chapter 2 job-order costing and modern manufacturing practices
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Chapter 2 Job-Order Costing and Modern Manufacturing Practices. Presentation Outline. Job-Order vs. Process Costing Cost Classifications in Manufacturing Companies Costs Flows in Manufacturing Companies Job-Order Costing System Allocating Manufacturing Overhead to Jobs - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 2Job-Order Costing and Modern Manufacturing
Practices
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Presentation OutlineI. Job-Order vs. Process Costing
II. Cost Classifications in Manufacturing Companies
III. Costs Flows in Manufacturing Companies
IV. Job-Order Costing SystemV. Allocating Manufacturing Overhead to
JobsVI. Modern Manufacturing Practices
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I. Job-Order vs. Process Costing
A. Job-Order CostingB. Process Costing
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A. Job-Order CostingA job-order costing system is a product costing system used by entities that make (perform) relatively small quantities or distinct batches of identifiable, unique products (services).
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B. Process CostingA process costing
system is a product costing system used by
entities that produce large quantities of
homogeneous goods.
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II. Cost Classifications in Manufacturing Companies
A. Manufacturing CostsB. Nonmanufacturing Costs
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A. Manufacturing Costs(Also called Product Costs)
Direct MaterialsMaterials that can
physically and conveniently traced
to a product.
Direct LaborLabor that can physically and
conveniently tracedto a product.
Manufacturing Overhead
All manufacturing costs other thandirect materialsand direct labor.
Prime CostsConversion
Costs
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B. Nonmanufacturing Costs (Also Called Period Costs)
Marketing or Selling CostsAll costs necessary to secureorders and get the finished
product or service intothe hands of the
customer
Administrative CostsAll costs of general
administration of thecompany as a whole.
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III. Cost Flows in Manufacturing Companies
A. Three Inventory AccountsB. The Schedule of Cost of Goods Manufactured
C. The Cost of Goods Sold CalculationD. Overview of Product Cost FlowsE. Overview of Period Cost Flows
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A. Three Inventory Accounts1. Raw materials inventory – cost of
materials on hand that are used to produce a company’s products.
2. Work in process inventory – cost of goods that are only partially completed.
3. Finished goods inventory – cost of all items that are complete and ready to sell.(Sell Illustration 2-4 on page 37)
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B. The Schedule of Cost of Goods Manufactured
Direct materialsDirect laborManufacturing Overhead
Beginning Work in Process Inventory
Total Work in Process InventoryEnding Work in Process InventoryCost of Goods Manufactured
+++
+
=
=-
Beginning raw materials inventory+ Purchases of raw materials= Raw materials available for use- Ending raw materials inventory
= Raw materials used in production
Plus: current manufacturing costs:
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C. The Cost of Goods Sold Calculation
Merchandising Company
Beginning merchandise inventory + Purchases ------------------------------ = Goods available for sale - Ending merchandise inventory ------------------------------ = Cost of Goods Sold
Manufacturing Company
Beginning finished goods
inventory + Cost of goods manufactured ------------------------------ = Goods available for sale - Ending finished goods inventory ------------------------------ = Cost of Goods Sold
(See Illustration 2-6 on page 40)
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D. Overview of Product Cost FlowsBalance Sheet Income Statement
RawMaterialsInventory
Work inProcess
Inventory
FinishedGoods
Inventory
ManufacturingOverhead
IndirectMaterials
Direct Materials
Labor
Indirect Labor
Direct Labor
Cost of GoodsSold
Raw MaterialPurchases
Cost of Goods Manufactured
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E. Overview of Period Cost FlowsBalance Sheet Income Statement
Prepaid Expenses
SellingExpenses
General & Administrative
Expenses
Selling Expenses
General &Administrative
Expenses
Prepaid expenses does not include inventory.
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IV. Job-Order-Costing SystemA. Materials Requisition Form
B. Materials Requisition Journal EntryC. Employee Time Ticket
D. Labor Journal EntryE. Manufacturing Overhead
F. Entry to Apply Manufacturing Overhead
G. Finished Goods and Cost of Goods Sold
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A. Materials Requisition Form
A materials requisition form is used to request the release of materials
from a company’s storage area. It shows the type, quantity, and cost of material, as well
as the number of the job using the material. See Illustrations 2-11 and 2-10 on page 44.
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B. Materials Requisition Journal Entry
Work-in-Process Inventory xxx (Direct materials)
Manufacturing Overhead xxx (Indirect materials)
Raw Materials Inventory xxx
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C. Employee Time TicketTime tickets keep track of
employee time spent on jobs. (See Illustration 2-12
on page 97). If many workers are on a certain
job, daily labor summaries may be posted to jobs
instead of individual time tickets. (See Illustrations 2-13 on page 46 and 2-10 on
page 44).
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D. Labor Journal EntryWork-in-Process Inventory xxx (Direct labor)
Manufacturing Overhead xxx (Indirect labor)
Salaries & Wages Payable xxx
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E. Manufacturing Overhead
Actual manufacturing overhead costs are recorded as debits in a manufacturing overhead account.
Overhead is usually applied to job cost sheets using one or more predetermined overhead rates. Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual measure of the activity base (cost driver) associated with each job.
(See 2 step process on pages 47-48)
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F. Entry to Apply Manufacturing Overhead
Overhead is applied at the end of the period or at the completion of
production, whichever is earlier. The journal entry to apply overhead is as
follows:
Work-in-Process Inventory xxx
Manufacturing Overhead xxx
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G. Finished Goods and Cost of Goods Sold
When jobs are complete, Finished Goods is increased and Work in Process is reduced:
Finished Goods Inventory xxx Work in Process Inventory xxx
When completed goods are sold, Cost of Goods Sold is increased and Finished
Goods is reduced: Cost of Goods Sold xxx Finished Goods Inventory xxx
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V. Allocating Manufacturing Overhead to Jobs
A. Computing a Predetermined Overhead Rate
B. Allocation of Manufacturing Overhead
C. Why Estimate an Overhead Rate?D. Overapplied and Underapplied
Overhead
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A. Computing a Predetermined Overhead Rate
Estimated Total Overhead CostEstimated Level of Allocation Base
=Predetermined Overhead Rate
$320,00040,000 direct labor hours
=$8 per direct labor hour
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B. Allocation (or Application) of Manufacturing Overhead
Predetermined Overhead Rate x Actual Level of Allocation Base --------------------------------------- Overhead Applied to Product
Manufacturing
Overhead (MOH)Actual MOH
Applied MOH
Work in Process
InventoryDMDLAppliedMOH
$8 x 27 hours = 216
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C. Why Estimate an Overhead Rate?
Overhead rates are estimated because
product costs need to be known for pricing purposes before
production is completed. Using annual estimates smoothes out fluctuations
in overhead costs so customers are treated more consistently in
pricing products.
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D. Overapplied and Underapplied Overhead
Any balance in manufacturing overhead should technically be adjusted through work in process, finished goods, and cost of goods sold since the
overhead flows through these accounts. If the balance is immaterial, it is often adjusted
through cost of goods sold only.(See Journal Entry Examples on Page 54)
Manufacturing Overhead (MOH)
Actual MOH
Applied MOH
Underapplied Overapplied
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VI. Modern Manufacturing Practices
A. Just-In-Time ProductionB. Computer-Controlled
ManufacturingC. Total Quality Management
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A. Just-In-Time (JIT) Production
Suppliers deliver materials just
before they are needed in the
production process.
Production lines are synchronized to remove waiting
time between lines.
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B. Computer-Controlled Manufacturing
Decreasing labor costs are causing many companies to reconsider their overhead
allocation bases. In a highly mechanized companies where
direct labor is a small part of total manufacturing costs, using labor as an
allocation base is generally not appropriate. When equipment is substituted for labor, fixed costs generally increase, and variable
costs decrease.
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C. Total Quality Management
Although there is no right way to implement total quality management (TQM), the
following are usually stressed: Listening to customer needs
Making products right the first time Reducing defective products
Encouraging continuous improvement by workers
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Summary1. Job-Order vs. Process Costing
2. Manufacturing (DM, DL, MOH) and Nonmanufacturing (S&A) Costs
3. Cost flows in a Manufacturing Company4. Manufacturing Overhead
5. JIT, Computer-Controlled Manufacturing, Total Quality Management