Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 3 Cost Accumulation for Job-Shop & Batch Production Operations

3-2 Learning Objective 1

3-3 vs. Job Costing Process Costing Units of output are distinctive (individual jobs, special orders). Each unit has a relatively high value. Costs can be traced feasibly to the units. Units of output are distinctive (individual jobs, special orders). Each unit has a relatively high value. Costs can be traced feasibly to the units. Units of output are homogeneous (mass production). Each unit has a very low value. Not feasible to trace costs to units. Units of output are homogeneous (mass production). Each unit has a very low value. Not feasible to trace costs to units. Evaluating Major Types of Product-Costing Systems

3-4 vs. Job Costing Process Costing Costs are traced or assigned to individual jobs. Costs are traced to the process. Then an average cost per unit is calculated for the process. Operation Costing is a hybrid often used for batches of similar products with different types of materials. Evaluating Major Types of Product-Costing Systems

3-5 Learning Objective 2

3-6 The model can be used to control use of resources, helping to ensure that goals and objectives are met. The Basic Cost Flow Model

3-7 Learning Objective 3

3-8 Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory. During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to Finished Goods during the month. Also, during May, goods costing $60,000 were sold. Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and Finished Goods Inventory. Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory. During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to Finished Goods during the month. Also, during May, goods costing $60,000 were sold. Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and Finished Goods Inventory. Managing and Using Cost Flow Information - Example

3-9 From Job Cost Records Cost of Goods Sold Managing and Using Cost Flow Information - Example

3-10 THE JOB Direct materials Direct labor Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate Managing and Using Cost Flow Information

3-11 Job Cost Record A record of all production- related resources used on individual jobs. The sum of all the costs in active jobs (unfinished jobs) = Managing and Using Cost Flow Information Work in process inventory

3-12 Work-in-Process Inventory Represents the cost of all the unfinished (in-process) jobs. As individual jobs are completed, their costs are shifted to... Managing and Using Cost Flow Information Finished goods inventory

3-13 Learning Objective 4

3-14 Job-cost accounting systems record cost flows systematically. Transactions are journalized. Info is posted to ledger accounts. Basic Job-Cost Flows

3-15 Accounts related to particular jobs are posted to those Job Work-in- Process (WIP) accounts. Basic Job-Cost Flows

3-16 We can determine Direct Materials Cost and Direct Labor Cost for a Job as we do the work. But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the job using a Predetermined Overhead Rate. How Production Overhead is Assigned to Jobs

3-17 Learning Objective 5

3-18  Identify the items to be included as indirect overhead costs.  Estimate the costs for each of the indirect overhead items.  Select the cost-driver.  Estimate the amount of the cost-driver.  Compute the predetermined overhead rate (POHR).  ÷   Identify the items to be included as indirect overhead costs.  Estimate the costs for each of the indirect overhead items.  Select the cost-driver.  Estimate the amount of the cost-driver.  Compute the predetermined overhead rate (POHR).  ÷  Use of Predetermined Overhead Rates

3-19 Budgeted total manufacturing overhead cost for the coming year Budgeted total units in the allocation base for the coming period POHR = The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead. Use of Predetermined Overhead Rates

3-20 Overhead applied = POHR × Actual activity Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the period. Based on estimates and determined before the period begins. Use of Predetermined Overhead Rates

3-21 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. 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. $ Use of Predetermined Overhead Rates

3-22 Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor hours are 12,000. What is Glass Creations’ predetermined overhead rate per hour? Use of Predetermined Overhead Rates

3-23 For each direct labor hour worked on a job, $30.00 of manufacturing overhead will be applied to the job. POHR = $30.00 per DLH $360,000 12,000 direct labor hours (DLH) POHR = Budgeted total manufacturing overhead cost for the coming period Budgeted total units in the allocation base for the coming period POHR = Use of Predetermined Overhead Rates

3-24 Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials. Job-Order Cost Flows

3-25 Raw Materials Material Purchases Direct Materials Mfg. Overhead Indirect Materials Work in Process Indirect Materials ActualApplied Job-Order Cost Flows Other Mfg. OH

3-26 Next let’s add labor costs and applied manufacturing overhead to the job- order cost flows. Job-Order Cost Flows

3-27 Direct Labor Mfg. Overhead Salaries and Wages Payable Work in Process Direct Materials Overhead Applied to Work in Process Indirect Labor Direct Labor Overhead Applied Indirect Labor ActualApplied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Job-Order Cost Flows Indirect Materials Other Mfg. OH

3-28 Now let’s complete the goods and sell them. Job-Order Cost Flows

3-29 Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Work in Process Direct Materials Direct Labor Overhead Applied Job-Order Cost Flows

3-30 Let’s summarize the document flow we have been discussing. Job-Order Costing Document Flow Summary

3-31 Jobs Materials Requisition Direct material s Indirect materials Manufacturing Overhead Account Materials used may be either direct or indirect. Job-Order Costing Document Flow Summary

3-32 Jobs Employee Time Ticket Manufacturing Overhead Account Direct Labor Indirect Labor An employee’s time may be either direct or indirect. Job-Order Costing Document Flow Summary

3-33 Job-Order Costing Document Flow Summary Work in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Apply

3-34 When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the appropriate account. Debit. Credit. Assigning Overhead to Jobs - Summary

3-35 Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account. Debit.. Credit Assigning Overhead to Jobs - Summary

3-36 The difference between actual overhead for the period and applied overhead for the period is called the OVERHEAD VARIANCE. Assigning Overhead to Jobs - Summary

3-37 We compare the Actual Overhead to Applied Overhead Actual > Applied Overhead is UNDERAPPLIED Actual < Applied Overhead is OVERAPPLIED Overhead Variance

3-38 Let’s return to Glass Creations and see what we should do if actual and applied overhead are not equal. Overhead Variance

3-39 SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000 SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000 Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour. Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour. Overhead Variance

3-40 Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour. Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour. SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000 SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000 Overhead is overapplied for the year by $20,000. What will Glass Creations do? Overhead Variance

3-41 Work in Process Finished Goods Cost of Goods Sold $20,000 may be allocated to these accounts. $20,000 may be closed directly to cost of goods sold. Cost of Goods Sold Glass Creations’ Method OR Overhead Variance

3-42 Glass Creations’ Manuf. Overhead Actual overhead costs $370,000 $20,000 overapplied Glass Creations’ Cost of Goods Sold Unadjusted Balance Adjusted Balance $20,000 Overhead Applied to jobs $390,000 Overhead Variance

3-43 Glass Creations’ Method Overhead Variance

3-44 Learning Objective 6

3-45 Actual Costing, Normal Costing and Standard Costing Actual Costing? Normal Costing? Actual direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is assigned to jobs when the actual overhead amounts are known. Actual direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is assigned to jobs when the actual overhead amounts are known. Actual direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is applied to jobs by using predetermined overhead rates. Actual direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is applied to jobs by using predetermined overhead rates. Standard Costing? Standard direct costs (material and labor) are assigned to jobs using pre- determined rates. Manufacturing overhead is applied by using predeter- mined (standard) overhead rates. Standard direct costs (material and labor) are assigned to jobs using pre- determined rates. Manufacturing overhead is applied by using predeter- mined (standard) overhead rates.

3-46 Learning Objective 7

3-47 Job Order Costing in Service Organizations Similar to costing for manufacturing. Most costs are related to labor and overhead. Standard costing is used in preparing bids.

3-48 Job-Order Costing and the Value Chain R& D Desi gn Supply Production Marketing D istri- bution Customer service Value of products and services Value of products and services Job-order costing emphasizes production in the value chain. We must remember that the other components are also important contributors to profitability.

3-49 Learning Objective 8

3-50 Job and Project Management Complex jobs require scheduling and progress evaluations. Gantt charts are used for scheduling major activities. Progress evaluations compare: budgeted and actual costs actual time and estimated time during the life of the project.

3-51 The following conditions can lead to improper job costing: Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Cost misrepresentation in “cost- plus” contracts. The following conditions can lead to improper job costing: Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Cost misrepresentation in “cost- plus” contracts. Job Cost and Project Improprieties: An Ethical Issue

3-52 Recording Job-Order Costs – Typical Accounting Entries Let’s look at summary journal entries for a job- order costing system. We’ll omit the numbers in order to focus on accounts.

3-53 Raw material purchases are recorded in an inventory account. Cost Flows – Material Purchases

3-54 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. Cost Flows – Material Usage

3-55 The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead. Cost Flows – Labor

3-56 In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. Cost Flows – Actual Overhead

3-57 Work in Process is increased when Manufacturing Overhead is applied to jobs. Cost Flows – Overhead Applied

3-58 As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process. Cost Flows – Cost of Goods Manufactured

3-59 When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods. Cost Flows – Sales

3-60 Nonmanufacturing costs (period expenses) are charged to expense as they are incurred. Cost Flows – Period Expenses

3-61 End of Chapter 3