Job-Order Costing Chapter 04

3-2 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  Cost are traced or allocated to jobs.  Cost records must be maintained for each distinct product or job.  Many different products are produced each period.  Products are manufactured to order.  Cost are traced or allocated to jobs.  Cost records must be maintained for each distinct product or job. Chapter 5

3-3 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical job order cost applications:  Special-order printing  Building construction Also used in the service industry  Hospitals  Law firms Typical job order cost applications:  Special-order printing  Building construction Also used in the service industry  Hospitals  Law firms

3-4 Quick Check Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels. Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

3-5 Job-Order Costing Direct material Direct labor Manufacturing overhead (OH) Allocated (Applied) to each job using a predetermined rate Manufacturing overhead (OH) Allocated (Applied) to each job using a predetermined rate Traced directly to each job The Job

3-6 Sequence of Events in a Job-Order Costing System Receive orders from customers Schedule jobs Begin production Order materials

3-7 Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Sequence of Events in a Job-Order Costing System Direct Materials Direct Labor

3-8 Allocate overhead to each job using a predeter- mined rate. Sequence of Events in a Job-Order Costing System Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

3-9 Job-Order Cost Accounting The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate

3-10 Job-Order Cost Accounting

3-11 Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) Direct Materials Indirect Materials ActualApplied Job-Order System Cost Flows

3-12 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Overhead Allocated Overhead Allocated to Work in Process Direct Labor Indirect Labor Indirect Materials ActualApplied Job-Order System Cost Flows

3-13 Finished Goods Cost of Goods Mfd. Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Sold Job-Order System Cost Flows

The Allocation of Costs

Actual Versus Normal Costing Actual Overhead Costs Unit Cost Unit Cost Actual Costing Actual direct labor cost Actual direct materials costs

Actual Versus Normal Costing Actual direct labor cost Actual direct materials costs Amount of activity required by the unit X predetermined rate Unit Cost Unit Cost Normal Costing

3-17 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. The Need for a Predetermined Manufacturing Overhead Rate $

3-18 Assignment of Overhead Costs in a Normal Costing System At the beginning of the fiscal year:  Estimate the total costs of manufacturing overhead for the period.  Choose a relevant activity or cost base, and estimate the amount of that activity or cost base.  Calculate the overhead allocation rate by dividing the estimate of total manufacturing overhead costs by the estimated amount of the activity or cost base.

3-19 Overhead allocation rate = Estimated total overhead costs Estimated total activity base Assignment of Overhead Costs in a Normal Costing System

Assignment of Overhead Costs in a Normal Costing System At the end of each accounting period:  Determine the actual amount of the activity base used during the period.  Multiply that amount by the overhead allocation rate. Allocated overhead costs = actual activity base x overhead allocation rate

3-21 Example Take Tours applies overhead based on direct labor hours. Total estimated overhead for the year 2013 is VND 5 billions. Total estimated direct labor hours in this period is 50,000. What is Take Tour’s overhead allocation rate? Tour #1105 H ả i Phòng - Hu ế from Nov. 25, 2013 to Nov. 30, 2013 required 100 direct labor hours. How much of overhead will be allocated for Tour #1105 ?

3-22 Job-Order System Cost Flows What we will do if actual and allocated overhead are not equal?

3-23 Work in Process Finished Goods Cost of Goods Sold The over(under)allocated amount may be allocated to these accounts. Overallocated and Underallocated Manufacturing Overhead The over(under)allocated amount may be closed directly to cost of goods sold. Cost of Goods Sold OR

3-24 Example (cont’d) Take Tour’s actual overhead for the year was VND 5.5 billions and its applied overhead for all jobs for the year is VND5.2 billions. How much of overhead was over(under)allocated? The balance at Dec. 31, 2013 of Work-in- Process Account is VND0.5 billions and Cost of goods sold Account is VND49.5 billions. Make journal entries for the over(under)allocated overhead.

3-25 Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $750. d. $730. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $750. d. $730.

3-26 Quick Check If overhead contains fixed costs, what will happen to the overhead allocation rate if lower unit sales volume is expected? a. The overhead allocation rate will likely increase. b. The overhead allocation rate would be unaffected. c. The overhead allocation rate will likely decrease. If overhead contains fixed costs, what will happen to the overhead allocation rate if lower unit sales volume is expected? a. The overhead allocation rate will likely increase. b. The overhead allocation rate would be unaffected. c. The overhead allocation rate will likely decrease.

3-27 Overallocated and Underallocated Manufacturing Overhead - Summary Take Tours’ Method

3-28 Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and an overhead allocation rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overallocated. b. $50,000 underallocated. c. $60,000 overallocated. d. $60,000 underallocated. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and an overhead allocation rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overallocated. b. $50,000 underallocated. c. $60,000 overallocated. d. $60,000 underallocated. Quick Check

3-29 End of Chapter 04