IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 1 Product Costing: Job Order Costing Chapter 4 Objectives:  Explain the types of costing systems  Explain the strategic role of product costing  Explain the flow of costs in a job costing system December 13 – 27, 2005

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 2 Product Costing Product Costing: ____________________________________________ ___________________________________________________________ Several different product costing systems are available, including… MethodsProduct Costing Systems Cost accumulation method Cost Measurement Method Overhead Assignment Method

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 3 Product Costing System The choice of a particular system depends on : 1. ______________________________________ 2.Firm’s strategy and management information needs 3.Costs and benefits of acquiring, designing, modifying, and operating a particular system

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 4 Strategic Role of Product Costing Effective management of manufacturing costs requires timely and accurate cost information Getting timely and accurate information requires that the firm choose a cost system that is a good match for its competitive strategy To provide meaningful information, a product costing system must keep up with the constantly changing manufacturing environment An important strategic issue for product costing involves the decisions the firm makes about the basis for allocating overhead costs

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 5 Cost Accumulation Method Job Costing vs Process Costing A job costing system is _____ __________________________ Ex:__________________ A process costing system _____ __________________________ Ex:__________________

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 6 Big Picture: Cost Flow JOB-ORDER COSTING PROCESS COSTING

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 7 Cost Measurement Method Costing System Type of Cost Used For Direct MaterialDirect Labor Factory Overhead 1. Actual Costing 2. Normal Costing 3. Standard Costing

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 8 Overhead Assignment Method ____________________________ allocate overhead to products or jobs using a volume- based cost driver (such as units produced) ____________________________ allocate factory overhead costs to products using cause-and-effect criteria with multiple cost drivers –ABC systems use both volume-based and nonvolume-based cost drivers

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 9 Intro to Job Costing System  Job costing is a product costing system that ____________________ ___________________________________________________ _  ________________________ records and summarizes the costs of direct materials, direct labor, and factory overhead for a particular job as it goes through multiple activities or departments  All costs are recorded on the sheet as materials and labor are added  ________________________ is a source document that the production department supervisor uses to request materials for production  ________________________ shows the time an employee worked on each job, the pay rate, and the total cost chargeable to each job  All costs shown in the job cost sheet are recorded in the ____________ _________________________________________________________

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 10 Job Costing: Source Document Figure 4.4 Material Requisition Form

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 11 Job Costing: Source Document Figure 4.4 Time Ticket

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 12 Flow of Costs Direct Materials Direct Labor Factory Overhead Job No. 1 Job No. 2 Job No. 3

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 13 Flow of Material Costs Factory Overhead Work-in-Process Inventory (Job Cost Sheet) Materials Inventory

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 14 Flow of Labor Costs Accrued Payroll Factory Overhead Work-in-Process Inventory (Job Cost Sheet)

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 15 Flow of Costs to Cost of Goods Sold Finished Goods Inventory Cost of Goods Sold Work-in-Process Inventory (Job Cost Sheet)

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 16 Application of Factory Overhead To apply overhead cost to each job, normal costing requires a per product rate, which is often called a predetermined rate (since it is calculated at the beginning of the accounting period) The predetermined overhead rate (POHR) is an estimated factory overhead rate used to apply factory overhead cost to a specific job 4 steps to determine POHR  ______________________________________________  ____________________________________________________  ____________________________________________________  ____________________________________________________

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 17 Application of Factory Overhead The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. POHR =

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 18 Application of Factory Overhead Overhead applied = × The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Budgeted factory overhead amount for the year Expected level of cost driver for the year POHR =

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 19 Ex: Applying Factory Overhead Costs Bay Company total budgeted overhead for the year equals $200,000. Expected direct labor cost for all departments is $200,000 Job 11 incurs $9,000 of direct labor cost. Actual unit for Job 11 is 100 units What is the allocation rate? What is the manufacturing overhead cost allocated to this job? What is the manufacturing overhead cost per unit for this job?

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 20 Factory Overhead Applied  Factory overhead applied is the amount of overhead assigned to a specific job using a predetermined factory overhead rate  Overapplied overhead ______________________________________ __________________________________________________________  Underapplied overhead _____________________________________ __________________________________________________________ Ex: Suppose that Bay Company incurred $222,000 of actual manufacturing overhead during the year, and that actual direct labor cost was $200,000 - How much overhead was applied? - Did Bay Company overapply or underapply factory overhead cost? By how much?

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 21 Disposition of Factory Overhead Underapplied or overapplied overhead can be disposed of in 2 ways: 1.Adjust the Cost of Goods Sold account –_________________________________________________ 2.Adjust the production costs of the period –_________________________________________________ _________________________________________________ EX: Job Costing Illustration – TFI Company

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 22 Job Costing Example (adapted from Blocher et al. 2002) TFI has manufactured home and office furniture. This example considers simplified, fictitious data from production job X4J of TFI. Related transactions during January 2001 are summarized as follows: 1.Material inventory account has a $10,000 balance on Jan 1, 01. Additional material is purchased on account for $25,000 during January. 2.WIP inventory account has a $5,000 beginning balance. During January, the company issued $20,000 in direct materials to its production department for this job. 3.TFI used $3,000 in indirect materials for this job. 4.TFI incurred $70,000 in direct labor cost in this job. 5.TFI also incurred $2,500 in indirect labor costs including the salaries of supervisors, inspectors, and material handlers. 6.TFI incurred other factory overhead expenses for this job including utilities ($1,000), depreciation on factory equipment ($4,000), and insurance on factory equipment ($500).

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 23 Job Costing Example (cont) 7.7. TFI applied factory overhead on the basis of direct labor cost. Suppose that the firm estimated its total factory overhead for the year as $30,000,000, and direct labor cost as $200,000,000. The actual direct labor cost for this job was $70, TFI has a $5,000 beginning balance in the finished goods inventory account. The company completed $80,000 worth of goods during January. 9.TFI sold this furniture job which a total cost of $70,000 in January. 10.TFI marks up its production at 200% of cost. 11.TFI had the following selling and administrative expenses in January as follows: –Advertising expenses$20,000 –Sales commissions$21,000 –Office salaries$30,000 –Depreciation-office equipment$2,000 –Other administrative expenses$7,000

IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT 24 Job Costing in Service Industry Job costing in service industries uses recording procedures and accounts similar to those in manufacturing except for direct materials involved In service industries, the primary focus is on direct labor The overhead costs are usually applied to jobs based on direct labor-hours or dollars