Job Costing, Process Costing, and Operations Costing Chapter 3 Job Costing, Process Costing, and Operations Costing

Introduction How do managerial accountants determine the cost of the products or services being produced and sold by a company?

Introduction How is the cost of the product used? Determining the selling price Buying or making a component

Product Costing Systems Job Costing Customized Production: Home, Furniture, Print Order Customized Service: Tax Return, Audit, Patient

Product Costing Systems Process Costing: A homogeneous product being produced on a continuous basis. Oil refineries, Breweries, Paint and Paper Manufacturers

Product Costing Systems Operations Costing: A hybrid of job and process costing Used by manufacturers who make products in batches Automobiles, Clothing

Basic Job-Order Costing Measuring and Tracking Direct Material Normal Spoilage: Results from the regular operation of the production process Abnormal Spoilage: Results from improper handling, poorly trained craftspeople, equipment that is in poor condition

Measuring and Tracking Direct Labor Direct Labor is calculated by multiplying a wage rate for each employee by the number of hours that each employee works on each product. Add Fringe Benefits such as employer’s cost for health, dental and other insurance, retirement plans, employer portion of social security tax and state and federal unemployment taxes (often 30-35% of the base wage).

Direct Labor or Overhead? Idle time? Overtime premiums?

Measuring and Tracking Manufacturing Overhead Rent Depreciation Repairs and Maintenance Utilities Indirect Labor Indirect Materials

Allocation of Manufacturing Overhead The choice of an allocation base requires a thorough understanding of what causes overhead costs to be incurred. Allocate based on the number of units produced. Allocate based on the number of direct labor hours or machine hours.

Cost Pools Instead of identifying cost drivers for each component of overhead, companies have traditionally lumped overhead into similar Cost Pools to simplify the task. May have one cost pool for the entire factory. May have separate pools of overhead for each department. May have a cost pool for each activity performed in making a product.

Predetermined Overhead Rates Key Formula Estimated Overhead for the Cost Pool Estimated Units of the Cost Driver Predetermined Overhead Rate (for a Cost Pool) =

The Problem of Over- and Underapplied Overhead Overapplied Overhead: Applied overhead is greater than actual overhead Underapplied Overhead: Applied overhead is less than actual overhead

Basic Process Costing Direct materials Direct labor Manufacturing overhead Process A Process B Process C Cost of Goods Sold Finished Goods

Basic Process Costing Equivalent Units One Full Glass = + 1/2 1/2

Backflush Costing For companies using JIT: All manufacturing costs are flushed directly into cost of goods sold. If the company has small amounts of inventory on hand at the end of the period, manufacturing costs are backflushed into the appropriate materials inventory, WIP inventory or finished goods inventory.

How much would the new product cost? End of Chapter 3 How much would the new product cost?