Job order and process costing ppt

Job-Costing SystemsJob-Costing Systems

Chapter 3Chapter 3

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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

Introduction

• How much does it cost?

• Managers ask this question for many purposes, including formulating overall strategies, product and service-emphasis decisions and pricing decisions.

• This chapter presents basic concepts of job costing.

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Learning Objectives

1 Describe the building block concept of costing systems

2 Distinguish between job costing and process costing

3 Outline a six-step approach to job costing

4 Distinguish actual costing from normal costing

5 Understand job costing in service and manufacturing contexts

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Learning Objectives (Continued)

6 Describe key source documents used in job- costing systems

7 Understand how the steps in the production process are tracked in a job-costing system

8 Describe alternative methods of dealing with period-end under- or overallocated indirect costs.

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Learning Objective 1

Describe the building block concept of costing systems

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Building Block Conceptsof Costing Systems

• The following five terms constitute the building blocks that will be used in this chapter:

1 A cost object is anything for which a separate measurement of costs is desired.

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Building Block Conceptsof Costing Systems (Continued)

2 Direct costs of a cost object are costs that are related to the particular cost object and can be traced to it in an economically feasible way.

3 Indirect costs of a cost object are costs that are related to the particular cost object but cannot be traced to it in an economically feasible way.

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• The relationship among these three concepts is as follows:

Direct Costs

Cost Tracing

Cost Objec

tIndirect Costs

Cost Allocation

Cost Assignment

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4 Cost pool is a grouping of individual cost items.

5 Cost allocation base is a factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object.

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Distinguish between jobcosting and process costing

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Job-Costing and Process-Costing Systems

• There are two basic systems used to assign costs to products or services:

1 Job costing

2 Process costing

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Job-Costing and Process-Costing Systems (Continued)

• In a job-costing system, the cost object is an individual unit, batch or lot of a distinct product or service called a job.

• In process costing, the cost object is masses of identical or similar units or a product or service.

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• Process costing allocates costs among all the products manufactured during that period.

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Job-costing Process-costing system system Distinct units Masses of identical of a product or similar units of a or service product or service

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Outline a six-step approachto job costing

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General Approach to Job Costing

• The following six-step approach is used to assign actual costs to individual jobs:

1 Identify the chosen cost object(s).

2 Identify the direct costs of the job.

3 Select the cost-allocation base(s).

4 Identify the indirect costs associated with each cost-allocation base.

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General Approach to JobCosting (Continued)

5 Compute the rate per unit of each cost-allocation base used to allocate indirect coststo the job.

6 Compute the cost of the job by adding all direct and indirect costs assigned to it.

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• D.L. Sports manufactures various sporting goods.

• D.L. is planning to sell a batch of 25 special machines (Job No. 100) to Healthy Gym for £104,800.

• A key issue for D.L. Sports in determining this price is the cost of doing the job.

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• Step 1: The cost object is Job No. 100.

• Step 2: Identify the direct costs of Job No. 100.

• Direct material = £45,000

• Direct manufacturing labour = £14,000

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• Step 3: Select the cost-allocation base.

• D.L. chose machine hours as the only allocation base for linking all indirect manufacturing costs to jobs.

• Job No. 100 used 500 machine hours.

• 2,480 machine hours were used by all jobs.

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• Step 4: Identify the indirect costs.

• Actual manufacturing overhead costs were £65,100.

• Step 5: Compute the rate per unit.

• Actual indirect cost rate is £65,100 ÷ 2,480 = £26.25 per machine hour.

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• Step 6: Compute the indirect costs allocated to the job.

• £26.25 per machine hour × 500 hours = £13,125.

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• Step 7: Compute the cost of Job No. 100.

Direct materials £45,000

Direct labour 14,000

Factory overhead 13,125

Total £72,125

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• What is the gross margin of this job?

Revenues £104,800

Cost of goods sold 72,125

Gross margin £ 32,675

What is the gross margin percentage?

£32,675 ÷ £104,800 = 31.2%

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Two Major Cost Objects

1 Products

2 Responsibility centres

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Distinguish actual costingfrom normal costing

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Actual Costing System

Actual costing system is a job-costing system that uses actual costs to determine the cost of individual jobs.

• Actual costing is a method of job costing that traces indirect costs to a cost object by using the actual direct-cost rate(s) times the actual quantity of the direct cost input(s).

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Normal Costing

Normal costing is a costing method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).

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Normal Costing (Continued)

• Assume that D.L. Sports budgets £60,000 for total manufacturing overhead costs and 2,400 machine hours.

• What is the budgeted indirect-cost rate?

• £60,000 ÷ 2,400 = £25 per hour

• How much indirect cost was allocated to Job No. 100?

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Normal Costing (Continued)

• 500 machine hours × £25 = £12,500

• What is the cost of Job No. 100 under normal costing?

• Direct materials 45,000 Direct labour 14,000 Factory overhead 12,500

Total £71,500

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Longer Time Period Used to Compute Indirect-Cost Rates

• The numerator reason (indirect costs):

• The shorter the period, the greater the influence of seasonal patterns on the level of costs.

• The denominator reason (quantity of the allocation base):

• The need to spread monthly fixed indirect costs over fluctuating levels of output.

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Understand job costing in service and manufacturing contexts

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Variations of Normal Costing

• Service industries perform jobs that differ from each other.

• Job costing is very useful in these industries.

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Variations of Normal Costing (Continued)

• Carmen and Associates provide home health services.

• Their budget includes the following:

• Total direct labour costs: £400,000

• Total indirect costs: £96,000

• Total direct (professional) labour hours: 16,000

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• What is the budgeted direct labour cost rate?

• £400,000 ÷ 16,000 = £25

• What is the budgeted indirect cost rate?

• £96,000 ÷ 16,000 = £6

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• Suppose a patient uses 25 direct labour hours.

• Assuming no other direct costs, what is the cost to Carmen and Associates?

• Direct labour: 25 hours × £25 = £625

Indirect costs: 25 hours × £ 6 = 150 Total

£775

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Management Control and Technology

• In what ways can modern technology help managers in making decisions?

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Management Control and Technology (Continued)

• Modern technology provides managers with quick and accurate product-cost information that facilitates the management and control of jobs.

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Describe key source documentsused in job-costing systems

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What are Source Documents?

• Source documents are the original records that support journal entries in an accounting system.

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What is a Job Cost Record?

• Job cost record is a document that recordsand accumulates all the costs assigned to a specific job.

• It is the basic record for product costing.

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What is a MaterialsRequisition Record?

• A material requisition record is the form used to charge job cost records and departments for the cost of direct materials used on specific jobs.

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What is a Labour Time Record?

• A labour time record is used to charge job cost records and departments for labour time used on specific jobs.

• It shows the time each employee spent on individual jobs.

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Understand how the steps in the production process are tracked in a

job-costing system

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General Ledger andSubsidiary Ledgers

• The Work-in-Progress Control account presents the totals of the separate job-cost records pertaining to all unfinished jobs.

• The job-cost record and Work-in-Progress Control account track job costs from the time jobs are started until they are completed.

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Transactions

Purchase of materials Conversion into and other work-in-progress manufacturing stock inputs

Conversion into Sale of finished finished goods stock goods

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Transactions (Continued)

• Purchase of £80,000 worth of materials (direct and indirect) on credit.

• Materials Accounts Payable Control Control 1. 80,000 1. 80,000

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• Materials costing £70,000 were sent to the manufacturing plant floor.

• £45,000 were issued to Job No. 100 and £10,000 to Job No. 102.

• £15,000 of indirect materials were issued.

• What is the journal entry?

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• Work-in-Progress Control: Job No. 10045,000 Job No. 102

10,000 Factory Overhead Control 15,000 Materials Control 70,000

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Materials Work-in-Progress Control Control 1. 80,000 2. 70,000 2. 55,000

Manufacturing Overhead Control Job No. 100 2. 15,000 2. 45,000

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• Total manufacturing payroll for the period was £22,000.

• Job No. 100 incurred direct labour costs of £14,000 and Job No. 102 incurred direct labour costs of £3,000.

• £5,000 of indirect labour was also incurred.


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• Work-in-Progress Control: Job No. 10014,000 Job No. 102

3,000 Manufacturing Overhead Control 5,000 Wages Payable

22,000

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Wages Payable Work-in-Progress Control Control 3. 22,000 2. 55,000 3. 17,000

Manufacturing Overhead Control Job 100 2. 15,000 2. 45,000 3. 5,000 3. 14,000

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• Wages payable were paid.

• Wages Payable Control 22,000 Cash Control 22,000

• Wages Payable Cash Control Control 4. 22,000 3. 22,000 4. 22,000

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• Assume that depreciation for the period is £26,000.

• Other manufacturing overhead incurred amounted to £19,100.


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• Manufacturing Overhead Control 45,100 Accumulated Depreciation Control

26,000 Various Accounts19,100

• What is the balance of the Manufacturing Overhead Control?

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• Manufacturing Overhead Control 2. 15,000 3.

5,000 5. 45,100 Balance 65,100

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• £62,000 of overhead was allocated to the various jobs of which £12,500 went to Job No. 100.


• Work-in-Progress Control 62,000 Manufacturing Overhead Control 62,000

• What are the balances of the control accounts?

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• Manufacturing Overhead Work-in-Progress Control Control 2. 15,000 6. 62,000 2. 55,000 3. 5,000 3. 17,000 5. 45,100 6. 62,000 Bal. 3,100 Bal. 134,000

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• The cost of Job 100 is:

Job No. 100 2.45,000 3. 14,000 6. 12,500 Bal. 71,500

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• Jobs costing £104,000 were completed and transferred to finished goods, including Job No. 100.

• What effect does this have on the control accounts?

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Work-in-Progress Finished Goods

Control Control 2. 55,000 7. 104,000 7. 104,000 3. 17,000 6. 62,000 Bal. 30,000

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• What is the journal entry to transfer Job No. 100?

• Finished Goods Control 71,500 Work-in-Progress Control 71,500

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• Job No. 100 was sold for £104,800.


• Accounts Receivable Control104,800 Revenues 104,800 Cost of Goods Sold 71,500 Finished Goods Control

71,500

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• What is the balance in the Finished Goods Control account?

• £104,000 – £71,500 = £32,500

• Assume that marketing and administrative salaries were £9,000 and £10,000.


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• Marketing and Administrative Costs 19,000 Salaries Payable Control 19,000

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Describe alternative methods of dealing with period-end under- or

overallocated indirect costs

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Budgeted Indirect Costs

• Budgeted indirect-cost rates can be assigned to individual jobs on an ongoing and timely basis.

• However, budgeted rates are based on estimates made up to 12 months before actual costs are incurred.

• Adjustments may need to be made by year end.

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End-of-Period Adjustments

• Underallocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred.

• Overallocated indirect costs occur when the allocated amount of indirect costs is greater than the actual amount incurred.

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End-of-Period Adjustments (Continued)

• Under- or overallocated indirect costs =Indirect costs incurred – Indirect costs allocated

• Underapplied (or overapplied) indirect costs and underabsorbed (or overabsorbed) indirect costs are equivalent terms.

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• Assume the following annual data for D.L. Sports: Manufacturing Overhead Control Bal. 65,100

Manufacturing Overhead Applied Bal. 62,000

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• How was the allocated overhead determined?

• 2,480 machine hours × £25 budgeted rate

= £62,000

• £65,100 – £62,000 = £3,100 (under-allocated)

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• Reasons for the underallocated amount:

– Numerator reason (indirect costs)

– Denominator reason (quantity of allocation base)

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• Actual manufacturing overhead costs of £65,100 are more than the budgeted amount of £60,000.

• Actual machine hours of 2,480 are more than the budgeted amount of 2,400 hours.

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• Approaches to disposing underallocated or overallocated overhead:

1 Adjusted allocation rate approach

2 Proration approaches

3 Immediate write-off to Cost of Goods Sold approach

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Adjusted Allocation Rate Approach

• Adjusted allocation rate approach restates all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted cost rates.

• Actual indirect-cost rate is computed at the end of the year.

• Every job to which indirect costs were allocated during the year has its amount recomputed.

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Adjusted Allocation RateApproach (Continued)

• Actual manufacturing overhead (£65,100) exceeds manufacturing overhead allocated (£62,000) by 5%.

• 3,100 ÷ 62,000 = 5%

• Actual manufacturing overhead rate is £26.25 per machine hour (£65,100 ÷ 2,480) rather than the budgeted £25.00.

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Adjusted Allocation Rate Approach

• D.L. Sports could increase the manufacturing overhead allocated to each job by 5%.

• Manufacturing overhead allocated to Job No. 100 under normal costing is £12,500.

• £12,500 × 5% = £625

• £12,500 + £625 = £13,125 which equals actual manufacturing overhead.

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Proration Approach

• Proration is the spreading of under- or over-allocated overhead among ending Work-in- Progress, Finished Goods and Cost of Goods Sold.

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Proration Approach (Continued)

• Basis to prorate underallocated or overallocated overhead:

1 Total amount of manufacturing overhead allocated (before proration)

2 Ending balances of Work-in-Progress, Finished Goods and Cost of Goods Sold

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Proration Approach “A”

• Manufacturing overhead component of year-end balances (before proration):

• Work-in-Progress £23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total

£62,000 100%

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Proration Approach “A” (Continued)

• £3,100 × 38% = £1,178 to Work-in-Progress

• £3,100 × 42% = £1,302 to Finished Goods

• £3,100 × 20% = £620 to Cost of Goods Sold

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Proration Approach “A” (Continued)

Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 1,302

0 33,802 Cost of Goods Sold Work-in-Progress 71,500

30,000 620 1,178 72,120

31,178

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Proration Approach “B”

• Ending balance of Work-in-Progress, Finished Goods and Cost of Goods Sold

• Work-in-Progress £30,000 22% Finished Goods 32,500 24% Cost of Goods Sold 71,500 54% Total

£134,000 100%

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Proration Approach “B” (Continued)

Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100

744 0 33,244 Cost of Goods Sold Work-in-Progress 71,500 30,000 1,674 682 73,174 30,682

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Immediate Write-off to Cost of Goods Sold Approach

Manufacturing Overhead 65,100 62,000 3,100 0 Cost of Goods Sold

71,500 3,100 74,600

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Choosing Among Approaches

• The adjusted allocation rate approach provides the most accurate record of individual job costs.

• Indirect-cost-allocated components provide the most accurate stock and cost of goods sold figures.

• Immediate write-off approach is the simplest.

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End of Chapter 3End of Chapter 3