12-1 Fundamental Managerial Accounting Concepts Thomas P. Edmonds Bor-Yi Tsay Philip R. Olds Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Fifth Edition

12-2 CHAPTER 12 Job-Order, Process, and Hybrid Cost Systems

12-3 Learning Objective LO1 Distinguish between job-order and process cost systems.

12-4 oAccumulates costs by individual products. oCompanies use job-order cost systems when they need to know the costs of individual products or batches of products. oAccumulates costs by individual products. oCompanies use job-order cost systems when they need to know the costs of individual products or batches of products. Cost Systems and Type of Product Job-order cost systems may be used by:  Walt Disney Production to determine the cost of a particular film.  Rust Engineering to determine the cost of an office building constructed.  Boeing to determine the cost of an airplane manufactured. Job-Order Cost System Process Cost System

12-5 Job-Order Cost System Process Cost System oAllocates costs evenly to homogeneous products. oUnit product cost is determined by dividing the total product cost by the number of units produced during the accounting period. oAllocates costs evenly to homogeneous products. oUnit product cost is determined by dividing the total product cost by the number of units produced during the accounting period. Process cost systems may be used by:  Texaco in its oil refining operations.  Dow Chemical in the manufacture of chemicals.  General Mills in the manufacture of cereal. Process cost systems may be used by:  Texaco in its oil refining operations.  Dow Chemical in the manufacture of chemicals.  General Mills in the manufacture of cereal. Cost Systems and Type of Product

12-6 Begin production Receive orders from customers Order materials Cost Flows Schedule work

12-7 Job-Order Cost Flow Income statement Boat 101 Materials Labor & OH Boat 104 Materials Labor & OH Boat 102 Materials Labor & OH Cost of goods sold Boat 105 Materials Labor & OH Boat 103 Materials Labor & OH Product costs Work in process inventory Finished goods inventory Cost of goods available for sale kept separately for all boats Materials Labor Overhead

12-8 WIP WIP mixing packing Process Cost Flow Product costs Materials Labor Overhead Income statement Cost of goods sold Finished goods inventory Materials Labor Overhead Transferred- in costs Materials Labor Overhead Cost of goods available for sale

12-9 Hybrid Accounting Systems A hybrid accounting system uses some features from both job-order and process cost systems. Hybrid systems are commonly used in the manufacture of personal computers. Many models are mass produced and sold as a package. Other systems are custom built to the specifications of the customer. Custom built systems normally sell at a premium compared to standard systems.

12-10 Learning Objective LO2 Identify documentation used in a job-order cost system.

12-11 Documentation in a Job-Order Cost System job cost sheet The primary document for tracking the costs associated with a given job is the job cost sheet.

12-12 Documentation in a Job-Order Cost System

12-13 John Smyth Documentation in a Job-Order Cost System

12-14 Documentation in a Job-Order Cost System

,400 × $3.90 = $5,460 Documentation in a Job-Order Cost System

12-16 Learning Objective LO3 Explain how events in a job-order cost system affect financial statements.

12-17 Benchmore started the month of January, 2009, with the following account balances. Job-Order Cost System Illustrated

12-18 Event 1 Benchmore Boat Company paid $14,000 cash to purchase raw materials. Job-Order Cost System Illustrated

12-19 Event 2 Benchmore used $17,000 of raw materials in the process of making boats. Job-Order Cost System Illustrated

12-20 Event 3 Benchmore paid $1,200 cash to purchase production supplies. Job-Order Cost System Illustrated

12-21 Event 4 Benchmore paid $8,000 cash to production employees who worked on Boat 103. Job-Order Cost System Illustrated

12-22 Event 5 Benchmore applied estimated manufacturing overhead costs of $6,240 to the Boat 103 job. Predetermined overhead rate Total estimated overhead costs Total estimated direct labor hours = ÷ $15,990 ÷ 4,100 = $3.90 per direct labor hour Job-Order Cost System Illustrated

12-23 Event 6 Benchmore transferred $36,240 of product costs for completed Boat 103 from work in process inventory to finished goods inventory. Job-Order Cost System Illustrated

12-24 Event 7 Benchmore paid $24,500 cash for selling and administrative expenses. Job-Order Cost System Illustrated

12-25 Event 8 Benchmore paid $12,000 cash to production employees for work on Boats 104 and 105. Job-Order Cost System Illustrated

12-26 Event 9 Benchmore applied estimated manufacturing overhead costs to boats 104 and 105. Job-Order Cost System Illustrated

12-27 Event 10 Benchmore paid $10,100 cash for utilities and other indirect production costs. Job-Order Cost System Illustrated

12-28 Event 11 Benchmore recognized $4,000 of actual manufacturing equipment depreciation. Job-Order Cost System Illustrated

12-29 Event 12 Benchmore counted the supplies on hand at year- end and recognized actual overhead cost for the supplies used. Job-Order Cost System Illustrated

12-30 Event 13 Benchmore sold Boat 101 for $91,000 cash. Job-Order Cost System Illustrated

12-31 Event 14 Benchmore recognized cost of goods sold for Boat 101. Job-Order Cost System Illustrated

12-32 Event 15 Benchmore closed the Manufacturing Overhead account, reducing cost of goods sold by $400. Job-Order Cost System Illustrated

12-33 Job-Order Cost System Illustrated

12-34 Learning Objective LO4 Explain how events in a process cost system affect financial statements.

12-35 Process Cost System Illustrated Janis Juice Company uses three distinct processes to produce cans of apple juice. Raw materials (whole apples) enter the Extraction Department where juice concentrate is extracted from whole fruit. The juice extract passes to the Mixing Department where Janis adds water, sugar, food coloring, and preservatives. The juice mixture then moves to the Packaging Department where it is canned and boxed for shipment.

12-36 The company’s trial balance as of January 1, 2009, is shown below: Process Cost System Illustrated

12-37 Event 1 Janis paid $84,000 cash to purchase raw materials. Process Cost System Illustrated

12-38 Event 2 Janis processed $26,720 of whole fruit to produce juice extract. Process Cost System Illustrated

12-39 Event 3 Janis paid $38,000 cash to production employees who worked in the Extraction Department. Process Cost System Illustrated

12-40 Event 4 Janis applied estimated manufacturing overhead costs to the Extraction Department work in process inventory. Predetermined overhead rate Total estimated overhead costs Total estimated direct labor dollars = ÷ $96,000 ÷ $120,000 = $0.80 per direct labor dollar Process Cost System Illustrated

12-41 Learning Objective LO5 Calculate equivalent units and prepare a cost of production report.

12-42 Equivalent Units Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

12-43 Equivalent Units Two half completed products are equivalent to one completed product. So, 10,000 units 60% complete are equivalent to 6,000 complete units. + = 1

12-44 A Janis engineer estimated the 85,000 units in ending work in process inventory were 40 percent complete. Janis computes the total equivalent units processed in the extraction department as follows: Equivalent Units

12-45 Event 5 Janis finished processing some of the whole fruit and transferred the related cost from the Extraction Department work in process inventory account to the Mixing Department work in process inventory account. Cost per equivalent unit = Total processing cost Number of equivalent whole units = $0.22 per equivalent unit $117, ,000 Process Cost System Illustrated

12-46 Event 5 Janis used the cost per equivalent unit to allocate the total cost incurred in the extraction department between the amount transferred to the mixing department and the amount in the extraction department’s ending work in process inventory as follows: Process Cost System Illustrated

12-47 The allocation of costs between units transferred and ending inventory can be summarized in a cost of production report. See next slide for Janis’ cost of production report for the Extraction Department Process Cost System Illustrated

12-48 Extraction Department Cost of Production Report

12-49 Event 6 Janis mixed (used) $24,400 of additives with the extract transferred from the Extraction Department. Process Cost System Illustrated

12-50 Event 7 Janis paid $48,000 cash to production employees who worked in the Mixing Department. Process Cost System Illustrated

12-51 Event 8 Janis applied estimated manufacturing overhead costs to the Mixing Department work in process inventory. $48,000 × $0.80 = $38,400 Process Cost System Illustrated

12-52 Event 9 Janis finished mixing some of the juice extract with additives and transferred the related cost from the Mixing Department Work in Process Inventory account to the Packaging Department Work in Process Inventory account. Process Cost System Illustrated

12-53 Event 10 Janis added containers and other packaging materials costing $32,000 to work in process in the Packaging Department. Process Cost System Illustrated

12-54 Event 11 Janis paid $43,000 cash to production employees who worked in the Packaging Department. Process Cost System Illustrated

12-55 Event 12 Janis applied estimated manufacturing overhead costs to the Packaging Department work in process inventory. $43,000 × $0.80 = $34,400 Process Cost System Illustrated

12-56 Event 13 Janis finished packaging some of the juice and transferred the related cost from the Packaging Department work in process inventory account to the finished goods inventory account. Process Cost System Illustrated

12-57 Event 14 Janis paid $106,330 cash for actual overhead costs. Process Cost System Illustrated

12-58 Event 15 Janis sold 490,000 cans of juice for $1 per can. Process Cost System Illustrated

12-59 Event 16 Janis recognized cost of goods sold for the 490,000 cans of juice sold. 490,000 × $0.69 = $338,100 Process Cost System Illustrated

12-60 Event 17 Janis paid $78,200 cash for selling and administrative expenses. Process Cost System Illustrated

12-61 Event 18 Janis closed the Manufacturing Overhead account and increased the Cost of Goods Sold account by $3,130. Process Cost System Illustrated

12-62 The ending trial balance for Janis Juice Company is shown below: Process Cost System Illustrated

12-63 End of Chapter 12