A&MIS 2121W. F. Bentz A&MIS 212 – Session 4 William F. Bentz January 10, 2002 Fisher College of Business

A&MIS 2122W. F. Bentz Thursday’ Agenda  Chapter 2, Exercise 3  Chapter 2, Problem 13  Introduce Job-Order Costing Systems

A&MIS 2123W. F. Bentz Meanings of Product Cost R&DDesign Produc- tion Consumer Service Distri- bution Market- ing Inventoriable product costs Reimbursable government contract costs Decision-relevant costs

A&MIS 2124W. F. Bentz The Flow of Costs Inventory System Work in Process Finished Goods Inventory Cost of Goods Sold Payroll System Indirect Costs Assigned

A&MIS 2125W. F. Bentz Cost Assignment  Tracing – direct costs can be traced to cost objects 1.Ability to trace with acceptable accuracy, validity, and cost 2.Cost-effective to trace costs  Cost allocation is the process of assigning costs to cost objects when the costs cannot be traced cost-effectively.

A&MIS 2126W. F. Bentz Job-Costing Job costing, also called job-order costing, is one system used to determine product costs. Job- costing systems are designed to cost single units or projects, or one or more batches of very similar units.

A&MIS 2127W. F. Bentz Job-Costing Applications Job-costing is suited to:  Ship building  Construction projects  Software development projects  Creative productions (e.g., movies)  Consulting projects

A&MIS 2128W. F. Bentz Costing Jobs--Materials  When materials and component parts are taken out of inventory and put into process, the costs of those materials are traced to the job in which they are used. The total cost of all materials used during a period is debited to Work-in-Process. The amount of that debit must equal the total of the material costs charged to all the individual jobs during that period.

A&MIS 2129W. F. Bentz Costing Jobs--Labor  When the total cost of labor is determined each period, that cost is either traced to specific jobs or charged to indirect cost. Workers and their supervisors must have a system for keeping tract of who worked on what jobs.

A&MIS 21210W. F. Bentz Costing Jobs—Indirect Costs  Indirect costs are applied to individual jobs based on predetermined (budgeted) overhead (indirect manufacturing cost) rates (PORs). In the least complex systems, there will be one POR. In more complex processes, there may be several cost drivers involved, with a corresponding POR for each cost driver.

A&MIS 21211W. F. Bentz Examples of indirect costs  Product development costs  Depreciation of factory buildings and equipment  Salaried and wages for indirect labor  Property taxes on factory real estate (land & buildings)  Indirect materials & supplies

A&MIS 21212W. F. Bentz To cost a specific job  Trace the direct costs to each job  For each job record the amount of the driver activity for each POR  Multiply the POR times the amount of activity for each cost driver  Add the cost components to compute the total cost (inventory value) of each job

A&MIS 21213W. F. Bentz The Flow of Costs Adjustment Indirect Costs Allocated Indirect Costs Incurred Cost of Goods Sold Finished Goods Inventory Work in Process Payroll System Inventory System

A&MIS 21214W. F. Bentz Inventory values  The cost of any job is the cumulative amount of the costs charged to that job in the current and previous periods. The cost accumulates until the job is completed. The costs incurred for long- term construction contracts, for example, would be accumulated using a job-cost system.

A&MIS 21215W. F. Bentz Updating the costs of jobs  Direct materials would likely be accounted for using a perpetual inventory system  Direct labor costs would be updated every time a payroll is computed and at the end of every accounting period.  Indirect costs are charged to jobs at the end of every accounting period prior to completion and when they are finished.

A&MIS 21216W. F. Bentz Refinements  One can keep track of categories of cost within a job. For example, a large construction company I once worked for kept track of the cost of; (1) concrete floors, (2) walls & piers, (3) electrical systems, (4) roofing, and (5) mechanical systems. The company used this information to price bids and to select subcontractors on the basis of costs.

A&MIS 21217W. F. Bentz Problem Areas  A major consideration in the quality of the direct cost information lies in the tracing of costs to jobs. A potential problem occurs when workers are involved in several jobs each morning or afternoon and do not keep accurate time records.

A&MIS 21218W. F. Bentz Challenges  The greatest potential for misleading results rests with the application of overhead to individual jobs. The use of multiple cost drivers when appropriate, and the careful separation of overhead costs into cost pools associated with each cost driver used, are key to the determination of job costs.

A&MIS 21219W. F. Bentz