Chapter Three Job-Order Costing

3-2 Types of Product Costing Systems Process Costing Job-order Costing  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.  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.

3-3 Types of Product Costing Systems Process Costing Job-order Costing  Many different products, each with individual and unique features, 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.  Many different products, each with individual and unique features, 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.

3-4 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical job order cost applications:  Special-order printing  Building construction Also used in the service industry  Hospitals  Law firms Typical job order cost applications:  Special-order printing  Building construction Also used in the service industry  Hospitals  Law firms

3-5 Quick Check Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels. Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

3-6 Job-Order Costing Direct material Direct labor Manufacturing overhead (OH) Applied to each job using a predetermined rate Manufacturing overhead (OH) Applied to each job using a predetermined rate Traced directly to each job The Job

3-7 Sequence of Events in a Job-Order Costing System Receive orders from customers Schedule jobs Begin production Order materials

3-8 Job-Order Cost Accounting The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate

3-9 Comparing Process and Job-Order Costing

3-10 Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Job-Order Costing – An Overview Direct Materials Direct Labor

3-11 Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. Direct Manufacturing Costs Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

3-12 PearCo Job Cost Sheet Job Number A - 143Date Initiated Date Completed Department B3Units Completed Item Wooden cargo crate Direct MaterialsDirect LaborManufacturing Overhead Req. No.AmountTicketHoursAmountHoursRateAmount Cost SummaryUnits Shipped Direct MaterialsDateNumberBalance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost The Job Cost Sheet

3-13 Measuring Direct Materials Cost Will E. Delite

3-14 Measuring Direct Materials Cost

3-15 Measuring Direct Labor Costs

3-16 Job-Order Cost Accounting

3-17 Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base is a measure, 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.MOH is an indirect cost. 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 production manager’s salary. Some of them are variable Overhead costs and some are fixed overhead costs. 3.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

3-18 The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Manufacturing Overhead Application Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Ideally, the allocation base is a cost driver that causes overhead.

3-19 Actual amount of the allocation based upon the actual level of activity. Based on estimates, and determined before the period begins. Application of Manufacturing Overhead Overhead applied = POHR × Actual activity

3-20 For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job. Overhead Application Rate POHR = $4.00 per DLH $640, ,000 direct labor hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =

3-21 Job-Order Cost Accounting

3-22 Job-Order Cost Accounting

3-23 Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118. The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.

3-24 Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. The Need for a POHR $

3-25 Quick Check 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 WR53? a. $200. b. $350. c. $380. d. $730. 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 WR53? a. $200. b. $350. c. $380. d. $730.

3-26 Quick Check 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 WR53? a. $200. b. $350. c. $380. d. $730. 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 WR53? a. $200. b. $350. c. $380. d. $730.

3-27 Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.

3-28 Job-Order Costing Document Flow Summary Job Cost Sheets Materials Requisition Manufacturing Overhead Account Direct materials Indirect materials Materials used may be either direct or indirect.

3-29 Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account An employee’s time may be either direct or indirect. Direct Labor Indirect Labor

3-30 Job-Order Costing Document Flow Summary Manufacturing Overhead Account Other Actual OH Charges Job Cost Sheets Applied Overhead Materials Requisition Employee Time Ticket Indirect Material Indirect Labor

3-31 Job-Order Costing: The Flow of Costs The transactions (in T- account and journal entry form) that capture the flow of costs in a job-order costing system are illustrated on the following slides.

3-32 Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) ActualApplied Direct Materials Indirect Materials The Purchase and Issue of Raw Materials

3-33 Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

3-34 Cost Flows – Material Usage Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.

3-35 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor The Recording of Labor Costs

3-36 The Recording of Labor Costs The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

3-37 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Recording Actual Manufacturing Overhead Other Overhead

3-38 Recording Actual Manufacturing Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

3-39 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Applying Manufacturing Overhead Other Overhead Overhead Applied Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

3-40 Applying Manufacturing Overhead Work in Process is increased when Manufacturing Overhead is applied to jobs.

3-41 Accounting for Nonmanufacturing Cost Nonmanufacturing costs are not assigned to individual jobs; rather they are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

3-42 Accounting for Nonmanufacturing Cost Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

3-43 Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Transferring Completed Units

3-44 Transferring Completed Units As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

3-45 Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Sold Transferring Units Sold

3-46 Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

3-47 Schedule of Cost of Goods Manufactured Calculates the cost of raw material, direct labor and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period.

3-48 As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Cost Flows

3-49 Conversion costs are costs incurred to convert the direct material into a finished product. Product Cost Flows

3-50 Product Cost Flows All manufacturing costs incurred during the period are added to the beginning balance of work in process.

3-51 Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.

3-52 Product Cost Flows

3-53 Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Raw Materials

3-54 Quick Check Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A.$276,000 B.$272,000 C.$280,000 D.$ 2,000

3-55 Quick Check Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A.$276,000 B.$272,000 C.$280,000 D.$ 2,000

3-56 Quick Check Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A.$555,000 B.$835,000 C.$655,000 D.Cannot be determined.

3-57 Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A.$555,000 B.$835,000 C.$655,000 D.Cannot be determined. Quick Check

3-58 Quick Check Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A.$1,160,000 B.$ 910,000 C.$ 760,000 D.Cannot be determined.

3-59 Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A.$1,160,000 B.$ 910,000 C.$ 760,000 D.Cannot be determined. Quick Check

3-60 Quick Check Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000.

3-61 Quick Check Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000. $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000

3-62 Problems of Overhead Application 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.

3-63 PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

3-64 PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo has overapplied overhead for the year by $30,000. What will PearCo do?

3-65 Disposition of Under- or Overapplied Overhead $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold PearCo’s Method Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. OROR

3-66 Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Quick Check Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000 Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

3-67 Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:

3-68 Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead:

3-69 Allocating Under- or Overapplied Overhead Between Accounts

3-70 Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

3-71 Multiple Predetermined Overhead Rates 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. May be more complex but... May be more accurate because it reflects differences across departments.

3-72 Job-Order Costing in Service Companies Job-order costing is used in many different types of service companies.

3-73 End of Chapter 3