JOB ORDER COSTING CHAPTER 17 Teacher Version

ENJOY THE FOLLOWING SHORT VIDEOS: Machine versus Man Legos Wilson Footballs

COST ACCOUNTING SYSTEMS MEASURE RECORD REPORT Managers use product costs for setting product prices, controlling operations and developing financial statements. Product Costs

HOW DO YOU DETERMINE THE COST OF PRODUCING ANY PRODUCT? 1.Identify and record the costs that go into making the item during each step of the manufacturing process. 2.As the product moves through the production process, the costs of direct materials, direct labor and factory overhead are recorded. 3.When the product is complete, the costs that have been recorded are added up to determine the cost of each product.

Job Order Provides product costs for each quantity per job For companies that manufacture custom products New construction homes Replacement windows Class rings Wedding invitations Apparel Process Cost Provides product costs for each department For companies that manufacture units that are indistinguishable from each other Oil refineries Paper products Chemical/food processors TYPES OF SYSTEMS

APPLY IT: JOB ORDER OR PRODUCT COST Golf tees Custom designed fencing for a specific golf course Pet grooming Golf balls Dog food Private golf lessons

INFORMATION NEEDED IN A JOB ORDER SYSTEM: DOCUMENTS (SAMPLES ON PAGE ) InformationDocument Amount of each type of materials on handMaterial Ledger – record of amount on hand Quantity of material used on each orderMaterials Requisition – authorization for release of inventory from storage Labor cost used on each orderTime Tickets – amount of time spent working on each job and labor cost Total cost of making orderJob Cost Sheet – lists materials, labor, overhead Cost incurred on jobs in processCost Ledger – job cost sheets for all orders in process Total cost of all completed jobsFinished Goods Ledger – job cost sheets for all finished orders

ALLOCATION OF OVERHEAD Assume you are responsible for planning a banquet for your school’s DECA club. The banquet will feature a dinner, followed by a speaker. The cost associated with the banquet are as follows: Now assume that 50 students will attend the banquet. If you want to break even on this event, how much do you need to charge for a ticket? Meals$10 per personTraceable cost Beverages$1 per personTraceable cost Use of Banquet Room$50Allocated cost Speaker’s Fee$100Allocated cost How much per ticket? Meals + beverages = $11 per person Allocate room and fee: = 150/50 students = $3 Ticket cost to break even will be: $11 + $3 = $14 per person

ALLOCATION OF PRE-DETERMINED OVERHEAD Costs of manufacturing a product that cannot be traced to a specific job are called overhead. You must allocate these costs to determine what each product costs. $1 million in overhead expenses Machine hours will be a reasonable way to allocate overhead Run machines for 40,000 hours during the year. Formula to calculate overhead rate is: Estimated total factory overhead costs Estimated activity base (hours) $1,000,000 40,000 hours = $25/hour of machine time Now calculate the overhead that would be allocated to a product that uses 3.5 hours of machine time. $25 * 3.5 hours = $ This cost will be added to the DM & DL.

PRACTICE PROBLEM Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of Job WR 53? Traceable costs are $200 direct materials 10 $15 = $150 $760,000 = $38/hour = $380 20,000 hours

JOB ORDER COSTING FOR DECISION MAKING Accumulates and records product costs by jobs Resulting total and unit product costs can be compared to similar jobs Compare overtime Compare to expected costs Used for cost evaluation and control Let’s view Exhibit 10 and make some decisions. Same type & number of guitars so direct materials cost per unit should be about the same. Used more materials for Job 54 than Job 63

POSSIBLE EXPLANATIONS FOR DIFFERENCES 1.A new employee not properly trained cut wood for Job 63; thereby causing excess waste and scrap. 2.Wood used for Job 63 was purchased from a new supplier. Poor quality, creating excessive waste and scrap. 3.Cutting tools needed repair and were not properly maintained resulting in excessive waste and scrap. 4.Instructions attached to the job were incorrect. Wood was cut according to instructions result: wood had to be recut and initial cuttings scrapped.

FLOW OF COSTS FOR A SERVICE BUSINESS Can be applied to any organization that needs to determine the cost of its product. The product is the service provided. Used by an advertising agency to determine the cost to produce an ad for a customer. Used by an accountant to determine the cost of preparing a tax return. Used by a plumber to determine the cost to clean a drain.