costing system.


Job Order Costing System

• Traces the costs of a specific order or batch of products to– Provide timely, accurate cost information– Facilitate smooth and continuous flow of that

information

The core of a job order costing system is the job order cost cards and subsidiary

ledgers.


Cost Flow in a Job Order Costing System for a Manufacturing Company

• Direct materials costs– Cart frame– Wheels– Upholstered seats– Windshield– Motor– Rechargeable battery

• Direct labor costs– Wages of two production

workers

• Overhead costs– Indirect materials cost for

• Upholstery zippers

• Cloth straps

• Wheel lubricants

• Screws and fasteners

• Silicon

– Indirect labor costs for

• Moving and inspection

– Depreciation on manufacturing plant and equipment

– Utilities, insurance, and property taxes

Augusta, Inc., builds customized and general-purpose golf carts.


Cost Flow in a Job Order Costing System for a Manufacturing Company (cont’d)

Three inventory accounts are used. All have subsidiary ledgers backing up their totals.

Augusta, Inc., builds customized and general-purpose golf carts.

Materials Inventory • Materials Ledger

Work in Process Inventory• Job Order Cost Cards

Finished Goods Inventory • Finished Goods Ledger


Cost Flow in a Job Order Costing System for a Manufacturing Company (cont’d)

Wheels

Materials Ledger

Cart Frames

Indirect MaterialsBeg. Bal. 30

Beg. Bal. 370

Beg. Bal. 830Job CC

Finished Goods Ledger

Beg. Bal. —Job CC

Job JB

Job Order Cost Cards

Costs from the previous period 400

Materials InventoryWork in Process

InventoryFinished Goods

InventoryBeg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400

Subsidiary Ledgers

General Ledger


MaterialsMaterials Inventory

Cart Frames

Wheels

Indirect Materials

Work in Process Inventory

Finished Goods Inventory

Job CCJob CC

Job JB

Cost of Goods Sold

Materials Ledger Job Order Cost Cards Finished Goods Ledger

Beg. Bal. 1,230 Beg. Bal. —Beg. Bal. 400

Beg. Bal. 30

Beg. Bal. 370

Beg. Bal. 830 Beg. Bal. —Costs from the previous period 400572

340

912

1. Purchased cart frames costing $572 and wheels costing $340, for a total purchase of $912.

This purchase increases the balances in the Materials Inventory account and the corresponding accounts in the materials ledger.


Materials (cont’d)Materials Inventory

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

2. Purchased indirect materials costing $82.

This purchase also increases the balance in the Materials Inventory account, as well as the balance in the Indirect Materials account in the materials ledger.



Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

3. Production requested cart frames costing $1,240 and wheels costing $640, totaling $1,880.

The Materials Inventory account is decreased and the Work in Process Inventory account is increased by

$1,880.



Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

1,240

640

3. Production requested cart frames costing $1,240 and wheels costing $640, totaling $1,880.

The corresponding accounts in the materials ledger must also be decreased by the appropriate amounts.



Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

1,240

640

Direct materials 1,038

Direct materials 842

3. Of the $1,880 of direct materials, $1,038 was used for Job CC and $842 was used for Job JB.

These amounts must be recorded on the job order cost cards for each job.


Overhead


Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

1,240

640



3. Production also requested $96 of indirect materials.

The Materials Inventory account is decreased and the Overhead account is increased. The corresponding account in the materials ledger must be decreased.

96

96

Indirect materials costs flow to the Overhead account rather than to specific jobs..

96


Overhead

LaborMaterials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

1,240

640



96

96

2,400

4. Production employees earned $2,400 of wages during the period.

The Factory Payroll account is increased and the Wages Payable account (not shown) is also increased.

Factory Payroll is a clearing account (holds cost only until they are distributed to the various production accounts).

96


Overhead

Labor (cont’d)Materials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

1,240

640



96

96

2,400 1,640

1,640

4. Of this amount, $1,640 was direct labor and $760 was indirect labor.

The Factory Payroll account is decreased; the Work in Process Inventory account and the Overhead account are affected. 96

760

760

Indirect labor costs flow to the Overhead account rather than to specific jobs.


These amounts must be recorded on the job order cost cards for each job.

Overhead

Labor (cont’d)Materials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

1,240

640



96

96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

5. Job CC required $1,320 of direct labor and Job JB required $320.

Direct labor costs for Job CC and Job JB total $1,640, the amount recorded in the Work in Process Inventory account.

96


Overhead

6. Other indirect costs totaling $295 were paid during the period.

OverheadMaterials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

912

The Overhead account is increased.

82

82

1,8801,880

1,240

640



96

96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

295

96


240

Overhead

7. A $240 adjustment was made for factory-related depreciation.

Overhead (cont’d)Materials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

912

The Overhead account is increased.

82

82

1,8801,880

1,240

640



96

96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

295

96


240

Overhead

8. Total overhead of $1,394 is applied, with $1,122 (85% of $1,320) going to Job CC and $272 (85% of $320) going to Job JB.

Overhead (cont’d)Materials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

912

The Overhead account is decreased and the Work in Process Inventory account is increased by $1,394 ($1,320 + $320). Overhead must be recorded on the job order cost cards for each job.

82

82

1,8801,880

1,240

640



96

96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

295

1,394

1,394

96

Overhead 1,122

Overhead 272


240

Overhead

9. Job CC was completed and moved to the finished goods storeroom. Its completed cost was $3,880.

Completed UnitsMaterials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

912

The Work in Process Inventory account is decreased and the Finished Goods Inventory account is increased. The job order cost card is also completed and transferred to the finished goods file.

82

82

1,8801,880

1,240

640



96

96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

295

1,394

1,394

Overhead 1,122

3,8803,880

96Overhead 272

Completed cost 3,880

3,880


240

Overhead

10. One general-purpose golf cart was sold.

Sold UnitsMaterials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold



Beg. Bal. 30

Beg. Bal. 370


340

912

The Finished Goods Inventory account is decreased and the Cost of Goods Sold account is increased. The finished goods ledger is decreased by the cost of the unit sold.

82

82

1,8801,880

1,240

640



96

96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

295

1,394

1,394

Overhead 1,122Completed cost 3,880

3,8803,880

3,880

Two units were completed in Job CC. The cost of each was $1,940 ($3,880 ÷ 2).

1,940 1,940

96Overhead 272

1,940


96

240

Overhead

11. The Overhead account is closed.

Reconciliation of Overhead CostsMaterials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold

Job Order Cost Cards Finished Goods Ledger


Beg. Bal. 30

Beg. Bal. 370


340

912

The ending balance of the Overhead account is transferred to the Cost of Goods Sold account.

82

82

1,8801,880

1,240

640



96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

295

1,394

1,394


3,8803,880

3,880

To prepare financial statements at the end of the period, actual and applied overhead must be reconciled.

1,940 1,940

1,940

31,394

—

1,391

3

End Bal. 1,937End Bal. 1,940

End Bal. 1,940

96Overhead 272


End. Bal. 1,434

96

240

Overhead

Reconciliation of Overhead Costs (cont’d)Materials Inventory

Factory Payroll

Cart Frames

Wheels

Indirect Materials



Job CCJob CC

Job JB

Cost of Goods Sold

Job Order Cost Cards Finished Goods Ledger


Beg. Bal. 30

Beg. Bal. 370


340

91282

82

1,8801,880

1,240

640



96

2,400 1,640

1,640

760

760

Direct labor 1,320

Direct labor 320

295

1,394

1,394


3,8803,880

3,880

1,940 1,940

1,940

31,394

—

1,391

3

End. Bal. 1,937

End of period account balances are determined for all permanent accounts.

End. Bal. 1,940

End. Bal. 1,940

End. Bal. 1,434

These balances will now be carried over to the beginning of the next accounting

period.

End. Bal. 16

End. Bal. 70

End. Bal. 162

End. Bal. 248

96Overhead 272


Stop & ReviewQ. What accounts are increased and decreased

when materials are requested for the production process?

A. Materials Inventory is decreased and Work

in Process Inventory is increased.


Stop & Review (cont’d)

Q. Why must overhead costs be reconciled at the end of the accounting period?

A. The balance of the Cost of Goods Sold account must reflect actual product costs, which includes actual overhead costs.


Manufacturer’s Job Order Cost Card and Computation of Product Unit Cost • Objective 4

– Prepare a job order cost card, and compute a job order’s product unit cost.


Job Order Cost Cards and the Job Order Costing System

• In a job order costing system, all costs are accumulated in one Work in Process Inventory account.– A subsidiary ledger of job order cost cards is used

to trace these costs to specific jobs.– As costs are incurred, they are classified by job

and recorded on the appropriate card.


Job Order Cost Card

• A document on which all costs incurred in the production of a particular job order are recorded– These costs are used to measure the cost of each

completed unit.


Job Order Cost Card (cont’d)


Job Order Cost Card and Computation of Product Unit Cost

Job order cost cards are used to record:• Direct materials, direct labor, and overhead

costs– Direct materials and direct labor costs are recorded

as incurred.– Overhead is applied at the predetermined rate.

• Job order number, product specifications, name of customer, date of the order, projected completion date, and cost summary


Job Order Cost Card and Computation of Product Unit Cost (cont’d)

• Job order cost cards for incomplete jobs make up the subsidiary ledger for the Work in Process Inventory account.– The ending balance in the Work in Process

Inventory account should equal the total of the costs shown on the job order cost cards.


Job Order Cost Card and Computation of Product Unit Cost (cont’d)

• When a job is completed, the costs on the job order cost card are totaled.– The product unit cost is computed by dividing the

total costs for the job by the number of units produced.

• This amount is entered on the job order cost card and will be used to value items in inventory.


Stop & Review

Q. Which costs are recorded as incurred on the job order cost card?

A. Direct materials and direct labor costs


Job Order Costing in a Service Organization

• Objective 5– Apply job order costing to a service

organization.


Job Order Costing in a Service Organization

• The most important cost is labor.– Accounted for using time cards

• The cost flow of services is similar to that of manufactured products.

• Many service organizations base jobs on cost-plus contracts.– The customer pays all costs incurred on the job

plus a predetermined amount of profit.


Job Order Costing in a Service Organization Illustrated

Gartner Landscaping Service employs 15 people. The service overhead cost for landscape design is 40 percent of design labor cost, and service overhead cost for landscape installation is 50 percent of installation labor cost.

Gartner has a 15 percent cost-plus contract with Rico Corporation.

Total costs incurred for Rico job $5,400

Profit margin ($5,400 x .15) 810

Total contract revenue $6,210

Rico Corporation is billed for $6,210.


Job Order Cost Card in a Service Organization


Stop & Review

Q. Which accounts are affected when direct labor is charged to production?

A. The Factory Payroll account is decreased and the Work in Process Inventory account is increased by the amount of direct labor charged to production.


Job Order Costing Versus Project Costing

• Objective 6– Distinguish between job order costing and project

costing.


Projects

• Take a long time to complete

• Require the talents of many departments, consultants, and subcontractors

• Complex jobs– Made up of many tasks– Take a broad, multidisciplinary approach to the

production of goods or services


Job Order Costing Versus Project Costing

Project Costing

• Links many different job orders and processes

• Transfers costs from one job or process to another

• Collects and summarizes costs in a variety of ways

• Provides appropriate internal controls to manage complicated projects

Job Order Costing

• Focuses on individual products or customer requests

• Accumulates costs on the job order cost card


Stop & Review

Q. Is a job order costing system a type of project costing system?

A. No. A project costing system is a type of job order costing system. It is a complex costing system that uses the concepts of job order costing (collecting the costs of direct materials, direct labor, and overhead) for complex projects such as building skyscrapers and developing software programs.


Chapter Review

1. Discuss the role that information about costs plays in the management process, and explain why unit cost is important.

2. Distinguish between the two basic types of product costing systems, and identify the information that each provides.

3. Explain the cost flow in manufacturer’s job order costing system.


Chapter Review (cont’d)

4. Prepare a job order cost card, and compute a job order’s product unit cost.

5. Apply job order costing to a service organization.

6. Distinguish between job order costing and project costing.

Documents

Managerial Accounting, Chapter 3 by Crosson, Needles