1 Chapter 5 Job Order Costing Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

2 Learning Objectives (1 of 3) Contrast the job order and process costing systems and their valuation methods Explain the purpose of the documents used in a job order costing system

3 Learning Objectives (2 of 3) List the journal entries that are used to accumulate costs in a job order costing systems Describe cost flows in job order costing systems

4 Learning Objectives (3of 3) Explain how standard costs are used in a job order costing system Describe how job order costing information supports management decision making Explain how losses are treated in a job order costing system

5 Job Order or Process Costing Job Order Small quantities Batches of identifiable, tailor-made products User-specific services Tracks costs by job

6 Job Order or Process Costing Job Order Small quantities Batches of identifiable, tailor-made products User-specific services Tracks costs by job Process Large quantities Homogeneous goods Tracks costs by batch of goods by department

7 Job Order Costing A job is a single unit or group of units identifiable as being produced to distinct customer specifications A job can be a –Client –Engagement –Project –Contract

8 Product Costing Cost identification Cost measurement Product cost assignment

9 Methods of Product Costing Cost Accumulation System defines –cost object –method of assigning costs to production Valuation Method specifies –how product costs will be measured

Six Possibilities Job Order Actual Normal Standard Process Actual Normal Standard V A L M U E A T T H I O O D N COST ACCUMULATION SYSTEM

11 Valuation Methods Actual –Actual direct material –Actual direct labor –Actual overhead Normal –Actual direct material –Actual direct labor –Predetermined overhead Standard –Standard direct material –Standard direct labor –Standard overhead The Difference

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13 Job Order Costing System Each job is a cost object Costs are accumulated for each job A job can consist of one or more units of output There is a subsidiary ledger for each job

Job Order Costing System WIP ControlJob 2Job 1Job 3 Job 1 + Job 2 + Job 3 = WIP Control WIP Subsidiary Ledger = Job Job Job Total

15 Material Requisition Form Tracks who is responsible for materials Verifies flow of materials from warehouse to department to job

16 Material Requisition Form Tracks who is responsible for materials Verifies flow of materials from warehouse to department to job Journal entry Work in Process Inventory (direct material) Manufacturing Overhead (indirect material) Raw Material Inventory

17 Materials Requisition Form Date ___________________ No. 341 Job No. _________________ Authorized by ___________ Department _______________ Issued by _________________ Inspected by _______________ Item Part Unit of Quantity Quantity Unit Total No. No. Descrip. Measure Required Issued Cost Cost Received by _____________

18 Job Order Cost Sheet All financial information about a job –direct material (from material requisitions) –direct labor (from time sheets or labor tickets) –applied overhead –budgeted cost information

19 Job Order Cost Sheet All financial information about a job –direct material (from material requisition) –direct labor (from time sheets or labor tickets) –applied overhead –budgeted cost information When job is complete, use job order cost sheet to analyze actual costs compared to budgeted costs

20 Job Order Cost Sheet Customer ____________ Job No. 315 Starting Date _________ Job Description ____________ Completion Date ______ Contract Price _____________ Materials Date Ref# Amount Direct Labor Date Ref # Amount Overhead Applied Date Ref# Amount Total Materials _________ Total Labor _________ Total Cost of Job Total OH Applied _________========

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22 Employee Time Sheet Time worked on each job

23 Employee Time Sheet Time worked on each job Journal entry Work in Process Inventory (direct labor) Manufacturing Overhead (indirect labor) Salaries and Wages Payable

24 Employee Time Sheet Employee Name _______________ Employee No. _______________ Department _______________ For week ending _______ Start Stop Total Type of Work Job No. Time Time Day Hours Employee Signature Supervisor’s Signature

25 Manufacturing Overhead Overhead Account Actual Overhead Applied Overhead Journal Entry Work in Process Inventory Manufacturing Overhead (applied)

26 Completion of a Job Move job cost sheet from WIP subsidiary to Finished Goods subsidiary

27 Completion of a Job Move job cost sheet from WIP subsidiary to Finished Goods subsidiary Journal entry Finished Goods Inventory Work in Process Inventory

28 Sale Journal entry Accounts Receivable Sale Cost of Goods Sold Finished Goods Inventory

29 Sale Journal entry Accounts Receivable Sale Cost of Goods Sold Finished Goods Inventory Matches revenues and expenses on the income statement

30 Job Order Costing and Technology Automate data collection and data entry Accounting software includes job costing modules Share information using intranet

31 Intranet Restricted network for sharing information and delivering data from corporate databases to local-area network (LAN) desktops

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33 Journal Entries Materials WIP-Job 1 FG CGS WIP-Job 2 Accts Pay Overhead W & Sal Pay WIP consists of job cost sheets

34 Purchase Materials on Account (a) Materials WIP-Job 1 FG CGS WIP-Job 2 Accts Pay Overhead W & Sal Pay a a

Use Materials Requisition to Request Materials for Jobs (b) Materials WIP-Job 1 FG CGS WIP-Job 2 Accts Pay Overhead W & Sal Pay a a b b b Direct materials to WIP Indirect materials to Overhead b

Record Labor from Employee Time Sheets (c) Materials WIP-Job 1 FG CGS WIP-Job 2 Accts Pay Overhead W & Sal Pay a a b b b Direct labor to WIP Indirect labor to Overhead b c c c c

37 Apply Overhead (d) Materials WIP-Job 1 FG CGS WIP-Job 2 Accts Pay Overhead W & Sal Pay a a b b b b c c c c d d d

38 Complete Job 1 (e) Materials WIP-Job 1 FG CGS WIP-Job 2 Accts Pay Overhead W & Sal Pay a a b b b b c c c c d d d e e

39 Sell Job (f,g) Materials WIP-Job 1 FG CGS WIP-Job 2 Accts Pay Overhead W & Sal Pay a a b b b b c c c c d d d e e Accts RecSales f f g g

40 Standard Cost System Actual cost Normal cost Standard cost –Predetermined norms (or standards) for materials, labor, and overhead –Compare actual costs to standard costs - difference is a variance

Management Use of Job Order Costing Systems Estimate future job costs Establish realistic bids and selling prices Develop budgets and standards Compare actual costs to estimated costs Furnish performance evaluation information based on profitability of jobs

42 Product and Material Losses Shrinkage –Evaporation –Leakage –Oxidation Production errors –Defects can be economically reworked –Spoilage cannot be economically reworked

43 Product and Material Losses Normal Loss – expected during production Abnormal Loss – exceeds what is expected during production

44 Normal Loss Anticipated on all jobs –Include cost when calculating predetermined overhead application rate –Include cost less the estimated disposal value Specific to a job –Applied to the specific job –Include cost less the estimated disposal value

45 Abnormal Spoilage Period cost – includes cost of abnormal loss less any disposal value

46 Product and Material Losses Normal Loss Abnormal Loss Loss for most jobs Loss identified with a specific job In overhead rate Period cost Charge to specific job Period cost

47 Questions What is the difference between job order and process costing systems? How do actual, normal, and standard costing valuation methods differ? How is the job order cost sheet used?

48 Potential Ethical Issues Inflating costs assigned to cost-plus contracts Assigning costs from a fixed-fee contract to a cost-plus contract Substituting materials with inferior quality

49 Potential Ethical Issues Overstating costs included in Work in Process Using methods or materials that violate intellectual property rights of other firms Recording sales value of defective work as “Other Revenue”