1 Copyright © 2008 Cengage Learning South-Western. Heitger/Mowen/Hansen Job-Order Costing Chapter Four Fundamental Cornerstones of Managerial Accounting

2 Job-Order Production and Costing Firms operating in job-order industries produce a wide-variety of services or products that are quite distinct from each other. Printing Example industries: Construction Furniture making Medical and dental services Automobile repair Beautician services

3 The key feature is that the cost of one job differs from that of another job and must be kept track of separately. Job-Order Production and Costing

4 Process Production and Costing Firms in process industries mass- produce large quantities of similar or homogeneous products. Food Example industries: Cement Chemicals Petroleum

5 The key feature is that the cost of one unit of a product is identical to the cost of another. Process Production and Costing

6 Production Costs in Job-Order Costing Direct Materials Direct Labor Job #1Job #2Job #3 Direct materials and direct labor are fairly easy to trace to individual jobs.

7 Overhead Overhead is not so easy to trace to individual jobs. Instead overhead is applied to production. Production Costs in Job-Order Costing

8 Actual Costing Actual costs of direct materials, direct labor, and overhead are used to determine unit cost. Actual overhead can be hard to track

9 Problems With Actual Costing and Overhead Many overhead costs are not incurred uniformly through the year Uneven production levels ◦Give rise to fluctuating unit overhead costs

10 Normal Costing Determines unit cost by adding actual direct materials, actual direct labor, and estimated overhead. Virtually all firms use normal costing.

11 Importance of Unit Costs to Manufacturing Firms Unit costs are essential for: Valuing inventory Determining income Making important decisions

12 Importance of Unit Costs to Service Firms Unit costs are used to determine: profitability Feasibility of introducing new services

13 Normal Costing and Estimating Overhead Applying overhead is a three step process: Calculate the predetermined overhead rate. Apply overhead to production throughout the year. Reconcile the difference between the total actual overhead incurred during the year and the total overhead applied to production.

14 Calculate the Predetermined Overhead Rate Formula: Overhead Rate = Estimated Annual Overhead Firm’s best estimate of manufacturing-related costs, such as factory-related costs, indirect materials, and indirect labor.

15 Formula: Overhead Rate = Estimated Annual Activity Level Estimated Annual Overhead Also called the “Cost Driver” Calculate the Predetermined Overhead Rate

16 Formula: Overhead Rate = Estimated Annual Activity Level Estimated Annual Overhead Both overhead and activity level are estimated because the overhead rate must be calculated at the beginning of the year. Calculate the Predetermined Overhead Rate

17 Applying Overhead to Production Formula: Predetermined overhead rate x Actual activity level Applied Overhead =

18 Over or Underapplied Overhead Actual Overhead > Applied Overhead = Underapplied Overhead Actual Overhead Applied Overhead < = Overapplied Overhead

19 Disposition of Overhead Variance At year end, costs reported on the financial statements must be actual, not estimated, amounts. Overhead Variance is assigned to Cost of Goods Sold

20 Disposition of Under and Overapplied Overhead Actual Overhead > Applied Overhead = Underapplied Overhead The amount of the underapplied overhead would be ADDED to Cost of Goods Sold

21 Actual Overhead > Applied Overhead = Underapplied Overhead Actual Overhead Applied Overhead < = Overapplied Overhead The amount of the overapplied overhead would be SUBTRACTED from Cost of Goods Sold Disposition of Under and Overapplied Overhead

22 Departmental Overhead Rates Plantwide Overhead Rate Departmental Overhead Rate Estimated overhead for a department divided by the estimated activity level for that same department A single overhead rate calculated using all estimated overhead for a factory and dividing by the estimated activity for the entire plant

23 Overhead Rates Machining Dept. overhead rate = Estimated Overhead Estimated Machine Hours Machining Department’s overhead is applied on the basis of machine hours

24 Unit Costs in the Job-Order System Materials used on the job (Direct Materials) Labor worked on the job (Direct Labor) Applied overhead Unit cost of a job is the total cost of:

25 Job-Order Cost Sheet Contains all information pertinent to a job ◦Job description ◦Cost of materials, labor, and overhead Jobs are named or numbered Total of all unfinished job-order cost sheets should equal the ending balance of the Work in Process account

26 Materials Requisition Form Provides information for assigning direct materials costs to jobs Useful for maintaining proper control over a firm’s inventory of direct materials

27 Job Time Tickets Employees fill out a time ticket that identifies: His or her name Wage rate Hours worked on each job Cost accounting department posts the cost of direct labor to individual jobs

28 Source Documents as Sources for Account Balances Work in Process Finished Goods Cost of Goods Sold Total of all the job-order cost sheets for the unfinished jobs. Total of all the job-order cost sheets for the finished but unsold jobs. Total of all the job-order cost sheets for the sold jobs.

29 Accounting for Materials Purchases are added to Raw Materials Inventory account As they are used in production, direct materials are moved from Raw Materials to Work in Process ◦Materials used in production are classified by job and recorded in job-order cost sheets Raw Materials Purchases Direct Materials used in production

30 Accounting for Direct Labor Cost Time tickets indicate the amount of labor spent on each job ◦These labor costs are added to the job- order cost sheets ◦Total of all the direct labor from all the jobs is recorded as a debit in the Work in Process account Work in Process Direct Materials Direct Labor

31 Accounting for Overhead Normal costing is used Actual overhead is not assigned directly to jobs Overhead is applied to each job using a predetermined rate. Work in Process Direct Materials Direct Labor Applied Overhead

32 Accounting for Actual Overhead Costs Never enters the Work in Process account Costs are recorded as debits in the Manufacturing Overhead control account At the end of the period, actual overhead is reconciled with applied overhead

33 Accounting for Finished Goods Costs of completed jobs are transferred from the Work in Process account to the Finished Goods account Work in Process Direct Materials Direct Labor Applied Overhead Finished Goods Completed jobs

34 Accounting for Sold Goods Once the job is sold, it is added to the cost of goods sold which is reported on the Income Statement Finished GoodsCost of Goods Sold Sold jobs Completed jobs Sold jobs

35 Cost of Goods Manufactured Statement To ensure the accuracy in computing these costs, a cost of goods manufactured statement is prepared

36 Accounting for Cost of Goods Sold When jobs are sold, ◦Finished Goods inventory is decreased ◦Cost of Goods Sold is increased The selling price is recognized by: ◦Increasing (crediting) Sales Revenue ◦Increasing (debiting) Accounts Receivable (or Cash)

37 Normal and Adjusted Cost of Goods Sold Normal Cost of Goods Sold Adjusted Cost of Goods Sold Cost of Goods Sold before an adjustment for an overhead variance Cost of Goods Sold after adjusting for an overhead variance

38 Accounting for Nonmanufacturing Costs Manufacturing costs are not the only costs incurred by a firm Selling and general administrative are period costs These period costs are shown on the Income Statement