1. Job-Order, Process, and Hybrid Costing Systems
CHAPTER 12
Job-Order, Process, and Hybrid Costing Systems
Chapter 12: Job-Order, Process, and Hybrid Cost Systems.
In this chapter we are going to look in detail at accounting using a job order cost system, a process cost system, and briefly explain why a company might use a hybrid of the two systems.
PowerPoint Author:
LuAnn Bean, Ph.D., CPA, CIA, CFE
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Cost Systems and Type of Product
Job-Order Cost System
Process Cost System
Job-order cost systems may be used by:
Walt Disney Production to determine the cost of a particular film.
Rust Engineering to determine the cost of an office building constructed.
Boeing to determine the cost of an airplane manufactured.
Accumulates costs by individual products.
Companies use job-order cost systems when they need to know the costs of individual products or batches of products.
Part I A job order cost system accumulates cost by individual products or batches of products. Companies use job order cost systems when they need to know the cost of the individual products that they produce.
Part II Job-order cost systems are likely to be used by companies like Walt Disney Productions as it develops and produces a film, or by Rust Engineering, a major contractor, when it builds an office building. A job order cost system would likely be used by a manufacturing company like Boeing that builds aircraft. It is essential that each of these companies be able to trace cost directly to a particular job or project in process at the current time.

3. Cost Systems and Type of Product
Job-Order Cost System
Process Cost System
Allocates costs evenly to homogeneous products.
Unit product cost is determined by dividing the total product cost by the number of units produced during the accounting period.
Process cost systems may be used by:
Texaco in its oil refining operations.
Dow Chemical in the manufacture of chemicals.
General Mills in the manufacture of cereal.
Part I A process cost system would be most applicable to a company that produces homogeneous products. Homogeneous products are very difficult to distinguish from each other. Unit product cost is determined by dividing the total costs by the number of units produced in any given accounting period.
Part II A process cost system may be used by Texaco in its refining operations as it converts crude oil into oil products and petrochemical products. It may also be used by companies like Dow Chemical in the manufacture of a wide variety of different chemicals. A manufacturer like General Mills would probably use a process cost system in the manufacture of cereal.

4. Receive orders from customers
Cost Flows
Receive orders from customers
Begin production
Schedule work
In any accounting system there tends to be a flow of costs. It begins when we receive an order from a customer. Once the orders have been received, we can schedule our work, order materials and begin production. This general flow applies to both job order and process cost systems.
Order materials

5. Job-Order Cost Flow Finished goods inventory Product costs
Income statement
Work in process inventory
Boat 101 Materials Labor & OH
Materials Labor Overhead
Cost of goods available for sale kept separately for all boats
Boat 104 Materials Labor & OH
Cost of goods sold
Boat 103 Materials Labor & OH
Here is a schematic showing the flow of costs in the job order cost system. Look at the top of the diagram first. We start with product costs, that are transferred into work in process inventory. Once complete, work in process inventory is transferred to finished goods. Eventually finished goods are sold and the sales revenue appears on the income statement.
In a job order cost system we can identify individual jobs that we are working on. Product costs include materials, labor and overhead. These costs are assigned to each job in the process. As the items in work in process are finished they are transferred into finished goods inventory at total cost. The items are taken out of finished goods inventory and charged to cost of goods sold when sold to the final consumer.
In this particular example our company is manufacturing boats, and as you can see we have five boats that are in work in process, two of which (boats 101 and 102) are finished in in the period. The boats are at different stages of construction as you would expect. We will follow this example of the manufacture of boats all the way through the job order costing presentation.
Boat 105 Materials Labor & OH
Boat 102 Materials Labor & OH

6. Process Cost Flow Finished goods inventory Product costs
WIP WIP mixing packaging
Income statement
Materials Labor Overhead
Materials Labor Overhead
Transferred- in costs
Cost of goods available for sale
Cost of goods sold
Materials Labor Overhead
This schematic outlines the cost flows in a process cost system. Once again look across the top of the schematic. In the process cost system we have various departments’ product costs being charged into a department. Upon completion in each department, they are then transferred to the next department. In our relatively straightforward example, we have two departments: mixing and packaging.
Materials, labor and overhead are first transferred into the mixing department. Once mixing is complete the goods are transferred to the packaging department. In the packaging department additional materials, labor and overhead may be added. When the packaging department has finished processing the goods, they are transferred to finished goods inventory. The process from finished goods inventory to sales revenue and cost of goods sold is the same as we described for the job order cost system.
The processing in departments may be sequential. We start in the first department, finish processing in that department, and transfer to the next department. The processing may also be concurrent. That is, processing can take place simultaneously in two or more departments. Regardless of how the processing is carried out, the cost flow remains the same.

7. Hybrid Accounting Systems
A hybrid accounting system uses some features from both job-order and process cost systems.
Hybrid systems are commonly used in the manufacture of personal computers. Many models are mass produced and sold as a package. Other systems are custom built to the specifications of the customer. Custom built systems normally sell at a premium compared to standard systems.
A hybrid system uses some of the features of both the job order and process cost systems. The manufacture of microcomputers is an excellent example of a hybrid accounting system. Most microcomputer manufacturers have a standard model that is mass produced and sold. But, most of these manufacturers will custom build a microcomputer to the user specifications. Custom-built systems normally sell at a premium. The mass produced computers may borrow most of their accounting from process costing, but the custom-built computers may take many of their accounting processes from the job order cost system.

8. Documentation in a Job-Order Cost System
The primary document for tracking the costs associated with a given job is the job cost sheet.
The primary document in a job-order cost system is called the job cost sheet. We are going to take a look at this job cost sheet in some detail. The example we will look at is the paper and pencil document; however, most job cost sheets are electronically generated.

9. Documentation in a Job-Order Cost System
Here is a completed job cost sheet for boat number Notice that we have an area to accumulate materials, labor, and manufacturing overhead. In addition, we have a summary to determine the total cost of production of boat number 101.

10. Documentation in a Job-Order Cost System
There is a separate source document called the material requisition form that supports the direct materials that appear on the job cost sheet. The material requisition form contains the details of the materials that were issued to manufacture the boat.
John Smyth

11. Documentation in a Job-Order Cost System
The direct labor charges are supported by work tickets or time tickets. These documents detail the number of hours worked and the individuals who work those hours, along with their related pay rates. By totaling the work tickets we can determine the amount of direct labor appropriately charged to Boat 101.

12. Documentation in a Job-Order Cost System
1,400 × $3.90 = $5,460
Part I In the case of Benchmore Boat Company, manufacturing overhead is applied on the basis of direct labor hours worked.
Part II
The one thousand four hundred direct labor hours worked will serve as the basis for application of manufacturing overhead.
Part III The predetermined overhead rate is $3.90 per direct labor hour.
Part IV We multiplied the 1,400 direct labor hours times $3.90 per direct labor hour to apply overhead of $5,460. We followed the same procedure to apply the $6,240 of manufacturing overhead.

13. Job-Order Cost System Illustrated
Benchmore started the month of January, 2012, with the following account balances.
Part I On January 1, 2012, the trial balance of Benchmore Boat Company appears as follows.
Part II The work in process inventory is comprised of three boats: 103, 104, and 105, for a total cost of $34,000.
Part III Finished goods inventory contains two boats. They are boats 101 and 102, with the total cost of $85,000.

14. Equivalent Units
Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.
Equivalent units need to be calculated because a department usually has some partially completed units in its beginning and ending inventories. These units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to that output.

15. Equivalent Units
Two half completed products are equivalent to one completed product. + = 1
The basic idea behind equivalent units is quite easy to understand, but the computation of equivalent can become complex. Here we can see that the two half-completed units of production are equal to one completed unit. Using this logic, we can say that 10,000 units that are 60 percent complete are equivalent, or the same as, 6,000 complete units.
So, 10,000 units 60% complete are equivalent to 6,000 complete units.

16. Equivalent Units
A Janis engineer estimated the 85,000 units in ending work in process inventory were 40 percent complete. Janis computes the total equivalent units processed in the extraction department as follows:
In the case of Janis Company that makes juice, an engineer estimated the 85,000 units in ending work in process inventory were 40 percent complete. The equivalent units in ending inventory are 40 percent of 85,000, or 34,000 units. Janis computes the total equivalent units processed in the extraction department by adding the units completed and transferred out to the equivalent units in ending inventory.

17. End of Chapter 12
End of Chapter 12.