copyright © the mcgraw-hill companies, inc 2011 systems design: job-order costing chapter 5

Copyright © The McGraw-Hill Companies, Inc 2011

SYSTEMS DESIGN: JOB-ORDER COSTING

Chapter 5


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Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single product.

One unit of product is indistinguishable from other units of product.

The identical nature of each unit of product enables assigning the same average cost per unit.





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ProcessCosting

Job-orderCosting







Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)

Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)


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ProcessCosting

Job-orderCosting

Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing

or allocating costs to each job, and maintaining cost records for each job.




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ProcessCosting

Job-orderCosting





Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)

Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)


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Comparing Process and Job-Order Costing

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated byIndividual

Job Department

Average cost computed by Job Department


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Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct material and direct labor costs to each

job as work is

performed.

Charge direct material and direct labor costs to each

job as work is

performed.

Job-Order Costing – An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Manufacturing Overhead, including

indirect materials and indirect labor, are

allocated to all jobs rather than directly traced to each job.


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PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-10Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

The Job Cost Sheet


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Measuring Direct Materials Cost

PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-10Job No. A - 143Department B3

Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00

116.00$

Authorized Signature Will E. Delite


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Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

Measuring Direct Materials Cost


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Measuring Direct Labor Costs

PearCo Employee Time Ticket

Time Ticket No. 36 Date 3-5-10

Employee I. M. Skilled Station 42

Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143

Totals 8.00 11.00$ 88.00$ A-143

Supervisor C. M. Workman


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Job-Order Cost Accounting




Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Product Cost


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Overhead Allocation

Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to

individual jobs.

Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to

individual jobs.

We use an allocation base because:

1. It is impossible or difficult to trace overhead costs to particular jobs.

2. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.

3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.


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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.

$

Why Apply of Manufacturing Overhead?


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The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

Application of Manufacturing Overhead


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Estimate the level ofproduction for the period.

Estimate the total amount of theallocation base in the denominator that

would be required for that level of production.

Estimate the total manufacturing overheadcost in the numerator that would be incurred

for the estimated amount of the allocation base.

Predetermined overhead rates arecalculated using a three-step process.


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Overhead applied = POHR × Actual activity

The predetermined overhead rate (POHR) is based on estimates and determined before the

period begins.

Actual amount of the allocation is based upon the actual level of activity.


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For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =



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Job Number A - 143 Date Initiated 3-4-10Date Completed 3-5-10

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total CostUnit Product Cost


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Job Number A - 143 Date Initiated 3-4-10Date Completed 3-5-10

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Product Cost 118$


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Interpreting the Average Unit Cost

The average unit cost should not be interpretedas the cost that would actually be incurred if an

additional unit were produced.

Fixed overhead would not change if another unitwere produced, so the incremental cost of another unit is something less than $118.

The average unit cost should not be interpretedas the cost that would actually be incurred if an

additional unit were produced.

Fixed overhead would not change if another unitwere produced, so the incremental cost of another unit is something less than $118.


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An Extended Exampleof Job-Order Costing

Rand Company produces gold and silvercommemorative medallions. At the beginning of April,Rand company had no finished goods inventory and

one job (Job A) in process, a special mintingof 1,000 gold medallions commemorating the

invention of motion pictures. Manufacturing costsincurred to date on Job A total $30,000. Job A will be

completed in April and Job B, an order for 10,000 slivermedallions commemorating the fall of the Berlin Wall,

will be started in April and finished in a subsequent month.

Rand Company produces gold and silvercommemorative medallions. At the beginning of April,Rand company had no finished goods inventory and

one job (Job A) in process, a special mintingof 1,000 gold medallions commemorating the

invention of motion pictures. Manufacturing costsincurred to date on Job A total $30,000. Job A will be

completed in April and Job B, an order for 10,000 slivermedallions commemorating the fall of the Berlin Wall,

will be started in April and finished in a subsequent month.


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Given this information, we will nowtrack the flow of Rand Company’s

raw materials, direct labor, andoverhead costs for April and preparean income statement for the month.

Given this information, we will nowtrack the flow of Rand Company’s

raw materials, direct labor, andoverhead costs for April and preparean income statement for the month.


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Beginning balance 30,000$ Direct materials 28,000

Job Cost SheetJob A

Beginning balance -$ Direct materials 22,000

Job Cost SheetJob B

Indirect materials 2,000$

Manufacturing OverheadIncurred

Job A direct materials 28,000$ Job B direct materials 22,000 Indirect materials 2,000 Total 52,000$

Materials Requisition Form


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Beginning balance 30,000$ Direct materials 28,000 Direct labor 40,000

Job Cost SheetJob A

Beginning balance -$ Direct materials 22,000 Direct labor 20,000

Job Cost SheetJob B

Indirect materials 2,000$ Indirect labor 15,000


Job A direct labor 40,000$ Job B direct labor 20,000 Indirect labor 15,000 Total 75,000$

Various Time Tickets


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Beginning balance 30,000$ Direct materials 28,000 Direct labor 40,000

Job Cost SheetJob A

Beginning balance -$ Direct materials 22,000 Direct labor 20,000

Job Cost SheetJob B

Indirect materials 2,000$ Indirect labor 15,000 General factory overhead 78,000


Factory utilities 21,000$ Rent on factory equipment 16,000 Factory property taxes 13,000 Factory insurance 7,000 Manufacturing depreciation 18,000 Miscellaneous factory overhead costs 3,000 Total general factory overhead 78,000$

Manufacturing Overhead Accounts


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Overhead Allocation for Extended Example of Job-Order Costing

Let’s assume the following:• Rand’s predetermined overhead rate is $6 per machine hour.• During April, 10,000 machine hours were worked on Job A.• During April, 5,000 machine hours were worked on Job B.

Let’s assume the following:• Rand’s predetermined overhead rate is $6 per machine hour.• During April, 10,000 machine hours were worked on Job A.• During April, 5,000 machine hours were worked on Job B.

Job A: $6 per machine hour × 10,000 machine hours = 60,000$

Job B: $6 per machine hour × 5,000 machine hours = 30,000

Total overhead applied to jobs 90,000$

Overhead Applied to Jobs


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Job A: $6 per machine hour × 10,000 machine hours = 60,000$

Job B: $6 per machine hour × 5,000 machine hours = 30,000

Total overhead applied to jobs 90,000$

Overhead Applied to Jobs

Beginning balance 30,000$ Direct materials 28,000 Direct labor 40,000 Manufacturing overhead applied 60,000 Total 158,000$

Job Cost SheetJob A

Beginning balance -$ Direct materials 22,000 Direct labor 20,000 Manufacturing overhead applied 30,000 Total 72,000

Job Cost SheetJob B

Indirect materials 2,000$ Indirect labor 15,000 General factory overhead 78,000 Total 95,000$



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Underapplied or Overapplied Overhead

The difference between the overhead cost applied to Work in Process and the actual overhead costs of a

period is referred to as either underapplied or overapplied overhead.

Underapplied overhead exists when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Overapplied overhead exists when the amount of overhead applied to jobs

during the period using the predetermined overhead

rate is greater than the total amount of overhead actually incurred during the period.


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Actual manufacturing overhead 95,000$

Manufacturing overhead applied 90,000

Underapplied manufacturing overhead 5,000$

Recall the following facts for Rand Company:

Underapplied or Overapplied Overhead


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Disposition of Under- or Overapplied Overhead

We will alwaysassume that underapplied or

overapplied overhead is closed outto Cost of Goods Sold.

Overapplied overheadis deducted from

Cost of Goods Sold.

Underapplied overheadis added to

Cost of Goods Sold.


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Prepare an Income Statement

Let’s recall some key facts from the Rand Company example:

Job A, which consisted of 1,000 gold medallions, was completed during April,

but Job B was not completed.

Job A, which consisted of 1,000 gold medallions, was completed during April,

but Job B was not completed.

The unit product cost for each of the 1,000 gold medallions included in Job A was

$158 ($158,000 ÷ 1,000 units).

The unit product cost for each of the 1,000 gold medallions included in Job A was

$158 ($158,000 ÷ 1,000 units).

The overhead for April was underappliedby $5,000.

The overhead for April was underappliedby $5,000.


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The Direct Method of DeterminingCost of Goods Sold

750 of the 1,000 gold medallions included in Job A were shipped to

customers by the end of April.

750 of the 1,000 gold medallions included in Job A were shipped to

customers by the end of April.

Cost of the medallions sold to customers

750 units @ $158 per unit = $118,500

Cost of the medallions sold to customers

750 units @ $158 per unit = $118,500


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The Direct Method of DeterminingCost of Goods Sold

Unadjusted cost of goods sold 118,500$

Add: Underapplied overhead 5,000

Cost of goods sold 123,500$


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Computing Ending FinishedGoods Inventory

250 of the 1,000 gold medallions included in Job A were unsold and in ending finished goods inventory.

250 of the 1,000 gold medallions included in Job A were unsold and in ending finished goods inventory.

Cost of the medallions in ending finished goods inventory

250 units @ $158 per unit = $39,500

Cost of the medallions in ending finished goods inventory

250 units @ $158 per unit = $39,500


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To complete the incomestatement, let’s assume that

Rand Company’s total sales revenueand selling and administrative expenses

for April were $225,000 and $87,000, respectively.


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Sales 225,000$ Cost of goods sold 123,500 Gross margin 101,500 Selling and administrative expenses 87,000 Net operating income 14,500$

Rand CompanyIncome Statement

For the Month Ending April 30


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Multiple Predetermined Overhead Rates

To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead

rate.

To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead

rate.

Large companies often use multiple

predetermined overhead rates,

Large companies often use multiple

predetermined overhead rates,

Which is more complex but . . .

Which is more complex but . . .

it is more accurate because it reflects differences across

departments.

it is more accurate because it reflects differences across

departments.


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End of Chapter 5

copyright © the mcgraw-hill companies, inc 2011 systems design: job-order costing chapter 5

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